Hungary faces deficit pressure

AROUND €7bn of European funds due to Hungary could be suspended if the country does not bring its budget into line with the new EU rules, Euro Commissioner Olli Rehn has warned.

But many other countries could be forced to take additional measures to cut spending and increase taxes once the Commission revises its forecasts to take into account the economic downturn, the commissioner hinted.

Hungary was the only one of five member states examined by the Commission to take insufficient action to bring its budget below 3% of GDP in a sustainable manner. Belgium, Cyprus, Malta, Poland and Hungary were warned in November the forecasts suggested they were not on track and urged to take additional action.

Four made additional cuts to spending and increased income-raising measures to bring their budgets into line. Poland used a clause it negotiated into the new rules that allowed them factor in the negative budget impact of pension reforms.

However, Hungary, which has failed to meet the 3% of GDP deficit target since the country joined the EU in 2004, was warned last July to take corrective action. While its budget was 3.5% in deficit last year this was due to once-off measures including a bank tax and the controversial transfer of private pension funds worth 9.75% of GDP to the public sector, without which the deficit would have been 6%.

“This cannot be considered a sustainable correction,” said Mr Rehn. He was unwilling to accept some similar once-off measures this year that appear to bring the deficit to the 3% threshold.

Since the country is not a eurozone member, it will not face a financial sanction under the new rules, but Mr Rehn said that, from January 13, the country could face suspension of commitments from the cohesion funds. Hungary had €8.6bn from cohesion funds to be spent before the end of 2015, but they have only spent about €1bn of it.

This is the first time the rules were used of the “six-pack” of measures that came into force at the start of the year, giving the EU power to order governments to change budgets and policies to cut debt and deficits.

Of 27 EU states, only four (Sweden, Finland, Estonia and Luxembourg) are not running excessive deficits.