Hungary failed to submit key document to Brussels, the 'secret' could soon be out

The European Commission proposed to open an Excessive Deficit Procedure (EDP) for Hungary as part of the 2024 Spring Package, which was finally approved by the European Council in July. The move is aimed at restoring fiscal discipline and promoting sustainable economic growth.

To limit government deficit and debt, European Union Member States have agreed reference values, which they have enshrined in the EU treaties: a 3% of GDP deficit ratio and a 60% debt-to-GDP ratio.

All member states must avoid exceeding these reference values. They have to avoid running excessive government deficits and they need to reduce excessive debt.

The aim of the excessive deficit procedure is to deter excessive government deficits and, if they occur, to prompt their correction. The rules of the EDP are set out in the ‘corrective arm’ of the Stability and Growth Pact (SGP).

The Council of the European Union formally decided to launch the excessive deficit procedure in July, and Hungary was given a first deadline of 15 October to submit its medium-term budgetary and structural plan to address the situation.

This was extended until 31 October at the request of the cabinet, but Portfolio has learned from several sources that the Finance Ministry's package had not been received by midnight that day.

However, they have indicated that, on the basis of preliminary discussions, they suspect that several of the measures proposed by the Commission have been adopted.

Without giving details, our sources in Brussels tell us that the Hungarian government could have developed a medium-term budget plan - at least based on previous discussions - that would help the economy go green and digital, and become more competitive, through a combination of investment and reforms.

Hungary incurred a budget deficit of 6.7% of GDP in 2023. The target for this year was set to 2.9% initially but by now it has been raised to 4.5%. Yet, it is expected to be close to 5.0% in the end. Our sources in Brussels explained that although the cabinet has already taken a number of corrective measures, there could be slippage due to deteriorating GDP data.

Several of our sources suspect that the reason the Hungarian government has not submitted its medium-term structural plan is because it would have revealed several key elements of next year's budget, such as the deficit target, tax revenue trends, debt servicing costs and possibly the phasing out of certain taxes.

Meanwhile, the government has promised to adjust the 2025 budget to Donald Trump's re-election as president, but the medium-term plan would "spoil the fun".

The Commission's country-specific recommendations for Hungary also include a number of steps:

• wind down of emergency energy support measures;
• should renewed energy price increases necessitate new or continued support measures, Hungary should ensure that these were targeted at protecting vulnerable households and firms, fiscally affordable, and preserve incentives for energy savings;
• phase out remaining price and interest rate caps to reduce distortive effects and facilitate the smooth transmission of monetary policy;
• target support measures in the housing sector to low-income households.

In the July document, the government was asked by the Commission to speed up the implementation of the recovery and resilience building plan and improve the social care system.

Such measures and reforms are key to ensuring that Hungary's public finances are in line with EU rules and to ensure sustainable economic growth in the future, the Commission said. So the package could also clarify these issues.

Portfolio has learned from several government sources that the medium-term structural plan could finally be sent out on Monday evening, a day before the start of the US presidential elections.

The Hungarian government would not be the only one not to meet the previously agreed deadline. Earlier, the German cabinet was also late in submitting the package, and the delay had not been flagged in advance.

We have also contacted the Finance Ministry with our questions and will update this article as soon as we receive their reply.

Cover photo (for illustration purposes only): Getty Images