Government ministers have to be careful nowadays what they say about the state of public finances. The latest pressure on Hungary’s sovereign debt well illustrates the point. The Hungarian Economy Minister has been at pains today to distance himself from remarks made last week by a ruling party official that Hungary had only a slim chance of avoiding a Greek-style crisis. He has indicated that the official who made the damaging comment was not a minister in the government. Despite this disclaimer, Hungarian bond yields continue to reflect investors’ worries that Hungary will, indeed, follow Greece into debt purgatory. The newly-installed government in Budapest has rightly questioned the basis on which its predecessor had projected the public finances, finding that much less progress than previously claimed has been achieved towards meeting this year’s 3.8% deficit/GDP target. This at least is reminiscent of the Greek situation but there is a fundamental difference between Greece and Hungary in that the latter is not locked into the euro arrangements. This means that Hungary retains some hope of eventually restoring its economy on a stable and sustainable growth path with a manageable level of public debt.

Nevertheless, Hungary’s Government is committing to an extraordinarily rapid reduction in the public deficit, which the figures it has published strongly suggest is not feasible. Successful debt reduction policies conducted during the 1990s by countries such as Canada and Belgium achieved cuts in deficit/GDP ratios on a scale similar to that now demanded of Hungary over periods of five years or more. The EU/IMF demand on Hungary, though, is that its target for cutting the budget target be achieved over three years. This requirement was set in October 2008 as a condition of EU/IMF support for Hungary’s foreign exchange position. The urgency reflected the EU’s concern at that time to buttress the credibility of the Growth and Stability Pact underpinning the euro, an anxiety that has not diminished since. Though Hungary is not in the euro zone, it is, like all EU members, expected to respect the fiscal rules laid down in the Pact. Unfortunately, the unrealistically rapid schedule for cutting Hungary’s deficit has, for financial markets, become the yardstick of true fiscal rectitude. Accordingly, Greece was allowed only three years to correct its budget imbalance, even though the cuts in spending plans and increases in taxation that such an effort will necessitate are likely to erode the taxable base and leave the target well out of reach. At this late stage, the EU and IMF might fairly claim the financial markets would look askance at any schedule for fiscal retrenchment that left budget deficits well above their historical range more than three years hence. But the source of the markets’ misapprehension that budget deficits can be cut rapidly surely lies in the terms of the original Hungary financial rescue almost two years ago.

It is to be hoped that Messrs Cameron and Osborne are watching the Hungarian situation closely and that they will draw the lessons on what not to do in terms of presentation and substantive policy. Reports that they are looking to Canada’s experience are mildly encouraging. The key feature of Canadian policy from the late 1980s onwards was the abandonment of neo-Keynesian notions that fiscal measures have an active part to play in pursuing the goal of full employment. From a peak level of 9.1% of GDP in 1992, Canada’s general government deficit shrank to 5.5% of GDP in 1995 before moving into surplus by 1997. A key event in this improvement was Mr Martin’s 1995 Budget, which reformed the system of transfers between the federal government and the provinces. It is difficult to find a parallel to this in the current UK situation, but it may tie in with Mr Cameron’s ideas regarding the Big Society. Another important point to bear in mind is that Canada’s success eventually came against the background of a prospering global economy. In the policy’s early stages, up to 1992, when the global economy was in recession, Canada’s budget/deficit ratio actually rose. It is by no means assured that the UK’s budget cutting efforts over the next few years will benefit from a favourable global economic environment. Indeed, there are no clear-cut examples of governments reducing their budget deficits while the global economy is weak, It just does not happen.

The US employment data for May reinforced concerns that the global economy could be heading for a second dip in activity after a brief recovery from the 2008/09 slide. We have long warned that these data are difficult to interpret. To be sure, past releases never supported the exaggerated hopes of returning prosperity that many investors had based on them. But, by the same token, a weaker than expected set of figures does not mean there were any fresh negative developments in the US economy last month. The series we favour as an indicator of US labour demand, namely, the index of aggregate weekly hours worked in the private sector, rose by 0.3% on the month, as compared with a 0.4% monthly increase in April. This measure is 1.9% above its trough in October last year but is still 8.3% below its previous peak in December 2007. that sets the ‘recovery’ in the US labour market in proper perspective. Meanwhile, private payrolls, which in this Census year must be a more more appropriate metric than the more widely-followed non-farm payrolls, rose in May for the fifth successive month. However, the aggregate rise in payrolls over those five months was only 0.4%, which may strike some market observers as insipid after the 0.7 percentage point rise in private payrolls recorded in the final five months of 1992, when the US economy was recovering from recession, and the 2.1% jobs growth between March and July 1983. But to have expected more from the US economy this time, after the impairment of productive potential it suffered during the downturn, was unrealistic. Indeed, future revisions may well show that there has been even less improvement in the employment picture than current data suggest.