Strasbourg, 26/09/2006 (Agence Europe) - On Tuesday, the European Commission decided to approve Hungary's convergence programme, while insisting on very strict implementation. While the previous version lacked precision, the Hungarian authorities forwarded a new programme early September as requested of them by the Commission in January (EUROPE 9107). The new convergence programme provides for bringing down the excessive deficit from 10.1% this year to 3.2% in 2009, but implementation of the adjustment plan will be essential, the Commission states in its analysis. Although in the spring economic forecasts, the Commission predicted a deficit of 6.7% of GDP for the current year, the situation has proven more difficult than expected. Nonetheless it does not come as a “total surprise”, admitted the Commissioner for economic and monetary affairs, who presented the results of his assessment to the press in Strasbourg on Wednesday.
According to Joaquin Almunia, to the initial 6.7% envisaged must be added: - 1.5% for the cost of pension reform (it is compulsory to take this into account from next year on); - 1.1% under the classification of spending for motorways that the Hungarian government had not included at the time; - 1.6% in various budgetary measures (such as the fall in taxation or suppression of the local government debt); - and, finally, 0.7% in surplus current expenditure. This brings the deficit to 11.6% in 2006, but a package of measures adopted in June by the Hungarian government must correct it by 1.5% this year, allowing it to reach 10.1% of GDP. “We are pleased that concrete measures have already been taken, but there are major risks and challenges”, Joaquin Almunia said at the press conference, specifying that the Commission will continue to closely follow the situation in order to ensure that the measures announced are fully implemented and that the government resolutely applies its structural reform and expenditure management programme.
The macro-economic scenario presented by the Hungarian authorities is plausible but there are still “substantial risks”, Almunia explained, bearing in mind the magnitude of the adjustments foreseen. The main thing is for correction (over 6 percentage points) to be achieved in 2007 and 2008, the Commission stressed. Noting the updated programme, it expects a deficit ratio compared to GDP of 6.8% next year. The debt level will continue to increase to reach 72.3% in 2008, and it will not fall until 2009.
Given this slide which threatens the long-term stability of Hungary's public finance situation, the Commission now suggests that the Council recommend Hungary correct its deficit by the end of 2009 at the latest, instead of end 2008 as in its recommendation of July 2004. Special attention should be paid to reducing the debt, preferably before 2009, as well as to improving the institutional control of budgetary procedure, Mr Almunia stressed. In 2005, the Commission and the Council had already stressed on two occasions the lack of concrete measures by Budapest, whose excessive deficit was constantly on the rise. While excessive deficit procedure against Hungary makes it impossible to pass on to the sanctions stage of the Stability and Growth Pact (SGP), Commissioner Almunia had already recalled in the past that it was possible to suspend payments under the Cohesion Fund. Stressing on Tuesday that it was a separate procedure from that for excessive deficit, Mr Almunia nonetheless told EUROPE: “It is true that, if, within six months from now, the new judgement on the way in which Hungarian authorities have applied the updated convergence programme is negative, then the question will be brought up”. (See EUROPE 9272 for remarks by the Hungarian prime minister on the subject of public finance in his country).