On May 1, 2004, ten new states, including Hungary, joined the European Union. In our series of articles, we explore how Hungary’s situation has changed over 20 years of EU membership using various indicators. This article focuses on the budget deficit and national debt.
Countries around the world typically face budget deficits year after year. National debt is essentially the aggregated value of these annual (negative) budget balances. For international and time-series comparisons, we typically examine these data as a percentage of GDP.
Gross National Debt as a Percentage of GDP Worldwide (%, 2022)
Source: IMF (2024)
The debt of countries worldwide is increasing both nominally and as a percentage of GDP. Japan’s GDP ratio of 266% (43% of which is financed by the Japanese central bank) and the USA’s 123% debt highlight that, in special cases (e.g., key currency countries), indebtedness can be a viable path, though it undoubtedly carries long-term risks. It’s worth comparing Hungary’s performance to countries that are socially and economically similar to us.
At the time of our EU accession in 2004, we were the most indebted state in the region, with a national debt of 59% of GDP. Despite the fiscal adjustment in 2006, national debt rose further, and the 2008-09 financial crisis increased the debt-to-GDP ratio to 80%.
Change in Gross National Debt as a Percentage of GDP (%, 2004-2023)
Source: Eurostat (2024)
The nationalization of private pension assets in 2011 caused a significant one-time reduction, after which the ratio followed a decreasing trend. The coronavirus crisis in 2020 led to a plunge in tax revenues, and increased government spending could only be financed through debt. Since then, a slow reduction in our debt ratio has been observed.
As a result, in 2023, Hungary’s national debt stood at 73.5% of GDP, meaning that over 20 years, we have not managed to approach our regional competitors in this regard. Interestingly, despite this, our national data is more favorable than the EU average, primarily due to the high debt ratios of Southern European states. However, the picture is nuanced when we also examine the data from the perspective of the annual budget balance.
Between 2004 and 2006, the Hungarian budget soared, facing a significant deficit year after year, making fiscal adjustment inevitable after 2006. Partly because of this, the 2008-09 financial crisis hit us particularly hard: both in the EU and our region, economic policymakers had more room for spending, whereas the consolidating Hungarian government could not afford this.
In the first half of the 2010s, our deficit roughly matched the regional and EU levels, fluctuating around 2% until the end of the decade. Several factors allowed us to maintain this moderate deficit level for years: the cessation of private pension fund payments eased the budget, a substantial amount of EU funds flowed into the country, and the domestic government benefited from a favorable international interest rate environment at that time.
GDP Ratio of Budget Deficit (%, 2004-2023)
Source: Eurostat (2024)
From 2017 onwards, the indicator diverged from that of other V4 countries, and since then, we have shown the highest GDP ratio deficit in the region every year. This trend intensified after the COVID crisis: while other V4 countries tightened their fiscal policies during the recovery, it seems the era of fiscal discipline in Hungary has come to an end.
Therefore, it is not surprising that in 2023, the Hungarian budget spent approximately 4.5% of GDP on interest expenses1, the highest in the EU. Meanwhile, in 2023, the total state expenditure on the entire Hungarian education system was 5.1% of GDP.2
On the bright side, a significant proportion (71%)3 of our national debt is denominated in forints, which significantly reduces our foreign exposure. However, the 29% share of foreign currency debt still poses the risk of a forint devaluation, and our record amount of inflation-linked government securities (exceeding 7,100 billion forints)4 makes inflating away the national debt difficult. All this can cause significant headaches for economic policymakers.
Download full analysis1 Hungarian National Bank, Inflation report (2024) page 61.
2 Eurostat (2024)
3 Government Debt Management Agency (2024)
4 Government Debt Management Agency (2024)
