Hungary plans wider budget deficit to tackle recession this year

Hungary's government has raised its budget deficit goal to 3.8% of economic output this year from 2.7% previously as the country tries to mitigate the economic fallout from the coronavirus pandemic.

The crisis has sent the Hungarian economy, which grew by a robust 4.9% last year, from a chronic labor shortage into rising unemployment and has forced right-wing Prime Minister Viktor Orban to abandon his long-held principle of keeping the deficit below a 3% EU-mandated ceiling. "The deficit, considering the financial impacts from the crisis management and recovery measures and the temporary recession in 2020, will remain at a relatively low level, and is expected at 3.8% of GDP this year," it said.

In an updated convergence program published on the European Commission's official website on Tuesday, the government outlined a baseline scenario of a 3% drop in output this year, although analysts had projected a 4.1% recession in a Reuters poll last month. It expects the economy to rebound in 2021 and grow by 4.8%, and the budget deficit to narrow to 2.7%. The unemployment rate is expected to rise to 5.6% this year from 3.4% last year.

The government said its projections were based on the assumption that the pandemic is curbed in the second quarter across Europe and from the third quarter output can recover gradually. "However, there is a risk that ....the recovery will start later," it said.

One of two government risk scenarios projects that the pandemic will be curbed only in the third quarter and economic recovery will start in the last quarter. In that case, the economy could shrink by 5.6%. If the recovery starts only in 2021, then the recession could reach 7.3% this year, worse than after the 2008 financial crisis.