Hungary Braces for Possible 2023 Budget Adjustment Amid Economic Slowdown

As Hungary's economy faces headwinds, the government is preparing for a potential revision of its 2023 budget. The decision, which could have significant implications for the nation's fiscal strategy, will be made following the release of third-quarter economic data. The reassessment comes as the government acknowledges that its initial full-year growth projection has become increasingly unrealistic in the face of ongoing economic challenges.

In a concerning development, Hungary's economy contracted by an annualized 2.4% in the second quarter, based on preliminary unadjusted data. The dual pressures of surging inflation at record highs and elevated borrowing costs have taken a toll on economic activity. Prime Minister Viktor Orbán's chief of staff. Gergely Gulyás, speaking at a press briefing, emphasized the formidable task of achieving the deficit target amidst these trying circumstances. "Based on the first two quarters, the chance of achieving 1.5% economic growth is very low; therefore, a correction is justified," Gulyás stated candidly. He further outlined the government's expectations for a resurgence in growth during the latter half of the year, underlining the pivotal role that third-quarter data will play in revising this year's growth forecast.
The struggle is exacerbated by diminishing consumer spending, resulting in reduced value-added tax revenues. This phenomenon has complicated efforts to trim the budget deficit to the initially planned 3.9% of the gross domestic product for the current year. Recent data from the finance ministry underscored the severity of the situation, revealing a staggering shortfall of HUF 620 billion in value-added tax revenue in the first 7 month of this year, equivalent to nearly one month's worth of revenue.
A comprehensive analysis of Hungary's budget paints a grim picture, with both revenue and expenditure indicators faltering over the first seven months of 2023. By the end of July, revenues had only reached 56.7% of the adjusted annual target, while expenses surged to 59.3%, significantly surpassing the corresponding figures from the prior year. Notably, housing subsidy funds for the year were nearly depleted, with over 90% already spent, and interest payments had surged to 60.7% of the annual plan, a stark increase from the 43.7% recorded at the same point last year.
The economic woes are further compounded by the highest inflation rate in the European Union, which peaked at over 25% year-on-year in the first quarter before easing to 17.6% in July. Despite the anticipation of a return to real wage growth, experts are cautious about an immediate rebound in consumer spending. Péter Virovácz, an analyst at ING, highlighted the complex dynamics at play, suggesting that recovery might not be as swift as hoped.
Earlier forecasts by the government had envisioned a 1.5% GDP growth for the year; however, the disappointing second-quarter GDP data prompted a reconsideration of these projections. Both the economy minister and the finance ministry, in separate statements following the data release, expressed optimism for a resurgence in the latter half of the year, buoyed by expectations of waning inflation. Nevertheless, an updated full-year forecast was notably absent from these pronouncements.
Prime Minister Viktor Orbán, in a recent live interview, acknowledged the current year's focus on tackling inflation. He alluded to 2024 as a potential year for economic growth momentum, signifying the government's long-term perspective amid the ongoing challenges.

Soaring public debt
Adding to the concerns is Hungary's ballooning public debt, which stood at HUF 48,139 billion by the end of July, reflecting a 9% increase compared to the previous year. Detailed public finance data published by the Ministry of Finance attributed a substantial portion of this rise to mounting interest expenses. The state's interest balance for the year was HUF -1,278.6 billion, and the increase in interest payments year-on-year amounted to HUF 456.8 billion. The shift in interest expenses is attributed to heightened interest and yield levels, illustrating the growing challenges in securing cost-effective financing for the state.
As Hungary navigates these multifaceted economic challenges, the nation's policymakers find themselves at a critical juncture, balancing the need for immediate adjustments with a longer-term vision for sustainable growth. All eyes are now on the impending release of the third-quarter economic data, which will likely shape the course of Hungary's economic policies and fiscal strategy in the months ahead.