Hungary cuts growth forecast, puts off public investment projects

2025 draft budget only after 5 November

The government will submit the 2025 budget drat after 5 November, Gergely Gulyás told a press conference on Thursday. The Prime Minister's chief of staff rationalised the decision by saying that it is currently a time of war, and the only change in this could be brought on by the presidential election in the United States, i.e. Budapest relies on Donald Trump as a presidential candidate.

This means that after years adopting the following year's budget in the spring/early summer, the government has finally realised that in the current situation this would do much more harm than good. The budget vote in parliament that has been taking place in the summer is therefore not expected until late autumn. This is definitely an unexpected and new development for the budget and could boost the credibility of fiscal policy. It improves predictability in general and also of fiscal policy.

Finance Minister speaking

The government has reviewed the current situation and prospects of the Hungarian economy. The Hungarian economy is one of the most open economies, so it matters what happens abroad. We are in a war situation and the EU is emerging from the crisis more slowly than expected. Germany has been ailing for a long time and it is not clear today exactly how long this situation can be maintained. Other foreign markets are also weak.

"We designed the macro-path for a war situation," said Mihály Varga.

Macroeconomic path

In 2024, economic growth in the country will resume in a healthy structure, said Varga. The government expects the Hungarian economy to return to growth this year , which could be around 2.5%, the Finance Minister added.

This means that the government has slashed its original GDP growth plan of 4%.

Consumption and investments entering the production phase will help growth this year, and the government expects growth of 4.1% next year, he continued.

2024 budget

This year's budget will also be adapted to the war situation. The government's deficit target for this year is 4.5% of GDP, with a possible reduction to 3.7% next year and 2.9% in 2026, said Varga.

The budget will be burdened by extraordinary expenditure: increased interest expenditure and the cost of the utility bills reduction scheme, he continued.

In order to achieve a declining deficit trajectory, the government has decided on new measures, he said.

The government will reschedule HUF 675 billion of investment for the next period. It is not cancelling, only postponing these,

he announced. There are savings to be made because more than HUF 2,000 billion of public investment will be made this year, the Finance Minister said, adding that new fiscal rules will be in force in the EU. The details of these are still to be seen, especially as regards the accounting of defence spending.

The government has reviewed the public investments in detail, and has given the ministries a budget, but also guidelines on which investments the ministries should postpone, Mihály Varga said, adding that the government has specified the amounts for the ministries.

There are projects that only concern this year and will be paid in 2025, and others that can only be paid and thus implemented in 2026,

he later explained in response to a question.

He argued that the altered interest rate environment, energy prices and the war environment are challenges for all countries. Many EU countries are in a similar situation, he said. The Hungarian budget is just adapting to the changed environment, he added.

Fiscal performance in Q1

In the first quarter of this year, there are some public spending items that increase the current expenditure of the state. Interest expenditure is HUF 600 billion higher due to the changed interest rate environment. Another such item was pension payments in February. Already in the first quarter, the budget earmarked the funds needed to buy Budapest Airport, this is the third item, said Varga, listing the items that explain why the deficit is so high in the first three months.

Tax package

Mihály Varga said that next year's budget will be submitted to Parliament in the autumn, and new tax measures could be introduced then, when the government will be asked when the proposal to extend the tax exemption for mothers could be tabled.

Central bank vs. government

The last time Varga met with central bank (MNB) Governor György Matolcsy was in March. On that occasion, the management of the MNB and the amendment of the Central Bank Act were discussed. These issues will also be reviewed at future meetings.

On the back of a greater market and international backlash and in the face of fierce opposition by the central bank, the government has shelved the planned amendment of the Central Bank Act.

2025 budget

In a wartime environment, you have to be more careful, you have to prepare a wartime draft, but the work will not be significantly different, Mihály Varga said in response to a question.

2024 budget and airport buyback: how can they worth at once?

Why is the government insisting on buying back the airport in the face of this year's budget deficit?, the Finance Minister was asked. The previously planned deficit target of 2.9% has been changed, the government has raised it to 4.5% of GDP, but we are reducing the deficit [compared to the 2023 gap], he replied.

This year, the cash deficit is expected to be around HUF 4,000 billion. Consumption tax receipts are better than expected, and this situation could improve further as real wages rise, he projected.

The cash balance will be higher this year, partly due to the financing of the airport renationalisation, but this will not affect the accrual balance, Mihály Varga explained, pointing out that the airport purchase is a strategic decision for the government.

What does Donald Trump have to do with Hungary's 2025 budget?

In response to a question, Mihály Varga said that situation is constantly evolving. In NATO, decisions are being taken that could even lead to an escalation of the [Russia-Ukraine] war. The situation is different from what the government expected even a few months ago. The political environment has shifted towards an escalation of the war, he said. This autumn planning will help us to manage these risks for the government, he continued.

We cannot be blind, we cannot sit back and watch the world change around us. And one element of that change could be the US presidential election, he said.

The preparatory processes and documents for the 2025 budget are going to the desk drawer, said Mihály Varga, responding to the question of whether these preparations will be thrown away. After all, a few weeks ago the government was still planning to submit the 2025 budget in April this year.

No need for another adjustment this year

The government is always open to amendments. If the current measures can be laid down in the budget, then there will be no need for measures of such magnitude [later on], Mihály Varga said in response to a question on whether further adjustments could be needed to reach the 4.5% deficit target. The 2.5% GDP growth estimate is based on the revised scenario.

5-point package of measures for farmers

The European Green Deal was a diktat for European farmers, Minister of Agriculture István Nagy began, saying that farmers had lost their competitiveness and their vision for the future. He said that Brussels and the European Commission had betrayed European farmers and supported Ukrainian oligarchs instead.

In this situation, the role of state aid and assistance becomes more important. That is why the government has decided on a 5-point package of measures:

• In response to the market situation caused by Ukrainian imports, the government has taken another measure affecting imports, in addition to restricting Ukrainian agricultural products. Agricultural products that are prohibited from import from Ukraine are subject to full notification by the government, regardless of the country of origin.
• The Hungarian State Treasury needs to complete area- and livestock-based payments for 2023 by 30 May. So far, the state has paid HUF 470 billion to 156,000 farmers. This will be accelerated, with HUF 265 billion going to farmers by the end of May. The government is reallocating resources in government agencies and the Treasury.
• Agricultural Széchenyi schemes: the government will provide up to HUF 45 billion in additional funding for the programme until 2026. The scheme is available at an interest rate of 5%, and there is a significant demand for it.
• The government is increasing the amount of tax on gas oil that can be reclaimed per hectare per year. This will generate an additional HUF 1 billion per year for farmers.
• EU development tenders for the food industry are to be announced. A total of HUF 400 billion could go to farmers in the coming days.

Farmers can apply for 44 direct aid and rural development titles between 10 April and 10 June, officially launching the second year of the support policy, he said.

No pension premium this year

There are clear rules on when to pay a pension premium. This is possible above a 3.5% growth. If GDP growth is 2.5%, as the government expects, then there will be no possibility to pay a pension premium, Mihály Varga said.

There is a place for this money, he said in response to a question about the fate of the HUF 20 billion pension premium budget.

Compulsory membership of the Chamber of Commerce and Industry

The Ministry of Finance does not have an independent position on compulsory chamber membership, the government does. There is no suggestion on the government's table that compulsory chamber membership fees should be abolished, he said in response to a question about central bank Governor György Matolcsy's argument in favour of voluntary chamber membership.

Consumption and VAT receipts

Household consumption expenditure could rise by 2.3% this year, according to a new government forecast. According to Mihály Varga, this gives an opportunity for VAT receipts to recover.

Cover photo: Finance Minister Mihály Varga (left) and Gergely Gulyás, the Prime Minister's chief of staff, hold a press conference on 25 May 2023. Source: MTI Photo/Tamás Kovács