Hungarian gov't and EC reach agreement on the excessive deficit procedure

The European Commission launched the Excessive Deficit Procedure (EDP) for Hungary in summer 2024, after the budget deficit as a share of GDP rose to 6.7% in 2023, well above the 3% limit set by the Stability and Growth Pact.

To address this, the government submitted a medium-term structural plan on 4 November, days after the deadline, promising to restore fiscal discipline, gradually reduce the deficit and achieve economic stability.

However, the European Commission found the submitted macro figures and plans to be incomplete and not in line with EU methodology and sent a warning letter on 5 December rejecting them.

In its original plan, the Hungarian government targeted a budget deficit of 4.5% of GDP by 2024, 3.7% by 2025 and 1.5% by 2028, with a commitment to reduce the public debt ratio by at least 0.5 percentage points per year.

At that time, GDP growth was forecast to reach 0.8% in 2024, inflation 3.7%, and a gradual recovery in investment intensity was also stressed. However, the European Commission did not accept the Hungarian figures - partly citing methodological errors - and agreed with the cabinet to wait for a new medium-term structural plan, with a compromise proposal sent on 20 December.

After a lengthy assessment, the European Commission accepted the Hungarian notification on Thursday and the new adjusted plan for deficit reduction was posted on the EU website.

The latest figures show a strong trade-off: the Hungarian government's budget projected GDP growth of 0.8% for 2024, but the government had expected growth of 3.4% this year.

In a document submitted to the European Commission, a correction plan has now been drawn up, accepting EU forecasts of 1.2% GDP growth.

In essence, the government has committed to a 4.3% limit on net fiscal spending increases compared to 2024 (i.e. spending only that much more than the previous year's maximum). The current compromise text means that it is also committing to deficit reduction under a much more pessimistic macro-path than its own.

It is worth noting that the Hungarian government is as much more optimistic than the market's 2-2.5% growth forecast as the European Commission is pessimistic.

The current adjusted draft, based on the EU forecast, projects a deficit-to-GDP ratio of 3.6% this year and 2.5% next year. And public debt could fall to 73.5% in 2025, down from 74% last year, according to the EU's calculations.

Portfolio has learned from EU officials that a decision on final approval could only be taken at the EU finance ministers' meeting (Ecofin) in February.

Sources said it would not be on the agenda for next week's meeting. However, it is expected to be approved by member states' finance ministers.

Government committed to deficit reduction

"The Commission also considers that, despite the unfavourable external economic conditions, both the budget deficit and public debt will continue to decline in the coming years," the Ministry of National Economy said in a reaction to the EU decision.

The ministry stressed that the government is committed to ensuring fiscal balance and economic growth in parallel, which it sees as mutually reinforcing objectives.

The targets are to reduce the budget deficit to 3.7% of GDP by 2025 and 2.9% by 2026, while public debt will be gradually reduced to below 70%. In doing so, Hungary "meets the requirements of the new EU economic governance framework and continues to pursue a disciplined fiscal policy," they stressed.

Cover photo (for illustration purposes only): Getty Images