Hungary govt pushes Budapest to brink of bankruptcy; EU defence funds delayed

In a highly unusual government decree, published overnight Tuesday in the National Gazette, the Hungarian government ordered the termination of legal cases against its controversial “solidarity” tax – a move that legal experts and opposition politicians called an outright breach of democracy and the rule of law. The measure appears targeted at Budapest, led by liberal Mayor Gergely Karacsony, who has long been at loggerheads with the government of PM Viktor Orban. The solidarity tax, imposed by the government on municipalities in 2021 and widely seen as designed to starve opposition municipalities of funds, effectively centralised local tax revenues. Budapest challenged the tax, which has been steadily increased since it was introduced, and after years of litigation the courts ruled the government had unlawfully deducted 28.3 billion forints (75 million euros), plus 6 billion in interest, from the capital. Following an appeal by the State Treasury, the Supreme Court (Kuria) fully upheld the ruling. The government decree now overturns that decision retroactively and could push the city further toward bankruptcy. “The government has had many low points in dismantling the rule of law and constitutionalism over the past 16 years. However, I do not recall anything like what happened on Tuesday,” Karacsony wrote on Facebook. “If this can be done to Budapest, then no one in this country is safe.” The mayor also announced he plans to turn to the EU Commission, arguing that the decree violates the EU Charter of Fundamental Rights. The Budapest branch of the opposition Tisza party said the government’s move attacks not only the capital but also the last bastions of the rule of law in Hungary, calling it a milestone on the “Belarusian path”.

The EU Commission could delay the disbursement to Hungary of loans from the 150-billion-euro Security Action for Europe (SAFE) fund until after the April general election, further aggravating the country’s dire financial situation, hvg.hu reported. Initially, Orban’s government didn’t support the EU initiative to issue low-cost, long-term loans for member states to spend on defense procurement when it was approved in May, but it reversed its position last summer when it realised the bonanza on offer. Hungary applied for loans worth 17.4 billion euros, but was ultimately allocated 16.2 billion euros in September, the third highest share of the SAFE fund. The government had hoped the first tranche – around 2 billion euros – would arrive before the April 12 election and help stabilise the budget. Economy Minister Marton Nagy implied the SAFE loan would be treated as cheap credit and save the Hungarian budget around 125 billion forints per year. Hungary has the highest debt servicing ratio in the EU, amounting to 5 per cent of GDP. However, the EU’s Rule of Law Conditionality Mechanism, in force since January 2021, which allows Brussels to suspend or reduce funds to member states if breaches of rule-of-law principles threaten the bloc’s budget, has intruded on Hungary’s plans. Although Kaja Kallas, the EU’s High Representative for Foreign Affairs and Security Policy, had said the conditionality mechanism would not apply to SAFE funds and loan amounts would be based solely on the national defence spending plans submitted to the EU Commission, there has since been a clear shift in thinking. In January, EU Budget Commissioner Piotr Serafin announced that the SAFE fund would indeed fall under the conditionality mechanism. Hungary has not published its national defence program, fuelling speculation about the allocation of the funds and reinforcing perceptions of a lack of transparency. By contrast, defence plans from Estonia, Finland, Greece, Italy, Latvia, Lithuania, Poland and Slovakia were approved on January 26. Despite this, Gergely Gulyas, head of the Prime Minister’s Office, remains optimistic a decision could be reached this week. Even then, the government would still need to sign a contract with the EU Commission to secure the initial 15 per cent advance payment, and the European Parliament must approve the joint EU loan with a two-thirds majority.