On 12 February 2008, the Council examined the updated convergence programme of Hungary, which covers the period 2007 to 2011. Over the last several years, Hungary has fallen behind in the catching-up process compared to its neighbours. This has been coupled with increasing fiscal laxity, which contributed to considerable internal and external imbalances and relatively tight monetary policy. Since mid-2006, the Government has taken comprehensive measures to consolidate public finances. These have set the budget deficit on a decreasing trend from a peak of over 9 % of GDP in 2006 to around 6 % (and possibly below, according to the most recent estimates) in 2007 and have started to lead to an improvement of the external balance. At the same time, the indirect tax increases and hikes in regulated prices have temporarily put upward pressure on inflation, which should decelerate again from 2008.

The main goal of the update is to correct the excessive deficit by 2009 (reducing it from 6,2 % of GDP in 2007 to 3,2 % of GDP in 2009 (2)), in line with the previous update against a background of a broadly similar macroeconomic scenario, and to further reduce it to 2,2 % of GDP in 2011. As interest expenditure is projected to progressively decline after 2008, the primary balance would improve slightly less, from a deficit of 2,2 % of GDP in 2007 to a surplus of 1,1 % of GDP in 2011.
The update confirms the medium-term objective (MTO) for the budgetary position of a 0,5 % of GDP deficit in structural terms (i.e. cyclically-adjusted and net of one-off and other temporary measures), which is not expected to be achieved within the programme period.

In view of this risk assessment, the budgetary stance in the programme seems broadly consistent with a durable correction of the excessive deficit by 2009 as recommended by the Council provided that the budgetary measures and structural reform steps announced in the programme are fully and effectively implemented. Moreover, and importantly, the budgetary position in 2007 as estimated in the programme, while significantly improved compared to 2006, still constitutes a risk to sustainable public finances even before the long-term budgetary impact of an ageing population is considered.

Overal conclusions
The overall conclusion is that the programme plans to continue the correction of high deficits of the past years through a necessary frontloaded adjustment effort and envisages modest progress towards the MTO after the planned correction of the excessive deficit in 2009. As a result of the consolidation measures and steps in structural reforms, Hungary is set to considerably outperform its deficit target for 2007 of 6,8 % of GDP and to increase progress towards convergence. However, the lower deficit targets are combined with higher-than-previously-planned expenditures on the back of better-than-expected revenues, which cannot be counted on after 2008.

Hungary is invited to

1. Rigorously implement the 2008 budget, take adequate action to ensure the correction of the excessive deficit by 2009 as planned, where necessary through additional measures; and allocate the better-thanexpected revenues to further deficit reduction, also given the insufficient margin in 2009 in view of the risks, thereby also contributing to accelerating the pace of debt reduction towards the 60 % of GDP threshold.
2. Ensure expenditure moderation in a permanent manner by continuing to enhance fiscal rules and institutions and through the adoption and swift implementation of the remaining streamlining measures as announced in the fields of public administration, healthcare, and education system;
3. In view of the level of debt and the increase in age-related expenditure, improve the long-term sustainability of public finances by making rapid progress towards the MTO, and continue to reform the pension system as announced after the steps already taken in 2006-2007.