This year’s Hungarian budget is manageable, but 2024 looks bleaker

When it comes to budgetary developments in Hungary, this year is proving to be very similar to 2022. The March monthly deficit is pretty much in the range of what we have seen in previous years. The monthly deficit generated in the budget amounts to HUF 564.6bn, pushing the year-to-date shortfall to close to HUF 2,900bn. This equals 61% of the full-year deficit target.

Budget performance (year-to-date, HUFbn)

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The deficit accumulation used to be frontloaded, which makes this year's picture bleaker as the Hungarian economy probably hit the bottom in the current mini-crisis at the beginning of 2023. This makes revenue generation more challenging, although high inflation does compensate somewhat. Moreover, as the Ministry of Finance pointed out in its press release, expenditures increased by 12% year-on-year during the first three months of this year. This is a result of the fact that the budget used to compensate energy suppliers during the heating season, and the 2023 heating season was more costly than last year’s. On top of this, the significant (15%) increase in pensions complemented by the extra (13th month) pension payments was an added burden to the budget during the first quarter.

The 12-month rolling budget deficit in Hungary

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With the heating season over, we see some improvement in the budget situation in the coming months. The government has maintained the freeze on public investment activity as well, which could also help in meeting this year’s deficit target. The biggest challenge remains the debt service cost. According to the official 2023 budget plan, the government expected HUF 2,500bn of net interest payments. In contrast, the latest EDP Report contains an updated calculation by the Central Statistical Office regarding the 2023 debt service cost. It is now up to HUF 3,000bn, which means an extra HUF 500bn burden on the expenditure side.

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This is clearly reducing the room for manoeuvre for the government when it comes to supporting the economy. With everything else unchanged, such a huge interest payment would mean that if the government wants to meet the 3.9% deficit-to-GDP target (accrual-based, Maastricht deficit), it needs to tailor a zero primary budget balance (so the deficit except for interest payments). This would result in a significant tightening of the fiscal policy. However, the expected inflow of EU funds could alleviate a lot of the risk. Our base case scenario is that the government will settle the dispute and money will start flowing during the second half of this year. With that in mind, we think the deficit target will be met. The Ministry of Finance has underscored this as well; that the government will make every necessary step to meet this year’s deficit target.

So, this year’s deficit situation looks manageable. But what about next year? The debt service cost could increase further, while the 2024 preliminary budget plan (based on last year’s Convergence Programme) contains a 2.5% of GDP deficit target, so sees further tightening. In this regard, next year looks more than challenging from a fiscal point of view. We would not be shocked if next year’s official budget deficit plan contains a higher target. But even with that, we see a significant risk that the government won’t have the opportunity to phase out the windfall taxes from a fiscal point of view. This would be good news from a fiscal consciousness perspective, but bad news for businesses and consumers who face yet another round of pass-through of the unexpected tax burden on consumer prices.