Hungary's Economic Struggles and Their Impact on Orban's Future
On January 1st, the European Union (EU) made a significant announcement: it would withhold over a billion euros in structural funds from Hungary. This dramatic decision stems from ongoing disputes between the EU and the government led by Prime Minister Viktor Orban regarding rule of law concerns. Given Hungary's precarious economic situation, characterized by a budget deficit exceeding 4.5% of GDP and a technical recession starting in late 2022, this financial blow arrives at a particularly inopportune time for Orban's Fidesz government.
The Economic Context: Declining Wages and Inflation
Inflation has emerged as a pervasive challenge for governments globally, but Hungary has faced unique difficulties, largely due to weak wage growth. This has led to a steep decline in real wages, making Hungary one of the countries hardest hit in Europe. In response to these challenges and in an effort to bolster support ahead of last year’s general elections, Orban implemented a series of spending measures aimed at appeasing voters.
Just before the elections, he embarked on a substantial spending spree that included increasing pensions, eliminating income tax for younger demographics, and providing grants for home renovations. Collectively, these measures amounted to approximately $2 billion or 1% of Hungary's GDP. Orban's administration also maintained an expansive family benefit regime, a policy that had proven popular among voters but now costs nearly 5% of GDP annually.
Despite these measures, the cost of living for ordinary Hungarians has not improved significantly, primarily due to rampant inflation. In 2023, Hungarian households' consumption—when adjusted for purchasing power parity—was only 70% of the EU average, leaving Hungary alongside Bulgaria at the bottom of the economic ladder in the EU. Additionally, a 2023 Eurobarometer survey indicated that merely 30% of Hungarian consumers felt confident about their ability to live comfortably in retirement, reflecting growing anxieties over inflation's impact on personal savings.
The public deficit in Hungary has substantially increased since 2015, particularly during and after the pandemic. Over the past four years, the average public deficit hovered around 7% of GDP, significantly surpassing the EU's target of 3%. By June 2024, Hungary's deficit had already eclipsed the revised target of 4.5% of GDP.
Moreover, Hungary is now confronting debt servicing costs that are among the highest in the EU, with over 4% of its GDP allocated to interest payments. This escalating scenario hints at a potentially dangerous cycle where rising debt necessitates increased borrowing to cover servicing costs—an alarming "debt doom loop."
Hungary's questionable fiscal practices have drawn repeated interest and reprimands from the EU. The government was one of eight nations warned by Brussels last month for breaching spending rules. Failing to rectify its budget could lead to fines of 0.1% of GDP annually, although such penalties have never been enforced.
With Orban tasked to develop a compromise fiscal plan for 2025 to 2028 by mid-January, the future remains uncertain. The options for addressing the deficit appear limited to either tax increases or fostering economic growth, both of which are increasingly complicated by Hungary's stagnant economy.
In recent months, Hungary faced additional losses, including the permanent forfeiture of over 1 billion EUR due to unallocated funds, and a continuous loss of 1 million EUR daily related to its treatment of asylum seekers. This represents a significant blow to the national budget, exacerbated by a one-time fine of 20 million EUR for non-compliance with EU asylum regulations.
The Political Landscape: Can Orban Survive?
As Hungary's economic clouds deepen, the opposition has seized the opportunity to target Orban's government. Peter Márki-Zay, a former ally turned critic, has positioned himself at the forefront of dissenting voices, criticizing alleged corruption and ineffective spending leading to deteriorating infrastructure like hospitals and railways.
While an outright economic crisis may not be imminent, with Hungary's economic prospects growing dim, the likelihood of recovery without significant reforms appears slim. If Orban continues to struggle in reconciling the issues with the EU, he may find it increasingly challenging to maintain the support of the electorate.
As Hungary approaches the 2026 elections, the stakes are high. The unfolding economic narrative will play a crucial role in shaping Orban's re-election prospects. Should the government's budget and growth rates remain unresolved, the Fidesz party could face unforeseen turmoil as new political leaders emerge, and the opposition grows stronger, possibly reshaping the future of Hungary away from Orban's long-standing governance.
Part 1/8:
Hungary's Economic Struggles and Their Impact on Orban's Future
On January 1st, the European Union (EU) made a significant announcement: it would withhold over a billion euros in structural funds from Hungary. This dramatic decision stems from ongoing disputes between the EU and the government led by Prime Minister Viktor Orban regarding rule of law concerns. Given Hungary's precarious economic situation, characterized by a budget deficit exceeding 4.5% of GDP and a technical recession starting in late 2022, this financial blow arrives at a particularly inopportune time for Orban's Fidesz government.
The Economic Context: Declining Wages and Inflation
Part 2/8:
Inflation has emerged as a pervasive challenge for governments globally, but Hungary has faced unique difficulties, largely due to weak wage growth. This has led to a steep decline in real wages, making Hungary one of the countries hardest hit in Europe. In response to these challenges and in an effort to bolster support ahead of last year’s general elections, Orban implemented a series of spending measures aimed at appeasing voters.
Part 3/8:
Just before the elections, he embarked on a substantial spending spree that included increasing pensions, eliminating income tax for younger demographics, and providing grants for home renovations. Collectively, these measures amounted to approximately $2 billion or 1% of Hungary's GDP. Orban's administration also maintained an expansive family benefit regime, a policy that had proven popular among voters but now costs nearly 5% of GDP annually.
Part 4/8:
Despite these measures, the cost of living for ordinary Hungarians has not improved significantly, primarily due to rampant inflation. In 2023, Hungarian households' consumption—when adjusted for purchasing power parity—was only 70% of the EU average, leaving Hungary alongside Bulgaria at the bottom of the economic ladder in the EU. Additionally, a 2023 Eurobarometer survey indicated that merely 30% of Hungarian consumers felt confident about their ability to live comfortably in retirement, reflecting growing anxieties over inflation's impact on personal savings.
Rising Deficits and Debt Servicing Challenges
Part 5/8:
The public deficit in Hungary has substantially increased since 2015, particularly during and after the pandemic. Over the past four years, the average public deficit hovered around 7% of GDP, significantly surpassing the EU's target of 3%. By June 2024, Hungary's deficit had already eclipsed the revised target of 4.5% of GDP.
Moreover, Hungary is now confronting debt servicing costs that are among the highest in the EU, with over 4% of its GDP allocated to interest payments. This escalating scenario hints at a potentially dangerous cycle where rising debt necessitates increased borrowing to cover servicing costs—an alarming "debt doom loop."
Discontent from Brussels and Fiscal Consequences
Part 6/8:
Hungary's questionable fiscal practices have drawn repeated interest and reprimands from the EU. The government was one of eight nations warned by Brussels last month for breaching spending rules. Failing to rectify its budget could lead to fines of 0.1% of GDP annually, although such penalties have never been enforced.
With Orban tasked to develop a compromise fiscal plan for 2025 to 2028 by mid-January, the future remains uncertain. The options for addressing the deficit appear limited to either tax increases or fostering economic growth, both of which are increasingly complicated by Hungary's stagnant economy.
Part 7/8:
In recent months, Hungary faced additional losses, including the permanent forfeiture of over 1 billion EUR due to unallocated funds, and a continuous loss of 1 million EUR daily related to its treatment of asylum seekers. This represents a significant blow to the national budget, exacerbated by a one-time fine of 20 million EUR for non-compliance with EU asylum regulations.
The Political Landscape: Can Orban Survive?
As Hungary's economic clouds deepen, the opposition has seized the opportunity to target Orban's government. Peter Márki-Zay, a former ally turned critic, has positioned himself at the forefront of dissenting voices, criticizing alleged corruption and ineffective spending leading to deteriorating infrastructure like hospitals and railways.
Part 8/8:
While an outright economic crisis may not be imminent, with Hungary's economic prospects growing dim, the likelihood of recovery without significant reforms appears slim. If Orban continues to struggle in reconciling the issues with the EU, he may find it increasingly challenging to maintain the support of the electorate.
As Hungary approaches the 2026 elections, the stakes are high. The unfolding economic narrative will play a crucial role in shaping Orban's re-election prospects. Should the government's budget and growth rates remain unresolved, the Fidesz party could face unforeseen turmoil as new political leaders emerge, and the opposition grows stronger, possibly reshaping the future of Hungary away from Orban's long-standing governance.