Hungary to Miss Budget Goal, Needs New Policies, IMF Says

Hungary will probably overshoot its budget deficit goals through 2015 and needs a policy shift to make fiscal consolidation sustainable and boost growth, the International Monetary Fund said.

The 2013 shortfall may be 3.25 percent of gross economic output, compared with the government’s 2.7 percent goal, and may exceed 3 percent in 2014 and 2015, the Washington-based lender said in a statement today after an annual review of the economy. Hungary needs “additional steps” to keep the gap within 3 percent, the European Commission said in a separate report.

Prime Minister Viktor Orban has relied on extraordinary levies on banking, energy, retail and telecommunications companies as well as the nationalization of private pension fund assets to reduce the budget deficit and public debt levels. The measures contributed to a second recession in four years.

“A new policy course is needed to deliver the required medium-term fiscal adjustment in a sustainable way to support growth and confidence, repair the financial sector, and promote structural reforms to boost the potential of the Hungarian economy,” the IMF said.

The forint fell to its weakest against the euro in almost eight months, trading at 298.83 at 5:12 p.m. in Budapest. It has lost 2.5 percent this year against Europe’s common currency.

‘Notable Effort’

Without altering its course, the government risks the country’s debt level, the highest among the EU’s eastern members, staying around 78 percent of gross domestic product, the IMF said. That is about 10 percentage points higher than the pre-crisis level after Hungary’s “notable consolidation effort” last year and after spending assets citizens had put away to complement state pensions, the IMF said.

Hungary’s budget measures are sustainable and ensure that the budget deficit stays below 3 percent of GDP, the Economy Ministry said in a statement today. The government is committed to exiting the EU’s excessive-deficit procedure this year, it said. Budget overruns under the procedure may lead to cuts in EU funding.

The government should reduce spending, including by better targeting social benefits, and phase out “distortive” industry taxes, the IMF said among its recommendations. The Commission “stressed the importance” of improving the banking environment to boost lending and investments.

‘Likely Harmful’

“The government was encouraged to review the increased reliance on revenue side measures -- mostly sectoral taxes, -- which are likely to be harmful for business confidence, economic growth and employment, not just in the short run, but even more so in the medium and longer term,” the EU executive said.

Further monetary easing after five quarter-point rate cuts to 5.75 percent, still the EU’s highest benchmark rate, should be considered “very cautiously,” the IMF said, adding that lower borrowing costs were “unlikely to have a material impact” on lending and demand as long as the banking environment remained unchanged.

The IMF statement followed a so-called Article IV consultation and was not a negotiating mission for a loan which Hungary requested in 2011.

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

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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