IMF warns Hungary 2026 deficit will reach 7.5 percent and urges tax overhaul

The International Monetary Fund published its 2026 Article IV concluding statement for Hungary on 8 October, projecting the country's general government deficit at 7 to 7.5 percent of GDP for the year and calling for a comprehensive fiscal adjustment. The statement was released following a mission led by Srikant Seshadri that ran in Budapest from 23 September to 6 October. It identified weak investment, a widening gap between wages and productivity, and pre-election spending by the previous Orbán administration as the principal drivers of the shortfall. The mission was the first Article IV consultation conducted with the government of Prime Minister Péter Magyar, whose Tisza party took office in May 2026 following April elections that ended sixteen years of Fidesz rule.

Scale of the deficit

Hungary's Central Statistical Office (KSH) published preliminary data on 2 October showing a first-half deficit of HUF 2,810 billion, equivalent to 6.2 percent of GDP. That compares with HUF 310 billion, or 0.7 percent of GDP, in the same period of 2025 — a deterioration of 3.3 percentage points. Government expenditure grew 10.8 percent year-on-year while revenue rose only 2.9 percent; employee compensation alone increased 23.1 percent, adding HUF 1,044 billion. Capital formation fell 21.5 percent. The central government sub-sector recorded a shortfall of HUF 3,107 billion for the half-year, partly offset by a local-government surplus of HUF 313 billion.

The IMF projected the full-year 2026 deficit at 7 to 7.5 percent of GDP, noting that pre-election commitments made by the Orbán cabinet had not been fully reflected in Hungary's official budget submissions. Without fiscal adjustment, the Fund warned, the deficit would continue to exceed Maastricht criteria throughout the medium term and public debt would remain on a rising path from its current level of approximately 74 percent of GDP. That trajectory would formally trigger obligations under the European Union's Excessive Deficit Procedure.

IMF recommendations

The Fund's concluding statement called for a front-loaded consolidation to bring the deficit to approximately 5 percent of GDP by 2027 — described as a credibly large downpayment toward Maastricht criteria — and to 3 percent by 2029. To achieve those targets it recommended phasing out subsidised mortgage and corporate lending programmes, estimating annual savings of approximately HUF 300 billion, or roughly 0.3 percent of GDP. It also called for narrowing preferential VAT rates and exemptions, which the Fund said primarily benefit higher-income households, and for replacing Hungary's family tax allowances with child tax credits.

The IMF described Hungary's personal income tax as the least progressive in the OECD, with a flat 15 percent headline rate and allowances that disproportionately favour higher-earning households. A more progressive schedule combined with child credits, the Fund said, would raise both revenue and labour-market participation. On energy, it recommended lowering the thresholds at which households receive subsidised prices and expanding means-tested cash transfers to reduce fiscal costs while protecting vulnerable consumers. It also noted that government guarantees extended to state-owned enterprises amount to 14 percent of GDP and that state-owned enterprise assets represent 25 percent of GDP — concentrations the Fund said expose public finances to substantial contingent liabilities.

Monetary and structural framework

Beyond fiscal policy, the statement called for the National Bank of Hungary to maintain a cautious monetary stance until disinflation is durably established. It noted the central bank's already-announced reduction of its official inflation target from 3 to 2.5 percent, effective January 2028, and described that move as consistent with a credible path toward euro area entry. The Fund also called on the authorities to strengthen the operational autonomy of the central bank from the government — a reference to governance changes introduced under the Orbán administration — and to activate debt-to-income limits for mortgage borrowers given signs of housing market overvaluation.

On structural matters, the Fund noted that Hungary regulates more occupations under licensing rules than any other EU member state and recommended reducing those restrictions to improve competition and labour mobility. It also flagged that over 30 percent of Hungarian jobs are highly exposed to artificial intelligence displacement and that the workforce lacks the complementary skills to offset that exposure. The IMF projected GDP growth at approximately 2 percent for 2026, rising to around 2.5 percent over the medium term as EUR 16 billion in previously frozen EU cohesion and recovery funds begin to disburse following the Magyar government's anti-corruption commitments to Brussels.

Government position

Finance Minister András Kármán, a former senior executive at Erste Bank and board member at the European Bank for Reconstruction and Development, told the National Assembly that Hungary's economic policy requires a change of direction rather than a simple course correction, and committed to meeting euro adoption criteria by 2030, Bloomberg reported. That timetable implicitly requires reaching the Maastricht deficit ceiling before the end of this decade, aligning with the IMF's 2029 target. However, as of 8 October the government had not publicly confirmed acceptance of the Fund's politically sensitive recommendations on family allowances and VAT, measures that Kármán had previously said Hungary has no need to implement under closer IMF programme engagement. The government's separate proposal for a 1 percent annual wealth tax on fortunes above HUF 1 billion, announced on 6 October, reflects an alternative approach to widening the revenue base that does not alter the flat 15 percent income tax rate.

Sources

• International Monetary Fund — Hungary: Staff Concluding Statement of the 2026 Article IV Mission (republished by Disruption Banking)
• International Monetary Fund — Hungary: Staff Concluding Statement of the 2026 Article IV Mission (republished by Bytes Europe)
• Hungary Central Statistical Office (KSH) — General government deficit H1 2026 (reported via Budapest Business Journal)
• Bloomberg Law — Hungary's New Finance Chief Pledges Euro Path, Policy U-Turn
• Bloomberg — Hungary Backs Wealth Tax, Euro, Fiscal Transparency, Karman Says
• International Monetary Fund — Hungary: Staff Concluding Statement of the 2025 Article IV Mission
• International Monetary Fund — Hungary: Executive Board concludes 2025 Article IV Consultation