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10th Aug 2020

EU to freeze millions for Hungary over deficit

Hungary on Wednesday (22 February) was given less than a year to lower its public deficit or have a third of its EU subsidies slashed, amounting to €495 million. It is the first time the EU commission takes such an action.

"This unprecedented step follows the commission's repeated warnings to Hungary urging it to step up its efforts to end the country's excessive government deficit, and its subsequent failure to take appropriate action," the EU executive said in a statement. Hungary has overshot the EU deficit threshold of three-percent of gross domestic product every single year since it joined the EU, in 2004.

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  • Hungary is tussling with Brussels on several fronts (Photo: Tracy Russo)

The freeze will affec one third of the EU funding for infrastructure projects in Hungary and will take effect on 1 January 2013 if the Hungarian government does not take "satisfactory", "structural" measures to reduce the deficit, rather than the one-off measures tabled hastily by the Viktor Orban government on the eve of the decision.

"We received very recently two letters from the minister of finance and Prime Minister Orban, but they did not present measures which could immediately change our picture about the outlook of Hungarian public finances," EU economics commissioner Olli Rehn said during a press conference on Wednesday.

The day before, the Orban government publishedl a series of measures slashing public spending by more than 0.3 percent of GDP, which would bring Hungary's deficit to below three percent.

But the measures, such as a cut in subsidies for medicines and for the Budapest public transportation system as well as the introduction of an electronic toll pay system on motorways are deemed to be 'one-off' rather than the deeper labour market and pensions reforms expected by the EU.

Rehn said that Wednesday's decision should be seen as a "strong incentive" rather than punishment and said it was a "separate process" from the other legal actions the EU commission has taken against Budapest for limiting the independence of its judges, media and the national central bank.

The latter issue is the main stumbling block in Hungary receiving a loan from the International Monetary Fund - which would also help bring its deficit down.

Informally, EU officials admit that all these issues are interlinked and it is up to the Orban government to untie the knot.

Budapest did not take the news very well, despite the reassurances from Brussels that this action is not meant to "alienate any government".

"Our government regards it as an unfounded and unfair proposal," government spokesman Peter Szijjarto said in an emailed statement.

"It is unfathomable why the European Commission has ignored the facts: Hungary’s budget deficit was, for the first time since we joined the European Union in 2004, below three percent in 2011 and will remain so this year as well, which makes it the country with the eighth lowest deficit in the European Union," he claimed.

But the EU commission argues the deficit was brought down by a "one-off measure" - the nationalisation of a private pension fund, which still left Hungary in an excessive deficit procedure.

The Hungarian government said it "remains ready for continued consultations with the institutions of the European Union."

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