Legal procedure may launch against Hungary next summer

The Spanish presidency published the final decision regarding the reform deal of the Stability and Growth Pact (SGP). The Council’s website confirmed the post made by the Hungarian Minister Mihály Varga.

Although Varga didn’t mention any specifics about the video conference on Wednesday, the ambassadors of the Member States officially agreed on the final text on Thursday and published it right away on their website. The deal still has to be accepted by the European Parliament, only then can it become a final legislation. The procedure will most likely begin in January.

The new deal

The revamped agreement mandates each Member State to devise a 4 or 5-year budgetary trajectory, strictly adhering to it. This path must illustrate the reduction and reform measures undertaken to ensure a sustainable debt and deficit situation, considering emerging challenges. For Member States surpassing the 3% GDP deficit or 60% debt ceiling, the Commission will propose a specific net budgetary spending plan. Countries with such tailored plans will face heightened scrutiny from fellow Member States.
Under German influence, a provision stipulates that a 1.5% deficit must be achieved by the conclusion of the expenditure reduction cycle, offering a safety net for economic emergencies. According to Portfolio, this ensures countries exceeding deficit limits are closely monitored and, if deviating from the plan, fined with 0.05% of their GDP until compliance is restored.

Short term flexibility

Though the outlined rules may seem stringent, they provide short-term flexibility in exchange for a more rigid approach in the long term. The Commission’s leniency allows governments to temporarily overlook increased interest payments during the 2025-2027 period. In return, proposed plans must be meticulously followed, ensuring a deficit below the 3% target by the adjustment period’s end, as advised by the Germans.

Despite the reform not altering the fundamental rules for excessive deficits, the high deficit numbers across Europe in 2023 are expected to initiate procedures against approximately 10 to 12 countries, including Hungary. The Hungarian government’s optimistic deficit goal of 5.2% faces skepticism from professionals at MNB. Exceeding the 3% deficit ceiling appears inevitable, challenging Hungary’s fiscal targets.

Hungarian answer

In other words, the excessive deficit procedure may as well be initiated against Hungary in the summer of 2024. This entails adhering to a meticulously crafted net spending plan from Brussels to avoid extended EU sanctions. While factoring in increased state interest expenses provides short-term relief to the budget, the new plan is lenient towards defence expenses. Mihály Varga, head of the newly established budgetary control authority, expressed relief for the programme’s flexibility. This new authority, headed by Mihály Varga may have been established to make up for the strict rules in the new deal that leave less room for fiscal acrobatics. The upcoming Hungarian parliamentary elections in 2026 will see lasting budgetary control, potentially breaking the cycle of fiscal challenges prevalent in such electoral phases.

Read more about the Hungarian budget HERE!

Read more about Hungarian economic projections HERE!