While an economic wunderkind in the nineties, Hungary has featured amongst the basket cases in the European Union in recent years, along with the likes of Greece, Lithuania and Romania. The previous, Socialist led government was responsible for the worst mismanagement of any economy in post transition Europe, resulting in a record high budget deficit on top of an already high national debt. This swept Hungary to the edge of sovereign default, with the IMF having to step in and provide an emergency standby loan as market interest rates of refinancing the country’s debt suddenly became unrealistically high in the wake of the international financial crisis and the disappearance of liquidity from international financial markets. Citizens became dramatically disappointed with the government, in spite of a change of prime minister and a drastic stabilisation programme in the final year of an eight year, two term rule, which decreased the hole in the national budget from above ten per cent of GDP to below four per cent, an achievement that is now being held up by international financial institutions to other austerity economies such as Greece or Spain. This helped little to calm anger and frustration, and at the national parliamentary elections in early 2010 the Socialists were reduced to a small party of 17 percent, while their main rivals, the centre right Fidesz party won a landslide victory with a whopping 67 per cent of votes cast.
The vote was primarily a protest vote, little was known about the future economic policies of Fidesz during the elections. The lack of information the party itself gave rise to wide ranging speculation, which continued for weeks even after the formation of the new government under Viktor Orbán, who had already governed once between 1998 and 2002. The fog cleared somewhat in the middle of the summer, once again as a consequence of pressure from the international financial markets. Leading members of the Fidesz party gave a series of statements to the press about “corpses” in the budget they inherited from the previous government, hinting that the annual deficit might be much higher again, than expected. It seems likely that these unfortunate pronouncements were only a concerted attempt to create more fiscal room for the policies of the new government, but they did not go down well with international investors. The forint took a dive, and the government had to backtrack and calm sentiments by making it very clear that they intend to stick to the original 3.8 per cent deficit target, as planned by their predecessors. They also held a three day emergency session, after which Prime Minister Orbán addressed parliament to outline a rather eclectic mix of 29 points that included everything from releasing the ban on distilling pálinka (gin) to a complete overhaul of the tax system. The major thrust of the package was the reduction of the tax burden on small, primarily Hungarian owned enterprises (through a second, lower rate of corporate tax) and middle class earners (through a single rate personal income tax), while increasing the tax burden of low earners and banks, including a special tax on financial institutions. With this, Hungary essentially joined the low flat rate tax competition that had swept across Central and Eastern Europe in previous years, started by Slovakia and followed up by Romania, Bulgaria and others. The interesting experiment of the new Orbán government is aimed at trying to alleviate the dramatically low employment rate of the country, at 54 per cent, ten percentage points lower than the EU average, through decreasing the tax wedge on labour. Whether this will work with Hungarians who have now been out of work for two decades, and have lost their skills and motivation, is an open question. However, by introducing the special bank tax, which is meant to counterbalance the immediate loss in government revenues from labour related taxes, Orbán has indirectly admitted that he no longer believes that tax reduction will be self financing through an increase in employment. Another indication of this is the fact that he is only willing to set employment targets for a ten year period, way after his current mandate, by which time he foresees one million new jobs created.
The introduction of the special financial task, amongst other issues, has lead to a deadlock in the negotiations with the IMF for the extension of the current standby loan, which will expire in October. Orbán then stepped in to declare that Hungary no longer needs the assistance of the IMF, and will be able to refinance its debt from the international markets. This certainly seems possible for the next two years, but from 2013 repayments of former debts will increase dramatically, coupled by repayments on the current IMF loan. Whether Hungary will have stabilised its economy and started on the path to high growth by then is anyone’s guess in the current turbulent international economic environment.
(This article appeared in Hospodarske Noviny in Czech)
