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Hungary budget deficit to surge, bank body warns

Hungary’s budget deficit could start to grow dramatically ahead of elections in 2010, reversing many of the gains made since 2006, an influential banking body has warned in a report.

The report from the Institute of International Finance, a grouping of around 380 financial institutions, is by far the gloomiest assessment of the outlook for Hungary’s finances in the run-up to the election. “Lagging revenues, higher borrowing costs and growing political pressures to boost spending as elections approach in 2009 and 2010 leave the fiscal deficit likely to widen to as much as 6.5% of gross domestic product by 2010 from the 4% likely this year,” according to the report, issued last week and obtained by Reuters on Wednesday.

Hungary’s Socialist Prime Minister Ferenc Gyurcsány hiked taxes and cut subsidies to reduce the deficit to 5.5% of GDP in 2007 from 9.2% in 2006, but even so it remains the highest in the 27-member European Union. As a result of the tax rises, inflation has jumped and the central bank has been forced to hike interest rates to 8% while at the same time economic growth crashed to just 1.3% in 2007, again the worst performance in the EU. Extra taxes have not been accompanied by meaningful reforms and the small liberal coalition party, the Alliance of Free Democrats, is to quit the government on April 30 in protest against what it says is Gyurcsány’s economic populism. That will leave a minority Socialist administration prey to calls for more spending to boost their poll ratings which currently stand at around 15%.

The IIF warned that the central bank will likely be forced to hike interest rates by another 50 basis points so as to be able to hit its inflation target of 3%. If the European Central Bank returns to hiking rates in 2009, an additional 100 basis points or more of rate increases would be needed in Hungary to prevent a run on the forint as fiscal policy is eased ahead of the election, the IIF said. Extra spending has been used by every Hungarian government, including Gyurcsány’s, ahead of elections.

The main opposition Fidesz party, which looks likely to win the 2010 election has called for tax cuts to stimulate the economy but has not specified spending cuts to allow them to do so without imperiling the country’s plans to join the euro. Fidesz has in the past criticized liberal economic policies and prior to the 2006 election threatened to renationalize Budapest Airport. Its backing for a referendum in March to end charges for healthcare and to prevent private capital entering the state insurance system was in large part responsible for Gyurcsány’s change of policy and the end of any structural economic reforms. “With economic underperformance highly likely to bring Fidesz to power then fiscal prospects seem unlikely to brighten,” the IIF warned. (Reuters)