Thursday, June 30, 2005

Euro accession and Hungary

Hungary's annual average inflation is expected to fall below 2% in 2006 largely due to a cut in the top VAT rate to 20% from 25%, Finance Minister Janos Veres said on Wednesday, Reuters, reported.

Veres told a press conference that the VAT cut would reduce the CPI by 1.7 percentage points in 2006. He also said Hungary was in continuous talks with the European Union Commission about Hungary's budget deficit cut plans and the planned tax cuts, after Monetary Affairs Commissioner Joaquin Almunia said he had been surprised by Monday's tax cuts.

From - No need for corrective action
VAT may come down but I very much doubt if prices will, whereas when VAT rises prices tend to rise.

As for the deficit it is a problem and combined with the proposed tax cuts, as discussed in the previous post, it could indeed cause a setback to Hungary's Eurozone accession - JP Morgan appear to agree.
“While the tax cuts are highly likely to be introduced, the implementation of the spending cuts is much less credible and we expect the net impact of the measures to be a widening of the 2006 budget deficit to around 5.8% of GDP (4.8% of GDP including private pension funds) from our previous forecast of 5.4% of GDP and an estimated 5.5% of GDP this year," JP Morgan analyst Nóra Szentiványi said in an emerging markets research note.

“In fact, the higher deficit profile until 2008, in our view, cuts the chances of euro adoption by the 2010 target date close to zero. We, nonetheless, think that EMU entry 2012 is still feasible, if the next government cuts spending after the elections or increases other taxes," she added.

From Portfolio Online - JP Morgan on Hungary's Euro adpotion
One would hope that a Fidesz led government would make serious cuts to the bloated bureacracy that plagues this country .... but then they did fail to do this last time they were in office so they may well fail again!