DBRS Morningstar: Fiscal repair is hampered by budgetary repercussions of previous stimulus measures in Hungary

Hungary implemented large fiscal and monetary stimulus measures during the COVID-19 pandemic and in the run-up to the parliamentary elections in April 2022.

While the government has changed course after the elections and now targets a marked narrowing of its large budget deficit, this commentary argues that a lasting repair of fiscal accounts is complicated by repercussions of previous stimulus measures in two important ways. First, fiscal stimulus measures prior to the elections have partly raised budgetary pressures in a structural manner as they comprised not only one-off but also permanent measures. Second, the very loose fiscal stance of the government contributed to a strong overheating of the Hungarian economy during the first half of last year which, in turn, necessitated a very large increase in domestic policy rates. As a result, the interest burden of the Hungarian government is set to rise markedly over the next few years.

Key Highlights

• Reaching the 2023 deficit target is complicated by cyclical headwinds and permanent spending increases and tax cuts from previous stimulus measures.
• The interest burden of the Hungarian government is projected to increase more strongly than those of other EU countries.
• The comparatively strong increase in domestic interest rates can partly be ascribed to the government’s very expansionary fiscal stance in early 2022 as the latter contributed to a strong overheating of the economy.

“The Hungarian government’s still elevated budgetary pressures stem from both the cyclical downturn of the economy and structural spending increases in the run-up to the April 2022 parliamentary elections,” said Yesenn El-Radhi, Vice President of the Sovereign Group at DBRS Morningstar.

“Moreover, the government’s overly loose fiscal stance in early 2022 contributed to a significant overheating of the economy which has come back to haunt public finances through a rising interest cost burden.”

Read the full report HERE.

As we wrote today, both domestic trade and imports have fallen in Hungary. Details HERE.

Source: DBRS Morningstar