Hungary to Overshoot Budget Targets, Needs Bank Tax, Fiscal Council Says

Hungary, the most indebted east European member of the European Union, needs revenue from a special tax on financial institutions to meet budget deficit targets this year and next, the country’s Fiscal Council said.

The government needs “strict fiscal control,” along with the financial tax, to meet its 3.8 percent of gross domestic product budget gap target for this year, the Budapest-based council said in a report today. Spending in 2011 can’t be nominally increased from this year if the shortfall is to fall below 3 percent, it said.

“For 2010, the budget-gap target can be met with strict fiscal control, but there are no more reserves to cover existing risks,” according to the report from the independent council.

Prime Minister Viktor Orban, elected on a pledge to spur economic growth in April, is resisting demands by the EU and the International Monetary Fund to honor the previous government’s promise to reduce the gap to below 3 percent next year. The Cabinet is relying largely on a bank tax equal to 0.5 percent of each lenders’ assets, three times larger than in the U.K., to plug budget holes after the worst recession in 18 years.

The Fiscal Council sees the budget deficit at 4 percent of GDP this year, 4.2 percent in 2011 and 3.4 percent in 2012 without any further measures. The council didn’t take into account planned revenue from the special financial tax for 2011 and 2012, saying the levy has yet to be adequately specified in legislation. The council also made the projection with a rise in nominal spending to account for an expected quickening of inflation.

Hungary was the first member of the 27-nation bloc to obtain an IMF-led bailout in 2008 to avert a default during the credit crisis. The government at the time pledged to cut spending in exchange for the loan.

The IMF and the EU suspended a quarterly review of Hungary’s budget in July without endorsing the Cabinet’s plans. The government said afterward it no longer needs IMF support once the current 20 billion-euro ($25.8 billion) bailout program expires in October.

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