BUDAPEST – Whoever wins Hungary’s parliamentary election on April 12 will likely face pressure to curb social spending to stabilize the nation’s finances, according to a modern assessment from S&P Global. The warning comes as Hungary grapples with a significant budget deficit and the economic fallout from global energy price shocks. The demand for fiscal restraint could significantly shape the next phase of Hungarian economic policy, impacting everything from social programs to long-term growth prospects.
The current government, led by Prime Minister Viktor Orbán, has been criticized for increasing spending in the lead-up to the election. S&P reported that Hungary’s budget deficit reached nearly 40% of its full-year target in the first two months of 2024 alone. This spending spree, intended to bolster support ahead of the vote, has exacerbated existing financial vulnerabilities. The agency cautioned that without a clear plan to address these imbalances, a downgrade of Hungary’s credit rating could be triggered.
S&P anticipates that any incoming government, regardless of its political composition, will need to implement consolidation measures after the 2026 election to manage the trajectory of social spending. “We would anticipate that the incoming government after the 2026 election (regardless of the government composition) will need to engage in consolidation efforts to rein in the trajectory of social spending,” S&P stated in a response to Reuters queries. This suggests a broad consensus among rating agencies that fiscal adjustments are inevitable, regardless of who is in power.
Orbán’s Stance and the Opposition’s Alternatives
Prime Minister Orbán has publicly stated that austerity measures will not be necessary to address the budget shortfall, which has consistently exceeded government forecasts in recent years and is currently projected at around 5% of Hungary’s economic output. Still, S&P’s assessment directly challenges this assertion, suggesting that a course correction is unavoidable. The Prime Minister’s Fidesz party has built a significant portion of its political platform on maintaining and expanding social programs, making any shift in policy a potentially demanding undertaking.
Orbán’s main challenger, Péter Magyar, is proposing a different path. Magyar is campaigning on a platform centered around securing billions of euros in European Union funding, launching a comprehensive anti-corruption drive, and implementing a wealth tax. He believes these measures will bolster state finances without resorting to cuts in essential social programs. The feasibility of unlocking EU funds, however, remains a key point of contention, as Hungary has faced scrutiny over rule-of-law concerns that have delayed access to these resources.
Economic Headwinds and Growth Concerns
The pressure to rein in spending comes at a time when Hungary’s economic growth is facing significant headwinds. S&P noted that recent global economic challenges are putting downward pressure on its previous growth estimate of 2.5%, following three years of near-stagnation. Goldman Sachs recently lowered its growth forecast for Hungary to 1.6% from 1.9%, citing the impact of the energy price shock. Reuters reported on the revised forecast, highlighting the vulnerability of the Hungarian economy to external shocks.
S&P’s “negative outlook” on Hungary’s ‘BBB-’ credit rating reflects concerns that the country’s fiscal performance may fall short of expectations. The agency emphasized that the energy price shock poses a dual threat, potentially increasing both inflation and fiscal costs due to Hungary’s high energy intensity. S&P does not anticipate Hungary receiving funds from the EU’s pandemic recovery facility due to time constraints, further limiting potential sources of revenue.
Rating Agency Concerns and Fiscal Credibility
S&P is not alone in raising concerns about Hungary’s fiscal trajectory. Earlier in March, Fitch Ratings highlighted the need for the next government to reverse weak growth, address the deterioration of public finances, and restore policy credibility. Fitch pointed to the larger-than-expected fiscal easing in the run-up to the election as a key challenge. The convergence of concerns from multiple rating agencies underscores the urgency of addressing Hungary’s fiscal vulnerabilities.
The situation is complicated by the fact that Hungary’s economic performance has been closely tied to political cycles in the past. The current election cycle has seen a surge in government spending, raising questions about the sustainability of these policies. Investors and international institutions are closely watching the outcome of the election and the subsequent policy decisions, as they will have a significant impact on Hungary’s economic outlook.
Looking Ahead
Regardless of the election outcome, the next Hungarian government will face a challenging economic landscape. The need to address the budget deficit, manage the impact of the energy crisis, and restore fiscal credibility will require difficult decisions. S&P’s assessment serves as a stark reminder that maintaining social spending at current levels will likely be unsustainable without significant fiscal adjustments. The next key date to watch will be the release of Hungary’s official budget figures for the first quarter of 2024, expected in May, which will provide a clearer picture of the country’s financial position.
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