Hungary in serious danger on economy, PM warns

Hungarians should brace for tough times in the autumn as the central European country of 10 million faced two choices: slipping back onto what he called the Greek path or forging ahead with economic plans

Hungary in serious danger on economy, PM warns

Hungary faces a "seriously dangerous" situation due to extraordinary risks from the euro zone debt crisis and must press on with budget cuts or risk a Greek-style loss of economic sovereignty, Prime Minister Viktor Orban said on Monday.

Orban's government was betting on a global upturn when it broke ties a year ago with the International Monetary Fund and opted for a 16 percent flat income tax and windfall taxes on businesses while seizing pension fund assets worth some $15 billion.

An income tax cut worth 400 billion forints ($2.1 billion) has failed to boost consumption as a rally for the Swiss franc raised mortgage payments for thousands of households who borrowed in the franc while exports have also slowed as growth abroad weakened.

"Hungary has drifted into a seriously dangerous situation over the past three months," Orban told a meeting of ambassadors. "The euro crisis ... poses extraordinary, immediate threats to Hungary."

"If I want to be frank with you but avoid giving my words too much pathos, I must tell you that what is at stake is the issue of Hungarian sovereignty," Orban said.

He said Hungarians should brace for tough times in the autumn as the central European country of 10 million faced two choices: slipping back onto what he called the Greek path or forging ahead with economic plans started over a year ago.

For a factbox on key vulnerabilities, see

For an analysis on the road ahead, see

In an interview late on Sunday, Orban's state secretary outlined plans to plug an 80-100 billion forint hole in the 2011 budget resulting from poorer than expected growth and again laid into the central bank for keeping interest rates high.

Economic growth ground to a halt in the second quarter and slowed to just 1.5 percent on an annual basis, prompting the government to seek further budget cuts to keep the deficit at 2.94 percent of GDP, as agreed with the European Union.

High interest rates

A bloated public sector and high borrowing abroad have prompted periodic market meltdowns in Hungary in the past decade and the central bank has had to keep interest rates much higher than its neighbours at 6 percent to keep markets happy.

Secretary Mihaly Varga said a recent fall in inflation did not justify high official interest rates, which reduced banks' willingness to lend and dragged on economic growth.

"In a country with such a high interest rate level as Hungary, where interest rates still do not want to decline, even though inflation is becoming less of a threat, why are banks still not lending?" Varga said.

"They are not lending because it is more comfortable to keep money at the central bank than to finance companies and lend."

Varga told private broadcaster HirTV in the interview that growth in 2011 would be "2 percent or less", well below earlier government expectations for 3.1 percent, pointing to lower tax revenues and threatening fiscal goals.

"The most important thing is for Hungary to deliver on its commitments arising from the government programme on the one hand and the convergence plan on the other hand," Varga said.

"In the convergence plan we have committed to cutting state debt, and, very importantly, to keep the 3 percent (of GDP) budget deficit that Hungary has failed to adhere to for years."

"Not simple"

Varga said covering the 2011 shortfall would "not be simple" and would require reviewing both the revenue and spending side of the budget. It could also entail a delay to further planned income tax cuts for households.

The centre-right government launched a flat 16 percent personal income tax cut from January but this tax is currently levied on a tax base which equals the gross salary plus social taxes paid by employers. The government had planned to reduce the tax base in 2012 and 2013.

Asked if a delay to phasing out this so-called supergrossing of salaries was possible, Varga said:

"This is a realistic alternative, we need to examine this opportunity if we cannot make this gap this year disappear using other funds, and we have not even talked about 2012," Varga said.

"(We need to examine) how we could introduce the tax system in a slower way so that it will not create such a big shortfall."

Adding to Hungary's fiscal woes next year is a July European court ruling, which said part of its regulations on VAT refunds to businesses went against EU law.

Varga said that according to first estimates, the government may refund about 240-260 billion forints to enterprises due to the court ruling.

The main opposition Socialists issued a statement saying the government's economic policy had failed, calling for the removal of Economy Minister Gyorgy Matolcsy.

Reuters

Last Mod: 29 Ağustos 2011, 15:38
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