Hungary's Fiscal Council has warned of significant risks surrounding the 2024 budget in a medium-term fiscal outlook issued on January 5. The three-member body, which has only an advisory role and no power to veto budget bills, has voiced dissent in the past about the government’s lack of fiscal discipline, but overall, its reservations had been rather lenient.

It warned of minor risks to meeting the 2024 revenue targets before the passing of the budget bill in the summer. This came at a time when the government had assumed a 1.5% growth and a 3.5% budget deficit for 2023, but as the year went on these outlooks became outdated and looked increasingly unattainable.

In the last days of the year, the cabinet released its medium-term forecast which showed that the 2023 budget deficit is expected to overshoot the revised 5.2% target by 0.7pp and that the economy has probably contracted 0.4% last year as budget revenues fell significantly short of the set targets.

Given these circumstances, it is not much of a surprise that the Fiscal Council came out with an unusually harsh criticism of budgetary developments. It has also called for comprehensive reforms to improve competitiveness and increase productivity to guarantee long-term, sustainable growth.

The major finding of the report is that Hungary needs to run a primary surplus of 1.2% to reach the 2.9% deficit target in 2024, and a 2% surplus, if the budget gap is to fall to 1.4% of GDP in 2026, as outlined in the Convergence Programme.

The government had pursued a relatively disciplined fiscal policy until 2016 with a surplus in the primary balance, but that changed as the government has increasingly prioritised supporting growth over tight fiscal discipline.

The Fiscal Council said the government’s 4% GDP projections (3.6% in the medium-term outlook) are overly ambitious and that a 3% target is more realistic.

It stressed that budgetary trends in 2023 were significantly less favourable than assumed earlier, and the overshoot of the budget was mainly due to the shortfall in revenue proceeds and higher debt service costs. Interest expenditures of the government sector are projected to rise from 2.3% of GDP in 2020 to 4.1% this year and to decline to 3.4% in 2026, according to the Convergence Programme.

According to a forecast by the Hungarian National Bank, gross debt service costs will rise to HUF3.5 trillion (€9.2bn) in 2024 from HUF3.3 trillion last year compared to just HUF1.25 trillion in 2025. Debt service costs per GDP hence will be the highest among EU countries in Hungary in 2024.

The Fiscal Council notes that the missed tax revenue targets last year created an unfavourable basis, which poses a significant risk to meeting fiscal goals set for 2024 and beyond.

The advisory body has expressed reservation about the viability of meeting debt-cap rules, which stipulate that year-end state debt relative to GDP must decline each year until the ratio reaches 50%. State debt per GDP has dropped from 79.3% in 2020 to 73.9% in 2022 and the decline continued last year.

To keep the trend going, the government needs to significantly reduce the government sector deficit or boost real GDP growth. However, there are risks surrounding measures that would reduce expenditures, it added.

To sustain GDP growth above 4%, comprehensive reforms and the transition to a productivity-intensive economic model are needed, they stressed.

Analysts recall the ongoing debate over the future of economic and fiscal policy between Economy Minister Marton Nagy and Finance Minister Mihaly Varga. The battle between the two could eventually decide the course of the fiscal trends and whether Hungary will meet the 2024 deficit targets or not. 

Nagy has recently been appointed by Prime Minister Viktor Orban to lead the Economic Cabinet replacing Varga at the helm, which suggests that the prime minister is on the side of the former MNB deputy in his view of fuelling growth and seeing financial prudence as of secondary importance.

Varga consoled himself with an appointment to a new government decision-making forum, responsible for disciplined fiscal management, with veto rights over major decisions, along with three ministers. 

The finance minister at a recent press conference said Hungary's fiscal situation was stable and the government's "most important goal" was to further reduce the deficit and state debt. When asked if the 2.9% deficit target was "carved in stone", he would not give a categoric yes.

Analysts had warned that if the government fails to keep the deficit in check this year, it would lead to negative actions from credit rating agencies.