Government remains committed to enhancing budgetary resilience and strengthening the fiscal balance

The Hungarian government successfully steered the economy through 2020 and 2021 during COVID with its supportive fiscal policies.

Economic activity has rebounded quickly, reaching record high levels of employment and approaching its pre-pandemic growth path. The government continues to be committed to strengthening its fiscal balance, further decreasing public debt levels and maintaining the sustainability of public finances.

The Russian-Ukrainian war, however, was yet another disruption. Supply chains were torn apart, and prices of raw materials and energy skyrocketed while their availability plummeted. Along with inflation, higher interest rates and soaring sovereign bond yields created a new situation — increasingly expensive financing costs and greater economic risk. In light of this, restoring fiscal resilience has taken on strategic importance, and the government has announced a series of revenue-boosting and expenditure-cutting measures.

The planned budget balance will be achieved via expenditure cuts of nearly 60 percent and higher revenues making up approximately 40 percent. The government is aiming for a deficit target of 4.9 percent of GDP in 2022 and 3.5 percent in 2023.

The financing of the deficit will continue to predominantly rely upon domestic sources, while international and local investor confidence will contribute to keeping interest expenditures at a moderate level.

Revenues will be contributed to by the temporary taxation of unexpected windfall profits, given the current disparate environment, e.g., the divergence between credit and deposit interest rates and between Brent and Urals crude oil prices. These taxes are targeted, impact a limited number of companies, and are constructed in a manner to encourage economic growth continuously. In addition, with new, value-creating developments, firms can continue to count on one of the most competitive tax systems in the EU.

Expenditure-cutting measures will take on a greater role than revenue-side actions. Certain public investment and capital expenditure projects will be postponed due to higher prices. This will free up capacities for private sector investments, strengthening domestic growth potential and reducing the pressure on prices. Cost-cutting at different ministries, budgetary authorities and government programs will further enhance fiscal efficiency, as the government aims to reduce its operational expenditures by 1 percentage point of GDP starting from 2022.

A Homeland Defence Fund has been created to cover the developments required to strengthen defense in the current war environment. Hungary’s defense expenditures in 2023 will constitute 2 percent of GDP, fulfilling commitments taken on at the time of NATO accession.

Also, the purchasing power of Hungarian households will be safeguarded by the creation of the Utilities Protection Fund. The further preservation of low utility costs contributes to maintaining high saving rates, which finances stable future growth.

Hungary continues to strive for the earliest possible agreement with the European Commission with regard to the RRF. Negotiations are in their last phase, and these EU funds will be channeled into the promotion of sustainable, clean growth, as well as further support increased productivity and economic resiliency. 

Read the full text of the briefing document here.