Commission rejects Hungary's unreliable economic estimates in EDP

Hungary’s fiscal plans are missing significant information and based on unreliable data, Valdis Dombrovskis has said in his letter to Finance Minister Mihály Varga on Thursday.

Budapest appears to be dragging its feet in submitting realistic economic forecasts to Brussels – part of a growing pattern of confrontation between the two.  

At this stage, there are still important elements missing, or requiring further adjustment and specification, for the Commission to finalise its assessment

of Hungary’s medium-term fiscal plan, said Dombrovskis, who is European Commissioner for the Economy.

The Commission also highlights issues with data on economic growth, inflation and interest expenditure, saying that

deviations from the Commission's own methodology need to be “duly justified”.

The analysis is supposed to set out how Viktor Orbán’s government plans to return to fiscal balance over the coming few years, after strict EU spending rules were relaxed amid the covid pandemic and the ensuing energy crisis.

But the EU executive's full assessment

may take some time [...] given the breadth of the missing information,

possibly stretching the deadline from the current 12 December into the middle of January next year, the letter said.

Hungary was apparently late submitting its fiscal plans, meaning it couldn’t be assessed in late November alongside most other EU member states. 

At a press conference on Friday morning, Portfolio has already asked Péter Banai, state secretary for public finance, about the Commission's letter, the full content of which was not known at the time, but sources in Brussels had informed us that the EU body had concerns about the plans of the Ministry of Finance.

Banai replied that

there are ongoing discussions with the European Commission on the medium-term fiscal plans, including the expenditure limits, and there is no special situation in this discussion.

He added that the government will reduce the deficit next year anyway, and he believes that the government will be able to reach an agreement with the European Commission on this basis.

Hungary's deficit level is the main concern in Brussels

The European Union's Stability and Growth Pact aims to avoid economic turmoil in the eurozone, as seen in Greece following the global financial crisis of 2007-2008 – but the rules also apply, albeit less strictly, to those such as Hungary who do not share the currency.

Under the EU's 'Maastricht criteria' outstanding government debt should not exceed 60% of annual economic output, or GDP, and the budget deficit should be no more than 3%.

These budget strictures were largely suspended during the government splurges of the pandemic and the energy crisis surrounding Russia's invasion of Ukraine, but they are back in force as of this year. 

The European Commission opened an Excessive Deficit Procedure (EDP) against Hungary in the summer, with a deficit of 6.7% of GDP in 2023, which was the main reason for the launch of the edp.

To address this, the government presented a medium-term fiscal-structural plan on 4 November, several days behind schedule, promising to restore fiscal discipline and macroeconomic stability. (The plan was initially available in English too but has since been removed.) The plan's main objective is to reduce the budget deficit, from 4.5% of GDP in 2024 to 3.7% in 2025 and 1.5% in 2028.

Budapest has also promised the Commission to lower the debt-to-GDP ratio by at least 0.5 percentage points per year, with significant cuts on the expenditure side and measures to increase revenues. For example, new tax measures have been introduced in the banking and energy sectors, while some public investment has been postponed to reduce fiscal pressure.

GDP growth in 2024 is estimated at just 0.8%, compared with the previous goal of 1.5%, while growth of 3.4% is expected in 2025.

Reducing inflation is also a key element of the plan, with its rate expected to fall to 3.7% this year, to 3.2% in 2025, and to stabilise around 3% from 2026. These projections are based on rising private consumption and a slow recovery in investment, which should be boosted by falling inflation and rising real wages.

The macroeconomic indicators presented by the government include a net expenditure path that allows for an increase of 4.9% in 2024, followed by 6.1% in 2025 and an average annual growth of 4.2% between 2026 and 2028.

Increasing the maturity of public debt and keeping the foreign exchange ratio low are also emphasised in the plan.

In light of domestic political issues, the Commission had given five other EU members extra time to submit their deficit proposals. Among them are Germany, which has called a snap poll for February, and Belgium, which is still attempting to form a governing coalition after June federal elections. 

Just one of the remaining 21 countries was given a fail grade for its fiscal plans in November. The Commission chastised the Netherlands, traditionally a fiscal hawk, for a deficit predicted to rise  from 0.2% this year to 2.4% in 2026, due in part to income tax cuts and a rise in public investment.

Cover photo (for illustration purposes only): Getty Images