On 27 November 2024, dr. László Windisch, President of the State Audit Office of Hungary, presented the SAO’s opinion on the Bill on the 2025 Central Budget to the National Assembly.
Dear Mr. President,
Dear Minister,
Dear Members of the National Assembly,
In the opinion of the State Audit Office of Hungary, the Bill on Hungary’s 2025 Central Budget is well-founded. If economic developments proceed in line with the macroeconomic forecast on which the bill is based, the revenue appropriations can be met.
The opinion of the State Audit Office of Hungary is founded on the assumption that the government’s macroeconomic forecast based on economic growth, underlying the bill, is achieved. The SAO makes this assumption because it could not otherwise carry out its assessment. For example, the fulfilment of the revenue estimates for a consumption tax depends mostly on the evolution of consumption, while the revenue from the social contribution tax is mostly influenced by the growth of earnings. Consequently, an assessment of the justification for the appropriations and the achievability of revenues of the bill can only be made on the basis of the same macroeconomic forecast on which the bill itself is based. This forecast must be the one drawn up by the Government, as set out in the annex to the justification to the Budget Bill. Therefore, the SAO has also assessed the soundness of the 2025 Budget Bill on the assumption that the macroeconomic developments will be in line with the government forecast on which it is based.
We all know that all forecasts are uncertain, and their fulfilment is subject to risks. This is no different for the forecast underpinning Hungary’s 2025 central budget. However, I will not list these risks here. Firstly, because a division of labour has emerged between the Fiscal Council and the State Audit Office of Hungary. According to this, the Fiscal Council assesses the feasibility of the government’s macroeconomic forecasts and draws the attention of the Government and then the National Assembly to the risks identified by the members of the Council and its expert background. The Council’s opinion was reached by consensus, and I, as a member of the Council, agreed with it. The opinion of the Council will be presented to you by the President of the Council.
The occurrence of many macroeconomic risks is independent of Hungarian economic policy. This was the case for the forecasts for 2024, and it is also the case for the risks to 2025. This year, the risks are mitigated by the fact that the Budget Bill will only be discussed at the end of November, when most of the economic and budgetary developments for 2024 have already taken place. We therefore have a better understanding of the basis on which to build next year’s budget compared to a scenario that the Budget Bill was adopted at the beginning of the summer. This year’s budget deficit exceeding the planned amount by at least HUF 1,000 billion can be explained by the fact that the base, i.e. the 2023 performance, was below expectations. This was mainly due to shortfalls in the value added tax.
We know that the 2024 developments are even worse than planned, so our first task in evaluating the bill was to assess whether its drafters had anticipated this situation. Given the lower-than-expected economic growth in the first three quarters, the government had to revise its forecast for 2024 downwards, but it has done so, so the bases for the 2025 appropriations can be considered realistic.
Dear National Assembly! The State Audit Office of Hungary summarises its assessment of the Budget Bill in two sentences: ‘the Bill on Hungary’s 2025 Central Budget is well-founded. If economic developments proceed according to the macroeconomic forecast underpinning the bill, the revenue appropriations can be met.’ As an independent audit organisation, we have come to this conclusion based on our best professional knowledge and our public methodology, which takes into account international standards. The summary assessment of last year’s SAO opinion was similar, but we added to the wording on the achievability of revenue appropriations that achievability is only ‘subject to the macroeconomic forecast of the economic trends underlying the bill’.
The additional text also shows that the SAO’s main concern is to assess the consistency of the Budget Bill. This is no small task, as the Budget Bill has to be consistent not only with the macroeconomic forecast, but also with changes in state tasks, the resource requirements of new government programmes, public sector wage increases, ongoing tax changes, demographic trends, expected changes in energy carrier prices and many other factors. I have highlighted the last three precisely because there is a difference of a few billion forints between the opinions of the drafters of the bill and those of the SAO experts. I will only briefly describe them, but they are explained in detail in the written opinion.
The appropriations for the Energy sector’s payments of HUF 296.7 billion are justified with calculations, but the SAO estimates that HUF 47.7 billion of its execution is at risk. Based on the historical data collected by the SAO, as well as domestic and international forecasts, we expect the price difference between Brent and Urals oil to be lower than the Ministry of Finance’s forecast, and thus the amount of tax to be paid in proportion to the price difference will be lower.
The risk indicated in the opinion regarding the payment obligation of financial institutions has been overridden by the publication of the government decree on extra-profit taxes, the provisions of which, according to our calculations, will result in higher revenues for the budget compared to the draft previously made available to the SAO.
In the case of the so-called ‘open-ended’ appropriations, i.e. expenditure that can be exceeded without the specific authorisation of the National Assembly, the SAO assesses whether the appropriations are sufficient to finance benefits and fulfil tasks. If not, it identifies a so-called ‘sufficiency risk’. The SAO calculates that the HUF 487.1 billion earmarked to support the reintroduction of the thirteenth-month pension is HUF 10 billion below actual needs, as the SAO, unlike the Ministry of Finance, expects a slight increase in the number of beneficiaries. The risk of exceeding the HUF 175 billion appropriation by HUF 2.1 billion for the M5, M6 motorway availability fees is based on the fact that when quantifying this appropriation, the presenter did not count on the HUF exchange rate foreseen for the justification of the Budget Bill, but on a stronger one. In the case of Operational Programme Plus for Digital Renewal, expenditure is expected to be HUF 1 billion less than the HUF 115.3 billion in expenditure appropriations. For the three expenditure estimates described above, the aggregated risk of adequacy is estimated at HUF 11.1 billion, which represents a negligible risk compared to the total expenditure.
I would like to draw the attention of the Honourable National Assembly to one more risk quantified by the SAO. The interest expenditures related to the financing of public debt, planned in the chapter entitled ‘Revenues and expenditures related to debt service’, are based on calculations and are sufficient if the annual average HUF/EUR exchange rate is close to the average annual exchange rate of HUF/EUR 397.5 assumed in the macroeconomic forecast of the Budget Bill for 2025. The actual HUF/EUR exchange rate, however, has been higher since 2 October 2024, from that date until the end of data collection for the SAO opinion, ranging between HUF/EUR 398.9 and 410.9. Consequently, the forint exchange rate will need to strengthen from its current level in order to reach the envisaged exchange rate. A higher-than-planned average annual HUF/EUR exchange rate will increase the interest expenditure on foreign currency debt compared to the forecast. According to the SAO’s calculations, a depreciation of HUF 1 against the euro would increase the annual net cash interest expenditure related to the stock of foreign currency debt and claims planned for the end of 2025 by HUF 1.3 billion compared to the planned amount.
Dear National Assembly,
After having anticipated the risks identified by the SAO, I will briefly describe the method used by the SAO to assess the Budget Bill and the results of its assessment. A detailed description of the methodology is available to all on the SAO’s website.
First, the SAO sought to answer the question: are the appropriations in the Bill on the Central Budget justified by calculations? In order to answer this question, the SAO selected 53 revenue appropriations and 201 expenditure appropriations by statistical sampling, representing 95.3% of the total revenue and 90.8% of the total expenditure. This coverage allowed the SAO to determine with 95% confidence whether the total appropriations in the bill were justified by calculations. Our assessment is that 99.7% of the total revenue appropriations and 99.9% of the total expenditure appropriations are justified. We identified deficiencies in the appropriation of HUF 100.0 billion for the proceeds from Asset Sales, as well as the expenditure appropriation of HUF 40.0 billion for the Research Fund Section within the ‘National Research, Development and Innovation Fund’ chapter, and the expenditure appropriation of HUF 150.3 billion for the Investment Fund within the ‘State Investments’ chapter. Overall, the appropriations of the Budget Bill are substantiated by calculations.
As in previous years, the justification for the appropriations set out in the 2025 Budget Bill is confirmed by the documents provided by the budgetary institutions to the SAO. At the same time, the figures for the last years show that most of the central budgetary institutions have spent significantly more during the year than their appropriations in the Act on the Budget. In some cases, this was due to the fact that the appropriations provided for in the Act on the Budget proved insufficient to carry out the necessary tasks and the government had to reallocate other appropriations to ensure the viability of these institutions. The 2025 Budget Bill significantly mitigates the risk of a similar situation by providing significant additional funding for inpatient care institutions, the Klebelsberg Centre and the Police compared to the previous year.
However, for the majority of central government bodies, the reason for exceeding their statutory appropriations is that part of the subsidies needed to carry out their tasks are not planned in the institution’s budget, but in chapter or centrally managed appropriations, and are transferred to the institution performing the task during the year. This solution is not objectionable in terms of regularity, but it means that the statutory appropriation and their institutional budgets based on it are not relevant for their management, since the various transfers significantly increase the funds available to them during the year.
The second question on the budget opinion was: can the revenue appropriations be met? To answer this question, we selected the most significant revenue appropriations in the bill, which together accounted for 75.3% of the total revenue. We assessed that 99.9% of the appropriations selected are achievable and 0.1% of the appropriations selected are at risk of being achieved. I have previously explained which appropriations are concerned. On this basis, overall, the revenues of the bill are achievable. As I stressed earlier, this assessment is based on the assumption that the government’s macroeconomic forecast will be realised. At the time of the preparation of the Opinion, the fulfilment was also conditional on the adoption by National Assembly of the pending tax amendments as proposed by the Government and the adoption of the Government Decree on Extra Profit Taxes. These two conditions have now been met.
I should point out that the SAO did not qualify EU revenues in terms of achievability, given the uncertainties surrounding the securing of EU funds and the lengthy decision-making process.
Finally, the SAO answered the question whether the government debt and deficit targets in the bill comply with the government debt rule and the legal requirements for the deficit. In this context, we also examined whether the risks identified, taking into account the reserves, jeopardise the achievement of the targets set in the bill.
The cash deficit of the central government sub-system is set at HUF 4,123.0 billion, which is 4.7% of the projected GDP of HUF 87,954.5 billion in 2025, according to the justification of the bill. The projected deficit is entirely due to the deficit of the central budget, in addition to the zero balance of the social security funds and the surplus of the earmarked public funds.
According to the detailed justification of the bill, the deficit of the general government sector in 2025, calculated according to the accrual-based EU methodology, is projected at HUF 3,272.3 billion, which is 3.7% of the projected GDP. This value does not meet the condition set out in Section 3/A (2) (b) of the Act on the Economic Stability of Hungary, which states that the deficit should not exceed 3% of GDP. Therefore, the Government has initiated an amendment to this point of the Stability Act in the bill on the foundation of Hungary’s 2025 central budget.
The Stability Act requires that the value of the government debt indicator in the Act on the Budget be set in such a way that its reduction relative to the reference year (in this case, 2024) is at least 0.1 percentage point. According to the Budget Bill, the planned government debt indicator for 31 December 2025 is 72.6%, a reduction of 0.6 percentage points compared to the ratio of 73.2% expected for 31 December 2024, thus fulfilling the quoted requirement of the Stability Act and the debt rule of the Fundamental Law.
In 2025, the projected 0.6 percentage point year-on-year decline in the government debt indicator is the result of a 6.7% increase in government debt and a projected 7.5% increase in nominal GDP, i.e. the decline in the value of the 2025 government debt ratio is due to an expected higher growth rate of government debt than nominal GDP.
In order to establish the limits of compliance with the public debt rule, the SAO carried out a sensitivity analysis. We have quantified how much the planned reduction in the government debt ratio by 0.6 percentage points, i.e. 0.5 percentage points above the legal minimum, represents an implicit reserve. By this we mean the extent to which it is able to cope with macroeconomic risk (expressed in terms of lower GDP growth) and fiscal risk (expressed in terms of higher public debt).
According to the SAO’s calculations, the government debt rule is met as long as government debt grows by no more than HUF 439.7 billion above the planned level, given the projected growth in nominal GDP, or the growth rate of nominal GDP exceeds 6.8%, given the planned government debt, which would imply a real GDP growth of 2.8% against a forecast of 3.4%. The implicit reserve of HUF 439.7 billion is significantly lower than the implicit reserve calculated in recent years (HUF 2,442.0 billion for 2024 and HUF 1,511.9 billion for 2023), which means that the implicit reserve mitigating the risk of non-compliance with the government debt rule is significantly lower in 2025 than in recent years.
What explicit reserve appropriations are included in the bill? The bill increases the amount of central reserves by 6.2% compared to the 2024 budget, which is the result of two opposite effects. The appropriation for ‘Extraordinary Government Measures’ is reduced significantly (by HUF 120 billion; less than half), and the appropriation for ‘Provisions’ is also reduced by almost 9% (HUF 66.5 billion). At the same time, the amount of central reserves is increased by the new reserve appropriation ‘Compensation of Utilities of Institutions Performing Public Functions’ (HUF 253.2 billion). Also new is the reserve appropriation ‘Reserve for the Increase of State Assets’, which provides cover for ownership transactions. The ‘Epidemiological Expenditures’ appropriation, previously planned as a reserve, will be repealed for 2025. The amount of the central reserves is reduced by a decrease of HUF 94.7 billion in the ‘Investment Fund’ expenditure appropriation compared to the 2024 appropriation.
The HUF 100 billion of appropriations for ‘Extraordinary Government Measures’ is 0.23% of the total expenditure under the bill, which does not comply with the current requirement of the Act on Public Finances, according to which this reserve must reach 0.5% of the total expenditure. Therefore, the Government has initiated the repeal of the provision on the upper and lower limit of the appropriation for ‘Extraordinary Government Measures’ in the bill on the foundation of the 2025 central budget of Hungary. In view of the utilisation data of previous years, the planned appropriations for ‘Extraordinary Government Measures’ for 2025 are sufficient to cover the expenditure incurred during the year in the normal course of business. However, it will not be sufficient in the event that extreme events generate large, extraordinary funding needs.
The additional appropriations in the reserve cannot be considered as a free reserve as they are intended to finance predefined tasks for which the subsidy amounts have not yet been allocated to the budget chapters of the future users. The largest of these is the earmarked reserve of HUF 676.6 billion. It is mainly intended to finance decisions on wage and salary increases already taken on the basis of legislation or government decisions, for which the volume of the resources required is known but which can only be allocated to the institutions in the course of the year, on the basis of an itemised assessment.
These include increases in the salaries of employees in public education, vocational training, the research sector and the water sector, as well as the expected increase in the minimum wage and the guaranteed minimum wage, and the increase in benefits linked to the average earnings of the national economy. Planned expenditure also includes the increase in the value of subsidies to higher education institutions run by public trust funds performing a public function. The provision also includes an additional item for expenditure related to the war in Ukraine. According to our calculations, the appropriation is sufficient to finance statutory and already announced public sector salary increases. The appropriation is open-ended, which allows the Government to finance additional wage measures from this appropriation, but this would increase the deficit.
The ‘Investment Fund’ allocation cannot be used to support new tasks either, as it has already been allocated at the time of programming to finance previously defined tasks. In fact, compared to the HUF 179.5 billion demand foreseen in the government decisions, the allocation is only HUF 150.3 billion. Consequently, the ‘Investment Fund’ allocation was considered not to be justified by calculations.
The use of the two new reserve appropriations, ‘Compensation of Utilities of Institutions Performing Public Functions’ and ‘Reserve for the Increase of State Assets’, is also earmarked, as their names indicate.
The SAO’s assessment identified a total risk of HUF 69.7 billion, which is lower than the amount of the planned reserves, i.e. the reserves are sufficient to cover the quantified risks. However, if the risks identified by the SAO were to materialise and the reserves were to be used to address them (otherwise the deficit would increase), this would further reduce the amount available to finance the budgetary expenditure required to cover unforeseen events.
The government has several possibilities to finance the additional tasks that arise in the course of the year by reallocating appropriations that are not planned as reserves. Consequently, the relatively low level of reserves does not mean that it is not possible to finance a large amount of extraordinary expenditure which may become necessary. However, it would divert resources from other known tasks, thus not only undermining the implementation of the budget according to plans, but also reducing or postponing the implementation of planned tasks.
I would also like to point out that uncommitted reserves could be used not only to finance unforeseen additional tasks, but also to compensate for revenue shortfalls, since if these reserve appropriations are not used by the government, the resulting savings will reduce the deficit. There are no such reserves in the Budget Bill, which means that any revenue shortfall will either increase the deficit, or planned expenditure will have to be rescheduled, or revenue-increasing measures will have to be taken. However, it is also true that increasing reserves would require a reduction in actual expenditure appropriations, which the proposer of the bill wanted to avoid.
The State Audit Office of Hungary is not responsible for assessing the allocation policy reflected in the budget. However, we will inevitably look to see whether the effort to remedy the shortcomings identified in the SAO’s audits during the year can be read in the figures. In this context, we have noted that the appropriations for the Police, the Prosecutor’s Office and the Klebelsberg Centre, which were recently audited by the SAO, show a significant surplus compared to this year’s appropriations. In its previous audit, the SAO drew attention to the lack of resources to maintain the infrastructure of the water utilities sector and the high level of water leakage due to the poor state of the water pipes. The appropriations foreseen for the improvement of the water network in 2025 are lower than in 2024. However, the creation of the Water Utilities Development and Compensation Fund, which will be included for the first time in the 2025 Budget Bill with an allocation of HUF 122 billion, is an important step towards the balanced management of the sector. This year, our audits in the areas of child protection and elderly care revealed that a significant number of public institutions are unable to meet the conditions for permanent operating licences. As a modest step forward, the Budget Bill provides an additional HUF 415.3 million for the infrastructural development of state-run child protection institutions.
Dear National Assembly! In view of the numerical soundness of the bill and the low amount of revenue and sufficiency risks, I recommend that the National Assembly approve the Budget Bill, but this is conditional on the adoption of the two legal amendments that will create consistency between the bill submitted and the legislation that will enter into force from the beginning of next year.
Thank you for your kind attention.