Hungary aims budget deficit of 2.9% of GDP next year

The Hungarian government has set its sights on reducing the country's budget deficit to below the European Union's threshold of 3% of GDP in the coming year. Finance Minister Mihály Varga made the announcement while presenting the 2024 budget plan to Parliament this week. As part of their strategy, the Cabinet will ease taxes on certain sectors while retaining special windfall taxes.

Prime Minister Viktor Orbán's administration is determined to bring the nation's budget deficit down to 2.9% of GDP, with a year-end state debt-to-GDP ratio target of 66.7%. This marks a decrease from the expected 69.7% at the end of 2023. The plan assumes an average annual inflation rate of 6% and economic growth of 4%, although the latter exceeds the market consensus of 3.3%, which could pose challenges for the ambitious deficit targets, analysts have pointed out.
In line with EU regulations, member states are required to maintain 2024 budget deficits below 3% of GDP, as the suspension of the Stability and Growth Pact is set to be lifted by the end of the current year. This means that excessive deficit procedures could be imposed beginning in spring 2024.

Windfall taxes
Hungary's windfall taxes, initially introduced in 2022 for a temporary two-year period, will remain in effect for the following year. However, the tax burden on banks, pharmaceutical companies, and energy suppliers will be halved, while that on retailers will remain unchanged, according to Finance Minister Mihály Varga.
The government is planning to increase defense spending by 50%, amounting to HUF1.3 trillion, which would raise the defense spending per GDP ratio to over 2%. Simultaneously, central budget support to the Utility Protection Fund for covering retail energy subsidy schemes will be halved to HUF489 billion, as energy prices have alleviated financial pressure on the country.
Furthermore, the 2024 budget allocates HUF2.5 trillion for energy subsidies. The remaining expenditures for the fund will be covered by windfall profit taxes from companies in the energy, mining, telecommunications, airline, and pharmaceutical sectors. The bill sets the target for state investments at HUF555 billion, a reduction from HUF580 billion in the 2023 budget act.

EU funds
The budget plan also designates HUF3.8 trillion for spending on European Union-funded developments. Despite these financial commitments, government officials have acknowledged that the first payments are unlikely to be transferred until the end of 2023, as Hungary had to meet 27 super milestones to receive the EU project funds.
Debt servicing expenditures are slated at HUF3.1 trillion, a significant increase from HUF2.5 trillion in 2023, surpassing the Hungarian National Bank's targets. In the bill's reasoning, submitted by Varga, the government referred to the 2024 budget as a "defense budget" aimed at addressing the challenges posed by the unstable global economic environment, Brussels' sanctions policy, and the ongoing war.

Fiscal concerns
While the government is hopeful that an early adoption of the budget could provide guidance for companies and state bodies, data indicates that deviation from budget targets tends to increase with early adoption. The Fiscal Council has also voiced concerns regarding the budget, suggesting that deficit targets could only be met under the best-case scenarios. Delays in EU sanctions, sluggish economic growth in Hungary's export markets, or an extended war could all jeopardize revenue targets.
The Fiscal Council has additionally highlighted that the budget draft does not account for the expected loss of the Central Bank (MNB), which could amount to hundreds of billions of forints. In December, the government revised the Central Bank Act to ease rules on potential compensation for losses and extended the period for payment from eight days to five years, with payments in equal parts.