Budapest's Fiscal Crisis: A Report Unveils Dire Financial Straits
A comprehensive municipal report depicts Budapest on the brink of insolvency amid rising solidarity contributions and financial mismanagement.
A recent report released by the Budapest City Council lays bare the city's precarious financial situation, detailing a trajectory toward potential insolvency.
Spanning 179 pages, the document underscores how the current financing system undermines constitutional rights, with solid contributions to the national budget increasing annually, particularly in the form of solidarity contributions, while state support remains stagnant.
Key statistics illustrate this alarming trend: whereas in 2018, the Budapest municipality allocated only 3.3% of its expenditures to solidarity contributions, projections suggest this figure could soar to nearly 25% by 2025. In contrast, allocations for public transport—the capital’s most vital service—are expected to drop from 57.7% to 43.7% over the same period.
Notably, the report highlights that the obligation to pay solidarity contributions has existed since 2018, predating the current mayor Gergely Karácsony, yet the amount required has consistently increased.
Former mayor István Tarlós criticized the expenditure of 50 billion HUF on the Rákosrendező project under his administration as ill-fated, while asserting that such increases alone do not render the contributions unconstitutional.
David Vitézy from the Podmaniczky Movement, appearing on a local programme, stated that Budapest is facing a multi-layered crisis characterized by:
Financial Crisis: The Budapest Assembly's decision to withhold solidarity tax has led the Curia to invalidate the city's budget.
Currently, there is a discrepancy of 51 billion HUF between the solidarity contribution demanded by the government and the amount the city intends to pay.
Leadership Crisis: Neither the Budapest Transport Center (BKK) nor the Budapest Transport Company (BKV) have a CEO, and the appointments of deputy mayors have been deferred for over six months.
Supervisory committees are also reported to be non-functional.
Political Crisis: The previous majority coalition of the Democratic Coalition (DK) and the Socialist Party (MSZP) in the municipal assembly has been markedly diminished, while new parties like the Tisza Party and the Podmaniczky Movement have gained significant influence.
The report indicates a structural transformation in the city’s economy, with an increasing portion of local business tax revenue needing to be diverted to the national budget.
Between 2018 and 2024, Budapest is projected to transfer a total of 235 billion HUF in solidarity contributions, amounting to 17.1% of its business tax revenue.
This severely impacts the capital's budget.
The report employs a three-tier model to assess financial sustainability:
Sustainable Management: Revenues cover both operating expenses and investments.
Critical Level: Revenues only meet operating expenses, leaving no room for improvements.
Unsustainable Situation: Revenues fall short even for operations.
According to the findings, Budapest has already crossed into the critical zone and is rapidly moving toward unsustainability, indicating that there are not enough funds for mandatory services, let alone necessary upgrades and maintenance.
The document differentiates between mandatory and discretionary tasks.
Current levies threaten even the former, raising direct constitutional issues regarding the provision of essential services such as public transportation, street lighting, and road maintenance—obligations enshrined in law—while discretionary commitments, like cultural support and environmental programs, can only be sustained with available funds.
As the situation deteriorates, the impact on public services is already palpable.
Shortages in funding threaten core services, with alarming predictions that the quality of community transport, public lighting, social services, road maintenance, cultural institutions, and elderly care facilities may significantly decline or even cease altogether if trends continue.
Independent organizations have corroborated the city’s assessment.
The State Audit Office issued warnings of financial unsustainability in 2023, and by 2025, a comprehensive inspection of the budget is planned.
Moody's credit rating agency has already downgraded Budapest’s outlook to negative as of late 2024, indicating growing concern from the international financial community regarding the city’s solvency.
Legal and constitutional concerns abound as well.
The current situation raises serious constitutional questions due to a disproportionate burden imposed on the city.
The solidarity contribution and other deductions exceed thresholds that infringe on local governments' financial autonomy as stipulated in the Fundamental Law and European Charter of Local Self-Government.
Previous judgments by the Constitutional Court highlight that financial autonomy is breached when a municipality’s net contribution endangers its ability to meet mandatory tasks.
This predicament is reflective not only of Budapest's struggles but also of a broader trend towards centralization across Hungary.
The financial crisis is the result of numerous actions: cuts, reductions in support, credit freezes, and resource withdrawals.
Throughout the 2020s, Budapest’s financial maneuverability has steadily diminished due to the increasing solidarity contributions and the real-term decrease of state support, coupled with restrictions on borrowing and the challenges associated with accessing EU funds.
The municipality has had to rely on operational loans throughout the year to cover mandatory contributions and basic expenses, creating a vicious cycle where high interest rates exacerbate budget imbalances and necessitate further borrowing.
The report reveals that Hungary's challenges regarding EU funding are similarly precarious.
With the European Recovery Fund set to distribute 4,200 billion HUF (approximately 11.5 billion EUR), concerns arise whether the government can fulfill required conditions in light of ongoing political disputes and missed deadlines.
If Hungary fails to secure funding from the Recovery Fund, it may exacerbate current strains on public spending and crash the already dubious confidence of international investors, possibly prompting a downgrading of Hungary’s credit rating.
As municipal and national governments grapple with fiscal stress, the implications of budgetary decisions loom significantly over the capital and beyond.
Spanning 179 pages, the document underscores how the current financing system undermines constitutional rights, with solid contributions to the national budget increasing annually, particularly in the form of solidarity contributions, while state support remains stagnant.
Key statistics illustrate this alarming trend: whereas in 2018, the Budapest municipality allocated only 3.3% of its expenditures to solidarity contributions, projections suggest this figure could soar to nearly 25% by 2025. In contrast, allocations for public transport—the capital’s most vital service—are expected to drop from 57.7% to 43.7% over the same period.
Notably, the report highlights that the obligation to pay solidarity contributions has existed since 2018, predating the current mayor Gergely Karácsony, yet the amount required has consistently increased.
Former mayor István Tarlós criticized the expenditure of 50 billion HUF on the Rákosrendező project under his administration as ill-fated, while asserting that such increases alone do not render the contributions unconstitutional.
David Vitézy from the Podmaniczky Movement, appearing on a local programme, stated that Budapest is facing a multi-layered crisis characterized by:
Financial Crisis: The Budapest Assembly's decision to withhold solidarity tax has led the Curia to invalidate the city's budget.
Currently, there is a discrepancy of 51 billion HUF between the solidarity contribution demanded by the government and the amount the city intends to pay.
Leadership Crisis: Neither the Budapest Transport Center (BKK) nor the Budapest Transport Company (BKV) have a CEO, and the appointments of deputy mayors have been deferred for over six months.
Supervisory committees are also reported to be non-functional.
Political Crisis: The previous majority coalition of the Democratic Coalition (DK) and the Socialist Party (MSZP) in the municipal assembly has been markedly diminished, while new parties like the Tisza Party and the Podmaniczky Movement have gained significant influence.
The report indicates a structural transformation in the city’s economy, with an increasing portion of local business tax revenue needing to be diverted to the national budget.
Between 2018 and 2024, Budapest is projected to transfer a total of 235 billion HUF in solidarity contributions, amounting to 17.1% of its business tax revenue.
This severely impacts the capital's budget.
The report employs a three-tier model to assess financial sustainability:
Sustainable Management: Revenues cover both operating expenses and investments.
Critical Level: Revenues only meet operating expenses, leaving no room for improvements.
Unsustainable Situation: Revenues fall short even for operations.
According to the findings, Budapest has already crossed into the critical zone and is rapidly moving toward unsustainability, indicating that there are not enough funds for mandatory services, let alone necessary upgrades and maintenance.
The document differentiates between mandatory and discretionary tasks.
Current levies threaten even the former, raising direct constitutional issues regarding the provision of essential services such as public transportation, street lighting, and road maintenance—obligations enshrined in law—while discretionary commitments, like cultural support and environmental programs, can only be sustained with available funds.
As the situation deteriorates, the impact on public services is already palpable.
Shortages in funding threaten core services, with alarming predictions that the quality of community transport, public lighting, social services, road maintenance, cultural institutions, and elderly care facilities may significantly decline or even cease altogether if trends continue.
Independent organizations have corroborated the city’s assessment.
The State Audit Office issued warnings of financial unsustainability in 2023, and by 2025, a comprehensive inspection of the budget is planned.
Moody's credit rating agency has already downgraded Budapest’s outlook to negative as of late 2024, indicating growing concern from the international financial community regarding the city’s solvency.
Legal and constitutional concerns abound as well.
The current situation raises serious constitutional questions due to a disproportionate burden imposed on the city.
The solidarity contribution and other deductions exceed thresholds that infringe on local governments' financial autonomy as stipulated in the Fundamental Law and European Charter of Local Self-Government.
Previous judgments by the Constitutional Court highlight that financial autonomy is breached when a municipality’s net contribution endangers its ability to meet mandatory tasks.
This predicament is reflective not only of Budapest's struggles but also of a broader trend towards centralization across Hungary.
The financial crisis is the result of numerous actions: cuts, reductions in support, credit freezes, and resource withdrawals.
Throughout the 2020s, Budapest’s financial maneuverability has steadily diminished due to the increasing solidarity contributions and the real-term decrease of state support, coupled with restrictions on borrowing and the challenges associated with accessing EU funds.
The municipality has had to rely on operational loans throughout the year to cover mandatory contributions and basic expenses, creating a vicious cycle where high interest rates exacerbate budget imbalances and necessitate further borrowing.
The report reveals that Hungary's challenges regarding EU funding are similarly precarious.
With the European Recovery Fund set to distribute 4,200 billion HUF (approximately 11.5 billion EUR), concerns arise whether the government can fulfill required conditions in light of ongoing political disputes and missed deadlines.
If Hungary fails to secure funding from the Recovery Fund, it may exacerbate current strains on public spending and crash the already dubious confidence of international investors, possibly prompting a downgrading of Hungary’s credit rating.
As municipal and national governments grapple with fiscal stress, the implications of budgetary decisions loom significantly over the capital and beyond.
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