Hungary Posts Record Budget Deficit on Pre-Election Spending

Hungary’s November government deficit broke an all-time record, boosted by a government spending spree to win re-election next spring. Economists fear that the upcoming general election will put the much-needed fiscal consolidation on hold.

Hungary recorded an unprecedented monthly budget shortfall of HUF 1,009 billion in November, according to preliminary information published by the Ministry of Finance this week. By the end of November, the country’s budget deficit ballooned to over HUF 3,900 billion, which is close to the annual target that was doubled during the year.
Prime Minister Viktor Orbán gave Hungarians generous financial handouts, including a $2 billion income tax rebate for families, as his government faces a closely fought election next year. These handouts have triggered a surge in the nation’s budget deficit, forcing the Cabinet to amend its annual deficit target. Hungary borrowed heavily in global markets this year to finance the swelling deficit and bridge a delay in access to EU pandemic recovery fund over a row with Brussels on democratic standards.

A month of records
After the November inflation number hit a record last seen at the end of 2007, we did not have to wait long for another record to break. The year-to-date budget shortfall now equals 98% of the amended full-year deficit plan. Against this backdrop, there is not much room (only HUF 92.7 billion) for maneuver for the government in December to comply with the deficit target. The average monthly deficit in the past six months was around HUF 440 billion and the historical average of the monthly deficits in December is HUF 220 billion.
One-off items played a significant role in the gigantic November deficit, mainly on the side of pension expenditure, which amounted to about HUF 250 billion. The state paid out pension bonuses and the compensation for pensioners due to high inflation in November but these expenses are not recurring items.
If the government wants to deliver its own deficit plan for 2021, it can only afford a deficit of HUF 93 billion in the last month of the year.

Fiscal room
Should the government miss its deficit target for this year, they have financial room to maneuver as the Government Debt Management Agency is well ahead of its issuance plan. This means that the government has enough funds in its coffers to finance a larger-than-planned budget deficit this year. Another positive factor is that thanks to strong nominal GDP growth, the public debt reduction goal remains achievable. In other words, Hungary will be able to comply with the European Union’s debt reduction rule, so the debt-to-GDP ratio will drop even if the government does not meet its own deficit target.
“As the budget was burdened by one-off expenditure … we expect a much better deficit figure in December,” said Péter Virovácz, economist at ING Bank in Budapest. He added that during the fourth quarter of 2021 and the first quarter of 2022, the government will have spent HUF 4.8 trillion to support the economy. This contains the pension bonuses, one-off bonuses for the armed forces, a tax refund for families, a personal income tax cut for those aged under 25 and a 4 percentage point cut in the payroll tax, as well as several state-financed investments. All these measures will push the aggregate demand higher in the Hungarian economy, which suffers from supply shortages in several areas. This will add to the inflation pressure, which has already hit the highest level in 14 years. “In our view, fiscal consolidation needs to start as soon as possible and needs to be carried out quickly to mitigate the risk of medium-term high inflation. We see this happening only in the second half of 2022 at the earliest, as Hungary is facing a general election in spring next year,” Virovácz said.