EU Funds: A Solution for Everything?

In series of articles GKI Economic Research Co. presents the short- and long-term economic challenges facing the new Hungarian government.

This time, they examine the macroeconomic effects of European Union funds.
The state of the budget, including the inflow of European Union funds, is one of the new government’s key economic policy challenges. The budgetary situation was aggravated by the previous government’s pre-election spending spree (weapon money to those in law enforcement, wage increases, the first instalment of the 14th-month pension, as well as unfunded personal income tax cuts, etc.). As a result, by the end of April 2026, more than 90% of the full-year planned budget deficit had been realized, and an internal review of the budget raised the deficit target to 7.5%.

A key role in stabilizing the budget is played by the total of EUR 16.4 billion announced at the end of May. Of these, a further EUR 12.8 billion in grants and EUR 2.7 billion in loans will actually become available for drawdown, as EUR 0.9 billion has already been drawn down. However, actual disbursement still requires assessments by the European Commission and the Council.

The direct impact of EU funds materializes through the development of government debt and liquidity. The budget had previously pre-financed Recovery and Resilience Facility (RRF) projects in the amount of HUF 2,187 billion from market borrowing or from its own resources. Since these expenditures have already been made, the EU foreign-currency funds arriving later do not generate additional real-economy demand, but instead make it possible to reduce the existing government debt and/or the cash-flow deficit. According to the Hungarian central bank’s June estimate, the available EU funds will reduce the government debt-to-GDP ratio by around 1.1 percentage points in 2026, the analysts note.

The impact on the budget deficit is more complex than this, and not unidirectional. When EU projects are pre-financed, the state first pays for the investments from its own resources or from borrowing, while the EU support arrives only later. As a result, a significant discrepancy emerges between the cash-flow deficit and the accrual-based ESA deficit. The RRF agreement’s total net effect improves the 2026 balance by HUF 491 billion, or around 0.5 percentage points, which already reflects both the balance-improving effect of the retroactive grants and the deficit-increasing effect of the new EU loans. These partly offset each other, resulting in a more moderate net effect.

EU funds also increase GDP through investment, but their real-economy impact is moderate compared to expectations. One reason for this is that a significant part of the funds serves to reimburse already completed or pre-financed projects, which together amount to HUF 969 billion.

Secondly, the import content of EU investments is high, so part of the expenditure does not increase domestic value added. Therefore, in 2026 and 2027 EU funds will raise the GDP growth rate by 0.1–0.2 percentage points, which represents a moderate effect relative to the total amount of funds.

Access to EU funds also improves the budgetary position through financing costs. The inflow of funds and the settlement of disputes with the EU reduced the country’s risk premium, which, through government bond yields, resulted in lower interest expenditure. Gross interest expenditure (at the current yield level) will decrease from 3.8% of GDP to 3.1% by 2028. The “settlement” with the EU strengthened the forint, which reduced the forint value of foreign-currency-denominated debt and thus also the government debt-to-GDP ratio. This is because a 10-forint appreciation of the exchange rate reduces the government debt-to-GDP ratio by 0.7 percentage points.

Another important effect is that the budget is relieved of certain investment obligations, which it can henceforth finance from EU funds. This happened earlier, for example, with the teachers’ pay rise, when the EU paid for that year’s wage increases, and the EU also covered a significant part of the costs of healthcare and education investments. In addition, spending EU funds also generates direct budget revenue through taxes and contributions. However, its specific effect is difficult to determine, as it depends heavily on the import content, the analysis concludes.