European Commission recommends opening excessive deficit procedure against Hungary due to overspending

The European Commission on Wednesday proposed that member states launch an excessive deficit procedure against the Hungarian government, among others, because its budget deficit is so high it is in breach of common rules. The body's announcement that it would be taking action against seven member states due to excessive deficits was part of its spring economic package.

What is this procedure and when is it used?

Part of the EU's common economic rules (Maastricht criteria) is that, in principle, no member state can have a deficit higher than three per cent – that is, a state can spend up to three per cent more than its revenue compared to its gross national product, or GDP, and the difference should be covered by loans. In addition, in principle, their debt cannot exceed 60 percent of the GDP. This is necessary to avoid a situation such as the one that occurred during the economic crisis which started in 2008. At the time, the high deficit and huge loans of several countries almost took the others with them, which necessitated the use of various financial rescue methods. (Not to mention that it is not good for the member state itself to leave a lot of debt for future generations which will then have to spend a lot on interest payments.)

During the crisis, the rules were tightened with the "Two pack" regulation and the "Six pack" regulation. Once the crisis had passed, in 2016, speaking in an interview, Commission President Jean-Claude Juncker justified why there was no action taken against France for breaching the rules by saying "because it is France". The procedures have been suspended since the onset of the coronavirus epidemic in 2020. The European Commission was supposed to bring them back last year after some fine-tuning, but member states weren't able to agree on the details with each other and with the European Parliament (EP) in time for that.

Since then, the process has been somewhat refined with the final rules, which were agreed by the Council of Ministers and the EP in February this year and voted on by both bodies in April. According to this, countries that have

• debt which is higher than 90 percent of their gross domestic product (GDP) will have to cut it by an annual one percent on average,
• while those between 60 and 90 percent will have to cut it by half percent.
• In addition, government deficits exceeding three per cent of their GDP should be reduced to one and a half percent, thus building up a reserve to prepare for a more difficult economic situation.

Why was Hungary included?

According to Eurostat data released in April, Hungarian public debt was 73.5 percent last year, which would tick the second criterion, but it has actually dropped by one and a half percent, which is well above the required half percent. A bigger problem is the third condition: the deficit has reached 6.7 percent, consistently exceeding government expectations. Only the Italian government has recorded a higher deficit than this. Moreover, it has been consistently high since 2020, at least double the 3 percent limit every year. This was also worsened by some non recurring effects, such as the epidemic or the estimated spending of 1,000 billion forints ahead of the 2022 elections, with the latter also containing permanent elements (such as the reintroduction of the 13th month pension in an aging Hungary.)

The government entered last year with a deficit target of 3.9 per cent for 2023, while this year, the year of the reintroduction of the rules, it aimed for just below the EU's 3 per cent requirement, at 2.9 percent. However, it wasn't even able to stick to the modified target of 5.2 and then 5.9 percent in 2023, ending up at 6.7 percent.

For this year, the original target of 2.9 percent was revised to 4.5 percent, with this deficit almost reached by April. In other words, by the end of the year, it will be nearly impossible to keep to the target unless the government does something – raises revenue (e.g. by collecting more taxes) and/or cuts spending (e.g. by cutting subsidies). In April, the government announced a postponement of public investments worth a total of HUF 675 billion, but Dávid Németh, macroeconomic analyst at K&H Bank, told Telex that this adjustment may not be enough to stick to the revised target, and he believes it will only bring the deficit down to around 5 percent.

The finance ministry is forecasting a deficit of 3.7 per cent, still above three per cent for next year, and would only bring it down to 2.9 percent by 2026 – the year of the next parliamentary election.

In addition to Hungary, the procedure has been proposed for six other member states – Belgium, France, Italy, Malta, Poland and Slovakia – out of the 12 examined. In the case of Romania, the procedure which was suspended in 2020 would be continued.

The European Commission is also monitoring economic imbalances, which could also trigger proceedings in extreme cases. In the spring package, 12 countries were examined. Along with several other member states, Hungary continues to be flagged as having imbalances, but is not in the excessive category.

What happens next?

There is no initial penalty for a country that has had an excessive deficit procedure opened against it. National finance ministers will next meet at the EU Council on Friday, where the spring economic package will be discussed (the current proposals were announced as part of that). In September, under the Hungarian presidency, each member state will have to present a four-year national plan on its spending targets, investments and reforms. If they can justify it to the Council, they may be granted another three years.

According to Szabad Európa, the European Commission's November package will reveal by when and in what increments the Hungarian government will have to reduce the deficit below the permissible level.

A single indicator, that of the sustainability of public debt is used to determine the fiscal path. There are exceptions to this, for example, for interest expenditure (which is high in Hungary), or in case of developments financed by EU subsidies and unemployment benefits.

But if a country that has been subject to the procedure goes off track, it could be fined 0.05% of its annual GDP until it gets back on track.

Subject to it for almost a decade, and out of it for more than a decade – until now

The Hungarian government was subject to an excessive deficit procedure from 2004, the year it joined the EU, until 2013. Even before we joined, after the election of Prime Minister Péter Medgyessy in 2002, the deficit was already out of control with the adoption of the twice-a-hundred-day programme.

Medgyessy was succeeded by Ferenc Gyurcsány in 2004, but, as he put it in his infamous speech in Őszöd: 'we did nothing for four years', even though 'we are so far beyond the country's means that we could not have imagined it before'.

Efforts were made to correct the situation after the election victory in 2006, and especially under Gordon Bajnai, but the global economic crisis that hit during Hungary's weak fiscal situation led the government to ask for an EU bailout (as well as from the IMF) as early as 2008.

When Viktor Orbán was elected in 2010, he first asked the European Commission for more fiscal leeway. This was denied (which prompted the famous Index article "Orbán went to Brussels for a slap in the face"), and as a result, the government announced a battle against debt and a deficit limit was burnt into the Fundamental Law, which has since been effectively watered down.

In 2012, on a proposal from the Commission, member states decided to suspend part of the catch-up (cohesion) funding Hungary was due from the following year because of the deficit. In the end, this was withdrawn in 2012 due to adjustments.