History and critique of Fidesz’s notions of tax cuts and economic growth

Let's start with the chronology. In 2005 Viktor Orbán announced that "only radical tax cuts can change the high unemployment in Hungary." A few months later in January 2006 Orbán promised during the election campaign that "if there is a 'civic' government after the elections we will decrease the payroll taxes by 30 percent starting July 1." By September 2007 Fidesz was less sanguine about tax cuts. Péter Szijjártó, the party's spokesman, said that in order to reduce the large black market three steps must be taken: a reduction in bureaucracy and corruption and "the avoidance of tax increases." He modestly added that they would emphasize tax cuts.

In October 2008 Mihály Varga also considered tax cuts necessary in order to create sustainable economic growth. He suggested a reduction in payroll taxes and a lowering of personal income tax rates. A month later Szijjártó outlined Fidesz's solution to the financial and economic crisis. The recipe would be to follow European examples: lowering taxes, lowering interest rates, and introducing programs that lead to economic growth.  A few months later in March 2009 Szijjártó expressed his opinion that the government should lower the sales tax (VAT) on foodstuffs and the excise tax on gasoline.

In February 2010 three men, two politicians and one economist, expressed their opinions. Zsolt Semjén (KDNP) talked about lowering payroll taxes for Hungarian businesses because otherwise they will move their headquarters to Slovakia. Mihály Varga at the same time announced that under the present circumstances the only solution would be a lowering of taxes that would directly lead to increased employment. He specifically mentioned taxes on businesses and payroll taxes. Almost at the same time Zsigmond Járai, former minister of finance and chairman of the Hungarian National Bank, suggested a complete reworking of the whole system of taxation. And then there is the latest suggestion by Viktor Orbán that I outlined yesterday. A very gradual lowering of taxes on both businesses and individuals.

Today commentators called attention to the significant change in attitude toward taxation in Fidesz circles.  The only exception was Járai, but he did mention that this was partly his own private opinion. Perhaps the change of heart came in the face of harsh realities: Hungary cannot pile up more debt, cannot have a higher deficit because the country most likely couldn't raise more money in the international markets. Thus the future government will have to follow the rules laid down by the IMF and the European Union.

The first economist who commented on Viktor Orbán's latest ideas on taxation was László Békesi, former minister of finance in the Horn government. He agreed with Orbán that it would be a good idea to reduce the rate of redistribution of revenues from fifty to thirty percent. But, as Békesi rightly pointed out, this can be done only if serious reforms are undertaken in health care, in the system of pensions, in financing local governments, and in running the central bureaucracy. That is, costs have to be wrung out of the budget. Then and only then could there be tax cuts that might in turn spur economic growth.

However Békesi was much more critical when it came to Orbán's reference to raising Hungary's competitiveness through tax cuts in relation to the other countries of the region. Because if we take Slovakia as a base Hungary should have much greater tax cuts, yearly amounting to a figure in the trillions of forints. On the other hand, if one wants to be competitive with Poland or the Czech Republic a much smaller tax cut would suffice. Békesi complained that the big problem with Orbán's suggestion was that he didn't say a word about how he was planning to fill the budget gap created by these tax cuts.

Finally, Békesi came to the same conclusion as I did in yesterday's post about the discrimination in favor of Hungarian middle-size and small businesses. He also likened it to the Széchenyi Plan and said that "those will get into favorable positions whom [they] like."

But because Fidesz has come up with so many variations on the theme of tax cuts, most likely this is not the last word on the subject. Moreover, one cannot even say that Orbán and his closest advisors have at last reconciled themselves to the fact that the deficit cannot be increased. Only a few days ago Mihály Varga was still talking about a hidden deficit of 7.5%. So, who knows? As far as I can see there is total confusion, and I wouldn't join the ranks of those who are certain that at last Viktor Orbán has become a realist.

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John T
Guest

The key issue for Fidesz regarding taxation is to ensure that everyone who should pay tax does pay tax. If they can increase the tax base / whiten, the increased revenue may give them some scope to reduce tax. I would also suggest they also use a portion to pay off the National debt more quickly if they can.

Mark
Guest
I’m sceptical as to whether tax cuts can boost economic growth – even if one accepts they are as efficient a mechanism as public spending for getting money to the economy (I doubt it in Hungarian circumstances), then it is a bit like increasing spending – the question is whether tax cuts will produce a multiplier and thus pay for themselves. The tax rates are a bit of a diversion, frankly, from the real competitiveness issue. Put very brutally this problem is that wages and prices (and thus unit labour costs) in Hungary in relation to its major trading partners in the Eurozone are too high to generate the levels of exports and investment to place Hungary onto a sustainable growth path. And on any measure this competitiveness problem is not small! There are basically two ways of dealing with this – (1) to bring the values of Hungarian wages and prices when expressed in the currencies of its trading partners, i.e. Euros, down to a competitive level through a substantial devaluation of HUF relative to EUR (which I favour, as the least painful and damaging to employment), or (2) the state conducts “internal devaluation” – in other words, it… Read more »
Hank
Guest
I think that there are still different interest groups and schools of thought within Fidesz and it hasn’t been decided at all what the policies will be. The danger is of course that in the end, for the sake of keeping everybody happy, it will be a bit of everything which is the same as nothing at all. We will only know when we know who will be the ministers of finance and economy. An other recurrent feature in Fidesz communication in the last few weeks, is that they want a real change in the size of Parliament, number of ministries and above all local municipalities. In the agreement Fidesz concluded yesterday with its other organisations (Fidelitas, farmers,etc) this fact is mentioned again, together with tax cuts. What is unclear to me is, if they would be able to do this (2/3 majority?),what would it save the budget money wise? Interesting is also how more and more Fidesz promises are getting a prolonged time schedule attached to them: one million jobs … in ten years, tax cuts … in four to six years. This sort of thing leaves room to do not too much in the first year or two.… Read more »
Mark
Guest

Hank: “I think that there are still different interest groups and schools of thought within Fidesz and it hasn’t been decided at all what the policies will be. The danger is of course that in the end, for the sake of keeping everybody happy, it will be a bit of everything which is the same as nothing at all.”
Strangely enough I think there is an interesting parallel here with the MSZP in the 1994 elections. They went into the election not having resolved serious ideological differences over how to manage the economy, and – because of the weakness of the alternatives – no-one really asked them any of the basic questions about what they intended to do, allowing them to get away with vacuous campaign slogans. Once they were in power we then had seven to eight months of drift before the financial markets forced the Bokros package on them. I don’t have any more of a crystal ball than the next person, but I wouldn’t be surprised to see history repeating itself.

whoever
Guest

Let’s not get too carried away with the Polish example.
It’s always had more weight than Hungary. It’s a much bigger country, with bigger internal markets. Perhaps most importantly, they have a completely different work ethic.

VIDEO
Guest

A good short video for Eva Balogh about the economy policy of the social-liberal government. (only K.S.H data)


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