EU Gets Tough On Hungary’s Swelling Deficit

EU finance ministers have agreed that member states cannot omit any budget expenses from their deficit calculations, regardless of the purpose of the state expenditure. However, when the European Committee (EC) starts proceedings against countries with budget deficits higher than 3% of their GDP, costly reform projects such as pension and healthcare reforms will be judged more favorably than other state projects as they help the structure of state expenditure on the long run.

“It doesn’t mean, however, that any country with a budget deficit higher than 3% can enter the euro zone,” said the spokesman of Joaquin Almunia, the EU commissioner for economic and monetary union.

The Hungarian government submitted its convergence program outlining its plan to join the euro zone last May. In its program Hungary forecast that budget deficit will be reduced gradually to 2.7% of GDP by 2008. The EC questioned the probability of this schedule as early as last summer. Since then Hungary’s budget figures have reinforced the EC’s skepticism. Hungary’s budget deficit in 2004 reached 5.3% of GDP, up from the original forecast of 4.6%. As a result, the government amended its convergence program, but it resulted in a plan with more drastic reductions towards the end, as the deficit figure for 2008 was upped to 2.8% only.

The EC views the program as leaving only small reserves to meet the euro zone conditions, and has urged the Hungarian government to make “further efforts” to cut deficit.