(Bloomberg) -- Hungarian Prime Minister Viktor Orban is set to rip up his budget-consolidation promises to unleash a wave of spending before what’s shaping up to be the toughest election of his more than decade-long rule, people familiar with the situation said. The forint erased gains against the euro.
The shift may come after the US presidential election in November and credit-rating reviews of the country’s fiscal health scheduled for later this year, according to the people, who asked not to be identified as the discussions are private. Hungary is rated at or near the lowest investment grade.
The template for the 2026 vote is the same as two years ago, when record spending helped Orban retain a parliamentary super-majority, albeit at huge economic cost. Measures including an almost $2 billion tax rebate fueled the European Union’s fastest inflation and culminated in a recession. It also led to a cost-of-living crisis that persists now.
The government is preparing for 1 1/2 years of spending in the run-up to the 2026 election, which will result in an overshoot of budget-deficit goals unveiled this year, according to one of the people. Orban has no regrets about the toll from the last vote since the expenditure ensured his victory, that person said.
In a statement, the Finance Ministry called the report on a looming fiscal turn “fake news.” Minister Mihaly Varga is scheduled to talk about budget policy at an economics conference on Friday.
The forint erased intra-day gains against the euro after rising to the strongest level in more than two weeks earlier on Thursday. The Hungarian currency traded at 393.22 to the euro at 6:22 p.m. in Budapest.
The problem for Orban this time around is that Hungary’s budget is stretched: The fiscal shortfall was 6.7% of output last year. What’s more, almost €20 billion ($22.2 billion) of EU funds remain frozen on corruption concerns, economic growth is sputtering and the forint is weak.
In 2022, market blowback was so severe that the central bank only averted a currency crisis by raising interest rates to the EU’s highest level. They’ve since been cut to 6.75% from 18%, though remain the bloc’s highest.
Central bank Governor Gyorgy Matolcsy, a close Orban ally before they fell out over spending, on Thursday decried the government’s budget policy.
“It’s unacceptable and life-threatening to carry such a budget load through this decade,” he told a conference. “It always starts with a good deficit forecast at the start of the year and then it needs to be corrected.”
The government announced a consolidation plan this year, including a delay in some investments and special corporate taxes. Even so, the European Commission hit Hungary with its excessive-deficit procedure in June, requiring action to avert possible fines.
Orban is racing to soothe concerns over the economy, political scandals and graft that have driven support for his opponents. Peter Magyar’s Tisza party came from nowhere to grab almost 30% in June’s EU elections — the best opposition showing since 2010.
The premier said in July he’ll seek to double child-tax credit in 2025, while his cabinet is working on a subsidized loan program for young, skilled technicians and help for small businesses. Tax breaks for home purchases are also possible.
The Finance Ministry says a fledgling stimulus plan won’t imperil the fiscal trajectory. It projects the budget gap narrowing to 4.5% this year, 3.7% in 2025 and 2.9% in 2026.
While the government plans to meet this year’s deficit goal, there’s no intention to do so beyond that unless markets force a correction, one of the people said.
Fiscal conservatism characterized Orban’s initial stint as premier from 1998, and most of the first decade since he returned to power in 2010. That kept foreign investors at bay, insulating the economy as he constructed his self-styled illiberal democracy.
That changed during the pandemic, when spending spiraled — also due to the 2022 election. In a speech in July, Orban talked about both extra stimulus and slashing debt to about 30% of output, from 76% now.
How he plans to achieve that may be revealed in November’s draft budget, which is arriving later than usual. Orban said he’s delaying the plan because victory in the US presidential election for Donald Trump, whom he backs, may herald a quicker end to Russia’s war in Ukraine and permit a “peace budget” with more scope for spending.
--With assistance from Veronika Gulyas and Patrick Donahue.
(Updates with Finance Ministry comment in fifth paragraph.)
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