Warning: 2022 Overspending Could Fuel Inflation

National Bank of Hungary (MNB) governor György Matolcsy said he believes the 5.9-percent-of-GDP deficit target in the 2022 budget is "a mistake" and could set the country up for "persistently high inflation."

He wrote in an online column this Monday that "Parliament has approved the 2022 budget and its target for a 5.9-percent-of-GDP deficit. I believe the decision is a mistake, as it unnecessarily builds significant risk into the operation of the Hungarian economy."

According to György Matolcsy, the 2022 budget cannot be a budget for a reboot, because the Hungarian economy has already rebooted this year, so its starting points are flawed and a good budget could not be built on them.

The budget adopted for next year is a budget for inflation rather than for recovery, because recovery will take place in a year and a half, which will bring with it inflationary spikes, because the demand that has been built up by necessity will not immediately be met by supply of the same volume and structure on the internal market. Once this happens in other countries, imported inflation will also spike," he explains.

The excess demand stemming from the 5.9% of GDP budget deficit will further fuel inflation, which could push spikes into a persistently high inflation path. The 2022 budget will therefore fuel inflation instead of the inflation-reducing effect of a return to a balanced path.

The Hungarian economy has the highest debt-to-GDP ratio in the V4 group, while it is projecting the highest budget deficit in 2022, which would also be the third largest in the EU, the central bank president points out.

If, after this year's second quarter restart with double-digit GDP growth, financial markets judge that the unchanged repayment moratorium, the adopted 2022 budget, persistently high inflation and the highest negative real interest rates together represent unsustainable economic policies, Hungary could face a strong financial attack, György Matolcsy warns.