Equity 13 February 2024, 9:43am

Government tweaks Baby Bond rules in an unexpected decision

Portfolio

The government published a brand new decree in the Hungarian Official Gazette late on Monday evening: from 13 February, a maximum of HUF 1.2 million can be paid into each Start account in a calendar year. The government is thus limiting the amount of the Baby Bond that can be invested per child per year, presumably in order to control interest expenditure, as the interest rate on the baby bond is currently at its peak.

As usual, this time too, the government explains the drafting of the regulation by the state of danger caused by the war in Ukraine, which is why Act CLXXIV of 2005 on the start of life support for young people must be applied differently.

According to the text of the decree,

the total amount of payments per Start account with a baby bond may not exceed HUF 1.200,000 in a calendar year.

The decree enters into force on the day after its publication, i.e. on Tuesday, and the payment limit will apply to payments made in 2024 for payments made after the entry into force of this decree.

What might be the underlying cause?

As the average inflation rate in 2023 was 17.6%, and the Baby Bond pays a 3 percentage point interest premium on that, anyone who saves for their child can earn 20.6% interest from this year. Nor should anyone with an older series of Baby Bonds be alarmed, as their yields will also be repriced with the latest inflation figures, so older series will also start paying 20.6% from February (this high interest rate will be credited in 2025).

By the end of December, the stock of the baby bond was close to HUF 280 billion, which is a good performance for the Baby Bond in itself, but still well below the Premium Hungarian Government Bond (PMÁP)'s stock of nearly HUF 7,000 billion. This may be related to the biggest drawback of this investment: the scheme must be held until the child's 18th birthday, and even then only the child can dispose of the amount.

The government's intention with the current move may be similar to what it did with the PMÁP last November, when it lowered its interest rate. That move will also save some budget money on interest expenditure in 2025. Last November, Portfolio also calculated that by cutting interest rates by 8 percentage points for the first year of the new PMÁP, the government would barely save a few tens of billions of forints.

In a video on Tuesday morning, Finance Minister Mihály Varga said that a loophole has been closed with the recent decision because, as he wrote, the exceptionally high yield of the Baby Bond has attracted the attention of abusers in the recent period, and in a short period of time they invested huge amounts in this government bond.

"The high yield of the Baby Bond and the government subsidy that comes with it should support families who save for their children, not those who abuse the rules. That's why the government is closing the loophole and capping the amount that can be paid into Start accounts at HUF 1.2 million a year. The change will affect 1% of account holders," the minister said.

Cover photo: MTI Photo/László Róka