Economy 21 May 2025, 4:25pm

Fiscal 'landmines' in Hungary's 2026 budget bill discussed in Parliament

MTI

Hungary's Fiscal Council (Fiscal Council) had no fundamental objections to the draft bill on the 2026 central budget, which would have justified its disagreement, Gábor Horváth, President of the Fiscal Council, said in the general debate on next year's budget in Parliament on Wednesday. Meanwhile, László Windisch, President of the State Audit Office of Hungary, said that the budget was based on calculations, adding that all of the government's assumptions and forecasts had been met in the evaluation of its draft budget for next year. However, both bodies acknowledged the extraordinary risks to the outlook for the Hungarian economy and budget next year. The President of SAO also pointed out that activating the EU's escape clause gives the government more leeway to increase spending, which could lead to a higher deficit.

The Fiscal Council's opinion

The FC President pointed out that, although there are minor numerical differences between the final version and the previous one, the essential elements — such as the 3.7% ESA deficit on an accrual basis, the cash deficit of the central subsystem, and the public debt — remain unchanged from those seen and commented on by the Fiscal Council.

He stressed that the government had accepted the Fiscal Council's proposal to increase reserves, so it had beefed up the allocation for extraordinary government measures from HUF 50 billion HUF to HUF 192 billion. At the same time, it had reduced expenditure by the same amount in the draft, leaving the budget balance unchanged.

The Council considers the budgetary expectations for employees to be reasonable. However, the draft does not explain why the forecast for wage growth in the private sector is more than two percentage points above the minimum wage agreement reached at the end of November 2024.

Gábor Horváth pointed out that

substantial risks surround the achievement of the 2026 deficit target.

These are:

Lower-than-planned economic growth next year would reduce tax revenues for the budget.
The occurrence of downside risks to economic growth in 2025, as well as the budget outturn this year, will affect the 2026 outturn through the base effect.
Continued uncertainty surrounding the availability of EU funds would lead to an increase in the cash deficit in case of a lower-than-targeted receipt of funds from the Recovery and Resilience Fund and the 2021–27 Cohesion Fund, if expenditure remains unchanged.

He pointed out that the fiscal plan anticipates inflation of 4.5% in 2025 and 3.6% in 2026. Lower commodity prices, as well as measures taken by the government and the central bank (MNB), could help reduce inflation. If they are accompanied by productivity improvements, dynamic wage increases will not have a negative impact on economic balances, including inflation.

In 2026, economic growth could be supported by rising consumption and a 5.9% increase in gross fixed capital formation, as well as a 6.4% increase in exports, which would contribute 0.1 percentage points to growth. They noted that a pick-up in investment would represent a reversal of the moderation seen in recent years, conditional on an improvement in growth prospects and business confidence.

According to Horváth, the risks to the budget's macroeconomic path are primarily posed by protracted geopolitical conflicts and mounting trade tensions.

The Fiscal Council continues to believe that reducing the government sector deficit to below 3% of GDP is necessary in order to balance the Hungarian economy and budget.

They found that the deficit target of 3% of GDP for 2026 exceeds the criterion set out in the EU Treaty, as well as the 2.5% target resulting from the net expenditure path in the medium-term fiscal structural plan submitted by the Hungarian government and approved by the Council of the European Union. According to the Council's recommendation issued under the excessive deficit procedure (EDP), Hungary should eliminate the excessive deficit by 2026.

What does the State Audit Office say?

On Wednesday, during the general debate of the National Assembly, the President of the State Audit Office of Hungary (SAO) assessed the bill on Hungary's central budget for 2026 as well-founded based on calculations.

László Windisch said that the revenue appropriations can be met if economic trends align with the macroeconomic forecast presented in the bill's explanatory memorandum.

The SAO's calculations show that the revenue estimates are in line with the government's macroeconomic forecasts, on which the bill is based.

There are only a few minor differences between the SAO's own calculations and the figures presented.

He also said that there is a lot of uncertainty surrounding macroeconomic developments in 2025 and 2026. The impact of political and economic factors, as well as global and domestic factors, on Hungary's economic prospects includes both dynamic growth and growth moderation. The government's macroeconomic forecast for 2026 is based on the former, the SAO President added, while the negative conditions are also very real.

He drew attention to a part of the government's forecast which predicts a 10.2% rise in average gross earnings in the competitive sector by 2026. If this forecast is not met, it could significantly impact the evolution of budget revenues. This increase is considerably higher than the 7.6% increase stipulated in the wage agreement between the industry and the members of the Government's Permanent Consultative Forum in November 2024.

He indicated that, provided the increase in average earnings in the business sector does not significantly exceed 7.6%,

there will be a significant shortfall in tax and social contribution receipts as a proportion of wages.

Despite the uncertainties, the SAO assessed the proposal on the basis that the government's forecast, as set out in the explanatory memorandum, will be met. This is because there is a realistic chance that the government's envisaged economic path will be achieved, a possibility that the SAO President does not rule out.

The motion showed that the total revenue appropriations in excess of 0.15% of the total revenue appropriations amounted to 77.3% of the total revenue appropriations. The SAO identified a risk of non-compliance for 0.1% of the selected appropriations amount.

Windisch said that the SAO had assessed most major revenue appropriations as fully achievable, although some were in doubt. These include HUF 7.0 billion for corporate tax, HUF 16.8 billion for energy sector payments, HUF 5.8 billion for retail trade tax, HUF 2.0 billion for insurance tax, HUF 3.8 billion for the part of the Social Security Contribution payable to the Health Insurance Fund and the Health Insurance Contribution.

Adding these together gives an estimated revenue default risk of HUF 35.4 billion, László Windisch said.

He added that in order to meet the revenue requirements, the National Assembly still has a task ahead of it, because the full appropriations for the mining levy, carbon dioxide quota tax, payments from financial institutions and the energy sector, insurance tax and retail tax will only be met with the adoption of the planned legislative amendments. The total budgetary impact of these amendments is an increase in revenue of HUF 521 billion.

The total amount of appropriations for expenditure above 0.15% of the total expenditure, as set out in the budget bill, amounted to 42.3% of the total expenditure. This is risky, despite these appropriations having been planned with due care.

According to the SAO's calculations, based on the documents made available to them, it is likely that there will be an overrun of HUF 4.6 billion in the case of the infant care fee, and an overrun of HUF 30 billion in the case of the express road network availability charge.

He stated that the proposal sets the cash deficit of the central government's general subsystem at HUF 4,218.5 billion for 2026. This equates to 4.4% of the planned GDP of HUF 95,747 billion for that year.

Taking this as a starting point, the government sector's deficit on an accrual basis, calculated according to the EU methodology, is projected at HUF 3,588.2 billion — equivalent to 3.7% of the projected GDP. However, this is not in line with EU law and therefore does not meet the legal requirements of Hungary.

However, in March 2025, the European Commission presented the so-called ReArm Europe plan. This would allow Member States to deviate from the correction path under the excessive deficit procedure between 2025 and 2028. This would be permitted if the deviation was due to an increase in defence spending and if the national escape clause of the Stability and Growth Pact was activated.

Hungary has submitted a request to activate the emergency clause, which the European Commission is expected to assess in June 2025.

Since 2022, Hungary's defence spending as a percentage of GDP has increased significantly. Therefore, adopting the exemption would allow for greater flexibility in increasing spending and, consequently, the deficit beyond current levels, Windisch concluded.

Cover photo: On 21 May 2025, Gábor Horváth, President of the Fiscal Council, spoke during the debate on the bill for Hungary's 2026 central budget at the plenary session of the National Assembly. Source: MTI Photo/Lajos Soós