GKI Co.,www.gki.hu Medium-term Economic Trends and Perspectives for Hungary László Akar CEO GKI Economic Research Co. Austrian Central and Eastern European Economic Forum 2006 ( ACEF 2006) September 20–22, 2006 in Velden, Carinthia
General outline of the economic policy (1.) GKI Co., www.gki.hu
The economic policy is determined by the pressure to improve economic equilibrium with special emphasis on the radical reduction of the general government deficit.
Economic policy after the 2006 Spring elections targets to create the conditions latest by 2009 for Hungary’s accession to the Economic and Monetary Union in 2011-2013.
General outline of the economic policy (2.) GKI Co., www.gki.hu
The main objectives of improving imbalances are:
to reduce general government deficit below 3 % of GDP,
diminish after the continuing increase the government debt stock,
diminish the current and capital account deficit in percentage of GDP,
to keep the rate of increase of incomes (mainly wages) in line with (or below) the rate of productivity growth,
to decrease inflation rate which will temporarily grow because of short term adjustment measures.
The most important objectives of economic policy modernisation that improves competitiveness, the EU supported development programs play a crucial role.
Short-term adjusting measures and comprehensive reforms take place from mid-2006.
The major reform directions are as follows:
In the system of local governments: the introduction of the obligatory fulfilment of certain tasks at micro-regions level, the development of the regional system, the transformation of financing, the introduction of the value based real estate tax.
In the administration: the reduction of the number of ministries and their staff, the simplification of the institutional system in the public sector, introduction changes in the employment rules and the rationalisation of the fulfilment of tasks.
In the primary educational system: transformation of the structure of public education, the increase of its efficiency, the decrease of the number of teachers.
In higher education the reduction of the number of students, the introduction of the school fee and the rationalisation of the system of institutions.
In healthcare: the switch to insurance basis, the promotion of competition among service providers, the rationalisation of hospital capacities, transformation of financing and the rollback of thank-you money, the introduction of the visit-fee.
In the pension system separation and reform of the existing disability pension system, tightening of the rules of early retirement.
In the social system: more consistent application of the principle supporting those in need.
A certain part of the reform laws should be approved of by two third majority. If this is not possible, indirect solutions can be applied.
The rate of growth of GDP continues to be more dynamic than the EU average, thus, on the average of the 2006-2008 years it will equal about 4 % , in 2007 less.
The growth will be mainly export and investment led.
The driving force of GDP growth will be the manufacturing industry and construction and some business services.
The number of employed will not increase. Unemployment will remain near the present around 7,5 % level.
Forecast of the General government deficit GKI Co., www.gki.hu
The problems of economic disequilibria might ease in 2006-2008 as measures will be taken aiming at raising the revenues of general government and reducing the expenditures and as well as improving the efficiency of the administration and reforms will be introduced.
General government deficit will total 9.5 % of GDP in 2006 (without the corrections associated with the contributions to private pension funds), but after that it will be reduced radically, totalling 5.8 % in 2007 and 3.5 % in 2008.
The stock of government debt will grow well above 60 % of GDP in 2006 and 2007, but will decline thereafter.
Monetary policy and inflation GKI Co., www.gki.hu
Co-operation between monetary and fiscal policy will presumably improve.
The Monetary Council will continue to follow a „cautious” policy. It will pursue inflation targeting. The present medium-term target is 3%.
Inflation is expected to jump temporarily as a result of the adjustment measures, by the beginning of 2009 the price stability will be reached .
The annual average exchange rate of the forint – as a permanent trend but with certain fluctuations – will moderately strengthen following the weakening in 2006 .
The consumer price level is likely to increase by 3.7% in 2006, 5.5% in 2007, and 2-3% in 2008.
Both exports and imports will expand relatively fast, at a similar rate by an annual average of 10%.
The foreign trade deficit denominated in euro will slightly grow; in the trade of services some surplus will emerge.
The external financing requirement (the total deficit of the current and capital accounts) will stagnate in 2006, but with the inflow of EU transfers in 2007 and 2008 it will sink below the level of 2005. The deficit is expected to equal 5.5-5.8% of GDP on the average of the period and 5% in 2008.
The buoyant net inflow of foreign direct investments and portfolio capital will contribute to the financing of the deficit; however, the gross and net foreign debt stocks will also increase.
Business sector perspective GKI Co., www.gki.hu
The growth of the world economy, within that (the moderate) growth of the EU will expand Hungary’s export markets.
Domestic demand (in some areas also due to the EU transfers) will grow steadily, but the competition in the markets will explicitly strengthen.
There will be sufficient capital and labour force for those enterprises capable of growing efficiently.
In case of efficient operations profits will dynamically increase