Election-year Budget Ramps up Spending on key Voting Groups

According to Minister of Finance Mihály Varga, next year’s budget will support families, reintroduce the 13-month pension, provide tax exemptions for earners under 25, while further reducing the tax burden on employers and supporting investments that create jobs. Dubbed as the “budget for restarting the economy,” the draft bill was presented to parliament on May 4.

“Due to the pandemic, the most prominent part of the draft bill is relaunching the economy; at the same time, it reserves the values the government has always praised, such as protecting families, supporting those raising children, and honoring the elderly,” Varga stated when he handed over the draft bill to Parliamentary Vice President János Latorcai.

The government’s budget calculations assume a dynamic 5.2% annual GDP growth, with a deficit target of 5.9% of GDP and public debt of 79.3%.

The government is taking advantage of the leeway granted by the European Commission, allowing EU member states to run higher budget deficits this year and next due to the pandemic. In doing so, it ignores a warning from the Fiscal Council that budget deficit and public debt levels should be reduced more aggressively as Hungary returns to growth in the aftermath of the pandemic.

The council said the proposed 0.6% reduction in public debt to 79.3% of GDP next year, as well as the planned decrease in the budget deficit, were “insufficient,” while the government’s growth forecast was near the top end of current projections.

Largest Ever

The draft bill, as Varga emphasized, outlines the most extensive economic program to date with HUF 7.308 trillion for restarting the economy. The main areas would receive more funds than last year: HUF 2.778 tln is earmarked for supporting families (including the tax exemptions for the under 25s and housing subsidies), HUF 483 billion more than in this year’s budget, Varga noted.

The government will ensure tax exemptions for families moving into new homes, saving this group HUF 170 bln. It will spend HUF 255 bln more on pensioners than it did in 2021 and earmark HUF 160 bln to reintroduce the 13-month pension.

Varga stressed that pensions would grow in line with inflation. As there is a 3% inflation target in the budget, he said that if inflation exceeds that, some HUF 68.5 bln is set aside for a pension premium.

Healthcare is also in the focus of next year’s budget draft: the government plans to spend HUF 2.884 tln on it in 2022, HUF 769 bln more than this year. Varga emphasized that those healthcare workers fighting in the pandemic frontline would receive a collective HUF 460 bln for raising their wages.

Reducing taxes and social contributions would leave some HUF 423 bln more with families and enterprises in 2022, Varga said. The social contribution tax would be reduced by a further two percentage points next year, in line with the contract signed in 2016 by the government, employers, and employee representations.

Varga said the prediction is for average wages to grow by 8% next year. Regarding the basic minimum wage and the minimum wage for skilled workers, he noted that an agreement between employers and employees would provide the basis for calculating these.

The minister noted that a HUF 233 bln reserve fund had been set aside in the budget to manage risks. The Fiscal Council also criticized this, saying said reserves in the 2022 budget for any unforeseen risks were low.

EU Funding

Varga also said when presenting the draft bill that Hungary could count on more EU funds in the new EU budget cycle than ever before, adding that the government expects HUF 3.001 tln from the EU in 2022.

The general discussion of the draft bill will start soon, which will be followed by committee hearings and more detailed talks. Parliament should pass the bill by July 14 at the latest, Varga said.

In the meantime, the government has sent its updated Convergence Plan to Brussels. The latest version shows that the government expects GDP growth to accelerate to 5.2% next year from a projected 4.3% in 2021. It outlines a 5.8% increase in household consumption expenditure and a 7.2% rise in gross fixed capital formation. Exports of goods and services are expected to increase by 10.5%, outpacing projected import growth of 10%.

The government sees the unemployment rate for Hungarians between the ages of 15 and 74 declining from 4.2% in 2021 to 3.3% in 2022.

The update confirms that Hungary expects next year’s general government deficit to reach 5.9% of GDP before narrowing to 3.9% in 2023, 3% in 2024, and 2% in 2025. The primary deficit, which excludes the cost of debt servicing, is set to narrow to 3.5% of GDP in 2022, 1.5% in 2023, and 0.8% in 2024 before the balance returns to a modest 0.1%-of-GDP surplus in 2025.

State debt relative to GDP will to return to a downward path, as required in Hungary’s constitution, from 2022 and reach 73.1% by 2025, still well over the 65.5% ratio at the end of 2019, before the pandemic hit. The program projects a HUF/EUR exchange rate of 360.9 for 2022-2025.

Numbers to Watch in the Coming Weeks

The Central Statistical Office will release data on April consumer prices on May 11, followed by a second estimate of March industrial output figures the next day. On May 13, the construction sector’s performance in March will be under scrutiny. On May 18, first-quarter GDP data will be out.

This article was first published in the Budapest Business Journal print issue of  May 7, 2021.