Updated convergence programme of Hungary, 2007-2011 - Main contents

EN

Official Journal of the European Union

C 49/20

On 12 February 2008, the Council examined the updated convergence programme of Hungary, which covers the period 2007 to 2011.

Over the last several years, Hungary has fallen behind in the catching-up process compared to its neighbours. This has been coupled with increasing fiscal laxity, which contributed to considerable internal and external imbalances and relatively tight monetary policy. Since mid-2006, the Government has taken comprehensive measures to consolidate public finances.

These have set the budget deficit on a decreasing trend from a peak of over 9 % of GDP in 2006 to around 6 % (and possibly below, according to the most recent estimates) in 2007 and have started to lead to an improvement of the external balance. At the same time, the indirect tax increases and hikes in regulated prices have temporarily put upward pressure on inflation, which should decelerate again from 2008. The continued fiscal consolidation supported by improved fiscal governance and enhanced structural reforms should form the basis of a return to robust and balanced growth. It could also contribute to providing more room for manoeuvre for monetary policy and to lowering the risk premia.

The baseline macroeconomic scenario projects real GDP growth to decelerate to below its long-term average in 2007 and 2008 and to return to 4 % or above from 2009 onwards. In light of currently available information (2), the growth assumptions appear to be plausible for 2007 and 2008, but rather favourable thereafter. In particular, starting from 2009, the programme projects a rather quick recovery and hence a somewhat favourable evolution of domestic demand, in parallel with only a moderate decline in the contribution of net exports. The envisaged robust growth after 2008 hinges on a somewhat optimistic assumption for the increase of labour productivity and on the projected acceleration in private consumption and rebound in investment. The projected improvement in the external balance is plausible provided that fiscal consolidation is continued as planned. Although the foreseen decline in inflation from 7,9 % in 2007 to around 3 % in the outer years is broadly plausible, higher-than-projected wages and sustained pressure from commodity prices may pose risks to the programme's inflation trajectory and thus could further delay nominal convergence. In this context, the continued implementation of structural reforms plays an important role.

For 2007, the general government deficit is estimated at 6,4 % of GDP in the Commission services' autumn 2007 forecast, against a target of 6,8 % of GDP set in the previous update of the convergence programme. The programme foresees an even lower deficit outcome of 6,2 % of GDP for 2007, which in light of the most recent information on budgetary implementation appears to be even surpassed. In mid-January, the Government announced yet again a lower deficit forecast of 5,7 % of GDP. The overachievement of the 2007 deficit target is chiefly due to a favourable base effect from 2006 as well as higher-than-expected revenues resulting from tax increases and the implementation of a set of measures addressing tax evasion. The reduction in the...