CUTTING IT CLOSE: GOVERNMENT LIKELY TO MEET 2009 AND 2010

UNCLAS SECTION 01 OF 02 BUDAPEST 000679

SIPDIS
SENSITIVE

DEPT FOR LAMORE; TREASURY FOR LNORTON, MHAARSAGER; COMMERCE FOR
ITA/MAC SSAVICH

E.O. 12958: N/A
TAGS: ECON EFIN PGOV HU
SUBJECT: CUTTING IT CLOSE: GOVERNMENT LIKELY TO MEET 2009 AND 2010
BUDGET TARGETS, BUT BARELY


1. (SBU) Summary: State Secretary Tamas Katona told analysts on
September 11 that the Finance Ministry is determined to meet its 3.8
percent budget deficit target for 2009. Despite shortfalls in tax
revenues, Katona believes that strict control of expenditures,
hiring freezes, and other cost saving measures would be sufficient
to offset shortfalls. On September 11, Finance Minister Peter Oszko
submitted the draft 2010 budget to Parliament. It includes further
expenditure cuts of HUF 448 billion (USD 2.4 billion). The 2010
budget is one of the final major elements of the Bajnai government's
crisis management plan, and following its expected passage at the
end of November, MPs will likely begin turning their full attention
to next year's national elections. End summary.

FIGHTING TO MEET TARGETS


2. (U) To help mitigate the effects of the deeper than expected
economic downturn, the GOH, in consultation with the EU and IMF,
increased its 2009 budget deficit target from 2.8 percent of GDP to
3.9 percent in May. During the first eight months of the year,
however, the budget deficit already reached approximately 3.5
percent of GDP (HUF 913.5 billion or USD 4.9 billion). The Finance
Ministry projects that VAT, corporate tax, and personal tax receipts
will be nearly HUF 156 billion (USD 834 million) lower than
expected. The Social Insurance Fund deficit is also projected to be
nearly HUF 150 billion (USD 800 million) larger than expected. The
overall deficit for 2009 is projected at HUF 991 billion (USD 5.3
billion),equivalent to approximately 3.9 percent of GDP.


3. (U) The GOH is undertaking a number of measures to ensure the
budget deficit does not exceed the 3.9 percent target, including
closer scrutiny of ministry spending, instituting a hiring freeze,
and enacting other cost-saving measures. For example, the Finance
Ministry created a system whereby it assigns Finance Ministry
officials to other ministries to report unreasonable spending over
HUF 10 million (USD 50,000). The Finance Ministry is also banning
spending of prior year residual funds.


4. (U) Other announced austerity measures include: suspending the
supplementary pension increase in November (about HUF 20 billion/USD
107 million) to offset pensioners price increases; obliging state
owned companies to transfer their dividends (HUF 20 billion) to the
government; and, freezing HUF 11 billion (USD 59 million) of the
general reserve.

TIGHTENING CONTINUES IN 2010


5. (U) On September 11, Finance Minister Peter Oszko submitted a
tight budget for 2010 based on a deficit target of 3.8 percent,
which assumes negative growth of 0.9 percent for 2010. The budget
represents a decrease in expenditures by HUF 448 billion (USD 2.4
billion) compared to 2009. This includes preliminarily announced
cuts of HUF 40 billion (USD 214 million) for public transport, HUF
125 billion (USD 668 million) for local governments, and HUF 140
billion (USD 749 million)for central budget organizations. Other
measures include reductions in pensions (HUF 80 billion/USD 428
million),housing (HUF 48 billion/USD 257 million),and energy price
subsidies (HUF 55 billion/USD 294 million).


6. (U) In Oszko's view, the draft budget would not only meet deficit
targets, but would also provide stimulus for growth, as balance
would be achieved through savings rather than increasing revenues.
He also told analysts that increased investor interest is a sign
that confidence in Hungary is increasing. (Note: In the September 9
government bond auction, the bid/cover ratio was 4.33, well above
August auction ratios of around 1.7. End note).

ANALYSTS CAUTIOUS: RISKS TO BUDGET REMAIN


7. (SBU) Analysts are cautious regarding the 2009 budget target, and
questioned whether corporate and VAT revenues would meet the target.
In addition, Prime Minister Economic Advisor Joseph Szuper and
other experts note several risks to the 2010 budget targets,
including pressure from MPs to restore planned cuts to local
governments, and the possibility that state-invested companies (like
the Hungarian railway company MAV) could need state assistance
should they run into further trouble.


8. (SBU) The IMF, in its latest assessment in early September,
however, noted continued improvement in the outlook for Hungary, and
observed that the GOH has implemented sufficient structural reforms
to decrease GOH spending and promote sustainable growth. In a
recent report, JP Morgan noted Hungary could be the next Central
European country to adopt the Euro, as it has the best chance of
reducing its budget deficit to the required level within a
reasonable period.


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9. (SBU) The main opposition FIDESZ Party has criticized the budget
for not going far enough to stimulate growth. FIDESZ party leader
Viktor Orban called the 2010 budget "the most dangerous budget of
the past 20 years," and has publicly vowed to eliminate the Bajnai
government-instituted property tax and roll-back cuts to family
subsidies. Most analysts believe that, if elected, FIDESZ will make
symbolic changes to the budget, but Hungary's macroeconomic
situation gives it little manuvering room to increase spending.

COMMENT:

10. (SBU) Based on recent statements by Socialist Party and Free
Democratic Party officials in support of the 2010 budget, we expect
it to pass without considerable difficulty by the government's
target date of November 30. Once this final major piece of the
government's economic crisis response program is complete, we expect
that most MPs after November will shift their focus to next year's
national elections.

LEVINE
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