UPDATE 1-Hungary approves 2021 budget with 2.9% deficit target

(Adds Fiscal Council, detail, context)

BUDAPEST, July 3 (Reuters) - Hungary’s parliament on Friday approved the country’s 2021 budget with a deficit target of 2.9% of gross domestic product, in line with a government bill submitted in May.

The country’s economy is expected to contract by 3% in 2020 in the wake of the coronavirus crisis but the government also estimates it will rebound sharply in 2021, growing by 4.8% and contributing to a fall in public debt as a proportion of economic output.

Reducing public debt and minimising the economy’s foreign exposure has been one of the main goals of nationalist Prime Minister Viktor Orban during his decade-long rule.

Orban has used an often unconventional economic policy to stabilise Hungary’s once-fragile economy even at the cost of heavily taxing major business sectors when necessary.

The targeted 2.9% fiscal shortfall is slightly higher than Hungary’s euro convergence programme stipulates but remains below the European Union’s 3% of GDP ceiling.

The fiscal deficit will return to the EU target range after this year’s slight deviation caused by the government raising the 2020 deficit target to 3.8% so it can spend money to help the country cope with fallout from the coronavirus pandemic.

Hungary achieved a growth rate around 5% in both 2018 and 2019.

The budget stipulates that public debt, projected at 72.6% of GDP at the end of 2020, will fall to 69.3% of GDP by the end of next year.

The Fiscal Council, a watchdog created to ensure budget sustainability, reviewed the bill and found it to be a credible guarantee for fiscal rigor, Arpad Kovacs, the council’s chairman, told parliament before the vote.

“Although risks are higher than in previous years, they are manageable,” Kovacs said. “The budget also creates opportunities to modernise state finances, so if we take advantage of them, positive scenarios may come to pass.” (Reporting by Marton Dunai. Editing by Jane Merriman)