Hungary's Budget Deficit Nears Annual Target Amid Economic Concerns

Hungary's Budget Deficit Nears Annual Target Amid Economic ConcernsHungary's budget deficit has surged to 62% of the government's full-year target in the first quarter, following a significant shortfall in March—the second-largest for that month in 24 years. This development raises questions about the feasibility of the administration's revised economic growth projections, especially as the National Bank of Hungary (MNB) cautions that ongoing trade disputes could further dampen growth in 2025.

Preliminary data from the National Economy Ministry reveals that the cash flow-based budget deficit reached HUF 831.2 billion (approximately EUR 2 billion) in March, culminating in a first-quarter total of HUF 2.55 trillion. This figure represents 62% of the government's full-year deficit target for 2025. The ministry attributes the rising deficit to increased interest payments on retail government debt and dollar-denominated bonds, alongside elevated expenditures on energy subsidies and pensions, which have outpaced the growth in tax revenues.

Tax and contribution revenues experienced an 11.6% year-on-year increase, with Value Added Tax (VAT) receipts contributing an additional HUF 265.6 billion. This suggests robust consumption activity and the impact of rising food prices. However, interest expenditures rose by 25% to HUF 1.55 trillion, influenced by the maturation of dollar-denominated bonds and inflation-linked government securities. Utility subsidies also played a role in the expanding deficit. Notably, pension payments, including the extra 13th-month entitlement, totaled HUF 1.2 trillion during the quarter.

This first-quarter deficit mirrors patterns observed in previous years, where front-loaded expenditures, particularly interest payments on retail and foreign currency bonds, were anticipated. Historically, the government has had to adjust its deficit targets mid-year and implement fiscal corrections to align with its objectives.

Despite these challenges, the official deficit target of 3.7% of GDP remains attainable, provided fiscal discipline is upheld, according to ING senior analyst Peter Virovácz. He notes, however, that the deficit could approach 4% of GDP, with risks skewed towards a higher shortfall.

In its revised macroeconomic framework for 2025, the government anticipates slower growth of 2.5% (down from an earlier estimate of 3.4%) and higher inflation at 4.5% (up from 3.2%). These adjustments could exert additional pressure on fiscal targets, especially amid the uncertainties stemming from global trade tensions. The central bank has warned that recent changes to global trade regulations could reduce growth by 0.5 to 0.6 percentage points, while also posing upward risks to inflation. The central bank reaffirmed its commitment to a strict, stability-oriented monetary policy to achieve price stability.

The government has been relying on the European Commission to grant member states greater fiscal flexibility in light of rising defense expenditures. As geopolitical tensions have escalated, many EU countries, including Hungary, have increased their military spending in line with NATO commitments.

Analysts caution that Hungary's persistently high budget deficit remains a structural concern. Without further fiscal consolidation, the shortfall could exceed 5% of GDP in 2025, according to a recent report by OTP Bank analysts. They also highlight that the government's deficit targets of 3.7% for this year and 3.5% for 2026 are unlikely to be met without significant adjustments, particularly given the upcoming elections. The full impact of granting lifelong personal income tax exemptions to mothers of two is projected to reach 1% of GDP, fully materializing by 2029 as the exemptions are introduced gradually.

OTP analysts project this year's economic growth at 2%, but warn that the ongoing trade war and a recent foot-and-mouth disease outbreak pose downside risks to an already fragile recovery. Domestic consumption is expected to rise by 5%, supported by looser fiscal policy, while investment activity could also rebound following a sharp contraction in 2024.