Hungary promised on Wednesday to outline fiscal steps next month to reverse an EU decision, prompted by alarm over budget laxity, to withhold half a billion euros in development funds from 2013.
EU finance ministers suspended on Tuesday Hungary's planned access to the funds but told Budapest it could escape the tough sanctions if it takes remedial fiscal action by June.
Brussels' decision exerts further pressure on Prime Minister Viktor Orban's conservative government as it struggles to win a precautionary standby loan from the EU and International Monetary Fund to cut borrowing costs and avert a market crisis.
A legal dispute with the EU over laws which Brussels said undermined the independence of the central bank and judiciary, has so far delayed the start of formal talks on aid.
Economy Ministry state secretary Zoltan Csefalvay said on Wednesday the government would take fiscal steps and argued that the fresh EU decision would actually help progress towards an agreement with lenders.
“When the convergence programme is drawn up in mid-April Hungary will answer the questions which relate to achieving the budget deficit (target),” Csefalvay told TV2.
Hungary needs to submit this updated economic programme to Brussels every year in April.
Csefalvay said if the government implements all the planned measures in its fiscal reform plan, which was launched in March 2011, that could ensure the deficit target is met. He said savings worth 130-140 billion forints would be needed this year.
Analysts say further measures could be needed, especially next year when the government plans to end crisis taxes on the energy, telecoms and retail sectors and halve a bank tax that is the highest in the EU.
Csefalvay also said it was “fortunate” Hungary could address the EU's budget requests quickly to allow relief from sanctions already by June.
When asked whether the EU's decision made on Tuesday could hinder talks on international aid, he said:
“I think this will actually accelerate the possibility of agreement (with the IMF and EU).”
Although 23 of the EU's 27 states have exceeded the bloc's deficit ceiling of 3 percent of GDP in the past, Hungary is the first to face the freezing of funds aimed at helping it to catch up with richer EU members.
AID TALKS IN LIMBO
After repeated budget slippages, last year Hungary posted a budget surplus but this was achieved with one-off measures including a nationalisation of mandatory private pension funds and big windfall taxes on banks and selected business sectors.
This year the government targets a deficit of 2.5 percent of GDP which it wants to cut further to 2.2 percent next year.
But the EU says the deficit could hit 3.6 percent next year if Budapest does not take additional measures, while a slowing economy poses risks to this year's budget.
Eszter Gargyan, an economist at Citigroup in Budapest said the Commission's deficit estimate looked realistic, barring one-off shocks. She said Budapest would need to cut its deficit by about 130-140 billion forints this year and 430 billion next year to meet its targets.
She said it would be better if the adjustment was worked out under the auspices of aid talks with the IMF as that could ensure structural measures are used to address the slippage.
“However, not because of the budget issues (but due to the legal dispute) negotiations will not start until April, but even June is questionable I think,” Gargyan said.
The government insists it aims to start aid talks as soon as possible but most analysts forecast in a recent Reuters poll that an agreement will be reached only by mid-year.
Some other analysts said the EU's budget forecast may prove overly pessimistic as this year's growth outlook could improve if Germany, Hungary's main trading partner, performs better.
On Tuesday the Organisation for Economic Cooperation and Development also urged more fiscal consolidation, particularly in cutting government spending, and said Hungary's economy is projected to be in recession in early 2012 with a weak recovery starting in the second half of the year.
“We think the EC's forecast of a 3.6 pct/GDP budget deficit for 2013 is too pessimistic. However, at the same time, this does set a basis for discussions with the EU/IMF that the government is apparently keen to start,” ING Bank said in a note. - Reuters