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"Too High" Hungary GDP Growth Leads to EU Cutting Recovery Fund by EUR 1.3 Billion

"Too High" Hungary GDP Growth Leads to EU Cutting Recovery Fund by EUR 1.3 Billion

Due to a much higher than forecasted economic growth, Hungary will be eligible for less non-reimbursable funding from the European Union’s coronavirus recovery fund than previously expected, leftist daily Népszava has learned.
Based on the European Commission’s latest economic forecast, instead of the previously expected HUF 2,511 billion (EUR 7.2 bn), Hungary will receive HUF 2,080 billion (EUR 5.9 bn) from the post-pandemic recovery fund between 2021 and 2026.

This is an 18 percent, or a EUR 1.3 billion (HUF 470 bn) decrease compared to the original amount, according to the calculation of Zsolt Darvas, a senior expert at the Brussels-based Bruegel think-tank. The final figure will be set by the EC based on the statistics expected in June, but Darvas says it will probably be close to his estimates.

The lower amount of support is due to Hungary’s GDP growth significantly exceeding expectations in both 2020 and 2021: the decline was only 4.7 percent instead of the 6.4 percent forecast for 2020, while in 2021 the economy is expected to expand by 6.5 percent instead of the previously-estimated 4 percent.

The legislation regarding the recovery fund stipulates that the calculation of the maximum financial contribution shall be updated by June 30, 2022 to take into account the actual results for the change in aggregate GDP in 2020 and 2020-2021.

The changes will affect 30% of the EU package, which the Commission has estimated in advance. The amount of this depends partly on the 2019 data, the population and GDP per capita, but also on the economic growth in 2020 and 2020-2021 combined, Zsolt Darvas explained.

Aggregate data for 2020-2021 already show that in 15 Member States, including Hungary, economic performance in 2021 exceeded the 2019 GDP, which means that this part of the support is no longer available to these countries, the expert said. Last week’s forecast showed that Hungarian GDP in 2021 was 1.5 percent higher than in 2019.

“With an 18% cut of its recovery funding, I calculated that Hungary is losing the third highest amount among the member states. Belgium comes first with 24 percent, the Netherlands second with 21 percent,” added Darvas.

However, the analyst pointed out that Hungary losing 18% or around HUF 470 billion of the recovery funds is not a huge problem given the much faster than expected economic growth, as it means the Hungarian budget has received much more tax and social contribution revenue. He calculated that between 2020 and 2022, the treasury could see an extra EUR 6.5 billion (HUF 2,300 bn) in tax revenues, topped up by a further EUR 8.8 billion (HUF 3,124 bn) from higher-than-expected inflation.

The reduced amount of financial resources, however, doesn’t come as a surpise to the Orbán government. In December, Finance Minister Mihály Varga estimated that the strong performance of the economy would result in Hungary receiving roughly HUF 440 billion less money. Darvas’ calculation is about 30 billion more than that.

Meanwhile, the European Union is still withholding Hungary’s coronavirus recovery funding. The Commission says it is due to concerns that Hungary’s spending plan doesn’t do enough to prevent corruption, while the Budapest claims the decision is politically motivated and is a punisment for the Orbán government’s child protection law.
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