Orbán cabinet admits Hungarian economy in serious trouble as forint may weaken

At a background briefing with journalists, Márton Nagy, Hungary’s senior minister for the economy, effectively acknowledged that pre-election spending, combined with weak inflation control and poor domestic production figures, has significantly widened the budget deficit — placing the Hungarian economy in jeopardy. He also revealed who will bear the cost of the government’s pre-election cash outflows and what is expected from the National Bank, a situation that could see the forint enter a weakening trajectory.

Handouts continue despite bleak economic data

Telex attended the briefing and provided an in-depth analysis of the discussion. Márton Nagy essentially conceded that the budget figures planned for 2024 and 2025 must be scrapped, treating pre-election giveaways as untouchable sacred cows — including the 14th monthly pension, discounted home and business loans, and one million forints in support for public servants.

This may appear surprising to outsiders in a country where GDP is projected to grow by only 0.5% — far below the expected 3.7% — inflation remains higher than planned at around 4.6%, and household consumption shows little sign of expansion. Still, thanks to a range of welfare benefits, consumer confidence has begun to rise.

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However, it appears that the desire for victory in the 2026 elections overrides all other concerns. According to independent pollsters, Magyar Péter and the Tisza Party, Fidesz has not faced such dire polling figures in two decades, despite having maintained a strong lead for at least a year.

Indirect austerity measures will impact citizens

To secure victory, the Hungarian economy must be brought under strict control, according to the briefing. It comes as little surprise that the government expects Hungary to post the fifth-largest budget deficit in the European Union in both 2025 and 2026 — around 5% of GDP, the threshold before excessive deficit procedures begin.

The government forecasts stronger growth of 3.1% and lower inflation of 3.7% for 2026, though markets predict worse outcomes on both fronts.

However, these macroeconomic trends alone will not suffice; the government also needs to find new sources of revenue. In that context, the bank tax will be increased on the grounds that banks’ windfall profits remain high. After the rise, banks would be required to pay:

• 10% tax on profits up to 20 billion forints from two years prior,
• 30% tax on profits exceeding 20 billion forints,
• and they could only deduct 30% of government bond purchases, down from 50%.

It is well known that banks rarely absorb such extra costs, and sooner or later pass them on to customers — whether individuals or businesses. As a result, these measures act as indirect taxes that ultimately weigh on households and families, with the government doing little to prevent this, likely because it lacks the capacity to do so.

A vulnerable Hungarian economy faces shocks ahead

The government expects this move to double tax revenues from banks by 2026. It is also pushing to receive 15% (€16.2 billion) of the SAFE defence development programme as an advance. Finally, a foreign currency bond issuance is planned, which will increase Hungary’s debt in foreign currency.

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This fragile framework, combined with a rise in external debt, depends heavily on how effectively domestic measures address the underlying problems. From an economic standpoint, it is discouraging that the entire deficit and taxation strategy revolves around parliamentary elections.

Interestingly, Telex notes that despite the government’s frequent references to American financial backing, Márton Nagy does not anticipate any support from the United States.

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Orbán could yet secure a historic multi-billion-dollar loan from the United States before the 2026 elections.

The forint may weaken

The government has long expected the National Bank, led by former Fidesz MP and Finance Minister Mihály Varga, to lower base interest rates — a move that would stimulate consumer spending and boost state revenues through VAT.

However, the National Bank has repeatedly made it clear that it will not reduce rates this year or next, as doing so would undermine the forint, which has remained relatively stable against the euro and other foreign currencies compared with recent years.

The question remains whether Mihály Varga will continue to resist political pressure — or ultimately give in, most likely after the elections.

UPDATE: Banking association protests plan to raise windfall profit tax

The Hungarian Banking Association warned that a plan to raise the windfall profit tax on lenders would weigh on the entire economy in a statement issued on Tuesday.

“Increasing the extra burden on banks would weigh on the entire Hungarian economy, slow economic growth further and hurt the country’s assessment,” the association said. It added that the step would give fintech companies offering cross-border services “another unjustified advantage”.

The association said that the windfall profit tax, introduced in 2022, originally for a period of two years, had an unfavourable impact on the local economy and outlooks as well as for banks’ earnings. It added that the base rate had stood at 18pc when the measure was rolled out, but was now at 6.5pc, eliminating the need for such a tax.

The association said lenders would pay HUF 842bn in additional taxes in 2025, including the bank levy, the windfall profit tax and the transactions duty.

Following Márton Nagy’s announcement, the Hungarian forint began to weaken.

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Featured image: illustration.