Hungary's economic recovery remains sluggish, with the country projected to significantly underperform its Central European neighbours in both growth and investment, according to the European Commission's spring forecast, which slashed this year's GDP target to 0.8% from 1.8% in November.

The government has recently cut this year's target to 2.5% from 3.4%, while setting out ambitious targets for next year. The 2026 budget is based on real GDP growth of 4.1%, CPI of 3.6% and a 3.7% budget gap (ESA-based). On Monday, May 19, the government published its updated medium-term economic forecast, which left the 2026 growth target unchanged but more importantly, assumes to forego sectoral taxes from 2027, leaving a HUF467bn (€1.2bn) hole in the budget, financial website Portfolio.hu writes on May 20.

While GDP growth is expected to pick up to 2.5% in 2026, Hungary's economic performance in 2025 remains among the weakest in the EU in 2025, below average growth in the EU27 and the Eurozone, the EC report showed. Hungary is a laggard among its regional peers, with the Polish economy set to expand 3.3%, Czechia's by 1.9% and Slovakia's by 1.5% this year.

The EU executive warned that Hungary's economy faces "headwinds" despite modest growth of 0.5% in 2024, driven primarily by strong wage hikes and resilient private consumption. However, the rebound is being held back by falling investment, subdued exports, particularly in machinery and vehicle manufacturing, and a deteriorating business climate.

As for 2025, private consumption is expected to remain the "key growth driver", supported by the growth of inflation-adjusted incomes and higher personal income tax exemptions and allowances, the EC said.

Investment, especially corporate CAPEX, is expected to be "limited" in 2025, but could rebound in 2026 as headwinds from global trade uncertainties ease and government-supported construction picks up, it added. Investments in Hungary are projected to fall by 1.5%, the lowest rate in the EU, compared with Poland's 6.9% expansion.

The budget deficit is forecast to narrow from 4.9% in 2024 to 4.6% in 2025, before widening slightly in 2026. Revenue from personal income taxes is slated to fall significantly due to the extension of tax exemptions for mothers and an increase in family tax allowances, with the combined impact estimated at 0.6% of GDP. These losses will be partially offset by the extension of sectoral taxes set to expire in 2025.

The government hailed the measures as the largest tax cuts in Europe. Mothers with two children will enjoy a lifetime tax exemption from PIT from 2029 as the measure is introduced in several phases. Public debt is projected to rise to 74.5% of GDP next year, partly due to the weakening of the forint and major one-off expenditures such as the purchase of Budapest Airport.

Exports are projected to recover, driven by improving demand and new production capacity in FDI-funded facilities, the EC said. Subdued external demand is among the risks to the outlook, it added. Hungary's current account surplus is set to narrow to 2.0% of GDP.

The EC put average annual inflation at 4.1% in 2025, up from 3.7% in 2024. Prices are expected to remain elevated due to excise tax hikes, food price pressures and rising service costs, with the labour market adding further strain.

Unemployment reached 4.5% in 2024 as vacancies declined, yet wage growth remains high, fuelled by a tight job market and a planned 9% minimum wage hike in 2025.

The cabinet has finalised its budget plans, submitting the chapter-based volumes of the 2025 budget and the updated medium-term macroeconomic forecast, along with the tax package for 2026. The main figures were left unchanged as it assumes GDP to rise 4.1% this year, 3.9% in 2027 and 4.1% in both 2028 and 2029. The nominal value of GDP could reach HUF120 trillion by 2029.

As for the fiscal trajectory, the government amended the 2026 deficit numbers slightly from 3.7% to 3.75%, but more importantly, the 2028 figures saw a sharp revision. The budget shortfall in the updated forecast is set to drop from 2.9% in 2027 to 2.2% in 2028 and 1.5% in 2029. Last autumn, when preparing the 2025 budget, the government calculated with a 1.5% deficit by 2028.

The primary balance of the budget could turn positive in 2028, provided the government's assumptions hold.

One of the most notable parts of the document is that the government no longer expects revenues from windfall taxes from 2027, leaving an estimated HUF467bn gap in the budget. Representatives of the affected sectors, including banks, insurers, energy companies and retail chains, are likely to remain sceptical based on these assumptions, as the government, from time to time, pledged to phase out windfall taxes, which remained in place nevertheless.

The government introduced windfall taxes in 2022 with a two-year horizon, yet they have since been extended and redefined multiple times to plug holes in the budget.