Economy 5 September 2024, 4:45pm

Long shadow of inflation reaches Hungary's public debt too - Fiscal Council President

Portfolio

One of the main problems facing the Hungarian economy, which is combating economic challenges, is public debt, which has been shaping the country's economic policy for decades. The country's debt-to-GDP ratio has been hovering around 70% for decades, and the extent to which this ratio can be reduced will remain a key issue in the future. The Hungarian Fundamental Law (i.e. Constitution) sets the desired level of public debt at 50%, but the economic situation and the global environment are not conducive to achieving this target, said Gábor Horváth, President of the Fiscal Council, in his presentation at the 62nd Itinerary Congress of Economists on Thursday.

"The long shadow of inflation" will continue to affect the reduction of public debt, said Gábor Horváth, referring to the fact that high inflation increases nominal GDP, which helps to reduce the relative debt.

However, he stressed that this is not the ideal way to manage debt. Last year, for example, the improvement in indicators was mainly due to inflation, rather than economic growth or structural reforms.

He considers it essential to reduce the budget deficit and noted that the government has fortunately already taken steps to restore the balance. Horváth underlined that the government has taken a number of fiscal measures to improve the primary balance, which have been well received by financial markets.

"It is important to keep stressing the importance of fiscal balance", he said, referring to recent statements by Economy Minister Márton Nagy, who wants to stimulate the economy while stressing the importance of maintaining balance.

However, the situation of the Hungarian economy is not only influenced by internal factors, but also by the international environment: Horváth highlighted the economic problems of Germany, Hungary's biggest trading partner.

The pandemic, skyrocketing energy prices, runaway inflation and the knock-on effects of sanctions [by the EU on Russia] are all weighing down on Germany, and this is also affecting the Hungarian economy. "It is a much more worrying prospect," he said, suggesting that many of the conditions of the German economic model have weakened and that passive waiting is unlikely to improve the situation.

He believes that it is not a foregone conclusion that consumption will grow, and that external demand for German products will also pick up in the near future, which may also have an impact on Hungarian export prospects.

Horváth warned that Hungary has no other option but to actively and effectively seek solutions to kick-start growth. He stressed that a competitiveness turnaround is essential, especially at a time when the forecasts are not very optimistic.

"Forecasts by the IMF show what German economic growth has been revised downwards several times this year," he said, adding that the detailed second-quarter Hungarian GDP growth data released earlier this week also gave no reason for optimism.

At the end of the lecture, Gábor Horváth also made a special reference to the reform of the European Union's economic governance framework - the Stability and Growth Pact - which entered into force on 30 April this year.

The new rules impose stricter fiscal discipline, and Horváth said it will be crucial for Hungary to meet these expectations. The return of the excessive deficit procedures against Hungary also signals that the EU will not tolerate high deficits and rising public debt, which is on the radar of credit rating agencies, and that a reduction in debt is expected to be a condition for a rating upgrade.