Population ageing and climate change will strain Hungary’s public finances. The 2026 Economic Survey of Hungary sets out recommendations to rebuild fiscal space and lift growth. The budget and medium-term fiscal plan that the new government is preparing will provide key opportunities to start addressing these challenges.
by Pierre-Alain Pionnier and Michaël Sicsic, OECD Economics Department
Fiscal pressures are rising
The fiscal deficit has systematically been close or above 5% of GDP since 2020 and is expected to reach 6.7% of GDP in 2026. Looking ahead, Hungary will face one of the largest increases in pension expenditure in the EU over the next decades, and climate-related costs are also rising. Without offsetting measures, the debt-to-GDP ratio, at 74.6% of GDP in 2025, would reach 180% by 2050.
Financing ageing- and climate-related expenditure will require additional fiscal space of around 8% of GDP by 2070 to ensure public debt sustainability (Figure 1, Panel A).
Balanced reforms are needed to safeguard public finances. Those advocated in the 2026 Economic Survey of Hungary (OECD, 2026) would keep public debt below 80% of GDP in the long term. Around 40% of the adjustment would come from reforming pensions and raising public spending efficiency, and the rest from higher tax revenues, either due to higher or broader taxes, or to the indirect effect of structural reforms, mainly through higher employment (Figure 1, Panel B).
Early action and the appropriate sequencing of reforms are essential. Several measures could be implemented in the near term without weighing on growth, such as:
- Securing access to EU funds, which the new government is actively working on;
- Reducing inefficient tax expenditures;
- Raising recurrent property and inheritance taxes;
- Streamlining subsidies, especially those related to fossil-fuels and housing.
Increasing tax revenues with an efficient and fair tax system
Multiple levers can be actioned to reduce inefficient tax expenditures. The 2026 PIT exemption for mothers that was decided by the previous government will cost 0.6% of GDP, yet international evidence suggests that expanding early childcare supply and aligning family leave entitlements with international practices, for both men and women, would support fertility and female employment more efficiently. While Hungary has the highest standard VAT rate in the OECD, reduced rates and exemptions narrow fiscal revenues and mainly benefit richer households. Phasing out reduced rates on non-essential goods and providing targeted cash transfers instead would make the tax system more efficient.
Recurrent taxes on immovable property are among the least harmful to economic activity, but they are underused in Hungary (Figure 2). Introducing a minimum local tax would strengthen municipal revenues for climate adaptation and affordable housing investment. Nevertheless, the tax base should also better reflect the market value of properties. To secure political acceptability, this reform should be gradual and protect low-income homeowners, e.g. with appropriate thresholds and the possibility to defer tax payments until a property is sold.
Further tax reforms can support growth and equity. The labour tax wedge for low-income earners is well above the OECD average due to the flat PIT rate in Hungary. Introducing PIT progressivity would strengthen labour market participation, increase the responsiveness of tax revenues to economic activity, and benefit 90% of taxpayers (Sicsic, 2026). Together with a better alignment of capital and labour taxation, this reform would raise tax revenues by 0.5% of GDP. Making the inheritance tax progressive and extending it to direct relatives would further raise tax revenues and strengthen equality of opportunities, in a country where income mobility is low.
Reforming pensions and improving spending efficiency
As Hungary’s pay-as-you-go pension system provides relatively generous benefits, and a special scheme allows half of women to retire early, the Survey recommends reforming pensions by:
- Linking the statutory retirement age and women’s eligibility for early retirement to life expectancy, while ensuring that the time spent in retirement continues to increase.
- Capping the 13th and 14th months of pension benefits that have been granted since 2022.
These measures would reduce pension spending by 2% of GDP by 2070 and raise social contributions by 1% of GDP through higher employment.
There is also room to raise spending efficiency by scaling back insufficiently targeted housing subsidies, and restructuring household energy support by moving from price caps to targeted cash transfers for vulnerable households. This would increase incentives for saving energy and renovating dwellings, reduce the exposure of public finances to fluctuations in global energy prices, and lower dependence on energy imports. In the longer term, relying on cost-benefit analysis in public procurement more systematically, improving the targeting of social transfers, and conducting regular spending reviews would further improve spending efficiency.
Supporting economic growth
Securing fiscal sustainability finally requires raising Hungary’s potential GDP. Some of the fiscal reforms advocated above will contribute to this objective, in addition to their direct impact on government revenues. For example, increasing PIT progressivity is expected to raise potential GDP by 1% in 2050 by attracting more low-income workers into the labour force. Encouraging female employment by rethinking family-leave entitlements and expanding early childcare supply, scaling up infrastructure investment, refocusing business investment support towards SMEs and R&D, and raising educational attainment would further lift economic output, with a total estimated gain of 8% of GDP by 2050.
References
OECD (2026), OECD Economic Survey of Hungary 2026, OECD Publishing, Paris. https://doi.org/10.1787/1d93d51d-en
Sicsic, M. (2026), Quantifying the impact of a personal income tax reform on tax revenues, growth and inequality in Hungary, OECD Economics Department Working Papers, No. 1868, OECD Publishing, Paris, https://doi.org/10.1787/f5c8c874-en.