Hungary May Win EU Reward for Budget Cuts

Hungarian Prime Minister Viktor Orban’s three-year fight to fix public finances may be rewarded today if the European Commission recommends ending nine years of budget monitoring.

The commission, the European Union’s executive, will present recommendations for its 27 member states and will name candidates it sees fit to exit the deficit procedures, according to its website. The final vote on the proposals will be taken at a meeting of the bloc’s finance ministers in June.

Orban, who sacrificed growth to keep the budget shortfall within the bloc’s limit, faces elections in 2014. He has made an exit from EU fiscal monitoring a priority to remove the threat of cuts in funding from the bloc, which accounts for 95 percent of infrastructure investments. Hungary probably convinced the commission, according to Raffaella Tenconi, an economist at Bank of America (BAC) Merrill Lynch.

“At this stage, exit in 2013 is a political victory for Prime Minister Orban but for fiscal policy it doesn’t make a difference in the near term,” she said in an e-mail yesterday.

The forint gained to as much as 285.58 per euro yesterday, its strongest in more than five months, and traded at 286.83 at 6:08 p.m. in Budapest. The benchmark BUX stock index advanced 1.1 percent to 19,481.47, its highest since Jan. 30. The yield on the government’s dollar bonds maturing in 2023 rose to 5.17 percent from 5.11 percent, according to data compiled by Bloomberg.

‘New Measures’

The Orban Cabinet’s reliance on extraordinary industry taxes contributed to a recession last year and has been opposed by the EU for damaging growth prospects. Hungary needs to keep its budget shortfall below the bloc’s limit of 3 percent of economic output to end the monitoring. The shortfall was 1.9 percent last year and the commission forecasts to widen to 3 percent this year and 3.3 percent in 2014.

The Economy Ministry last week proposed levying a tax on advertisements to get back below the limit. The government announced on May 10 that it would freeze 92.9 billion forint ($417 million) of budget expenditures this year and next and said it was ready to save another 80 billion forint in 2014 to keep the deficit in check.

“By taking new measures the government can ensure the deficit will remain clearly below 3 percent this year and next,” Economic and Monetary Affairs Commissioner Olli Rehn said May 3 after the forecasts were released.

The government, which disputes the EU estimate, predicts a shortfall of 2.7 percent for both years.

Growth Forecasts

The government last year backtracked on a pledge to cut the bank tax in half and introduced a financial-transaction tax to rein in the deficit. The EU and the International Monetary Fund had urged the country to ease the bank burden to boost growth after relying on a policy of squeezing lenders to cover budget holes.

Orban has argued that the economy will expand more than the European Commission’s 0.2 percent forecast for this year, allowing him to keep the shortfall within the bloc’s limit.

The economy grew 0.7 percent in the first quarter from the previous three months, expanding for the first time since 2011. The Cabinet forecasts 0.7 percent growth this year, with Orban predicting an expansion of as much as 1 percent.

“Freeing Hungary from the excessive-deficit procedure would mean that potentially less new sectoral tax hikes are needed, which would be good for business sentiment,” Annika Lindblad, a Helsinki-based analyst at Nordea Bank AB (NDA), said in an e-mailed note yesterday. A negative EU assessment would hit sentiment hard, she wrote.

To contact the reporter on this story: Edith Balazs in Budapest at ebalazs1@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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