2009-10-14 | Tomasz Dąborowski

 
The budget bill for 2010 prepared by the technical government led by Prime Minister Gordon Bajnai, supported by the socialists and liberals, was read for the first time at the Hungarian parliament on 6 October. The bill provides for a continuation of the previous policy of cutting costs and a significant - especially in comparison with the other countries in the region - reduction of the budget deficit to 3.8% of GDP.
The draft budget fits with the public finance reform conducted by Budapest over the past few months. It has caused a stabilisation of the state finance sector following the economic crisis which had become aggravated in the second half of 2008. Although the opposition right-wing Fidesz party, which is likely to win the parliamentary elections next year, has criticised the budget bill, the restrictive fiscal policy will be continued in 2010.
 

Public finances, a flaw in Budapest's policy
 
Hungary was the first EU member state to apply in October 2008 to the International Monetary Fund (IMF) and other financial institutions (the World Bank Group and the European Bank for Reconstruction and Development) for stand-by loans to stabilise the country's financial situation. The international institutions granted a total loan of 20 billion euros; however availability of subsequent tranches was made dependent on carrying out a number of reforms, first of all of the fiscal and pension systems (by September 2009 Hungary made use of nearly 17 billion euros from those funds).
 
International assistance was necessary because Budapest was unable to obtain sufficient funds from the private market to finance its vast public debt which had reached 73% of GDP at the end of 2008 and the very high foreign debt which exceeded 100% of GDP at the end of the same year. Such indices, along with those generated by the Baltic states, were the worst in Central Europe.
 

Implemented reforms and the crisis budget for 2010
 
The economic crisis and the need to meet the requirements imposed by the IMF forced Budapest to carry out reforms. This May and June Hungary's parliament passed a number of laws introducing structural changes into the pension and the tax systems. The changes include a gradual raising of the retirement age (to reach the final threshold of 65 years), a liquidation of 'thirteenth' pensions, increasing the VAT rate (from 20% to 25%) and introducing a real estate tax. Additionally, the levies imposed on employers have been reduced (for example, the medical and social insurance premium rates have been lowered by 10 and 3 percentage points, respectively).
 
The laws will allow Hungary to keep its budget deficit at a level not higher than 3.9% of GDP in 2009 and thus meet the IMF's requirements. Owing to this it will have the lowest budget deficit rate among all other Central European countries. Additionally, Hungary will keep the lowest level of public finance deficit in the region (which covers not only the central budget but also the budgets of local governments and state agencies). According to the European Commission's forecasts, it will reach 3.4% of GDP in Hungary (for comparison: 4.3% in the Czech Republic, 4.7% in Slovakia, 5.5% in Slovenia and 6.6% in Poland).
 
At the end of November the parliament will vote on the budget act for 2010 which provides for a continuation of the Hungarian government's restrictive fiscal policy. According to this bill, in Hungary the recession will continue (GDP will decrease by 0.9%), the unemployment rate will grow to 10% and the budget gap will slightly shrink to 3.8% of GDP (as with this year, this is one of the lowest expected budget deficits in the region). The bill is likely to be passed with small amendments; the socialists and the liberals, who support the government, have promised to support it, while the opposition Fidesz party is unable to block it.
 

Forecast
 
The prospects for a stabilisation of Hungary's public finances are good owing to the recent reforms and the IMF's declared readiness to extend its potential assistance to Hungary (this has been signified for example by the Fund's decision this October to extend the credit line for Hungary from March to October 2010).
 
However, Fidesz's expected economic policy (the party is as of now the most likely winner of the parliamentary elections scheduled for spring 2010) may raise concern. The party has criticised the draft budget for the next year and promised to revise it when it forms the government. At the same time, Fidesz's leader and the probable future prime minister, Viktor Orban has declared his will to adopt a less restrictive fiscal policy in order to stimulate economic growth. However, it seems that declarations like this have to be interpreted first of all in the context of pre-electoral rhetoric. The new government will be formed by the middle of the next year, and any adjustment of the fiscal policy will be possible in 2011 at the earliest.
 

The budget bill for 2010 prepared by the technical government led by Prime Minister Gordon Bajnai, supported by the socialists and liberals, was read for the first time at the Hungarian parliament on 6 October.

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