Pandemic Forces Hungary to Modify 2021 Deficit Target

Hungary’s budget deficit widened at an alarming pace in the first three months of 2021, prompting the Finance Ministry to modify the year-end target. Economists are concerned that the severeness of the pandemic will force the government to repeatedly review its forecasts for the year as the economic impact of the epidemic is set to be more punishing than initially expected.

Hungary’s budget deficit, excluding local councils, widened to HUF 1,144.1 billion (EUR 3.2bn) by the end of March from HUF 539.7 billion (EUR 1,51bn) at the end of February, according to preliminary data released by the Finance Ministry. The central budget recorded a shortfall of HUF 943.0 billion, social insurance funds were HUF 182.7 billion in the red, while separate state funds had a HUF 18.4 billion deficit at the end of the quarter. The fallout caused by the pandemic shrank revenues and the reduction of the social contribution tax to 15.5% from 17.5% also contributed to lower budgetary income. The ministry noted that payouts for European Union funded projects came close to 616 billion forints in January-March, while transfers from Brussels reached just 150.6 billion.

Spending related to the pandemic came to 342.8 billion while family allowances, disbursed early due to the Easter holidays, amounted to 32.1 billion forints, the ministry said.

Poor performance
Hungary’s budgetary performance in February and March is the weakest in the last decade, according to Péter Virovácz, senior economist at ING Bank in Budapest . The year-to-date fiscal deficit amounts to 34% of this year’s deficit goal. Although this looks time proportionate, this ratio used to sit at around 25-30%, the economist noted.
The government will modify the 2021 budget to raise the deficit target to 7.5% of economic output from 6.5% as the third wave of the pandemic has hit the economy hard, Finance Minister Mihaly Varga told daily newspaper Vilaggazdaság at the end of March. Nevertheless, the minister sounded optimistic, saying that the Hungarian economy, which contracted by 5% in 2020, could still rebound "surprisingly fast" in 2021 and grow by 4.3%. "Looking at next year, we expect that a high rate of vaccinations will allow a reopening (of the economy) and we could see GDP growth possibly exceeding 5%," Varga said.
Hungary’s government is balancing the world's highest daily per-capita coronavirus death rate, according to Our World in Data, with a need to reopen the economy as fast as possible.

Budgetary risks
The March deficit included the newly introduced employer benefits, reduction of the social contribution tax and higher public wages (mainly due to the increased wages in healthcare). These will continue to affect the budget going forward, underpinning Varga’s opinion that the coming months will be “difficult.” Virovácz believes that the new deficit goal “seems to be achievable, especially given that the government’s GDP and inflation projection is well below the market consensus, which poses a positive risk to budget execution.” When it comes to deficit financing, the State Debt Management Agency (ÁKK) said that it is somewhat ahead of its issuance plan (37% executed in the first quarter), while the liquidity reserves of the government amounted to approximately 5.5% of GDP at the end of March, putting the ÁKK in a comfortable position for the rest of the year.

Wide shortfall in 2020
Hungary’s budget was heavily impacted by the coronavirus epidemic in 2020 as well. The shortfall amounted to HUF 3,870 billion (EUR 10.7bn) last year, which equaled 8.1% of GDP. The shortfall ballooned because of the economic impact of the pandemic as well as government stimulus and spending on Covid-19 defense. Hungary’s public debt stood at 80.4% of GDP at the end of last year, according to data compiled by the National Bank of Hungary (NBH). The finance ministry stressed that Hungary’s public debt was still lower than the European Union average of over 90% of GDP while the 8.1% budget deficit was around the EU average.