By Krisztina Than
BRUSSELS/BUDAPEST (Reuters) - The European Commission proposed on Wednesday to take Hungary off its list of budget sinners and the government claimed victory for Prime Minister Viktor Orban after years of clashes with Brussels.
Orban has been at loggerheads with the European Union over his go-it-alone policies, windfall taxes on banks and laws that Brussels and the United States said had weakened democracy in the former communist country.
Orban has denied these accusations. He says his government, which swept to power in 2010 with a strong mandate, has saved Hungary from financial collapse and reined in the deficit, putting the country on a sustainable path after years of mismanagement by previous Socialist governments.
Hungary's exit from the EU's Excessive Deficit Procedure will also remove a threat of financial sanctions - a potential cut in European Union development funds - and so reduce the EU's control over Budapest and its disputed policies.
The European Commission said fiscal measures announced by Budapest in past weeks would bring its deficit to 2.7 percent of economic output this year and 2.9 percent next year, within the EU's 3 percent deficit ceiling, which warranted that Hungary be removed from the fiscal offenders' list.
Brushing aside frequent criticism that it has plugged the budget gap with short-term measures, the government said the EU verdict was proof of the success of its economic policies.
"The country has performed remarkably, as Hungary's achievements have been acknowledged also in Brussels today," Economy Minister Mihaly Varga told a news conference.
The decision "means that we ... have protected the support (development funds) which Brussels gives to member states."
Hungary has been on the EU's offenders' list ever since it joined the bloc in 2004. It posted a budget deficit of 1.9 percent last year and targets a deficit of 2.7 percent both this year and next, partly relying on windfall taxes on banks and corporations.
Past measures included the effective nationalization of $14 billion of private pension assets in 2011 to plug budget gaps and cut debt.
A return to economic growth in the first three months of this year, after a year of recession, could help state finances.
The Commission, in its separate recommendations, said Hungary should lower the additional taxes on the financial sector, ensure a more predictable corporate tax system and put government debt on a firm downward path.
Peter Kreko, an analyst at think tank Political Capital, said the Commission's favorable decision was unlikely to lead to a melting of frosty relations with Brussels.
On the contrary, this could embolden Orban in his dispute with Brussels over legal changes implemented by his government.
His Fidesz party has a firm lead over the main opposition Socialists but close to half of voters are undecided.
"The government's rhetoric at home will be that we have won the battle and we need to keep fighting ahead," Kreko said.
"The efforts to force Hungary to show more respect for the EU's norms have been unsuccessful and the potential cut in development funds had been the biggest weapon. So the control of EU institutions over Hungary will decrease."
Orban managed to avoid an IMF-led program last year, but has angered Western partners with policies including windfall taxes on the mostly foreign-owned retail, telecoms and energy sectors.
Hungary's forint, which jumped to five-month highs versus the euro on Tuesday partly fuelled by optimism over the budget verdict, retreated slightly on Wednesday.
(Additional reporting by Robin Emmott in Brussels; Editing by Ruth Pitchford)