Brussels, 18 February 2009
On 18 February, 2009, the European Commission examined the updated Stability and Convergence Programs of 17 EU countries including Bulgaria, the Czech Republic, Denmark, Germany, Estonia, Hungary, the Netherlands, Poland, Sweden, Finland and the United Kingdom (see IP/09/274 for separate programs). Hungary has made considerable progress to put its public finances on a sounder footing, and needs to sustain this effort to secure investor confidence
"We are going through a very serious crisis that is taking its toll on public finances. Fortunately, many countries have entered the crisis with public finances in a solid position, allowing them to the respond to the European Council's call for stimulus measures in 2009. Implemented swiftly and effectively, these measures should help to create, together with the bank rescue plans and the significant easing of monetary policy, the conditions for a gradual recovery in the second half of the year. If in 2010, as we believe, economic activity gathers momentum, fiscal policy needs to revert to a consolidation path. This is also important for Member States which are in a relatively favorable position in order to avoid a permanent deterioration in the sustainability of their public finances. In this context it is important that the Stability and Growth Pact remains the framework within which the Commission and the Council advices Member States on their conduct of fiscal policy
", said Economic and Monetary Affairs Commissioner Joaquín Almunia.
In spite of distinct improvements in its high imbalances, including the reduction in its budget deficit from 9.3% in 2006 to below 3½% in 2008, Hungary has been particularly exposed to the financial crisis due to still high levels of government and external debt. Thus, to restore investor confidence, Hungary adopted a policy of further fiscal adjustment and tighter deficit targets.
The updated Convergence Program submitted in December is based on the economic policy program adopted by the government in response to the financial crisis and supported by international financial assistance, including a €6.5 billion loan from the European Union.
The program foresees a continuation of the front-loaded budgetary consolidation strategy, with another important reduction in 2009 to 2.6% of GDP. Thereafter, it plans a more moderate progress towards a deficit of 2.2% in 2011. In view of the recent substantially deteriorated macroeconomic outlook and the related budgetary risks, the government adopted on 15 February an additional corrective package of 0.7% of GDP and slightly revised its 2009 deficit target upwards.
The sustainability of public finances hinges on the continuation of structural reforms, as recently announced, to the extent that they increase long-term growth, help meet budgetary targets, and reduce the country’s vulnerabilities.
Given this assessment, Hungary is invited,
- (i) in view of the risks, maintain adequate buffers, take the necessary measures to keep the budget deficit below 3% of GDP and ensure that adequate progress in budgetary consolidation is made, thereby setting the debt-to-GDP ratio on a declining path towards the 60% of GDP threshold.
- (ii) ensure full implementation of the fiscal responsibility law and continue the expenditure moderation through additional structural reforms and strengthen financial market regulation and supervision. Finally,
- (iii) Hungary is invited to further improve the long-term sustainability of public finances namely through a continuation of the reforms in the pension system.
Full text of the press release:
Stability and Convergence Programs
According to Council Regulation (EC) No 1466/97 on the strengthening of budgetary surveillance and the surveillance and coordination of economic policies, Member States must submit updated macroeconomic and budgetary projections every year:
- Such updates are called stability programs in the case of countries that have adopted the euro, and
- Convergence programs in the case of those that have not yet done so.
This regulation is also referred to as the 'preventive arm' of the Stability and Growth Pact.