VZCZCXRO8129
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSL RUEHSR
DE RUEHUP #0679/01 2601611
ZNR UUUUU ZZH
R 171611Z SEP 09
FM AMEMBASSY BUDAPEST
TO RUEHC/SECSTATE WASHDC 4505
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

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. 
 
 
BUDAPEST 00000679  002 OF 002 
 
 
¶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 
0