Pre-election spending splurge propels Hungary’s budget gap in February to 45% of full-year target

Pre-election spending splurge propels Hungary’s budget gap in February to 45% of full-year target
The government has frozen the price of a handful of food staples.
By bne IntelliNews March 9, 2022

The Hungarian government's pre-election spending splurge has dealt a deep blow to public finances, which recorded a deficit of HUF1.58 trillion (€4.1bn) in February, or 2.5% of the GDP. With a rare surplus in January, the deficit reached HUF1.4 trillion, or 45% of the full-year cash flow-based target of HUF3.15 trillion by the end of the month. Analysts pointed out that after the election, the government will have to make painful fiscal adjustments.

The central budget ran a HUF1.4 trillion deficit and the social security funds were HUF43bn in the red at the end of February, but separate state funds had a HUF49bn surplus.

The February deficit was lifted by tax refunds, pensioner and public sector bonuses and payroll tax cuts, the finance ministry noted.

Viktor Orban’s government, which is seeking a fourth consecutive term, has unleashed a massive social handout timed before the election.

Families raising children got a personal income tax refund in February totalling HUF600bn, while pensioners and the armed forces got bonuses. Under-25s got a PIT exemption and the payroll tax was reduced to 13%. Pensions were raised 5% from January, but the annual hike will have to be supplemented later as inflation is likely to exceed the 5% target. The minimum wage rose 19% and many in the public sector received double-digit wage growths.

The impact of the war will be severe, analysts warned. It is too early to give forecasts, but GDP will surely be lower than the 6% target and inflation will also exceed the 5-5.5% projections, they added. The spike in energy prices and the weaker forint will exert immense pressure on consumer prices and on public finances.

Before the election, the government capped fuel prices, and froze the price of a handful of food staples. After the April election, the mandatory price caps will have to be lifted.

Hungary’s opposition alliance will unveil its economic programme on Wednesday, but comments by Peter Marki-Zay’s advisors suggest the new government will have to be careful on what it says about these measures, especially on the centrally-fixed energy prices for households.

The government froze retail electricity prices in 2013 and keeping the bills low is a key part of Viktor Orban’s re-election campaign. Hungarian households pay the lowest gas and electricity prices in Europe after Bulgaria in nominal terms, but when adjusted to purchasing power, it is mid-ranking. The government has opposed proposals to extend sanctions to the energy sector, saying it would lead to a surge in prices for households.

If not households, then the state has to foot the bill, but energy subsidies are not included in the 2022 budget, leftist daily Nepszava reported. The lower residential energy prices will generate a loss of HUF1 trillion -2 trillion for state-owned companies this year. Last year the government injected HUF500bn into state-owned energy giant MVM, which is raking up huge losses due to the gap between market and subsidised prices.

The weaker forint will also push up state debt financing costs by €200bn-400bn.