Hungary euro plan sticks to 2008 budget deficit goal

Hungary's revised convergence report, which is due to be submitted to the European Commission by the end of November, will pledge annual deficit cuts of around 0.6-0.7 percent of GDP. These would lead to a 2.9 percent shortfall in 2008, just below the EU's 3 percent limit, said Finance Ministry deputy state secretary Almos Kovacs.

"We still have the target to have a deficit below three percent by 2008 ... but because this year the outcome is higher than originally forecast, so the yearly cuts will be somewhat larger," Kovacs said in an interview late on Tuesday.

These deficit reductions would be in line with budget plans announced last month.

Like all new EU members Hungary wants to adopt the euro by 2010. But since submitting the plan's first version shortly after EU accession in May, Budapest has revised up this year's deficit target to 5.3 percent from 4.6 percent and set next year's goal at 4.7 percent, up from the originally-predicted 4.1 percent.

Central bank Governor Zsigmond Jarai told Reuters on Monday it would be "very difficult" to meet the 2008 target.

In its quarterly inflation report the bank forecast the government will yet again miss its targets with the 2004 deficit seen at 5.6 percent and next year's at 5.5 percent.

Kovacs, however, said the government believed both 2004 and 2005 goals were realistic, even though some uncertainty remained about this year's value added tax revenues, which were the main reason for the upward revision in the 2004 deficit.

He rejected accusations that the Socialist government may be now deliberately delaying VAT refunds for exporters until next year to hit the 2004 target.

"This is not a trick, this is an element of a fight against fraud and unfortunately it has its consequences in delays," Kovacs said, adding that tighter controls over who was really eligible for refunds could yet help to improve revenues.

Some economists estimated the delayed refunds could amount to 100 billion forints ($532 million), but Kovacs declined to give any figures.

He also said that despite missing the initial targets the budget had achieved its goals -- it tightened fiscal policy compared with 2003, and tempered domestic demand and price pressures.

Economists acknowledge that growth has become more balanced but say missed targets led to a loss of investor confidence which had to be offset by very high interest rates.

Kovacs said the central bankers have been closer to the mark in predicting on the 2004 deficit, but they may have been too pessimistic in their economic assumptions for next year.

"The central bank is forecasting slower consumption growth and real wage growth that what we forecast at the ministry."

Kovacs said the deficit reductions envisaged for next year and throughout the programme would rely solely on savings -- reducing the size of the public sector and cutting waste -- and no tax increases were planned to plug budget holes.

Source: Reuters