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EU criticizes Hungary's overspending, gives it until 2009 to cut debt

EU criticizes Hungary's overspending, gives it until 2009 to cut debt

The Hungarian government's overspending has "considerably damaged" the nation's economic credibility, the European Commission said Tuesday as it gave the country until 2009 to cut the EU's largest budget deficit.
The EU criticism comes after protests following a leaked recording in which Prime Minister Ferenc Gyurcsany said the government had lied "morning, evening and night" about the state of the economy to increase the chances of electoral victory and had failed to implement reforms.
"This highly expansionary fiscal policy has considerably damaged the credibility of the fiscal policy and has been weighing increasingly on the economy," said the EU executive arm's report on the country's budget plan.
Hungary's deficit is forecast to hit 10.1 percent of gross domestic product this year _ well above the 3 percent ceiling EU nations are asked to keep to in order to keep their economies stable. Budapest has already abandoned a 2010 target date to join the euro, and its high debt will likely keep it out of the European shared currency for the near future.
EU Economic and Monetary Affairs Commissioner Joaquin Almunia said the situation was "very serious" and called for Hungary to cut the deficit as quickly as possible, undertake economic reforms and introduce stricter spending controls.
"I know that the effort demanded from the Hungarian people is huge. But it is worth it. It is absolutely paramount to put Hungary's public finances on a sounder footing for the sake of a healthy, stable and growing Hungarian economy and for the welfare of the Hungarian people," he said in prepared remarks distributed by his Brussels office.
However, he said Hungarian plans to raise taxes and cut public spending should meet new targets _ but only if Budapest enforces spending freezes in 2007 and 2008 and cuts back in other areas. The government's weak control over its budget risked "substantial slippages," he warned, and it had yet to provide details of how it planned economic reforms.
The EU report says Hungary's budget deficit started to balloon after 2001 when significantly higher public spending and generous wage increases pushed its debt over 5 percent of GDP.
Budapest overshot its own budget estimates with "virtually every" fiscal report, it said, tracking how the climbing deficit consistently missed a set of downward targets agreed on with EU governments.
"A large part of the budgetary slippages stemmed from over-optimistic budgetary planning, large expenditure overruns, tax cuts and the overall lack of sufficient structural adjustment efforts," it said.
However, it recommended that EU finance ministers give Hungary until 2009 _ one year more than the current program _ to bring its budget deficit down to 3.2 percent. Half of the reduction is slated for next year.
Ratings agency Fitch was skeptical this would happen, downgrading Hungary's credit rating to negative from stable last week and saying it believed the public protests would spur the government to soften its planned reforms in favor of political security.
But Hungarian Finance Minister Janos Veres said Tuesday he was convinced his current spending plans could reduce the deficit and remove the threat of the EU pulling development funds worth 8 trillion forints (US$37.22 billion, euro29.36 billion).
"For the government the task is clear," Veres said. "In the first few years the most crucial steps need to be taken."
Almunia warned that the EU's executive arm would watch Budapest closely. The report cautions that Hungary may have underestimated inflation over the next three years _ casting doubt on the nation's forecasts that it will peak at 6.2 percent in 2007 and fall to 3 percent by 2009.
The Commission said the earlier _ much lower _ forecast for the deficit to reach 6.7 percent this year did not include the cost of pension reform, the full price of building new highways, overruns on gas price and housing subsidies and revenue shortfalls.
It also blamed a number of government policies it said it did not know about last May, such as debt cancellation and exceptionally large transport investment.
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Associated Press Writer Palma Benczenleitner in Budapest contributed to this story.


Updated : 2021-10-16 10:41 GMT+08:00