At present the financial state of Hungary does not meet the requirements set by the treaty of Maastricht. In 2004, government debt amounted to 60.7% of GDP against the 60% ceiling proposed by the treaty and the budget deficit stood at 5.4% of GDP while the Eurozone requirement is 3% of GDP and this deficit is expected to rise to 6.7 to 6.9% in 2007 ( 2005, p. 11). The budget deficit figure widely projected for 2005 remains above 5%, however, by the end of April the cumulative deficit of the central budget has already reached way over half the annual target. The rate of inflation stood at 3.3% in March 2005, and is projected to be between 3-3.5% by the year’s end ( 2005, p. 13).
Hungary’s budget deficit has been remarkably high since 2002, when the cabinet of former Socialist Prime Minister introduced a series of welfare measures that put a strain on the central budget. As a result, the deficit soared to as high as 9% of GDP ( 2005, p. 14). Finance Minister clearly stated the problem when he declared that the government has failed to introduce sufficient long-term reform steps aimed at reducing state spending ( 2005, p. 14).
To meet the requirements set by EU the country needs to initiate reforms and other programs to minimize deficit and stop the swelling of government debt. This problems can be solved by cut government budgets on specific departments of the bureaucracy. Hungarian Prime Minister declared that while the government will not cut its budget with regards to social and infrastructure spending, the government will be balancing its budget to meet the requirements set by the Eurozone while providing quality services to its citizens (2005, p. 236). The government is unwilling to reduce the budget with regards to infrastructure since this aspect of the economy attracts foreign investments and capitals needed by the economy.
The prime minister argued for the elimination of “waste” and other budget consuming departments that would result in savings up to Ft 200 million. In addition the government is also increasing the share of the legal economy by creating higher tax revenue flow and tax reforms to maximize collections of much needed capital (2005, p. 189). Another strategy to meet the requirements set by the European Union is the restructuring in the collection of security contributions since this is the main source of funds for the government. also declared that he would instigate saving measures through structural and organizational reforms aimed at the education sector, local government and health care industry ( 2005, p. 190). The government is also trying to save on public administration by approving development projects that are supported by substantial funds from the European Union.
Another step that is being implemented by the Hungarian government in the next five years are plan for significant tax cuts that will make up less than 1% of GDP annually ( 2005, p. 210). Because of this measure financial analysts hoped that the general government deficit will be brought down from 6.1% to below 3% by 2008. Another key element towards the incorporation of Hungary to the Eurozone will be the improving GDP growth, which the government believes will be over 4% per year.
When viewed holistically, the national bank of Hungary argued that it is beneficial for the economy of the country to adopt the euro as the national currency of the country since it brings certain advantages that is helpful to Hungary when competing with other countries in terms of international trade and commerce (2004, p. 89). The disappearance of exchange rate risk will lead to the expansion of foreign trade and declining domestic interest rates. As a result of such changes, domestic fixed investment will pick up, which, in turn, will boost Hungarian economic growth over the longer term, thereby accelerating catch-up with EU income levels ( 2004, p. 71). The introduction of a single European currency will result in favorable changes that households will be able to sense directly. The extra costs and inconvenience involved in foreign currency transactions are expected to diminish considerably. It will be easier to compare the prices of domestic and Western European products and services, leading to sharper competition, which will eventually increase consumer welfare (2004, p. 219).
The Government's announced commitment to adopting the single European currency in 2008 may help rebuild investor confidence. This will first of all require having tangible results in the area of fiscal consolidation, seen as the most critical point, even this year. In addition, a realistic medium-term deficit reduction program, enjoying credibility right form the start, will have to be drawn up ( 2004, p. 222).
The Government's fiscal measures for 2004 are aimed at reducing the deficit primarily by increasing revenues. However, reductions in expenditures as a proportion of GDP, particularly in current rather than capital expenditures, in an adequate structure, cannot be avoided over the longer run ( 2004, p. 352). Adoption of the euro in 2008 also makes it necessary to reduce inflation