Hungary has averted the risk of a fiscal crisis after making a “huge” adjustment that cut Hungary’s budget deficit forecasts by 5 per cent of gross domestic product in the last year, the new central bank governor told the Financial Times on Thursday.
Andras Simor, who took office in February and is seen as a political independent, rejected arguments that much of the dramatic shift in Hungary’s budget could be chalked up to higher than forecast inflation and growth and an under-forecast of revenues by the government.
Hungary’s central bank is now projecting the 2007 budget deficit to be around 6 per cent of GDP.
A year ago, the government was expecting a 2006 deficit to exceed 11 per cent. The final 2006 figure came in at 9.2 per cent of GDP.
“We have to recognise the fact that there have been enormous improvements,” Mr Simor said. “I think we are no longer looking at crisis scenarios and credibility is slowly being regained in the market.”
Mr Simor added that Hungary had been lucky to escape relatively unscathed from a period in which an external shock could have severely damaged the forint, Hungary’s currency.
“If we were not a member of the EU this time last year and the markets were a little less friendly toward risk in general, it could have been much, much more serious for us,” he said.
Though he tempered his optimism at times, Mr Simor gave an upbeat assessment of the government’s attempts to launch more sustainable budgetary savings through structural reforms.
So far, Hungary’s deficit reduction efforts have relied heavily on tax rises. Further cuts will require deeper changes to health care, education and state administration.
Mr Simor said changes in health care, particularly to the structure of drug subsidies, had begun to show a positive impact on the budget, and that “big changes” to government administration were on the way.
“I think a lot has been done. Unfortunately, a lot more needs to be done and the question is, ‘How many changes can a population absorb within a reasonably short period of time before they get totally tired of reforms,” he said.
Mr Simor said the “jury is still out” on whether the government had the courage to continue with painful reforms as 2010 elections approach.
After alarming investors and the European Commission with its runaway deficit, the government pledged last year to reduce the budget gap to 3.2 per cent of GDP by 2009, putting the country back on track to adopt the euro by about 2012.
Mr Simor declined, however, to offer his own estimate for when Hungary might adopt the euro.
“It doesn’t make sense to set targets now. The government has to keep meeting its budget targets, and once have regained credibility, we can start setting adoption targets again,” he said.
Mr Simor admitted that Hungary’s credibility in financial markets was not only damaged by overspending, but also by the politicisation of the central bank. He said several state institutions that required independence had been tainted by Hungary’s divisive political atmosphere.
“Unfortunately the Hungarian National Bank has been in the middle of the political fight, not only for the past six years, but since the political changes in the early 1990s,” he said.
He added that his job was now, not to point fingers at his predecessors but “to take the bank our of politics”.