Hungary Commits to 3% Budget Deficit After Battles With IMF, EU

Hungary said it will cut the 2011 budget deficit to less than 3 percent of gross domestic product as Prime Minister Viktor Orban’s government gave up its drive for greater leeway to boost economic growth.

“The fog has finally lifted,” Economy Minister Gyorgy Matolcsy told reporters today in Budapest, referring to the commitment. “The European Union will provide all its support for a deficit below 3 percent of gross domestic product but won’t back us with a higher deficit.”

The shortfall has been a source of tension since Orban took office in May amid pledges to spur growth and shun budget cuts after five years of austerity. Orban’s refusal to agree to a 2.8 percent shortfall for 2011 led to the breakdown in talks with the International Monetary Fund and EU on July 17, boosting cost of insuring Hungary’s debt against default.

Today’s commitment will increase investor confidence, guaranteeing that Hungary can finance the deficit on the market through 2011, Matolcsy said. That will eliminate the need to take a loan from the IMF or EU once the current 20 billion-euro ($26 billion) bailout expires in October, he said.

The forint strengthened 0.7 percent against the euro after Matolcsy’s comments and traded at 287.46 at 4:35 p.m.

“The message is unequivocally positive,” Daniel Bebesy, who helps manage $1.5 billion of mostly Hungarian government debt at Budapest Investment Management, said in an e-mail. “They finally realized they don’t have maneuvering room.”

The government needs 200 billion forint ($887 million) of annual revenue from a special tax on financial institutions this year and next to meet its budget targets, Matolcsy said. In addition, it will need to reduce spending by as much as 200 billion forint next year and the economy must grow by at least 2.5 percent.

Euro Adoption

Hungary, which joined the EU in 2004, has been forced to repeatedly postpone euro adoption target dates because of a ballooning budget deficit.

The government “doesn’t see clearly” when it will adopt the common currency, Matolcsy said. The Cabinet may be in a position in 2012 to name a target adoption date. One of the requirements is a deficit of less than 3 percent of GDP.

Hungary and eight other EU members are trying to persuade the EU to change its method for calculating deficits to account for pension reforms. In Hungary’s case, this would lower the shortfall by about 1.5 percentage points, Matolcsy said. The 2011 budget won’t assume this adjustment, he said.

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