By Gergely Szakacs
BUDAPEST, Oct 21 (Reuters) - Hungary's government hopes a front-loaded budget adjustment geared towards spending cuts will pave the way for a sustainable reduction in the deficit and put the country on course to adopt the euro, possibly in 2032, the finance minister said.
Prime Minister Peter Magyar's first budget, seen as a key test of a pledge to meet the conditions of euro entry by 2030, targets a deficit of 4.9% of gross domestic product in 2027, well below this year's expected
7.5% level.
Investors have taken the larger-than-expected reduction as a positive first step. However, some economists have warned that volatility in global bond and energy markets could hamper economic growth and deficit cut efforts.
"We are not aiming to merely maximise deficit reductions in the short term," Finance Minister Andras Karman told Reuters.
"We are taking sustainable deficit reduction measures that bring us closer to a deficit below 3% of output in 2030, and, as such, to the adoption of the euro rather than simply wrestling down the 2027 deficit," he said in an interview late on Tuesday.
SOME ORBAN-ERA REFORMS LOOK DIFFICULT TO REVERSE
The measures include moves, which could be politically costly, such as capping an income tax exemption for mothers, or halting the phasing-in of an extra month's worth of pensions, policies the government inherited from former Prime Minister Viktor Orban which it deems unsustainable.
Changes to pension benefits will nonetheless result in higher spending on the elderly, the government says.
"The sooner the euro can be introduced, the better for Hungary," Karman said, marking a stark policy shift from Orban, who strongly opposed the euro. "I think this will mainly be determined by the reduction in the deficit."
By front-loading the adjustment, Magyar's cabinet hopes to avoid having to make spending cuts later as the next election in 2030 draws nearer.
Magyar's first budget has also laid bare the challenges of reversing flagship Orban-era policies, such as steep sectoral levies, or a costly energy support measure for households.
The cost of the measure capping retail energy prices, which the EU has called on Hungary to eliminate, will rise by 232 billion forints ($716 million) next year -- exceeding the 200 billion forints Magyar aims to raise from a new wealth tax.
CAUTIONS AGAINST RUSHED ERM-2 ENTRY
Karman said Hungary curbing its deficit below 3% of output in 2030 would enable euro adoption in 2032, in line with market expectations, although Magyar's government has yet to set a target date.
The government plans to form a working group with the central bank next year to map out the tasks required in the run-up to Hungary entering Exchange Rate Mechanism II (ERM-2), the waiting room of the euro, and draw up what Karman called a "realistic" timetable.
"The euro zone is a lot more complicated set of institutions than 10 or 15 years ago," he said.
While both Magyar and central bank Deputy Governor Zoltan Kurali said Hungary should not hesitate to join ERM-2, Karman said it should not be rushed.
"The point is not to enter ERM-2 as fast as possible but to adopt the euro as soon as possible and spend the least amount of time needed in ERM-2," Karman said.
Earlier this month Kurali warned that risks including fiscal slippage and exchange-rate turbulence during ERM-2 membership could push euro accession beyond 2033.
"It is very hard to determine the appropriate timing of entry from the aspect of the exchange rate," Karman said. "Entering too soon, or fixing the mid-point of the exchange rate too soon would not necessarily be ideal."
($1 = 323.99 forints)
(Reporting by Gergely Szakacs; Editing by Alexander Smith)
