The latest Fidesz ideas about the economy

Yesterday with a certain fanfare Viktor Orbán and Mihály Varga held a joint press conference during which they outlined their plans to relieve the economic pressure on the Hungarian population caused by rising food and energy prices. As we know, the parabolic rise in the price of oil and all other energy sources is influencing the economic health of the whole world. Even the price of food is partly connected to the rise in the price of energy. Although in the United States the presidential candidates advocate immediate remedies (like lowering the excise tax on gasoline or a windfall profit tax on oil companies) cooler heads who aren’t trying to get elected prefer to let the market work things out. Admittedly so far the market hasn’t done a very good job. Crude oil in the U.S. is up 400% since Bush was inaugurated in 2001; heating oil is double what it was a year ago. There’s lots of finger-pointing: China and India are using huge amounts of oil, the U.S. dollar is in the toilet, environmentalists prevent oil exploration, speculators are driving the price into bubble territory. So far we’ve seen only limited demand destruction in the U.S. The upshot: no one knows whether oil is heading to $170 as the president of OPEC predicted, whether it will hit the round number of $200, or whether it will settle back down to more reasonable levels.

The Gyurcsány government is pursuing a cautious course: next year’s crop should be very good and lowering VAT on food usually makes no difference because, based on past experience, any decrease in VAT is offset by an increase in the price of the product. VAT goes down, the price of the item goes up, and the consumer doesn’t gain a cent. On the energy front Hungary is suffering from horrible inefficiencies. For instance, the Hungarian consumption of natural gas is sky high because of the shoddy apartment buildings erected during the era of plentiful and dirt cheap Soviet gas. Moreover, these rows and rows of ugly apartment houses are heated by distance heating that is very convenient but also very expensive. Most of the apartments in these buildings don’t have their own thermostats, and the only way to regulate heat is by opening windows. The owners of these apartments cannot turn a thermostat down at night or during the day when they are at work. Or during the two weeks of winter holidays. Insulation is practically nonexistent, and through the single pane windows heat pours out. The government did introduce some financial incentives for the owners to consider investing money into fixing up their apartments and for all the owners jointly to do something about the thermostat problems. In East Germany these apartment complexes (in Hungarian panelházak) were simply torn down. Hungary and I assume the other former socialist countries couldn’t do that: there was no rich West Hungary or West Czechoslovakia behind them.

Anyway, let’s see what Fidesz is proposing. It is obvious that Orbán and his team consider this plan politically important. It doesn’t happen too often that Viktor Orbán gives a press conference, especially not a shared press conference. But I guess he wanted the endorsement of Mihály Varga, who has clout in economic circles and is not considered to be a dolt. Briefly the plan is as follows. Fidesz would lower the excise tax on gasoline and the tax on distance heating. The VAT (ÁFA) on foodstuff would be greatly reduced: from 20% to 5%. In the final analysis, claimed Varga, for the government there would be no revenue loss because the currently higher prices would result in higher taxes, even at a reduced tax rate. It seems that Ibolya Dávid, no friend of Fidesz, likes the idea. Her party would favor such a solution and would be willing to convene parliament for an extraordinary session to discuss the proposals. However, I doubt that such session will materialize because neither MSZP nor SZDSZ is willing to seriously contemplate such a solution.

Ferenc Gyurcsány showed his political skill when he didn’t out of hand reject the Varga-Orbán proposals. Bernadette Budai, one of the two official spokesmen of the government, announced that the prime minister was willing to talk with Orbán about these proposals, but he would like to see a detailed financial analysis of the proposal including an explanation of how lost government revenues could be recouped. Of course, Gyurcsány knows darn well that Fidesz cannot go to its Excel spreadsheets and create income.

János Veres, the minister of finance, was less diplomatic. First he denied that the government is experiencing a revenue bonanza as a result of the general price hikes. As far as the excise tax on gasoline is concerned, it is a fixed amount (105.9 Ft per liter), so no extra income has flowed to government coffers from this source. Theoretically, the VAT on gasoline should have resulted in higher revenues, but even this eventually didn’t come to pass. Because of higher prices people have cut back on their driving.

In the case of food, according to the Central Statistical Office prices have grown by 11.7%. The ministry was expecting a 9% rise in prices and initially calculated and planned accordingly. As the result the government has realized a 30 billion Ft windfall. Viktor Orbán’s suggestions, according to the calculations of János Veres, would turn a 30 billion Ft gain into 320 billion Ft loss. Lowering the VAT on food from 20% to 5%, as suggested by Orbán, would cost 260 billion Ft. In addition, lowering taxes on distance heating would be an additional loss of 26 billion Ft., and lowering taxes on natural gas and gasoline would be a further drain of 33.4 billion forints. So altogether we are talking about 320 billion forints that would be missing from the Hungarian budget. That, according to Veres, equals of one and a half months of pension for everyone who currently enjoys retirement.

The other possibility, of course, continued János Veres, is that the government would make up this missing 320 billion forints, but then the convergence program would be in jeopardy. Moreover, continued Veres, the European Union’s finance ministers already in 2005 agreed that unexpected price changes couldn’t be compensated for by tax reductions.

I’m sure that Fidesz will have answers that prove Veres wrong. This war of numbers has just begun.

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John Hunyadi
“Admittedly so far the market hasn’t done a very good job.” So what job do you think the market should be doing? It is not the purpose of a market to keep down prices for buyers. Markets, of all types, exist to benefits both sellers and buyers by aligning supply and demand, mainly through the mechanism of price. In my view (and I admit I do not have any background in economics nor in the oil industry), the market is doing a great job in clearly demonstrating (through increased prices) that demand for oil is increasing faster than supply. Yes, the price has increased very quickly – but partly because the market is restricted. In an ideal market, demand should decrease as price increases. But many countries subsidise the cost to consumers of gasoline, so the increased price on international markets is not reducing demand as much as it should. And, you must admit, both consumers and businesses have know since the 1970s that the price of oil can be subject to rapid increases so they have only themselves to blame if they are now suffering financially because they rely on, for example, driving an SUV 100km a day to… Read more »
John Hunyadi

Oh, and I should also point out that a further cause of energy waste in apartment blocks is government subsidies for pensioners’ heating bills. The situation should have improved somewhat since the current government reduced subsidies, but as of a few years ago a typical story would be…all residents of an apartment block had to vote on which dates to turn on and off the heating for the building. Because pensioners paid next to nothing for their heating, they naturally voted for as much heating as possible. If an apartment block had a high proportion of pensioners (and remember that pensioners in Hungary can be as young as 50) then it was all but guaranteed that the heating system would be turned on continuously, sometimes even when the temperature was more than 20C outside. And no one could turn off their radiators!
In effect, rather than giving people money to invest in energy efficiency measures, the government was handing out money to encourage people to waste energy!

Odin's lost eye

To some extent I disagree with John about district heating. I lived in a flat which had district heating. Only 1 radiator (out of 4) and the ’round the bath’ heater out worked. 2 had the taps jammed shut and 1 was full of air which could not be blead out. We still paid as much for ‘no heat’ as the rest did for ‘heat’. I was forbidden to touch or fix them!