The European Council has endorsed Hungary's medium-term budgetary plan, which outlines a path for deficit reduction but reflects a more cautious economic outlook, National Economy Minister Marton Nagy announced on February 19 after the Ecofin meeting.

EU finance ministers also discussed the global minimum tax, and the way defence expenditures should be accounted, he added. The minister warned that the withdrawal of the US from the OECD-administrated global minimum tax agreement puts European companies at a severe disadvantage.

The government revised some of its projections after the European Commission asked the government late last year to review some of the forecasts citing deviations in methodology.

In the revised version, the Hungarian government aligned the macroeconomic trajectory with EU expectations and committed to limiting net budgetary expenditure growth to 4.3% in 2025, while slashing growth projections.

According to the leftist daily Nepszava the government has significantly slashed its 2025 GDP target from 3.4% approved in the budget act to just 1.2%. Growth is expected to accelerate to 2.8% in 2026, but slow to 1.5% a year later.

The revision represents a sharp departure from earlier projections. Prime Minister Viktor Orban had flagged a "flying start" and spoke of a fantastic year after a disappointing 2024, when the economy grew just 0.6%, short of the 4.0% target.

The 1.2% growth projections for 2025 is below market expectations, as analysts expect GDP will expand 1.8-2.8%. The slower pace of expansion cold also raise concerns about Hungary’s fiscal room for manoeuvre as the government has pinned its hope of an economic turnaround on the domestic engines, such as rapid increase in consumption spurred by rising real wages. VAT remains the largest revenue proceed for the budget and if consumers remain cautious, the fiscal shortfall could be really painful and would trigger further budgetary adjustments. 

The latest economic data does not bode well. Inflation soared to 5.5% in January, 0.7pp above consensus, December industrial data showing EV battery production nosediving and construction remained in the doldrums in the last month of the year.

Under the new EU-approved budget framework, Hungary has committed to reducing its budget deficit from 4.9% of GDP in 2024 to 3.6% in 2025, and to 2.5% in 2026. Initially, the plan targeted a 3.9% shortfall for next year and 2.9% a year later.

The question is whether the government will abide by its commitment, with 2026 being an election year and polls show a tight race ahead. Prior to the 2022 vote, Viktor Orban unleashed an unprecedented spending spree with tax refunds for families, bonus payments to armed personnel and the re-introduction of the 13-month pensions.

Analysts fear that government could again resort to these measures. Economy Minister Marton Nagy has already warned that food price caps could reintroduced to control the rapid rise of basic staples. 

The European Commission has also urged Hungary to ensure its net expenditure growth does not exceed 4.3% in 2025 and 4.0% in 2026, as part of its Excessive Deficit Procedure (EDP) obligations.

Hungary was put under EDP last summer after consecutive years of budget overshoot, as the deficit has exceeded 6% between 2020 and 2024.

Hungary committed to reducing state debt to 73.5% of GDP by 2025 and continue to decline in subsequent years. The excessive deficit procedure aims to strengthen debt sustainability, which Hungary seeks to contribute to by strictly controlling budgetary expenditures and following the EU-mandated deficit reduction path.

The government also committed to reducing the national debt ratio by at least 0.5pp through annually through significant spending cuts and revenue-enhancing measures. These include new tax policies targeting the banking and energy sectors and delaying certain public investments to alleviate budgetary pressure.

The plan encompasses approximately 80 reforms and investments aimed at enhancing Hungary's social and economic resilience, alongside commitments to bolster the country's energy security. It anticipates maintaining defence spending at 2% of GDP throughout the plan's duration. However, the Council acknowledges that geopolitical risks could exert pressure on defence expenditures.

Additionally, the plan indicates that the government will delay the phasing out of certain windfall profit and sectoral taxes beyond the timelines outlined in the respective measures of the Recovery and Resilience Plan (RRP), with no current plans to phase out others.