Hungary's Fiscal Council has raised concerns over the government's draft budget for 2026, warning that it rests on overly optimistic growth assumptions and contains multiple risks, including low fiscal reserves, ongoing uncertainty over EU funding and potential fallout from the US-led trade war. The government will submit the 2026 budget bill to lawmakers on May 6.

The council's 28-page opinion outlines a series of vulnerabilities that could undermine fiscal stability and jeopardise debt reduction efforts. The three-member body, which includes the leader of the State Audit Office, the central bank governor and its president appointed by Hungary's head of state, only has a consultative role with no power to block the budget.

Although the Council refrained from issuing a formal objection, it stressed that the draft carries "material risks" to meeting targets. Hungary's economic openness and export dependence leave it particularly exposed to external shocks, such as protracted geopolitical conflicts and tightening trade policy.

According to the body, the government's 2.5% GDP forecast for 2025 and 4.1% in 2026 is challenged by the weak Q1 GDP released last week. This, coupled with escalating global trade tensions, casts doubt on the underlying assumptions for next year's budget framework.

The Council flagged several concerns, from lower revenue proceeds to uncertainty surrounding the inflow of EU funds. Hungary is still lacking access to recovery funds (RRF) and cohesion funds due to rule-of-law disputes, as it failed to meet the necessary "super milestones" set by the European Commission. These shortfalls could widen the cash-flow deficit unless offset by spending cuts or new revenue sources.

While the Fiscal Council did not provide specific projections of the trade war, it warned that the policy shift could damage Hungary's export-oriented manufacturing sector and set back investment activity.

The upswing in domestic consumption, driven by high employment, higher real wages and government measures boosting households' net incomes, could mitigate those risks, it added.

Fiscal stimulus efforts in Germany and other major EU economies could partially offset these negative effects, provided EU budget rules remain flexible, according to the report.

The Council acknowledged the 3.7% accrual-based deficit target for 2026, paired with a primary deficit of zero, but said the gap should still be brought under 3%.

The general reserve of HUF50bn (€120mn) earmarked for extraordinary government measures is seen as insufficient, falling short of both historical norms and the scale of the identified risks, members said.

The Fiscal Council has urged the government to significantly increase the budgetary reserve for extraordinary measures and adopt a more conservative approach to revenue and growth planning.

The vague classification of asset-related expenditures and the opaque use of the HUF200bn defence reserve were dubbed as "built-in landmines."

The Council also questioned the credibility of the government's wage growth assumptions. A significant deviation in inflation or average gross earnings could trigger renegotiations, the Council noted, adding another layer of fiscal uncertainty.

Despite these headwinds, the government continues to push for early approval of the 2026 budget, which is likely in June, citing the need for predictability and policy continuity.

The government will act on the Council's recommendation and will increase reserves for extraordinary government measures from HUF50bn to HUF192bn, while cutting overall expenditures by the same amount to keep the budget balance unchanged, the National Economy Ministry said on Monday.

The ministry stressed that the government saw no reason at present to review the macroeconomic projections in the budget draft, but could revisit them in the summer.

Analysts warned that even with the revised fiscal targets for 2025, public finances remain under strain from lower-than-expected growth and persistent inflation, as well as generous tax exemptions to families.

The government last month raised the inflation target for 2025 from 3.2% to 4.5%, while slashing the GDP forecast to 2.5% from 3.4% and upped the deficit target from 3.7% to 4%. The fiscal slippage is due to the extension of tax breaks to families as well as higher energy subsidies and the increase in debt service costs, from high yields on inflation-linked government bonds, the Economy Minister said.

Hungary's 2026 budget draft is based on real GDP growth of 4.1%, CPI of 3.6%, and an ESA-defined fiscal deficit of 3.7% of GDP, assuming an HUF/€ rate of 400. In absolute terms, GDP is set to rise to HUF95 trillion (€23bn) from HUF88 trillion in 2024.