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Pre-election spending could haunt Hungary's Orban - or his successor




A budget gap of $5.35 billion created by Viktor Orban, Hungary's Prime Minister, ahead of next week's election has caused serious problems for whoever wins. The conflict in Ukraine is adding to the pressure on the public finances.

Orban is projected to be the most competitive candidate for fourth term, with polls showing that he has received 1.8 trillion forints in tax cuts, tax rebates and pension increases.

This helped to push the deficit to 1.585 trillion forints (HUDEF=ECI ) in February. That's half of the 2022 target. Some economists also believe that the government's fiscal plans are obsolete, as the war is already slowing down growth.

Rising interest rates, rising inflation, energy prices and the rising cost of refugees help to create multiple budget pressures. This is made worse by Hungary's inability to access EU pandemic recovery funds because of a dispute over democratic standards.

Peter Virovacz, an ING economist, stated that "Room for maneuver has decreased as the budget was spending through-the-nose at the beginning of the year." "The main priority for anyone who forms a government is to get the budget in order."

Mihaly Varga, Finance Minister, has already suggested the possibility of a budget overhaul following the April 3 vote.

Some economists believe that the European Union could ignore high budget deficits in its bloc due to extraordinary circumstances. However, the risk for Hungary is the way credit rating agencies will respond to an increase in deficit.


Fitch stated that it would be difficult to achieve the 4.9% deficit target for this year. This is down from 7.3% and 8%, respectively, in 2021, and 8% in 2020 when it was pushed up by pandemic stimuli.

"The budget will be negatively affected by the sharply rising inflation and the near certainty of lower growth in 2022," said Arvind Ramakrishnan, a director at Fitch Ratings. Arvind Ramakrishnan (director in Fitch Ratings sovereign team) stated that there is a reasonable chance of the targeted deficit being missed.

Based on Eurostat data, Hungary's public debt ratio has risen to the highest level in Central Europe during the pandemic. Any further increase would be detrimental for its ratings.

Ramakrishnan stated that any potential impact of the current developments on credit rating will depend in large part on the government’s fiscal response, impact on headline debt as well as the extent to which the country abides by fiscal rules domestically and EU from 2023.

Standard & Poor’s stated that its stable outlook for Hungary's credit rating reflected the expectation of solid growth, which was supported by EU funds. This note was made before Russia sent troops to Ukraine on February 24.

S&P stated that "we could lower the ratings if fiscal deficits continue to be elevated, leading to increasing debt to GDP or if Hungary’s external situation weakens beyond what we currently expect,"

The war in neighboring countries has had a devastating effect on Central Europe, with plunging currencies and stock markets creating obstacles like snarled supply chains or labour shortages.

Hungary's central bank is one of those that has been forced to raise its rates. It raised its base rate 100 basis points Tuesday. The bank estimated that additional spending due to the Ukraine crisis would be 0.6% of GDP. This could increase to 1.6% if the conflict becomes more severe.

The central bank warned that higher commodity and energy prices could further accelerate inflation and slow down economic growth.

"If we call COVID-19 major shock, which required unprecedented economic policies to manage, then this applies exponentially to the war," stated economist Zoltan Turok at Raiffeisen.

Analysts believe that a price freeze to restrict household utility bills could lead to a cost of up to 1 trillion forints each year. It has been in place since 2015.

One economist, who chose not to be identified, stated that unless gas prices drop significantly, this will result in a spending of nearly 2% of GDP. There is also the fiscal risk that economic growth falls below the baseline scenario.

The deficit is projected to be nearly 7% for this year. However, rising inflation could help ease the blow through tax revenues.

The central bank has now lost money on its cheap financing of companies, despite padding its budget with 500 billion forints worth of dividends during the pandemic.

This and higher debt servicing costs could create another 1 trillion forint hole in comparison to 2019, Governor Gyorgy Matholcsy said in a January op ed. He stated that the government will need to find new revenue sources.

Analysts have raised concerns about the possibility of Orban returning to unorthodox fiscal stabilisation measures after 2010, despite Orban promising to support middle-class pensioners and families.

Raiffeisen's Torok stated that "the return of similar measures and sectoral taxes, etc., cannot be ruled out," regardless of who wins the election.

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