(9)

On 15 December 2011 Hungary submitted its Report on the measures taken in response to Council Recommendation of 7 July, 2009 under Article 126(7) of the Treaty, December 2011 (‘December 2011 EDP progress report’) to the Commission and the Council. On the basis of, inter alia, that progress report, an updated assessment of the action taken by Hungary to correct the excessive deficit by 2011 in response to the Council recommendation of 7 July 2009 leads to the following conclusions: (a) in 2010 the actual budget deficit exceeded the target by 0,4 % of GDP while economic growth was stronger in 2010 than foreseen by the Commission services’ 2009 spring forecast, which had served as the basis for the Council recommendations of 7 July 2009. In 2011, the general government balance is expected (both by the government and the Commission services’ 2011 autumn forecast – ‘2011 autumn forecast’) to turn into surplus, but only thanks to one-off revenues of 9,75 % of GDP linked to the transfer of the pension assets from the private pension schemes to the state pillar and of 0,9 % of GDP from sectoral levies (on telecom, energy, retail and financial sectors). Without one-off measures the deficit would have reached around 6 % of GDP and by far surpassed the 3 % of GDP reference value set in Article 1 of Protocol (No 12) on the excessive deficit procedure attached to the Treaty on European Union and the Treaty. In their 2011 autumn EDP notification, the Hungarian authorities projected a surplus of 3,9 % of GDP. The 2011 autumn forecast projected a somewhat lower surplus (notably 3,6 % of GDP), since it included the assumption of part of the debt of public transport companies (0,2 % of GDP). Based on recent information on one-offs received after the cut-off date of the 2011 autumn forecast, the surplus may even be lower. As to the structural deficit, it deteriorated by 1,5 % in 2010 and by 1,25 % in 2011, a cumulative 2,75 % of GDP, contrary to the Council recommendation of 7 July 2009 that recommended to ensure, at least, a cumulative 0,5 % of GDP fiscal effort over these 2 years as needed to correct the deficit by the 2011 deadline in a sustainable manner. This structural deterioration is a reflection of the fact that tax cuts amounting to over 2 % of GDP were not sufficiently compensated by structural measures; (b) regarding 2012, the draft budget targets a deficit of 2,5 % of GDP in line with the 2011 update of the Convergence Programme. In order to achieve this, the budget proposal contains several measures, altogether amounting to close to 4 % of GDP according to the authorities, while setting aside 0,7 % of GDP as an extraordinary reserve buffer. In contrast, the 2011 autumn forecast projects the 2012 general government deficit to reach 2,8 % of GDP and the structural deficit to improve by 2,4 % of GDP. Compared to the draft budget, these higher deficit numbers reflect, among other factors, a lower economic growth projection for 2012 by 1 percentage point as well as a more prudent assessment of revenue and expenditure developments. At the same time, the draft budget assumes in line with the relevant legislation that the extraordinary reserve is not expected to be spent. Nevertheless, the 3 % GDP deficit threshold is only respected on the back of a close to 0,9 % of GDP one-off revenue stemming from the abovementioned extraordinary sectoral levies; (c) according to the 2011 autumn forecast, and based on the usual no-policy-change assumption, the budget deficit was projected to deteriorate again to 3,7 % in 2013. This is chiefly due to the fact that the phasing out of the extraordinary levies of around 0,9 % of GDP is not expected to be counterbalanced by the additional savings from the structural reform programme for that year; (d) based on budgetary developments since the publication of the 2011 autumn forecast, the 2012 projection of general government deficit of 2,8 % of GDP still appears to be plausible (without taking into account the recent deterioration in the macroeconomic environment). This is explained by the fact that the deficit-decreasing impact of the new consolidation package of 0,4 % of GDP adopted by the government on 15 December 2011 is broadly counterbalanced by the deficit-increasing amendments adopted to the draft budget as well as by the net budgetary costs of the agreement with the banking sector concluded on 15 December 2011 which are not yet appropriately offset by additional consolidation measures; (e) for 2013, taking into account some further specifications of the structural reform programme (related government and Parliamentary decisions are detailed in Hungary’s December 2011 EDP progress report), the positive base effect from 2012 and the net cost stemming from the agreement with the banking sector, the 2013 deficit projection contained in the 2011 autumn forecast could be lowered from 3,7 % of GDP to 3,25 % of GDP, which is, nevertheless, still clearly above the 3 % GDP deficit threshold. The difference between the present updated assessment and the official target (2,2 % of GDP) laid down in the April 2011 Convergence Programme of Hungary notably stems from the fact that, in the absence of specific steps, about half of the structural reform programme could not be taken into account. The remainder of the difference compared to the official target is related to a higher expenditure forecast, notably in the area of state-owned transport enterprises and the maintenance of roads and also incorporates some difference in growth assumptions. Further structural reforms are planned, that could reduce the deficit forecast, but are not yet sufficiently specified; (f) the risks to these updated medium-term projections are tilted to the downside. There is some positive risk, notably stemming from the continuation of better-than-expected revenue inflows into 2012 and 2013. However, negative risks are expected to be higher than the offsetting positive risks. In particular, interest rates for all maturities have increased, the exchange rate has weakened, and the medium-term economic outlook seems to have worsened since the 2011 autumn forecast was published on 10 November 2011. Overall, if these factors were taken into account, the deficit projections in both 2012 and 2013 would be further increased by 0,5 % of GDP, leading to deficits of just above 3 % of GDP and 3,75 % of GDP, respectively; (g) according to the 2011 autumn forecast, gross public debt, given both the forecast deficit numbers and the exchange rate assumptions, is expected to increase again to nearly 77 % of GDP by 2013, following a temporary drop in 2011 due to the takeover of the private pension assets. If the medium-term budgetary projections were updated only on the basis of new measures adopted after the cut-off date of the forecast, the projected 2012 debt ratio would be largely unchanged and improve only slightly in 2013. However, further possible revisions in the budgetary projections, taking into account most notably the increased yields, the end-2011 HUF/EUR exchange rate of 311 (which is around 12 % weaker than the technical assumption used in the 2011 autumn forecast), as well as the weaker macroeconomic environment, would lead to a debt ratio of around 80 % in 2011, after which it would stabilise at around 78,5 % in both 2012 and 2013, whereas the Council recommended that the gross debt ratio should be brought onto a firm downward trajectory.