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On track to cut budget deficit

Hungary will be given a pat on the back from Brussels on Wednesday for taking measures to control its towering public deficit, lifting the threat of potential sanctions – Financial Times reports.

Joaquin Almunia, EU monetary affairs commissioner, will report that Budapest has kept its promise to start bringing down the deficit from over 10% of GDP towards a target of less than 3% by 2009. His report concludes that „no further steps are needed” by Brussels to bring Hungary into line, removing the possibility that EU funds could be frozen as a punishment. In mid-2006, Hungary's budget deficit was on path to exceed 11% of GDP before the government introduced austerity measures – mostly tax rises – and announced plans for public sector reforms. The short-term measures have exceeded expectations, halting the 2006 budget gap at 9.2% of GDP and deflating projections for this year's deficit to 6.0 to 6.4%, well within the 6.8% target Hungary submitted to Brussels last year. The progress has calmed investors. However, Hungary's deficit will likely remain the highest among EU member countries.

In the report, Almunia adds a caution, saying that Hungary's public finances are still „fragile” and the 2009 deadline for complying with the EU's stability pact's 3% ceiling is „subject to risks and uncertainties”. He says the country will remain under tight scrutiny, particularly in view of its „past record” of misleading Brussels over its intentions to bring the budget deficit under control. Analysts said the warning was the most important portion of the European Commission's report. One economist worried that Almunia was not firm enough. „There is a bit of apprehension that if Almunia is too positive or too supportive of the fiscal effort made by the government so far, then they might take their eye off the ball in Hungary,” said Zsolt Papp, an economist in London for ABN Amro, the Dutch bank. The commissioner had threatened to withhold EU cohesion funds worth tens of millions of euros unless Hungary fell into line – the toughest sanction available for countries which are not members of the eurozone.

In addition to soothing Brussels, the rapid turnaround has calmed investors whose damaged confidence had threatened to trigger a currency crisis. Continued progress on cutting the deficit now hinges on attempts to make painful reforms to health care, education, pensions and state administration. Parties from the governing coalition are this month trying to hammer out a compromise on changes to state health insurance that may open the system to private insurers. (