Developments in public debt in Hungary between 1998 and 2012: trends, reasons and effects

Over the past decade, increasing public debt has become one of the most important problems for the Hungarian economy, significantly constraining the room for manoeuvre for fiscal policy and in some periods even calling into question its sustainability. As a percentage of GDP, gross public debt increased in the first half of the decade, mostly as a result of the high government deficit, after which economic stagnation and the eventual recession, along with a weakening exchange rate prevented a reduction of the debt ratio with tighter fiscal policy. By the end of the decade, public debt stood at around 80 per cent of GDP, which is very high compared to Hungary’s level of economic development and to regional competitors. As a result of tight fiscal policy and the one-off impact of the transformation of the private pension system, the rate of public debt has been declining modestly since 2010, but this has also been offset by the revaluation of FX debt as a result of HUF weakening. In this paper, we discuss the factors that contributed to the historically high public debt-to-GDP ratio by the end of the 2000s and identify the different subsections of the period between 1998 and 2012 that led to this situation. We treat the consequences of high public debt separately, present a survey of international data to compare debt ratios and note the differences between Hungary and other EU member states in terms of developments in public debt during the crisis.