IMF analysis identifies risks to Hungary's deficit and debt trajectory

How will this path lead to growth and a decreasing debt ratio?

The IMF regularly conducts detailed analyses of each member state's economy, typically every 12–18 months, as authorised by Article IV of the organisation's Articles of Agreement. These reviews are usually conducted over a period of several months in consultation with local authorities. The staff report for the latest Article IV consultation for Hungary has been recently published.

Key messages:

• The Hungarian economy is at a challenging juncture with stagnant output over the past three years and inflation above target.
• A modest recovery is expected with significant risks to the downside including a delay in needed fiscal adjustment and deepening geoeconomic fragmentation.
• To strengthen macroeconomic resilience and revitalize growth, it is essential to rebuild fiscal buffers, sustain a tight monetary stance into next year, and implement structural reforms to bolster competitiveness, energy security and productivity.

IMF staff noted right away that the Hungarian economy is at a challenging juncture. Output has stagnated over the past three years, while inflation remains well above the central bank’s 3% target.

Regulatory measures—such as price, interest and margin caps, along with windfall taxes and subsidized lending schemes—have distorted market signals and added uncertainty.

Despite significant fiscal adjustment in recent years, public debt is elevated given high financing costs.

High domestic and external uncertainty are expected to continue weighing on the outlook. Modest consumption-driven growth of 0.7% is expected in 2025 underpinned by favorable wage dynamics. According to the latest IMF estimates, Hungary's GDP is expected to grow by just 0.7% this year, accelerating to 2% in 2026 on a recovery in investment and a positive impulse from German fiscal expansion but only reaching 2.5% by 2029. In other words, the IMF does not expect the economy to receive a significant boost in the coming years, so the government's desired growth of 3–6% will remain unattainable.

Inflation is expected at 4.5% in Q4 2025 and then to gradually decelerate to the central bank’s 3% target by 2027.

Under current policies, the fiscal deficit will remain around 4.5% of GDP through the medium term, with debt-to-GDP rising to around 79% by 2030,

according to the IMF's most painful projection.

The detailed table shows that the Monetary Fund expects a deficit of 4.4% in 2029, following this year's 4.7% deficit. This suggests that

they do not foresee any significant reduction in the deficit.

According to the IMF, risks are tilted to the downside. "Deepening geoeconomic fragmentation amid a further escalation in trade measures, intensification of regional conflicts, a failure to enact a credible fiscal adjustment, and cancelation of EU funds, pose significant downside risks," IMF staff said.

What should be done then?

The second part of the statement contains specific recommendations from the IMF to the Hungarian authorities on how to deal with the current situation and reduce risks.

• Reforms are needed to strengthen growth and macroeconomic stability amid an unsettled external environment. "Elevated and still growing public debt and high refinancing costs underscore the urgency of credible, well-designed measures to restore fiscal buffers. This would also support efforts by the central bank to bring down inflation. Implementing structural reforms to address the root causes of stagnant productivity will be crucial to safeguard growth against trade tensions and heightened uncertainty. However, with national elections in early 2026, the political economy of reform could be challenging."
• Fiscal adjustment would also be crucial for debt sustainability. Directors emphasized the importance of additional fiscal effort to rebuild fiscal buffers and ensure debt sustainability. They welcomed the authorities’ medium term goal of achieving a structural primary surplus, which would help reduce the headline deficit and place public debt firmly on a downward path. In that context, Directors underscored the importance of high quality fiscal adjustment.
• They called for broadening the tax base by reducing exemptions and rationalizing spending— particularly energy subsidies — while reallocating savings to strengthen targeted social support.
• Directors also stressed the need for reforms to contain long term pension and healthcare spending pressures and improve monitoring and mitigation of fiscal risks, including those stemming from state owned enterprises.
• Contingency planning, including in case of additional defense spending, would be important.
• Directors agreed that the monetary policy stance should remain tight to return inflation to target. They supported a data dependent approach amid high uncertainty and highlighted the role of continued exchange rate flexibility and adequate reserves in mitigating external shocks.
• Directors agreed on the need to phase out price, fee, and margin controls to avoid market distortions and strengthen the effectiveness of monetary policy.
• Directors considered that the financial sector is broadly sound, but urged continued vigilance. They noted that while banks are well capitalized, liquid and profitable, vulnerabilities remain, including from risks in the corporate sector, banks’ growing sovereign and FX exposures, and buoyant housing prices.
• Directors also recommended phasing out housing related incentives to contain price pressures and concurred that differentiation in borrower based macroprudential measures should be introduced only on financial stability grounds
• Directors emphasized the need for structural reforms to boost productivity and competitiveness.
• Directors also stressed the importance of improving energy security and expanding the use of renewables to strengthen economic resilience and
• advancing governance reforms to foster a more predictable business environment and
• unlock EU funding.

At first glance, there is little flattery in the IMF's analysis. The budget forecast and the resulting assumption that debt will continue to rise are particularly painful. The IMF has published an in-depth analysis of almost 80 pages to accompany the statement, which Portfolio will review in detail, focusing on specific areas and findings.

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