Hungary Budget Deficit Widens as Central Bank Urges Structural Changes

Hungary’s budget deficit continued to widen on government stimulus measures, reaching nearly half of the increased annual target by the end of July. Meanwhile, the head of the nation’s central bank warned that a global economic crisis was looming large on the horizon and the government needs to undergo structural changes to respond to the challenge.

Hungary’s cash flow-based government deficit, excluding local councils, reached HUF 1,803.7 billion at the end of July on the back of economic stimulus measures implemented by the government, the Finance Ministry said this week. The seven-month shortfall amounted to 45% of this year’s modified annual target of HUF 3,990 billion. Initially, the government calculated with a budget deficit of HUF 1,491.2 billion for 2021, equaling 2.9% of GDP. However, in May, the Cabinet revised the target to a staggering 7.5% of the GDP, more than double of the EU limit of 3%. “In order to restart the economy, it is necessary to continue pursuing supportive fiscal policies this year. Further stimulating the growth already under way will also help us achieve 5.5% economic growth this year,” the ministry said in a statement.
According to the ministry, the economic impact of the COVID pandemic hit budget revenues while employer benefits, the reduction of the social contribution tax from 17.5% to 15.5% as well as higher wage outflows also took a toll. Nevertheless, corporate tax, VAT, personal income tax revenue and social security contributions were higher in January-July 2021 than in the same period a year earlier, the ministry noted.

Central bank warning
Hungary needs to sketch a new economic policy vision that will allow the nation to catch up with the more prosperous EU member states over the coming decade, National Bank of Hungary (NBH) Governor György Matolcsy wrote in an article published this week. The governor warned that the global economy was most likely facing another crisis and urged major changes in the structure and operations of the government in order to avoid Hungary getting stuck in a “middle-income trap”. Matolcsy stressed that Hungary’s level of development at the end of 2019 was below the historical high of 1936 when the country’s level of prosperity was closest to that of Western Europe. The nation’s economic development is still trailing the EU average despite the achievements of the past decade, according to the governor. Matolcsy attributed this mainly to shortcomings in the operations of the state and specifically that of the government. Hungary’s level of development in 1936 was close to 83% of the “EU” average, in 2019 it was at 73%, he said. “Our mediocre economic performance compared with that of our competitors this past decade was the result of a mediocre performance of government,” the governor wrote.

Repeated criticism
This was not the first time that György Matolcsy criticized the government’s economic policy. In an article published earlier this year, Matolcsy claimed that the country lacked a comprehensive economic policy with a unified and clear vision for the future. He argued that Hungary should follow in the footsteps of Estonia, which performed far better in terms of economic catch-up. The governor stressed that between 2009 and 2020, Estonia caught up to the EU average from 64.6% to almost 84%, a performance that has brought the country closer to the level of developed European countries by almost 20 percentage points. In comparison, Poland performed with 13 percentage points, Hungary and the Czech Republic less than 10, and Slovakia even dropped 2 percentage points. “We need a strong vision, a good strategy, a complete digital transition, high investment rate, sustained dynamic productivity growth, wage catch-up, repatriation of workers from abroad, low public debt, a strong technology sector, many innovations and world-class universities,” Matolcsy concluded.