The Hungarian government’s pre-election spending spree dealt a severe blow to public finances, which recorded a deficit of HUF 1.58 trillion (4.1 billion euros) in February, or 2.5% of GDP. With a rare surplus in January, the deficit reached HUF 1.4 trillion, 45% of the annual target of HUF 3.15 trillion based on cash flow at the end of the month. Analysts have pointed out that after the elections, the government will have to make painful fiscal adjustments.
The central budget showed a deficit of HUF 1.4 trillion and social security funds showed HUF 43 billion in the red at the end of February, but separate state funds showed a surplus of HUF 49 billion.
The February shortfall was made up by tax refunds, pensioner and public sector bonuses and payroll tax cuts, the finance ministry noted.
The government of Viktor Orban, which is seeking a fourth consecutive term, launched a huge timed social handout ahead of the election.
Families raising children got an income tax refund totaling HUF 600 billion in February, while pensioners and the armed forces received bonuses. People under 25 benefited from an exemption from IRP and the payroll tax was reduced to 13%. Pensions were raised by 5% from January, but the annual increase will have to be completed later as inflation is expected to exceed the 5% target. The minimum wage increased by 19% and many public sector employees received double-digit wage increases.
The impact of the war will be severe, analysts warn. It is too early to give forecasts, but GDP will surely be below the 6% target and inflation will also exceed projections by 5-5.5%, they added. Soaring energy prices and a weak forint will put immense pressure on consumer prices and public finances.
Before the elections, the government capped fuel prices and froze the price of a handful of basic foodstuffs. After the April elections, the mandatory price caps will have to be lifted.
Hungary’s opposition alliance will unveil its economic program on Wednesday, but comments from Peter Marki-Zay’s advisers suggest the new government will have to be careful what it says on those measures, particularly on oil prices. centrally set energy for households.
The government froze retail electricity prices in 2013 and keeping bills low is a key part of Viktor Orban’s re-election campaign. Hungarian households pay the lowest gas and electricity prices in Europe after Bulgaria in nominal terms, but adjusted for purchasing power they are in the middle of the ranking. The government has opposed proposals to extend sanctions to the energy sector, saying it would drive up prices for households.
If it’s not households, it’s the state that must pay the bill, but energy subsidies are not included in the 2022 budget, according to a left-wing daily Nepszava reported. Falling residential energy prices will generate a loss of 1 trillion to 2 trillion HUF for state-owned companies this year. Last year, the government pumped HUF 500 billion into state-owned energy giant MVM, which is suffering huge losses due to the gap between market prices and subsidized prices.
The weaker forint will also push up public debt financing costs by €200 billion to €400 billion.