Hungary’s government sector deficit hit a 17-year high of 9.8% of quarterly GDP in Q1 at HUF1.7 trillion (€4.5bn), according to preliminary data released by the Central Statistics Office (KSH) on July 4. The recent data is the highest since 2006 when the January-March gap reached 11.6% of the quarterly GDP.

Compared to the base period, the balance deteriorated by HUF1.26 trillion, or by 6.8pp as a proportion of the GDP.

The deficit in the January-March period equals the combined total of the first quarter shortfalls in 2020, 2021 and 2022.

The Q1 data released by KSH on Tuesday refers to the ESA-based deficit, but the cash-flow-based figures from April and May show that the deteriorating trend continued as Hungary is struggling from a recession, setting back revenues, while energy subsidies and rising debt service costs put a burden on expenditures.

The budget's shortfall stood at 81% of the full-year target, at HUF2.76 trillion at the end of May.

According to the ESA-based data, government sector revenue rose 9.2% y/y to HUF7.2 trillion in the January-March period, while expenditures climbed 26.5% to HUF8.9 trillion.

Other general government sector expenditures went up by HUF1 trillion (+77.3% y/y), mainly due to a sharp increase in subsidies for energy supplier companies. Last year’s Hungary energy import bill rose €7bn to €17bn as energy prices soared. The government reduced retail energy subsidies, but it still accounts for 2% of GDP.

Revenue from taxes on production and imports climbed 15.6% to HUF3 trillion.

The bad news for the government is that VAT revenues, accounting for the bulk of revenues, rose at a moderate pace, 8% y/y, well below the rate of inflation as retail sales plummeted in the first five months.

For 2023, the government targeted a 30% increase in VAT revenues compared to the 2022 target, rising from HUF5.5 trillion to HUF7.1 trillion. The 2023 target was later revised to HUF7.9 trillion at the end of 2022 after data showed that last year's proceeds overshot targets by 25% to HUF6.8 trillion due to surging inflation. Hungary has the highest VAT rate in the EU at 27%.

In the 2024 draft budget, the government calculated a modest 8% growth from the revised 2023 targets to HUF8.5 trillion. This could be in jeopardy given the risks of meeting the 2023 target because of the economic downturn facing Hungary.

Despite the worst Q1 data in 17 years, the government is confident that the 3.9% ESA-based deficit target could be met.

In related news, the Hungarian National Bank pointed to the fiscal risks of recapitalisation of the central bank.

In its Fiscal Report released on Tuesday, the MNB warned that compensating for its losses could equal 0.4-0.5% of GDP next year. The central bank is slated to post a historic HUF1.8-2 trillion loss in 2023 from surging interest rates as it has trillions of forints of subsidised loans it has to finance at a higher rate.

The government has a legal mandate to cover any difference between the central bank's net assets and statutory share capital in equal payments over five years.

The MNB estimated that next year's cash flow-based budget deficit could exceed the HUF2.5 trillion target by around HUF400bn due to rising expenditures and lower revenues.