The fiscal plan looks positive for investors
The key story of the past few weeks has been the presentation of the government’s budget plan for 2027, with a macroeconomic framework running through 2030. This plan includes an ambitious reduction of the deficit ratio as soon as next year, and a similarly ambitious income policy that focuses heavily on improving social stability by helping the poor and raising the tax burden of the very rich. The plan continues this year’s trend of radically cutting the government’s spending on itself, mainly through eliminating the waste and theft of public funds.
We see the 2027 budget as being in line with the stated aim of completing euro-convergence by 2030, and despite some significant risks and deficiencies, feasible and progressive enough to serve the economy reasonably well next year, while pleasing investors, rating agencies and the EU alike. Paradoxically, its reception by the domestic public is far from entirely positive, despite the fact that millions will pay a lower income tax, get a substantial increase in old-age pensions and significantly higher wages in the government sector. This is because Tisza is delivering on only some of its election campaign promises, and largely all of society is demanding more in the way of fiscal handouts immediately, after a very long period of autocratic rule and official neglect under the previous government.
Despite some signs of popular dissatisfaction, Tisza is holding up very well in opinion polls. A slow erosion of its support base, which took place during the summer, has recently halted, and the party still has a commanding lead, supported by markedly more people than those who actually voted for it in April. This is mainly due to the acceleration of Tisza’s anti-corruption drive since end-summer. Lots of suspicious spending items have been thrown out of the budget, large numbers of criminal investigations, reaching now high-level figures as well, have been officially initiated, and anti-corruption rules have been tightened further. Parliament has finally elected a new Prosecutor General, sorting out an initial disagreement between Tisza and the new President of the Republic on this subject.
One might think that the prospective sharp cutback in net fiscal spending would hold back growth proportionately. But this is not entirely true, as the bulk of the spending that is now being eliminated had previously filled the pockets of rich businessmen and politicians, with much of their high profits saved or transferred abroad. Shifting much of those savings to low-income wage-earners and pensioners should result in a much higher propensity to consume domestically. In addition, regaining access to EU funds should provide great support to fixed investment by the government and SMEs. However, private investment by large companies is a much more controversial issue, as the government is maintaining its sector-specific extraordinary taxes, exhibiting increased sensitivity to environmental issues, and is greatly impacting representatives of the late Fidesz regime’s business empire with its spending cuts.
In terms of its impact on inflation and central banking, the government policies announced so far appear to increase the role of MNB actions, and to contribute to monetary stability over long term. Cutting back interest subsidies to households and SMEs, lifting the administrative caps on retail margins and refraining from the reintroduction of fixed fuel prices all point in this direction. However, the latter two items on this list are likely to lead to moderately higher inflation in the short term, justifying the MNB’s cautious approach to policy loosening. Importantly, the reduction of administrative market distortions appears to be cautiously gradual so far, and income policies are set to be only moderately less ambitious than earlier, maintaining considerable upward pressure in terms of inflation prospects.
Finally on current macroeconomic trends, the central government’s cumulative cash deficit ratio continues to decrease month by month, pointing toward a lower annual level than the amended target in 2026. Industrial growth has accelerated further in most recent months, as an upturn in car manufacturing and IT hardware is increasingly combined with the impact of the commissioning of new capacity in EV battery production. The expansion of consumer demand remains robust and stable. On the other hand, agricultural results hit overall GDP growth substantially in Q3 because of a disastrous weather episode in the summer, and the bad news is likely to continue in Q4, as well. CPI-inflation remains at below-target levels, but it is firmly established on a moderately ascending trend, given energy import prices, the ongoing turn of the food price cycle, and the lack of further appreciation potential for the forint. The BOP’s fundamental trend remains significantly negative, although this year’s annual figures will likely be affected favorably by RRF transfers.
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