Preparing for war? Hungary’s defence spending to increase next year

Finance Minister Mihály Varga said the 2024 draft budget will be a “defence budget”, adding that an unstable world economic environment, a “failed European Union sanctions policy” and the protracted war in Ukraine weighed on Hungary’s economy.

“We will not allow our achievements to go to waste. These unstable times warrant a budget that guarantees the country’s physical and economic security,” Varga told a regular press briefing on Thursday.

The budget is designed to protect families, pensions, jobs, and to maintain Hungary’s “unique utility price cap system”.

Defence spending will increase next year, he said.

The family support system will be revamped but the tax cuts for families and the utility protection fund will remain, he said.

The draft budget calculates with a growth rate of 4 percent and a 2.9 percent deficit. State debt is expected to fall to 66.7 percent, and inflation to an annual 6 percent, he said.

Commenting on a statement by Johannes Hahn, the Commissioner for Budget and Administration, Gergely Gulyás, the PM’s chief of staff, said the conditionality procedure pertained to very little of the “budget resources Hungary is entitled to”. Talks with the European Commission are ongoing regarding the budget and the resilience and recovery funding, he said.

The European Council approved the Hungarian plan on spending the recovery funding last December, and Hungary amended its judiciary law to comply with the last requirement to access the funds of the 2021-2027 budgetary cycle, Gulyás said.

The conditionality procedure against Hungary involves the partial suspension of three EU programmes, he said. “That should not be conflated with the issues of the budget and the resilience fund.”

Hungary is working to close the conditionality procedure as soon as possible, Gulyás said. “If the EC didn’t set one new requirement after the other, it could have closed the procedure long ago, but sometimes, the goal seemed to be not to close it.”

Hungary has a constructive approach to the negotiations and hopes to see results quickly, he added.

Responding to a question on whether the European Parliament could stop Hungary from overtaking the European presidency in the second half of 2024, Gulyás said the EP had no way of doing that. A recent draft resolution on the matter is “part of the propaganda steaming with anti-Hungarian sentiment” regularly on display in the EP, he added.

Answering questions on the draft budget, Finance Minister Mihály Varga said the government drafted next year’s budget in spring or summer so that families and companies can prepare for next year.

“I don’t think that pushing the drafting back to September or October would make it any more accurate for 2024,” he said.

Next year’s draft calculates with a 385 HUF/EUR exchange rate, he said.

Regarding the central bank’s decision to cut the base rate, Varga said the government is expecting a substantial fall in interest rates next year, aiding private and company loans. The interest burden on budgetary spending may decrease at a slower pace, as those loans have longer terms, he said.

Central bank losses have not been calculated in the draft budget, but talks are ongoing with the Budgetary Council of which Governor Gyoörgy Matolcsy is a member, he said.

Alongside the draft budget, the government will also submit to parliament amendments to tax laws, showing the changes for 2024, he said. “This is the government of tax cuts,” he added.

Regarding this year’s GDP, the government is working to avoid recession, Varga said. The “robust foundations of the Hungarian economy” have allowed to stick to the original growth forecast, he said.

Varga said the central bank was “the government’s most important ally” in curbing inflation, and had more tools to help that process than the government did. “So we are optimistic and say that if we both make an effort, inflation may be reduced significantly by year-end,” he said.

Extra taxes on companies and sectors making excessive profits during in war-time are expected to be phased out in 2024 for the banking, energy and pharmaceutical sectors, he said.

Health care funding will grow next year. The exact numbers will be forthcoming at next Tuesday’s press briefing, he said.

Answering a question, Varga said the government had sufficient reserves to continue financing the Erasmus and Horizont student programmes next year, should the payment of EU funds were further withheld by Brussels. “Hungary will meet all criteria set by Brussels and can justly expect the receipt of funds it is entitled to,” he said.

Regarding education, Varga said the government had drafted next year’s budget with increased spending in all areas of the sector. The sector itself will receive 3,400 billion forints (EUR 9.1bn), including 1,200 billion on teachers’ wages, 126 billion more than this year.

Gergely Gulyás noted that teachers’ wages would be raised to 80 percent of the average salary of degree holders once Hungary has access to EU funding. Until that is the case, the government guarantees raises apace of inflation this year and at least 10 percent annually afterwards, he said. The government also pledged to give larger raises to teachers working in the most disadvantaged regions, he added.

He also called on leftist MEPs “earning 6 million in Brussels” not to hinder the wage hikes.

Asked about the introduction of the euro, Varga said the government was working on meeting its criteria, adding, however, that no target date had been set yet. The real focus is on a robust Hungarian economy, and “if introducing the euro can be a by-product of that, that’s another question,” he said.

He said chances of paying a pension bonus this year were “slim”. If economic growth exceeds 3.5 percent next year, the payment can be resumed, he said. “We have been in an alliance with the pensioners since 2010 which is why we cannot allow pensions to lose their value in real terms.”

Varga said budget deficit usually accumulated more in the first half of the year. This year’s deficit was increased by the purchase of Vodafone and the payment of a 13th month pension, he said.

Regarding the transit fee increase of deliveries via the Druzhba oil pipeline, Varga said it was understandable on the part of the suppliers “to pass on their expenses”.

Asked about a planned battery plant in Debrecen, in eastern Hungary, the finance minister said the government’s aim was to provide state funds for only the most necessary developments.

Negotiations are also ongoing on a planned vaccine plant in Debrecen, “delay due to the war-like situation and the EU’s flawed sanctions policy”. “The question is the type of vaccine that would be worthwhile to manufacture; with the pandemic gone, that will definitely not be the one for coronavirus.” The state secretary for health care is handling those talks, he added.

As regards the construction of the Hungarian vaccine plant in Debrecen, Varga said it was ongoing, though with some “. Meanwhile, Gergely Gulyás added that professional consultations were ongoing under the auspices of the health secretariat on the type of vaccines to be produced in the plant considered that fact that “the production of Covid vaccines was not worth it any longer”.

Asked about the 24 billion forint loan taken out by Budapest public transport company BKK, Varga said the decision raised eyebrows. “The city of Budapest has  record tax revenues this year, which will increase further next year as a result of increasing business taxes induced by economic growth,” he said.

In connection with the 4 billion forints worth of foreign funding received by the Hungarian left-wing opposition from the United States “for ousting the government” in last year’s parliamentary election, Gulyás said ruling Fidesz would possibly submit an amendment on campaign financing during parliament’s spring session. He called foreign financing a serious breach of Hungary’s national sovereignty which he said could not be allowed “to happen again” in next year’s municipal elections.