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Despite warnings and proposals for solutions to the problems of the Hungarian economy, the Orban government neither hears nor sees.

Despite warnings and proposals for solutions to the problems of the Hungarian economy, the Orban government neither hears nor sees.

Fitch's Economic Policy; Tax Reform; IMF;

International financial bodies expect reforms from Hungary.

The European Commission (EC), Fitch Ratings and the International Monetary Fund (IMF) delegation have a similar view on the performance of the Hungarian economy and the effectiveness of economic policy. According to the organizations, the economy is highly regulated, competition is limited in some areas, requirements are not transparent, and the rule of law is violated.

According to Fitch Ratings, one of the biggest concerns is the poor quality of economic management. In its latest review, the international credit rating agency maintained Hungary’s debt rating at “BBB”, which means it remains highly recommended for investment, but this does not mean that Fitch analysts do not see risks. According to them, the problem lies in the political environment and unconventional economic policy measures – this was mentioned in a background discussion published by Portfolio.hu. According to Fitch, one of the biggest risks is that due to rule of law problems, Hungary will not be able to withdraw a significant part of the EU recovery grants, as they are still blocked.

The European Commission, together with six other member states, has initiated an excessive deficit procedure against Hungary after the government failed to meet the minimum balanced budget rule this year, which is a public deficit of no more than 3% of GDP. The government currently expects 4.5% compared to 6.7% last year, but wants to reach only 2.9% in 2026, the year of parliamentary elections. In 2021, the Fidesz government, fearful of the emergence of Prime Minister Peter Márquez, embarked on its biggest ever election spending of 3,000-4,000 billion Hungarian forints.

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It is a big question whether in 2026, when, according to our current knowledge, Fidesz may have a strong opposition rival in Tisza, whether it will be able to stop budget spending and buy votes, or whether the budget chaos of 2021-2022 will be repeated.

Fitch Ratings addresses this in its country assessment, saying that spending ahead of the 2026 elections is currently a potential risk. A persistently high deficit could lead to further loss of confidence and depreciation of the Hungarian forint. Under the EU’s excessive deficit procedure, the Hungarian government should use a 3-4-year medium-term economic policy plan to reduce the budget deficit and public debt, and promote green and digital transformation.

The Commission has already proposed several adjustment measures, but the government does not want to hear about most of them. The first is to abolish emergency energy subsidies, i.e. to reconsider public spending cuts. Although European energy prices have fallen by a tenth in the past two years, the Hungarian government still spends HUF 900 billion annually on utility subsidies, in many cases for purposes that cannot be verified. Both the European Commission and the IMF recommend that only those who are truly in need receive utility allowances. The IMF points out that maintaining the subsidies does not encourage Hungarian households to make energy-saving investments or to switch from fossil fuels. In parallel, the Commission also suggests that the government establish programs to support low-income households.

IMF experts also see tax reform as essential, and the changes they have proposed will be incorporated into the medium-term program to be prepared under the excessive deficit procedure. According to the IMF, on the one hand, the Hungarian budget's dependence on consumption tax should be reduced, which can be done in part by raising the SJ rate or rates, but

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Equally important is the increase in the corporate income tax rate, which is low internationally.

It is recommended to reduce deductions and exemptions in both VAT and corporate tax, which would make the tax system more transparent and, last but not least, could increase revenues.

In addition, the IMF also recommends reforming the healthcare and pension systems, taking into account that the two social welfare systems do not increase state expenditures in the long run. On the other hand, from a competitiveness point of view, it would be necessary to increase spending on health and education, which means that many may oppose this IMF proposal, and not only in the government. The IMF report implicitly criticized the government’s acquisition of companies in the telecommunications and transport sectors in recent months. Valutalap clearly refers to the acquisition of Vodafone Zrt and Budapest Airport Zrt., which cost taxpayers HUF 1,500 billion. According to the IMF, such acquisitions can only be supported if they are “guided by legal, regulatory and policy frameworks that ensure fair competition.”

Not good enough yet

According to preliminary data, the budget deficit in the first quarter amounted to HUF 1.068 billion, or 5.4 percent of GDP. Compared to the same period of the previous year, the balance decreased by HUF 611 billion. The Central Statistical Office wrote that the state sector's income amounted to HUF 7.952 billion, and its expenditures amounted to HUF 9.020 billion. Value-added tax revenues increased by 5.6 percent, or HUF 89 billion, and income tax revenues increased by 17.1 percent, or HUF 206 billion. expanded. Expenditures increased by HUF 146 billion, or 1.7 percent.

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