S&P Global Ratings warned that the government's measures of extending PIT exemptions to families and increasing welfare spending before the 2026 elections pose serious economic risks and will make it harder to reduce the budget deficit to below 3% and stabilise the forint, financial website Portfolio.hu reported, citing Bloomberg.

Hungarian PM Viktor Orban announced bold tax cuts and increase in support to families over the weekend. PIT exemptions will be extended for mothers with at least two children, introduced gradually, starting from 2026, first available for mothers below 40. Women over 60 will receive the entitlement from 2029.

Hungary's veteran leader, bracing for a tight election next year, called the lifelong exemption the biggest tax cut in Europe. 

Additionally, the government will double family allowance for those raising at least two children, which will benefit 1mn families and 1.7mn children. The PIT exemption will affect 900,000 families. The two benefits do not rule each other out. 

According to government officials, the two measures combined will leave HUF754bn at families in 2025.

Given the gradual extension of the programme, the figure is slated to rise in the coming years.

According to S&P, the impact of the measure could strain the budget HUF915bn annually, more than 1% of GDP.

The credit rating agency also flagged additional risks for Hungary to meet its fiscal targets, including weak external demand, reduced access to EU funds, and the depreciation of the forint. There is little chance of a breakthrough in the impasse between the EU and Hungary over the disbursement of EU funds, it added. 

At the end of 2024, the Hungarian government permanently lost over €1bn in frozen EU funds due to the EU’s N+2 budgetary rule, leaving only €9.4bn in cohesion funds still recoverable. However, this amount was further reduced by €325mn due to a European Court of Justice ruling on Hungary's asylum policy failures, which imposed a €200mn lump-sum fine and a daily penalty of €1mn.

The European Commission has already deducted €293mn from Hungary’s 2021-2027 cohesion funds at a punitive interest rate of 11.5%.

Analyst Gabriel Forss signalled that further tax cuts and a spending splurge before the election could worsen the country's fiscal position and limit the central bank's ability to meet its inflation targets, increasing tensions between monetary and fiscal policy. 

In its baseline scenario, excluding the impact of the measures unveiled by the prime minister over the weekend, S&P expects the debt-to-GDP ratio to peak in 2026 at 77% of GDP before declining in the following year, due to fiscal consolidation unveiled by the government earlier.

Debt financing costs are set to drop to around 4% of GDP this year, compared to nearly 5% in 2024, when interest payments made up 11% of budget revenues.

The weaker forint increased the debt-to-GDP ratio by 1.4pp in 2024 to 76.4%, which is 3.8pp above the government's target. S&P projects 2.7% growth this year, above the market consensus of 2.0-2.2%, which could rise to 2.8% in 2026, below the government’s 4.1% target.

Economic output could slow to 2.4% in 2027, which is 1.9pp below the cabinet’s 4.3% estimate.

Hvg.hu noted that in an October interview with Bloomberg, former Finance Minister Mihaly Varga dismissed the possibility of the government easing fiscal policy before the upcoming election. Analysts have drawn comparisons to the pre-2022 election spending surge, which was subsequently followed by a series of austerity measures, including the introduction of new windfall taxes and a revision of the utility subsidy scheme.

Higher-income families with two children will benefit the most from the PIT exemption, and the measure will likely exacerbate the income disparity between singles and families, economic research firm GKI said in a note. 

S&P Global Ratings reaffirmed Hungary's 'BBB-/A-3' long- and short-term foreign and local currency sovereign credit ratings with a stable outlook in October.