The board said recent tax cuts could improve competitiveness but also entail a substantial fiscal cost. Measures to offset the revenue loss, including levies on select industries, are “in large part temporary and distortionary”, the board added.
The government’s move to rechannel private pension fund savings into the state pension fund is “a source of concern as it increases medium-term fiscal risks while reducing transparency,” the board said.
The board said there was a need for reform, including better targeting of social benefits and restructuring of state-owned transportation companies.
In this respect, the board welcomed the government’s plans to unveil a reform package in February.
The IMF board welcomed efforts to support distressed retail borrowers suffering the effect of the strong Swiss franc, but said moral hazard and fiscal costs should be contained. Beside the ongoing rise in credit losses, bank earnings in Hungary are already under pressure from a “disproportionately large levy” that could dampen credit growth and undermine the economic recovery, the board said.
The board welcomed action to strengthen the legal authority of financial market regulator PSZAF, but said the weakening of the Financial Stability Council “reduces the capacity to monitor and control systemic risk.” The Council was established after the crisis to survey the financial sector and identify risks, and is made up of the head of the central bank, the head of PSZAF and the Finance Minister (the National Economy Minister).
The board said the National Bank of Hungary’s recent tightening cycle helped anchor inflation expectations and protect the financial sector but added that there is still substantial slack in the economy as evidenced in particular by high unemployment, they added. “A sound medium-term fiscal framework would create room for monetary easing,” the board said.
The board expressed concern over the weakening of economic governance, noting that steps to lessen the independence of both the Fiscal Council and the central bank’s Monetary Council as well as the reduced role of the Constitutional Court in assessing budgetary matters undermine key checks and balances. “These steps run counter to the authorities’ stated goal of restoring investor confidence and lowering borrowing costs,” the board said.