Hungary approves 2023 budget and deficit cuts after spending spree ahead of election

Autoworkers assemble fuel lines for exports to Western Europe at Veritas Kft in Dunakiliti, Hungary November 7, 2008. REUTERS/Karoly Arvai

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BUDAPEST, July 19 (Reuters) – Hungary’s parliament on Tuesday approved the 2023 budget, which aims to cut the budget deficit next year to 3.5% of economic output from a target of 4.9% this year as the government is trying to put the finances back on a sustainable track.

Nationalist Prime Minister Viktor Orban, who won a fourth consecutive term in April, faces his toughest challenge since coming to power in 2010, with inflation at its highest level in two decades, a weak forint and EU funds still stuck amid dispute over democratic standards.

After a pre-election spending spree, which included large family tax refunds and pension hikes, the government is now trying to rein in the budget deficit at a time when the current account deficit has also widened in largely due to rising energy import costs.

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These increased Hungary’s external vulnerability and sent the forint to historic lows at the start of the month.

The government has imposed large windfall taxes on banks and a range of businesses, launched spending cuts and last week scrapped a one-year cap on utility prices for the highest-consuming households, which, along with tax changes for entrepreneurs, sparked protests against Orban. Read more

The change in taxation and especially the removal of price caps should improve the budget balance.

“Both measures are expected to lift inflation but calm consumption and improve fiscal and external balances, addressing Hungary’s key structural issues,” Citigroup said in a note.

“These metrics point to downside risks to the growth outlook and we forecast a potential recession in Q4 2022-Q1 2023, meanwhile, the adjustment may help prevent further HUF underperformance.”

The 2023 budget is based on an average inflation forecast of 5.2% and economic growth of 4.1%, which is higher than the central bank’s latest projection of 2.0-3.0% growth of GDP.

As the economy continues to grow, boosted by strong domestic demand, analysts expect a slowdown from the second half of this year, as soaring energy costs, double-digit inflation and high rising interest rates bite.

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Reporting by Krisztina Than and Anita Komuves; Editing by Nick Macfie

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