The Hungarian economic situation

Yesterday I said a little about the economic woes of the country; today I would like to give a few more details. I’m relying heavily on an article of Péter Róna that appeared in Népszava (October 26,2007). I mentioned that the problems began in 2001 when, because of the approaching elections, the Fidesz government decided to change course. Until then the government had followed a disciplined fiscal policy. But, in the hope of winning votes, they began to be irresponsibly generous. They doubled the minimum wage and gave out guaranteed loans with very low interest rates for the purchase of houses and/or apartments. Continuing this pattern of excessive government spending, the Medgyessy government raised the salaries of state employees and, just before the 2006 elections, on the insistence of the SZDSZ, they lowered the value-added tax on some items. All these were long-term obligations. The housing subsidies were a tremendous burden, and they were not well targeted. Many people used these loans for speculative purposes. Moreover, the maximum loan size was so high that the government ended up subsidizing investors in the luxury real estate market. The Medgyessy government fiddled with these subsidies, lowering the value of the eligible properties and making the loans available only to people under a certain age, but the socialist-liberal government didn’t dare to take this new privilege away completely.

Today some experts believe that by lowering government expenses and increasing tax income Hungary will be able to set things right. This is what the government is trying to do at the moment, with some success. The current GDP growth of 1.5% is subpar by global standards, but the budget for 2008 projects a growth of 2.8%. This is most likely achievable, especially because in the next seven years, 22.4 billion euros in subsidies will be coming into the country. Moreover, the deficit is being reduced, and the government has even managed to deliver upside surprises. As part of the "convergence program" (the plan that is supposed to ready the country for joining the euro-zone) János Veres, minister of finance, projected a deficit of 6.8% for 2007, but actually it will be closer to 6%. Right now they project 5% for 2008, and it is possible that it may even be lower because the ministry’s estimates are conservative.  So, according to some economists, everything is going splendidly.

However, there are other financial observers who think that the country’s economic woes cannot be remedied so easily because they stem from deep-seated structural problems. For instance, according to a new Financial Times article, 47% of the working-age population is unskilled, a worrisome statistic in a competitive global economy. In theory 6.4 million people would be able to work, but only 2.8 million are employed in economically productive jobs. (About 800,000 people are employed in the public sector.) Well, 2.8 million people cannot support 10 million, especially since some of the unproductive people must be maintained from the budget. In Hungary only 44% of households have at least one wage earner. In 1992 the situation was much better: 59%. Among other problems, the population is aging.

Although privatization was very thorough, the social "safety net" of the Kádár regime remained. In fact, it was strengthened. Today half of an average household’s income comes from some kind of direct subsidy; this does not include services subsidized by the government–from health care to sports or cultural activities. The heavily indebted state is still generous to a fault. For instance, on average, the government subsidy of a Hungarian theater ticket is as much as the cost of a theater ticket in London. Yet, the Hungarian people remain stubbornly unhappy. They want higher incomes, and they don’t want to part with all these cozy subsidies. The Fidesz opposes any "reform," which of course helps to maintain its lead in the polls. However, the small work force simply cannot produce the necessary tax base to support such government spending.

If this is really the case, the government is in an awful bind. Perhaps sooner or later they will have to do what they would loath to do: make very serious cuts in government subsidies. The outcry would be terrible, but there might not be any other way in the long run. Fortunately life always moves in the short run, and more often than not long-term problems get resolved in ways previously uncontemplated. The doomsayers are usually wrong (for instance, especially in light of Hungary’s situation, think of Thomas Malthus).