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. Last Updated: 07/27/2016

Tight Budget Faces Hungary's Poll Winner

BUDAPEST -- Hungary's struggle to break free from the sharp economic recession that has accompanied the transformation to free-market democracy provides a powerful backdrop to general elections next Sunday. The next government will have to grapple with big budget and trade deficits, feeble growth in crucial exports, and double-digit unemployment and inflation -- factors eroding the current center-right coalition's chances for re-election. But economic policy cannot change much whoever wins given the tight constraints Hungary faces, economists say. Hungary's $25.7 billion foreign debt -- the largest per capita in Eastern Europe -- will limit the government's room to borrow and spend its way out of recession. What is more, Budapest's need to stay in the International Monetary Fund's good graces -- and thus reassure foreign investors that its economic policy is sound -- rules out a sharp increase in spending that would swell the budget deficit, now over 6 percent of gross domestic product. All the major political parties have stressed the need to keep pressing ahead with economic reforms, exercise fiscal restraint and integrate more closely with the European Union. Most call for an Austrian-style pact for social peace among the government, labor and employers. The government, which eschewed shock therapy in favor of gradual reform, dismantled nearly all the subsidies that distorted prices under communist rule, which ended in 1990. But this also made prices spike higher, pushing inflation to nearly 40 percent in 1991. Consumer price rises are now slowing down, but still rose at an annual rate of nearly 17 percent in March. Unemployment, which swelled as inefficient enterprises shed staff or went bankrupt, stood at 12.2 percent in March, helping the resurgent Socialists draw support by pledging more help for those hit hardest by economic upheaval. The International Labor Office estimates the real jobless level may be up to a third higher given restrictions on benefits and the number of workers who have left the labor force. Official data indicate Hungary's output of goods and services has shrunk by a fifth under the current government. Prime Minister Peter Boross's government points out in turn that these figures understate the real performance of an economy where many entrepreneurs do their best to hide from the tax man. The private sector now accounts for around half of GDP. Critics heap abuse on the slow pace of privatization and the conservative coalition's failure to reform public finances. But the Hungarian Democratic Forum-led government was also the victim of circumstances to some extent. The collapse of the former communist trading bloc Comecon and the inability of Hungary's traditional eastern markets to pay hard currency for goods forced many businesses to go under. Hungary successfully shifted most exports to developed western markets, only to see a European recession curb the continent's appetite for Hungarian products. The second-worst drought of the century slashed farm output by 20 to 30 percent, and economic sanctions against Yugoslavia crimped exports to the south