Hungary takes huge sanctions to keep EU funds flowing

Portfolio
The European Commission transferred nearly HUF 500 bn in EU funding to Hungary over the past five weeks, and the extreme flow of money has not yet come to an end. However, several sources have indicated to Potfolio that this favourable development carries a heavy price, as in order to renew the flow of EU funds, Hungary had to accept financial sanctions to the tune of tens of billions of forints to close a number of ongoing accounting disputes regarding irregular use of funds. The current trend could result in Hungary's cash-based general government balance posting a massive surplus in coming months.
BRUSSELS, BELGIUM - SEPTEMBER 3: Hungarian Prime Minister Viktor Orban (L) and President of the European Commission Jean-Claude Juncker (R) shake hands.

How did we get here?

At the end of May, leading officials from several Hungarian ministries visited Brussels to settle several long-dragging accounting disputes with the European Commission, opening the way to further EU transfers to Hungary. According to information at the time, fines amounting to HUF 400 bn at the very least, and potentially up to HUF 1,000 bn, were to be expected. As Portfolio pointed out at the time, this would not involve a net loss of funding, it would only mean that Hungary needs to carry out this much more development projects covered with invoices that we can send to Brussels to access EU funding.

The exact amount is unknown but Hungary has managed to cut favourable deals in several ongoing cases according to sources, and the amount of financial penalties remains well below HUF 300 bn, while it is certainly well above 50 bn.

We do not know the details of the individual deals Hungary and the EC made in recent weeks without fanfare, but we do know the following:

  • The European Commission's final position letter late in August concluded its systemic review of the Hungarian audit authority, which has been ongoing for several years. Hungary has not been hit with a financial penalty over this investigation, and now the government can, without fear, send the invoices for the various Operational Programmes to Brussels for payment.
  • The end of August also brought an end to a water management public procurement issue after the EC fixed the agreement in its final position letter. Hungary has agreed to a 25% penalty on the problematic invoices involved. A 25% fine is typical when public procurement rules are broken, so this was to be expected, Assuming that half the HUF 450 bn public procurement has been confirmed as delivered, the 25% fine would amount to HUF 52 bn.
  • During various audits, the EC has also uncovered issues regardin other EU development projects, and according to our sources, Hungary has agreed to pay a 10% "flat fee" fine on these. In exchange, the Commission will no longer investigate these public procurements. We do not know the exact numbers involved but estimate the fine to amount to tens of billions of forints.
  • An agreement has also been reached regarding the 2007-2013 budget period, the contents of which have not been made public, which led to roughly HUF 20 bn in EU funding being transferred as the payment counter rose 0.3% to 98.73%.

What are financial sanctions?

The huge penalty for the 2014-2020 budget period means Hungarian authorities will now remove affected invoices to the amount of the sanction from accounts sent to Brussels and will replace these with fresh, "clean" invoices. As a result, transfers to Hungary can resume without problems. To sum it up, Hungary will have to carry out extra developments equal to the financial sanctions and send out the proper invoices for payment in order to access the originally allocated funding. As such, financial sanctions do not result in loss of funding for the countries involved, and the Hungarian government will probably be able to access all the funding planned for the 2014-2020 period, but it will have to spend extra domestically to get the same amount of EU funding. This will increase government deficit, or rather, has increased deficit retroactively for years when the problem invoices were issued.

To put it simply, Hungarian taxpayers must (or had to) reach into their pockets to cover the irregular development projects of recent years.

Money tap opens up again

Following these presumably painful government decisions, it is no surprise that the 2014-2020 EU payment counter has spun up again, with EUR 1.48 bn in EU funding coming in after 1 August according to sources.

This effectively means that Hungary has received EU funding worth some HUF 490 bn over the last week or two, to which we have to add the HUF 20 bn payment from the previous, 2007-2013 budget period.

Massive budget surplus coming up?

One of the major consequences of the above developments is that the gap between domestic disbursement and EU transfers has finally started to close visibly, easing pressure on the general government due to the difference in payment schedules. Moreover, as the January-August cash-based deficit was only HUF 508 bn, the Finance Ministry could easily report in early October that cash-based deficit has all but disappeared in Hungary by the end of September.

As outlined above, the recent agreement opens the way to have Brussels pay invoices in several Operational Programmes, which means that

further substantial transfers are to be expected, so the budget could even post a surplus in the coming period. The question will be how the government makes use of this comfortable budget situation: spending, debt reduction, or a mixture of the two.

For the time being, the charts below only show us that disbursement between early August and early September amounted to nearly HUF 200 bn, increasing the total to HUF 6,350 bn, or 69% of the seven-year budget. Meanwhile, payments from Brussels rose HUF 500 bn to more than HUF 3,100 bn, or 39% of the seven-year total. The gap still remains more than HUF 3,000 bn, but this could decrease substantially in coming months as outlined above. This could also pave the way to faster disbursement of EU funds to winners in the autumn and winter months, including the awarding of new grants and accelerated payment for ongoing projects.

This article is part of the work programme titled "The impacts of EU cohesion policy in Hungary - Present and Future" which is carried out by Net Média Zrt., the publisher of Portfolio.hu, between 1st April 2019 and 31st March 2020 with European Union financing. The views in this article solely reflect the opinions of the author. The European Commission as the funding entity does not take any responsibility for the use of information presented in this article.

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