Budapest - The Organization for Economic Cooperation and Development (OECD) called Thursday for Hungary to stick to economic reforms in the wake of a coalition crisis that threatens the former East Bloc nation's attempts to cut its budget deficit. A report released by the OECD said that Hungary must cut its deficit - at 5.5 per cent of Gross Domestic Product (GDP) currently the highest among OECD countries - to below 3 per cent by 2010 to boost its potential for economic growth.
Hungary in 2006 introduced economic reforms that cut the deficit from 9.2 per cent that year but pushed up inflation to a high of 9 per cent and almost stalled the economy in 2007.
The economic reforms, coupled with Prime Minister Ferenc Gyurcsany's admission he lied about the need for painful belt-tightening, pushed the government's popularity levels down to rock bottom.
Gyurcsany in late April backed off from further reforms by scrapping plans to introduce private capital into the healthcare system, prompting the junior coalition party to quit the coalition.
The premier said that public opposition to the reforms - most recently expressed in a sweeping referendum defeat on fees for medical treatment and education - meant that the pace of change would have to slow.
While he vowed that his minority government would stick to the deficit reduction plans, he said the government was not planning any structural reforms over the next two years.
However, the OECD report said that further structural reforms were exactly what was needed to help Hungary catch up with better performing OECD countries.
"Bringing greater discipline to public finances by reforming taxation and government spending is Hungary's most immediate challenge," said Aart de Geus, Deputy Secretary-General of the OECD.
"If the reform programme goes according to plan the whole economy will benefit, raising the standard of living across society and allowing Hungary to resume catching up with other OECD countries," he added.
The government has recently been making noises about cutting taxes as it attempts to claw back its popularity ahead of the 2010 general elections.
Hungary's tax wedge - the difference between labour costs to the employer and the net take-home pay of the employee - was 54.3 per cent for a single person in 2007, the second highest in the OECD.
Many domestic voices have been demanding tax cuts to improve regional competitiveness, but the OECD said that while cutting the taxation on labour was a "pressing concern," it added that any reduction in taxes should be accompanied by spending cuts.
Government spending is currently in excess of 50 per cent of GDP.
Although the economic reforms were widely welcomed when first announced, they also drew criticism for focusing on revenue-raising measures such as tax and energy price hikes.
The report also called for healthcare improvements, pension reform, measures to boost employment, and the promotion of the small and medium-sized business sector.
