The National Bank (MNB) expects the government to use additional proceeds from better-than-expected growth to boost expenditures this year, thus reducing the chances of reducing the budget gap at a faster pace, according to its biannual fiscal report on September 3.
"On the basis of favourable macroeconomic projections, a more ambitious reduction of the general government deficit and state debt than the one at present would be a realistic goal, which is why it would pay off to save surplus resources from economic growth in 2022," the MNB said in the report.
Instead, the central bankers presume that additional room for manoeuvre resulting from stellar growth in 2021 will be used by the government.
MNB Governor Gyorgy Matolcsy has repeatedly warned of the risk of overheating and said the government’s 5.9% deficit target could set the country up for persistently high inflation.
He argued that the economic recovery would allow Hungary to return to a path of fiscal balance sooner after the pandemic stimulus widened the budget gap in 2020 and 2021.
Finance Minister Mihaly Varga has shrugged off these criticisms, saying that "if we want to overtake in the curve" – borrowing one of Matolcsy's signature phrases – "we have to press the gas pedal harder".
Analysts expect the expansionary fiscal policy to remain until the first half of 2022 as the government will continue to unleash a spending binge before the election.
Hungary’s gross debt surged 15pp to 80.4% at end-2020 as the economy contracted by 5% and the budget deficit widened to 9%. The MNB forecasts the debt ratio to decline to 76.8% by end-2021 and to 75% a year later thanks to nominal GDP growth above 10% combined in 2021 and 2022.
Matolcsy has formulated sharp criticisms of the government’s economic policies in recent months. In his latest op-ed piece, he said that significant institutional changes will be required in the structure and functioning of government to avoid getting stuck in a middle-income trap.
A week earlier, he blamed "institutional weaknesses of economic policy" for Hungary's "mediocre" performance compared to regional peers in the region. Matolcsy has also chided the government for the lack of investment in knowledge-intensive industries and focusing rather on "steel and concrete" investments, a criticism widely shared by opposition parties.
In related news, London-based analysts see Hungary’s economic outlook as rosy. Morgan Stanley raised its growth forecast in 2021 to 7%, well above the 6.1% consensus based on stronger-than-expected Q2 GDP and above the 6.2% target by the MNB. Due to the high base, economic growth could decelerate to 3.6% in 2022, which is closer to Hungary’s long-term growth trajectory trends seen before the pandemic.
Standard & Poor's global financial services group, which has recently affirmed its 'BBB/A-2' investment-grade outlook on Hungary's long- and short-term sovereign debt with an unchanged stable outlook, forecasts 6.1% growth in 2021 provided that infections remain low.
Fitch Ratings has also retained its 'BBB' stable outlook on Hungary and forecasts a 6.5% growth in 2021 to slow to 4.8% from 2022-2023.