Hungary approves 2023 budget and deficit cuts after pre-poll spending spree

Hungary's parliament on Tuesday approved the 2023 budget, which sets out to reduce the budget deficit next year to 3.5% of economic output from a targeted 4.9% this year as the government tries to put finances back on a sustainable track.

Nationalist Prime Minister Viktor Orban, who won a fourth consecutive term in office in April, is facing his toughest challenge since taking power in 2010, with inflation at a two-decade high, a weak forint and EU funds still held up amid a dispute over democratic standards.

After a spending spree ahead of the elections, which included hefty tax refunds to families and pension hikes, the government is now trying to rein in the budget deficit at a time when the current account deficit also widened largely due to rising energy import costs.

These have increased Hungary's external vulnerability and sent the forint to record lows earlier this month.

The government has imposed big windfall taxes on banks and a raft of companies, launched spending cuts and last week scrapped a years-long cap on utility prices for higher-usage households, which - along with tax changes for entrepreneurs - triggered protests against Orban.

The tax change and especially the scrapping of price caps are expected to improve the budget balance.

"Both steps should lift inflation but cool consumption and improve the fiscal and external balances, addressing Hungary's main structural issues," Citigroup said in a note.

"These measures point towards downside risks to the growth outlook and we see a potential recession in Q4 2022-Q1 2023, at the same time the adjustment may help to prevent further underperformance of the HUF."

The 2023 budget is based on a forecast of 5.2% average inflation, and economic growth of 4.1%, which is above the central bank's latest projection of 2.0-3.0% GDP growth.

While the economy is still growing, boosted by strong domestic demand, analysts project a slowdown from the second half of this year, as surging energy costs, double-digit inflation and sharply rising interest rates bite.