(Bloomberg) -- Hungary announced it will raise the minimum wage by 40% over three years in a move Prime Minister Viktor Orban expects to boost the recession-hit economy, but which critics say may fuel inflation.
The government seeks to jumpstart economic growth ahead of general elections in 2026, with Orban’s Fidesz party trailing opposition leader Peter Magyar’s Tisza in most polls. Magyar has also promised big increases to the minimum wage, which at 266,800 forint ($677) monthly is ranked as the second-lowest in the European Union after Bulgaria.
The wage agreement foresees a 9% raise in the minimum wage next year, followed by 13% and 14% increases in 2026 and 2027 respectively. While the raises are partly aimed at keeping workers from seeking employment abroad, Orban conceded that the salary hikes were based on an “optimistic” scenario where economic growth and productivity increase hand-in-hand.
“It’s a big question whether the economy can handle this wage level,” Orban said as he joined employers and labor unions in signing the agreement. “The government is ready to assist employers with steps that make it possible to profitably operate their companies even with these salaries.”
All sides agreed to review the wage hike targets should key indicators, such as for economic growth and inflation, miss the government forecasts.
The central bank is particularly focused on keeping inflation under control after annual headline price growth spiked to more than 25% early last year, before retreating to close to policymakers’ 3% target last month.
“I would caution every decision maker against boosting economic policy at the cost of higher inflation,“ National Bank of Hungary Deputy Governor Barnabas Virag told a parliamentary hearing on Monday, Telex news website reported. At the same time, he said the minimum wage increases may not lead to inflationary pressures if they come out of increased corporate profits.
However, that may not always be the case, especially when it comes to less efficient small- and medium-sized companies that have struggled to match salary hikes with productivity gains.
Accounting for inflation, real wage growth is estimated at an average 7% annually in the next two years, which is “certainly not in line with productivity growth in the medium term,” said Mariann Trippon, a Budapest-based economist at Intesa Sanpaolo SpA’s CIB Bank.
“In 2026-2027, if these real wage dynamics do not moderate, this could trigger an increase in cost-side and demand-side inflationary pressures and company closures,” Trippon said.
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