Eu Sees Hungary Breaching Deficit Limit in Orban Setback

The European Union may release Hungary from its monitoring program for budget offenders, a pre- election boost to Prime Minister Viktor Orban.

Orban’s Cabinet committed to “structural” measures, to be presented in April, that will keep the deficit within the EU limit of 3 percent of gross domestic product, European Union Economic and Monetary Affairs Commissioner Olli Rehn said in Brussels today. The gap may widen to 3.4 percent of GDP this year and in 2014 from 2.4 percent in 2012, the European Commission, the EU’s executive, forecast today.

Orban, who faces re-election next year, sacrificed growth to remove the threat of cuts in EU funding, which finances 95 percent of all development projects in the country, the highest proportion in the bloc, according to the government. Extraordinary industry taxes in the past two years helped push the economy into its second recession in four years in 2012. GDP may shrink 0.1 percent this year and rise 1.3 percent in 2014, the Brussels-based commission said.

“Hungary is one of the promising half-dozen countries that may receive abrogation from the” so-called excessive-deficit procedure “in the course of this spring,” Rehn told reporters today.

The forint weakened 0.1 percent against the euro to 292.12 per euro at 4:21 p.m. in Budapest, paring losses after it dropped to a two-week low of 293.99 earlier in the day. Yields on Hungary’s 10-year forint-denominated bonds fell four basis points, or 0.04 percentage point, to 6.236 percent, the lowest in five weeks. The yield fell to a seven-year low of 5.99 percent on Jan. 3, compared with 10.8 percent a year earlier.

Forecasts Questioned

The EU’s forecasts are inaccurate because GDP will grow almost 1 percent this year, allowing the government to keep the budget gap “well below” 3 percent, the Economy Ministry said in an e-mailed statement today.

“Don’t let the European Union’s forecasts bother you because it hasn’t been able to predict our budget deficit a single time,” Orban told an audience at his annual state-of- the-nation speech in Budapest today.

The commission failed to take into account some revenue items, including proceeds from the introduction of an electronic road-toll network, the ministry said. Rehn said the EU executive is still verifying some budget items to determine whether they are temporary or structural.

‘Debt Trap’

Orban wants to persuade EU officials to release the country from budget shackles in the run-up to 2014 elections, which would give the government more fiscal freedom. The Cabinet, which plans to cut utility prices by 30 percent by mid-2014 and may raise teachers’ wages, has said it won’t go on a spending spree before the ballot.

Hungary has been under the 27-nation bloc’s excessive- deficit procedure for budget offenders since it joined in 2004.

While Economy Minister Gyorgy Matolcsy yesterday said Hungary had “emerged from the debt trap” and made its budget sustainable, the commission has questioned the sustainability of the debt reductions.

The 2013 deficit may rise after the phasing-out of extraordinary taxes introduced in 2010 and other one-time revenue items accounting for 1 percent of GDP, the commission said today.

The measures to reduce the deficit and debt levels have included the nationalization of private-pension fund assets and retroactive extraordinary taxes on industries, including Europe’s highest bank tax.

Dwindling Investment

Those contributed to dwindling investment and lending, pushing the economy into its second recession in four years in 2012. The economy’s potential growth rate is near zero, according to government estimates. Investment will be 17.6 percent of GDP this year, the lowest since 1992, the International Monetary Fund forecasts.

Growth this year may exceed the government’s 0.9 percent estimate because of a boost from agriculture and car production, Cabinet spokesman Andras Giro-Szasz said on Jan. 25. That contrasts with the EU’s assessment, which projects “stagnation” this year.

The public debt level may drop to 77.7 percent of GDP next year from 78.7 percent this year, the commission said. The inflation rate may decline to 3.6 percent this year and 3.3 percent in 2014 from 5.7 percent in 2012, it forecast.

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