Hungary’s Budget Deficit Projection

By Marc Jones

LONDON (Reuters) – A combination of anaemic European growth and pre-election government spending could push Hungary’s budget deficit as high as 4.5% of GDP this year, according to the country’s economy minister.

Rising longer-term government debt costs have caused concerns recently, but Marton Nagy emphasized that Hungary would maintain the trust of both markets and rating agencies scrutinizing its investment-grade credit score.

“This year, the official deficit figure communicated to the market is 4.1%, but I now see it being between 4% to 4.5%, and around 4% next year,” Nagy said in London after meeting with investors.

The government recently revised its economic growth forecast from 2.5% to 1% for the year. Nagy noted it could potentially be slightly lower due to Europe’s sluggishness, but even a growth rate of 0.7% wouldn’t significantly impact the budget as domestic consumption and VAT revenues remain robust.

Prime Minister Viktor Orban aimed for a stronger economy to secure another term in the upcoming elections, where he is expected to face significant opposition. His strategies include large tax cuts for families, affordable loans for first-time home buyers, and pension increases due to higher-than-expected inflation, which is predicted to average 4.7% this year.

Nagy acknowledged it would be “naive” not to expect increased government spending ahead of elections but recognized the constraints, especially as the debt ratio hovers near 75% of GDP, with S&P, Moody’s, and Fitch conducting rating reviews in the coming months.

“We don’t want to risk the trust of investors or our credit rating. We are not foolish in that regard,” he stated.

However, he added, “You must demonstrate to the public that you are the best choice because you have competence and can enhance their living standards.”

Nagy noted that rating firms appeared more relaxed since Hungary borrowed 3 billion euros in the market. S&P, which reviews Hungary on October 10, issued a “negative outlook” on its BBB- rating last April, which could lead to a downgrade into junk territory.

Economic Insights

Regarding the economy, Nagy praised Donald Trump’s trade tariffs and criticized the European Commission for not effectively boosting Europe’s economy. Chinese EV manufacturer BYD plans to open its long-awaited factory in Hungary by year-end, allowing for more competitively priced cars that will not be subject to the EU’s tariffs of up to 45.3%.

Nagy also expressed support for Hungary’s central bank, where he previously served as a policymaker, as it maintained interest rates at the EU’s highest level of 6.5% last month. He described inflation as a “public enemy” and highlighted ongoing efforts to cap prices for essential household goods while noting the benefits of a strong currency, the forint, which helps mitigate import costs despite some negative impact on exporters.

“There are more advantages to a strong currency at the moment than disadvantages,” he explained, citing the benefits of cheaper imports outweighing the minimal impact on exporting firms.