Hungary’s Public Debt Rule in the Procrustean Beds of Inflation

Abstract

The ratio of public debt to gross domestic product is one of the most important indicators of fiscal sustainability, and its reduction is a central element of the Hungarian public debt rule. Objective: The study examines how rising inflation affects the public debt ratio in the short and medium term. Method: The article analyses the effect of inflation on nominal output, the increase in budget expenditures, and the lagged adjustment of the implicit interest rate on public debt, based on Hungarian data between 2022 and 2025. Results: The surge in inflation temporarily created favorable conditions for reducing the public debt ratio, but at the same time increased budget expenditures and, with some delay, interest burdens. Conclusions: Accelerating inflation cannot be considered a sustainable debt reduction tool because its effects on increasing budget expenditures remain persistent, making it difficult to reduce the public debt ratio. This may necessitate fiscal adjustment, which may also slow down growth.