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Gov’t reforms will ensure Hungary's fiscal consolidation is sustainable, says economy minister

A government package of structural reforms will ensure Hungary's fiscal consolidation is sustainable, National Economy Minister György Matolcsy said in a letter to European Commissioner for Economic and Monetary Affairs Olli Rehn published on the government's website on Friday.

“The structure of the new program will ensure that the fiscal consolidation will be sustainable,” Matolcsy said, responding to Rehn's assessment of Hungary's current situation under its excessive deficit procedure. “Nevertheless, the emphasis on the Hungarian economic policy will remain on boosting employment and on increasing competitiveness,” he added.

Matolcsy said fresh employment data show the feasibility of the government's goal to create 300,000 new jobs by the end of 2014.

The government's structural reform program will ensure Hungary's fiscal targets are met and will bring the country's state debt-to-GDP ratio under 70% in the coming years, Matolcsy said.

Matolcsy said the government's Stability and Growth Program “will be based on lasting measures mainly on the expenditure side, thus improving the government balance on a permanent basis.”

“The initial impact of these measures will be noticeable as early as in 2011, however, the program will unfold in full size in 2012 and 2013,” he said. The measures taken under the program “will ensure that the fiscal targets as laid down in the Convergence Program are met,” he added.

Matolcsy said he welcomed the European Commission's conclusion that Hungary's general government deficit would be under 3% of GDP and could even turn into a surplus.

In the letter to Matolcsy, dated January 14, 2011, Rehn acknowledged government measures to reduce the deficit but said tax cuts and other steps would raise the structural deficit by 0.9% of GDP in 2010 and another 2.8% of GDP in 2011 after improvements, estimated at 2.5% of GDP a year earlier, in 2009.

The government has cut personal income tax and corporate profit tax, which will affect fiscal revenue in the long term, while introducing extraordinary taxes on select business sectors, which will have a short-term fiscal effect.

Rehn noted there was a “large gap” between the cumulative deterioration - 3.7% of GDP - on the structural deficit in 2010-2011 resulting from the measures and the Council's July 2009 recommendation to made an improvement to the structural balance equivalent to 0.5% of GDP.

“This leads to the conclusion that, although the 2011 general government balance is expected to be below a deficit of 3% of GDP and may even be in surplus, this would not be achieved in a sustainable manner even by 2011 nor through an increased reliance on structural measures as recommended by the Council,” Rehn said.

The transfer of assets in Hungary's private pension fund pillar to the state pillar under recently approved legislation is expected to bring some HUF 30,000 billion -- about 10% of GDP -- to the budget in 2011, which could shift the government balance to a surplus above 5% this year, and would improve the balance on the longer term by less than 1% of GDP.

Rehn said a new recommendation to Hungary to take action to correct its excessive deficit against the same deadline would be warranted, “considering Hungary has not taken effective action”, but added that “I am willing to re-consider the situation in February”.

The government said earlier it would finalize the reform program on February 28.

Rehn said the package should be permanent and amount to 2-3% of GDP, in the Commission's view. The government must start the gross debt ratio on a declining path at a satisfactory pace and see that the fiscal responsibility law is rigorously implemented, he added. (MTI – Econews)