Economy 9 November 2023, 1:23pm

Hungary budget deficit exceeds full-year goal by end-October

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Hungary's state budget closed with a deficit of HUF 222.6 billion in October 2023, in line with the last few years' figures overall (excluding last year's surplus in October due to a payments freeze). This means that the cash deficit for the first ten months of the year exceeded the original target. In our article, we briefly outline the options the government is left with in the last two months in terms of the upwardly revised deficit target.

The Ministry of Finance published an even shorter-than-usual statement it released its preliminary October public finance data. The previous month it had published the monthly figure (not coincidentally, as it showed a surplus), but now it has again published only the usual cumulative balance for the first ten months.

In any case, it does not take a math professor to calculate the October budget balance, which was HUF -222.6 billion. This is not at all out of line with the pattern of recent years, although the years 2020-2021 were burdened by the Covid crisis.

Compared to last year, it is important to note that the budget surplus in October 2022 may have arisen because the government imposed a payment freeze, which temporarily improved the government's liquid financial position (but what other consequences this had, and what market participants suddenly thought about the government's financial position, is another question).

The ministry also notes that by the end of October, the cost of the utility bills protection scheme amounted to HUF 1,301.4 billion. This means that in the tenth month of the year alone, the state spent HUF 195.8 billion on energy. We wrote about this in October, based on government decisions published in the Official Gazette:

How is the budget doing after ten months?

So after the first ten months, the cumulative deficit stands at HUF 3,487.6 billion. This is the worst cumulative ten-month figure ever, so it also confirms that this year's budget is on a slippery slope.

In light of these developments, it is no coincidence that a month ago the government announced that it was raising this year's deficit target from the original 3.9% of GDP to 5.2%.

By the end of October, the deficit reached 102.6% of the original full-year cash deficit target, so the upward revision is not surprising at all. It is simply that the cabinet wants to use a bigger blanket to cover up the nasty fiscal developments of 2023.

What can be expected?

When the deficit target for this year was still 3.9% of GDP in accrual terms, the government expected a deficit of HUF 3,400 billion in cash terms. With the new deficit target announced at the beginning of October, this annual nominal cash deficit target has risen to HUF 4,166 billion, i.e. the government has allowed itself a HUF 766 billion higher deficit this year.

Currently, after ten months, the government has used up HUF 3487.6 billion of this, leaving HUF 678.4 billion, or 16.3% of the new revised deficit target, for the government to use in the remaining two months.

What this means in practice is that

if the government wants to meet the new deficit target, it could accumulate a total deficit of around HUF 680 billion in November and December.

Of course, it is still possible that things could turn out differently from an accrual perspective, but this two-month deficit is a good benchmark for the room for manoeuvre the government has in the last two months of the year.

This logically leads to the question of the government's chances of not exceeding the HUF 680 billion budget deficit in these two months. It may be easier to answer this question if we look at how the balances of the last two months have developed in recent years.

If we look at the long-term average over the last 21 years, we have a deficit of HUF 540 billion, which would seem to suggest that the government has nothing to worry about.
However, if we look at the more relevant timeframe for this year, i.e. the aggregate balance of the last two months from 2017, we already have a deficit of HUF 1,375 billion. This would suggest that the government will have no chance of meeting this year's revised deficit target.
And if we look at the last two-monthly balances over the last three years, the average deficit is over HUF 2,400 billion. True, it is important to note that in previous years the government has regularly embarked on a spending spree in the last days of the year, but such a government intention is not possible, or even likely, this year.

On the basis of the analysis of the above scenarios, it looks very difficult for the government to meet even this year's higher deficit goal. Therefore, in light of this, we do not rule out the possibility that the government will take some decision towards the end of the year to stabilise the budget, but our first thought should not necessarily be a tax hike (as a special tax raise has traditionally been the case in the past). It is also possible that the government will not exhaust its expenditure envelope and spend the existing room for manoeuvre on other purposes. We are thinking here in particular of the expenditure reserves earmarked in the Defence Fund and the Overheads Protection Fund.

Cover photo: The building of the Finance Ministry in József Nádor square in Budapest. Source: Mohai Balázs/Bloomberg via Getty Images