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Hungary government announces new fiscal plan as Orbán is to meet Barroso

Hungary’s government plans new taxes and spending cuts to increase budget savings and meet deficit targets required to unlock European Union grants. The Cabinet sent its fiscal plan on Monday, dubbed Széll Kálmán Plan 2.0, detailing additional savings of 150 billion forint ($660 million) this year and 600 billion forint in 2013, the Economy Ministry said on its website. The measures are on top of budget steps announced last year.
Hungary has been on the EU’s excessive-deficit list since joining the bloc in 2004 and risks losing funds in 2013 if it fails to show it can sustainably rein in its shortfall. The country can “safely” meet its deficit targets of 2.5 percent of gross domestic product in 2012 and 2.2 percent in 2013, the Budapest-based ministry said today.
“This program proves that the government is able to safeguard the stability of public finances and kickstart growth even in a less favorable economic environment,” the Ministry said on its website.
Prime Minister Viktor Orbán turned to the International Monetary Fund and the EU for financial assistance in November after the forint dropped to a record against the euro and as Hungary’s credit rating was cut to junk. Formal talks have yet to start as the nation remains embroiled in a legal dispute with the trading bloc over the independence of the central bank and other institutions.
Hungary won’t compromise in all EU conditions for bailout talks, Orbán told reporters in Brussels on Monday. He is scheduled to meet European Commission President Jose Manuel Barroso Thuesday.
Asked whether Hungary can start negotiations with contested issues remaining unresolved, Orbán said: “I can’t tell you, we’ll try.”
The forint weakened 0.9 percent, the most in almost two weeks on Monday, to 299.54 per euro by 4:40 p.m. in Budapest, depreciating the most among more than 20 emerging-market currencies tracked by Bloomberg. The benchmark BUX index fell 1.8 percent, led by a 2.8 percent plunge in OTP Bank Nyrt. (OTP) Magyar Telekom Nyrt. (MTEL) declined 1.7 percent.
“The trouble with Hungary now is that everyone is so focused on the talks between the EU, the IMF and the government,” Christian Lawrence, a London-based currency strategist at Rabobank International, said by telephone today. The forint “will continue to drift lower unless we have a concrete resolution to the EU-IMF deal,” Lawrence said.
The government expects the economy to expand 0.1 percent this year and 1.6 percent in 2013 and sees annual average inflation of 5.2 percent in 2013 and 4.2 percent in 2013.
Hungary will levy a 0.1 percent tax on bank transactions from 2013, yielding between 130 billion forint and 228 billion forint of revenue a year. The tax will apply to private and corporate bank transactions, including cash deposits and withdrawals, bank card transactions as well as financial transactions carried out at post offices.
The limit will be 30,000 forint per transaction with the possibility of turning it into a progressive tax or levying a higher rate on cash withdrawal, according to the plan.
The government will introduce a telecommunications services tax from the second half of 2012, charging 2 forint per minute of phone call or per text or multimedia message. The new levy is expected to yield 30 billion forint this year and 52 billion forint annually from 2013.
The new levies on the financial and telecommunication industries are designed to replace extraordinary industry taxes that were in place since 2010 because of the crisis, Orbán said.
“I have to say very openly that because the crisis is still here we just simply can’t get rid of them,” he said.
The Cabinet will maintain a 16 percent income tax on energy suppliers introduced in 2009 and will extend it to other public utility companies, boosting revenue by 55 billion forint a year, according to the plan.
A unified insurance tax, to be levied on property and accident policies with a 10 percent rate, on car insurance with 15 percent rate and a 30 percent rate for mandatory car insurances, will result in 15 billion forint in extra revenue.
The Cabinet will cut drug subsidy spending by 10 billion forint in 2012 and 40 billion forint in 2013, according to the plan. Spending by ministries and other state institutions will be reduced by 44.7 billion forint each this year and next.
Changing value-added tax rules in agriculture will bring in 10 billion forint in 2012 and 15 billion forint in 2013, according to the document.
The budget plan presented today “suffers from the same shortcomings as its 1.0 version: significant implementation risks and no sight for better growth prospects,” Gábor Ambrus, a London-based analyst at 4CAST Ltd., wrote in a note sent by e- mail to Bloomberg. “Furthermore, the plan does not bring an EU/IMF loan agreement any closer.”

A never ending story: the Central Bank dispute
Orbánis refusing to cede ground to Brussels in a dispute over central bank independence, preventing Budapest from starting talks on an emergency credit line.
Neither side is optimistic about an agreement at the meeting in Brussels, raising the risk of a further delay to the international financial support analysts see as vital to sustaining the Hungarian economy.
“These are tactical but not strategic plays by Orbán,” said Mujtaba Rahman, an analyst at Eurasia Group. “The longer this plays out, the less leverage the government will have. The government does not seem to understand that.”
In January the Commission expressed concerns that Mr Orbán’s sweeping constitutional reform threatened the independence of the central bank, the judiciary and the country’s data protection monitor.
While Mr Orbán has addressed some of the demands made by the Commission to bring the legislation into compliance with EU law, several issues remain unaddressed. Speaking in Brussels on Monday, Mr Orbán predicted that differences over the central bank and the pensions of judges would have to be resolved in court.
The question of central bank independence was particularly important because the Commission held it out as a precondition to begin talks on Budapest’s request for a multibillion-euro credit line from the EU and the International Monetary Fund.
The main sticking point is a proposed restriction on the salary of the central bank governor, which Mr Orbán insists is a “general public office salary cap” and no impediment to central bank independence. “They say this is illegal. We don’t think so,” he said.
“Interest rates are growing, growing and growing. It is not an easy period for the country,” Mr Orbán added. “But we have to find a solution. It is a very tough negotiation. We will not give up the independence of the country. We will not accept double standards.
“But at the same time to get a precautionary loan we have to do something and we understand that,” he said.
He bristled at the conditions being placed on Hungary before it can start talks with the IMF over a standby loan or bailout, complaining that Chad, Pakistan and Egypt received more favourable treatment than Hungary.
Hungary showed some willingness to meet EU budget deficit targets, unveiling a new levy on financial, telecoms and energy companies to replace one-off “crisis taxes” on industry.
While the measures are intended as a means to fill its budget black hole and avoid losing EU development funds, Brussels is still likely to harbour concerns given the package does not include wider structural reforms to the economy.
Source: Bloomberg, Financial Times

Last Updated on Friday, 30 August 2013 09:11

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