Hungary Posts Significant Budget Shortfall in May

Despite lifting many of the pandemic-related restrictions, Hungary’s central budget posted a significant shortfall in May. Expenditures are mounting on a new set of measures to re-start the economy.

In May, the central budget booked a deficit of HUF 269 billion, pushing the shortfall in the first 5 months of the year to HUF -1,312.6 billion. This equals 39% of the revised annual deficit target, but it is already 88% of the original deficit target. The May deficit is outstanding as the budget had a larger deficit only once in any 5th month of the year, and that was in 2020. The January-May shortfall is nominally the largest deficit in recent years.
The Ministry of Finance stressed that the primary objective of this year’s budget is to restart the economy as soon as possible. "The government's goal is for everyone affected by the epidemic to recover. The result is, among other things, that Hungary's gross domestic product increased by 2% in the first quarter of 2021 compared to the previous quarter. All this already indicates that the economic protection and economic restart measures have been effective,” the ministry said in a statement.
Analysts, on the other hand, see the May budget figures as a slight negative surprise as higher revenues resulting from the reopening were expected to counterbalance heftier expenditures. “With the May shortfall, the year-to-date budget has reached 33% of the adjusted deficit plan. In this respect, we don’t need to push the panic button,” economists at ING Bank in Budapest said in a research note.

Budget details
When it comes to budget revenues, the ministry highlighted that during the first five months of 2021 revenues from corporate, value added, personal income and social security taxes increased on a yearly basis. This hardly comes as a surprise considering the effect of the pandemic and the reopening this year.
On the expenditure side, the ministry didn’t share details about the extra spending. It only highlighted that the budget ensures the resources necessary to re-start the economy. In practice, this means some tax reductions as well as support for cheap loans and ramping up investment activities.
The government amended the deficit goal to 7.5% of GDP for 2021 and forecasts a 79.9% debt-to-GDP ratio. However, these figures are based on a quite outdated macro projection, which forecasts only 4.3% GDP growth in 2021 with 3.6% inflation. Economic growth may be close to 7% this year while the average price increase is expected to be around 4.4%. This would mean extra revenues for the budget compared to the plan.
“Against this backdrop, the only question that remains is what the government would like to do with the extra wiggle room during the fourth quarter. Considering that Hungary is facing a parliamentary election in spring 2022, we think the government leans towards spending the extra money and reaching the fiscal goals, rather than using the cash to reduce the deficit and debt at a faster pace,” according to ING Bank.

Budget outlook
Earlier this week, Parliament passed the main figures of the government’s 2022 budget, with a projected shortfall of HUF 3,152.6 billion (EUR 9.1 billion). The deficit for 2022 is targeted at 5.9% of GDP. The government will grant HUF 81 billion (EUR 233 million) next year to the tourism industry for developments connected to restarting the economy, up from HUF 40 billion this year. Under the passed budget law, a finance ministry reserve fund will be raised from HUF 93 billion to HUF 105 billion. Parliament also adopted tax cuts aimed at reviving the economy. For instance, the new tax laws stipulate that employers’ social security contributions will decline by 0.5% compared to 2021.
Next year’s budget figures may nevertheless undergo further amendments as the government comes forward with new initiatives. Prime Minister Viktor Orbán announced at a conference organized this week that parents raising children may be refunded the personal income tax they paid in 2021. The Prime Minister highlighted that the crisis brought on by the coronavirus epidemic took its toll on families raising children and there are many families that were compelled to dig into their savings. The premier also stressed that Hungary cannot cut its budget deficit to 3% of economic output next year in one step as it would deal too big a shock to the economy.