Hungary's financial correction to amount to HUF 400 bn

Portfolio
The Hungarian government has accepted HUF 400 to 420 billion in financial correction from the European Commission for the whole of the 2014-2020 EU budget period, Portfolio learned from reliable sources. The correction, colloquially referred to as a fine, is substantially higher than the figure circulating in September (less than HUF 300 bn), but much lower than the HUF 600 to 700 bn in press reports last week. Also, half of the fine will only impact Hungary's budget in the future.  
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Even the HUF 500 bn estimate is way over the mark, Gergely Gulyás, minister leading the Prime Minister's Office, said last week, adding that the flat-rate corrections accepted by Hungary are just for part of the invoices in the operational programmes involved, not all of them.

Systemic irregularities were found in the public procurement processes of seven Hungarian operational programmes. The Commission recommended a 10% financial correction on HUF 5,600 bn worth of procurements. Hungary accepted this flat rate fine, for it made no sense to check the procurements one by one, and this was probably the best way to mitigate the damage. Whereas MEP Benedek Jávor estimated that this will cost Hungary HUF 560 billion, it was a mistake to calculate the penalty on all of the above public procurements.

The European Commission’s answers to Jávor’s questions also revealed that in addition, other flat-rate financial corrections were applied in Hungary. One of these is a 25% financial correction on framework agreements in the water sector in the Environment and Energy Efficiency OP due to public procurement irregularities. The other is a 10% flat-rate financial correction in the Territorial and Settlement Development OP due to deficiencies during the project selection.

The three items above added up to HUF 695 billion worth of financial sanctions. Given that the ratio of EU funding in these projects is generally 85%, the actual penalty would have been about HUF 590 billion or 7.4% of all allocations in the seven-year programming period.

It also made it difficult to assess the situation that the items listed among the answers given to questions by Johannes Hahn, Commissioner for European Neighbourhood Policy & Enlargement Negotiations (temporarily in charge of Regional Policy) add up “only” to EUR 175 million or cc. HUF 55 bn, and he also noted that some of the EC’s reservations are not yet resolved.

Since last week, Portfolio has learned more precise details on the deal between the EC and the government, which indicate that the total amount of financial correction accepted by Hungary for invoices in the 2014-2020 period is

between HUF 400 and 420 billion.

Although this figure is much higher than the one reported in September (less than HUF 300 bn), it is also significantly lower than the HUF 600 to 700 bn opposition MEP Benedek Jávor calculated and is in line with what Gulyás said yesterday (i.e. "even the HUF 500 bn estimate is way over the mark").

The penalty accepted by the government means that the EC will not accept invoices to this amount for projects originally meant to be funded by the EU due to various irregularities, so this HUF 400 to 420 bn bill will have to be footed by Hungarian taxpayers.

The amount equals roughly 5.1% of all anticipated EU funding in the seven-year period, or 0.1% of Hungary's cumulated seven-year GDP.

The practical consequence of the financial correction is that the project invoices rejected by Brussels will have to be supplanted by other similar projects if Hungary is to access the full amount of funding it is due under the seven-year budget. This means extra projects above those planned originally, which will obviously cost additional money.

As far as we can tell, Hungary will not miss out on actual funding and will be able to access the full amount for the seven-year period. However, it will have to overspend in order to make sure it can access funding to the last euro.

The amount of EU funding Hungary has actually lost in the 2014-2020 period is just EUR 684,000.

As for effects on Hungary's budget, the country will now have to spend about HUF 400 bn more than originally planned, and Hungary's debt will grow by a like amount as a result. The HUF 8,000 bn total funding anticipated from Brussels originally required HUF 1,200 bn co-payment from the budget, but this will now increase to HUF 1,600 bn for a grand total of HUF 9,600 bn. Grants awarded so far only total HUF 9,424 bn, which means Hungary will have to allocate further amounts to applications in the coming period.

Budget impacts

It is important to note that the budgetary effects of these corrections will be drawn out over a longer period. Hungary will continue to send the invoices under review to Brussels, but the EC will reject a part of these (10% or 25% as per the agreement), which rejected portions will then "transfer" to the Hungarian budget. This protraction effect is because majority of the projects covered in the agreement between Hungary and the EC have already passed through the Hungarian public procurement system but most of the projects have not yet been physically implemented, which means the performance-based invoices of these contracts can only be submitted to Brussels in the future.

Only about half of the HUF 400 to 420 bn correction involves invoices already sent, with the other half yet to be submitted.

As a result, Hungary's budget expenditure and debt have only grown by about HUF 200 bn so far due to these irregularities, with the remaining amount to materialise gradually until the financial closing of the 2014-2020 budget cycle in 2023. This means the impact on the individual annual deficit and debt figures will be limited.

Cover photo: European Council press service

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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