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Hungary to Cut State Jobs to Narrow 2011 Budget Deficit Under 3% of GDP

Hungary plans to cut as many as 30,000 public-sector jobs next year to help push the budget deficit below 3 percent of GDP, and predicts debt will fall as a wave of private pension fund portfolios returns to the state.

The 2011 budget targets a shortfall of 2.94 percent of gross domestic product, Economy Minister Gyorgy Matolcsy said, down from 3.8 percent this year. The budget is based on a 3 percent growth estimate and inflation of 3.5 percent. The cabinet is planning to cut personal income tax to a flat 16 percent to help boost growth, and impose special industry taxes to plug budget holes.

Hungary, the first European Union member to resort to a bailout as the credit crisis hit in 2008, is trying to convince investors it can finance its budget without International Monetary Fund assistance. The economy is recovering from its worst recession in 18 years and the IMF this week said growth and tax revenue may miss government forecasts.

“I think a growth rate of 3 percent is ambitious but realistic,” Matolcsy said. “This is a budget that helps us get back on our feet.”

The forint has gained 6 percent against the euro since the government on Sept. 8 agreed to keep next year’s deficit below 3 percent of GDP, abandoning a fight with the EU. The forint traded at 271.28 per euro late yesterday. Five-year credit default swaps, measuring the cost of insuring government debt against default, fell to 293.42 from 368.695 in the period.

Photographer: Balint Porneczi/Bloomberg

Orban’s Fidesz party captured the Budapest mayor’s office for the first time, mayoral positions in 22 of the 23 biggest cities and all 19 county assemblies, according to the national election commission. Close

Orban’s Fidesz party captured the Budapest mayor’s office for the first time, mayoral... Read More

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Photographer: Balint Porneczi/Bloomberg

Orban’s Fidesz party captured the Budapest mayor’s office for the first time, mayoral positions in 22 of the 23 biggest cities and all 19 county assemblies, according to the national election commission.

Job Cuts

The government will freeze the state’s nominal wage bill next year, and cutting 25,000 to 30,000 of the 690,000 public- sector jobs by attrition will allow for a 4 percent to 5 percent nominal wage increase for those that stay on, he said.

Prime Minister Viktor Orban was elected in April on a pledge to end five years of austerity. He is implementing a three-year tax on the financial, energy, telecommunications and retail industries, which will generate 343 billion forint of budget revenue this year.

The cabinet is also counting on as many as 90 percent of members of mandatory private pension funds returning their portfolios to the state by the end of 2011, after a government drive to convince them that their savings are safer there. Private pension fund members have amassed a total of 2.7 trillion forint in savings, half of which are in domestic government bonds.

Plugging Holes

The cabinet would use 540 billion forint of the returning portfolios to plug holes in the state retirement fund, in addition to the 360 billion forint that will come from the redirection of next year’s social security payments from private funds to the state, Matolcsy said.

The rest of the portfolios, to be allocated in a special fund, would be used to cut Hungary’s debt level, which is the highest of any eastern EU member, Matolcsy said.

“This measure would constitute a significant step back in the pension reform process initiated in the late 1990s, which has contributed to making Hungary’s pension system one of the most sustainable in Europe,” the IMF said in an Oct. 25 statement.

‘Bold but Risky’

Hungary is overestimating the effect of income-tax cuts on growth as their impact is “highly uncertain,” Christoph Rosenberg, head of a visiting IMF delegation, said in Budapest on Oct. 25. The Washington-based lender estimates the economy will grow 2.5 percent next year, compared with the government’s 3 percent projection.

“The government’s plans are bold but also risky,” Rosenberg said before the administration unveiled its full budget proposal. “They do address one long-standing issue, namely the tax wedge, and they do that while attempting to stick to fiscal targets agreed with the EU. They’re also risky because they do raise questions on medium-term fiscal sustainability.”

Standard & Poor’s lowered the outlook on Hungary’s BBB rating to negative in July as the government said it won’t seek a new loan after the current bailout expired this month. A one- step cut would reduce the grade to junk for the first time since 1992.

Moody’s Investors Service is reviewing Hungary’s Baa1 grade, which is three levels above junk. Moody’s will make a decision in November, Frankfurt-based Moody’s analyst Dietmar Hornung said by phone on Oct. 25.

“The IMF’s assessment is in line with our view that fiscal adjustment based on one-off taxes is ultimately unsustainable and potentially negative for growth,” Magdalena Polan, a Goldman Sachs economist in London, said in an e-mailed note on Oct. 26. “From the fundamental perspective, this means that the government may find it difficult to achieve a lasting reduction in the risk premium and long-term interest rates.”

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Willy Morris at wmorris@bloomberg.net

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