The question is not whether Hungary will overshoot its 2023 deficit target, but by how much, financial website Portfolio.hu wrote on July 6.

Worries over the scale of Hungary's budget woes are hitting the currency. The forint weakened to a 3-month low of 385 versus the euro in early trading on July 7, a 4% decline in 10 days.  

The government looks set to sacrifice its deficit targets in 2023 as bringing the budget shortfall below 4% would entail some rather unpopular measures, like trimming housing and loan subsidies to households and other welfare spending items.

Hungary will likely miss the 3.9% deficit target despite generating 1.1% of GDP in extra profit taxes on banks and retail and other sectors, analysts note. The government vowed to the European Commission to phase out the extra levies, introduced as a temporary measure,  by the end of this year.

Despite some cuts in ministries' spending, housing subsidies, the 13th-month pension introduced last year and energy subsidies have led to a widening budget gap in 2023. The government sector deficit hit a 17-year high of 9.8% of quarterly GDP in Q1 based on the ESA methodology.

Tax revenues are trickling in at a slower pace than anticipated. Notably, it is VAT revenues that are causing a headache for policymakers. Proceeds are missing targets by hundreds of billions of forints as retail sales fell for the sixth straight month in May and the decline reached 11% on an annual basis in the January-May period.

Economic policymakers are speaking of a consumption shock. The EU's highest inflation has dented the purchasing power of households, many of whom are coping with an increase in energy bills after the government overhauled energy subsidies last August. 

The cash-flow-based deficit widened to 80% in the first five months. After the report, Unicredit issued a note with a budget deficit projection of 4.4%

OTP analysts said the budget shortfall could reach 6% of the GDP without corrective measures. To meet the target, the government would need to make a fiscal adjustment of HUF1.6 trillion. Under their risk scenario, the deficit would come to 6.5% if tax revenues do not bounce back in H2.

The government set up a task force to examine ways to reduce expenditures to achieve a 3% saving. Spending on drug subsidies, home and loan subsidies will be scrutinised, a move that suggests the scale of the problem.

The government has also drawn up a list of state-owned properties to be auctioned off.

At Thursday’s press conference, cabinet chief Gergely Gulyas denied that the government would reduce energy subsidies and blamed Brussels for any impending budget cuts. In the spring report, the European Commission only proposed Hungary to adjust its energy subsidy scheme to target vulnerable groups.  

Gulyas struck an optimistic note, saying that retail sales are slated to bounce back in the second half as inflation eases, leading to higher GDP and budget revenues.  He stressed that government remains committed to meeting the 3.9% deficit target.

S&P is scheduled to issue its regular rating review on Friday. Analysts predict there is little chance of a downgrade, as it would put the country back to junk status. S&P will likely point to the growing fiscal risks due partly to uncertainties over EU funds, while the government needs to cope with rising debt service costs and the recapitalisation of the loss of the central bank.

Parliament will vote on the 2024 budget on Friday.