Hungarian budget deficit balloons

The Hungarian budget posted a HUF1,585bn deficit in the month of February, the second biggest monthly deficit ever. With the small surplus in January, the year-to-date deficit accumulation is at HUF1,434bn. This equals to 45.5% of the full-year cash-flow based shortfall target.

For those who do not follow Hungarian economic policy closely, this budgetary performance may be quite surprising. However, we have already highlighted in our budget assessment in February, that a huge deficit figure is looming. The Finance Ministry’s statement reveals the main drivers. The families raising children in February received their personal income tax paid in 2021, pensioners received a 13-month pension, and those employed by the armed forces and law enforcement agencies got a six-month bonus payment. All in February. In addition to these one-offs, the government has also decided on significant tax cuts in January. As a result, people under the age of 25 are receiving a full PIT exemption, while the payroll tax has been reduced by 4ppt to 13%. But this is impacting the budget during the whole year.

This front-loaded deficit accumulation was a well-planned action based on the strong economic activity last year and the expected good performance this year. In a vacuum, this is not a data that would concern us. What makes the situation delicate is the war in Ukraine, which could have significant implications on the 2022 fiscal targets.

The government planned the 4.9% of GDP deficit target with an expected 5.9% GDP growth, but the war and the sanctions are reducing the viability of that growth projection. On the contrary, inflation is flying much higher than planned, probably ending up somewhere around 8%. This gives extra inflow on the revenue side even if we take into consideration the expected slowdown in the real GDP growth. Plainly speaking, nominal GDP growth could be even higher (but due to the wrong reason).

Thus, the real issue regarding the budget is not necessarily related to the macroeconomic performance. What could cause headaches are:

• increasing interest payments due to the higher bond yields;
• deteriorating central bank earnings due to higher interest rate environment and a weaker forint (budget bears the loss of the central bank, though it is rather an issue in 2023);
• soaring energy costs are making the anti-inflationary shields more expensive, especially the utility cost cuts. State-owned utility providers need to be recapitalized.

These three things are possible to generate a HUF1,000-1,500bn extra budgetary spending if the situation won’t improve soon. Compared to the planned HUF3,153bn cash-flow based deficit target, this is a significant impact.