Hungary will miss budget deficit target in 2024 and also in 2025, OTP analysts say
In recent days, the state of the domestic budget has again become the focus of attention. On Tuesday, the government sector released this year's first quarterly data, which shows the state of the 2024 budget on an accruals basis. This is special because the accrual-based indicator is relevant for the EU and markets, and the monthly reports of the Ministry of Finance include the cash flow figures. On the other hand, Portfolio has just presented a detailed analysis of what kind of situation the government faces when it comes to deciding on budgetary issues. And thirdly, it has also been decided in recent weeks that Hungary will also be subject to the excessive deficit procedure, under which the government will have to present a national medium-term fiscal structural plan by mid-September.
So there is a sense in the air that there will be some brand new developments from the government in the near future as far as the budget is concerned.
These were followed by an updated fiscal forecast from OTP Bank analysts on Tuesday, based on fresh first quarter government sector data. It concludes that
the deficit-to-GDP ratio could be around 5% in 2024 against a new deficit target of 4.5%, and 5% in 2025 against the current target of 3.7%.
Among other things, the economists pointed out that VAT receipts have again increased at a rate above the rate of inflation, which has not been seen since the third quarter of 2022. They recall that the first quarter GDP data also showed a positive surprise in household consumption, which in turn helped VAT receipts to expand. However, they note - as Portfolio pointed out recently - that this is mainly linked to a fall in VAT refunds.
They also mention, in line with other market participants' expectations, that if the government wants to meet this year's deficit target of 4.5%, it will need to take further measures. They come to this conclusion because
- the government has decided to postpone investments of HUF 675bn since the publication of their last analysis, which will bring a 0.66% improvement in the fiscal balance as a share of GDP, and
- VAT revenues could also turn out better than previously expected, while gross revenue growth will also pick up as consumption recovers.
- However, the HUF 80 billion fine imposed by the European Court of Justice and the EUR 1 million per day penalty, which OTP analysts expect to reach 0.2% of GDP by the end of the year, are a negative development for the budget.
Overall, they still expect the deficit to narrow this year, after a 6.7% figure last year. But perhaps even more interesting is what is expected next year. Assuming an unchanged scenario, the deficit would be 5% in 2025, the bank's experts say, but they also point out that
pressure on the government to loosen the fiscal tightening ahead of the 2026 general election will intensify.
But this, according to the bank's analysts, would first require a fiscal adjustment, which could consist of several elements.
They also point out that as a result of the new rules of the excessive deficit procedure, there is less pressure on the government to correct the budget.
However, the analysts still assume that Hungary and the EU can reach an agreement with respect to all allocated funds, in accordance with the government’s plan in the Convergence Programme. The release of around EUR 12.2 billion from the EUR 30 billion EU funds by the European Commission is a cause for optimism in this respect; however, the European Parliament’s litigation against the Commission is a risk from this aspect.
Cover photo: Portfolio
