Hungary’s so-called economic policy

It is sad that I have to spend so much time on economics and finance when I'm actually much more interested in party politics, but it is obvious that there is no "pure politics." This is especially true in the wake of the worldwide economic crisis that hit us in 2008.

So again I have to talk about economic policy. In the title of the blog I called the current Hungarian government's ideas on the economy a "so-called economic policy" because to me the steps taken by the government since April-May seem no more than stop-gap measures.

By now we can be fairly certain that before the elections Orbán and his economic advisors bet everything on one card: they will claim that the Bajnai government's budget was fraudulent. The deficit is actually not 3.8% but more like 7.5%. With this bad piece of news they will go to Brussels, and Brussels will be understanding. But for at least two reasons the financial leaders of the European Union were not sympathetic. One was that ever since the fall of 2008 the IMF and the EU four times a year monitored the Hungarian government's books and their teams found everything in order. Therefore the officials in Brussels simply didn't believe Viktor Orbán's contentions about the 7.5% deficit. The second reason was that in the interim the Greek crisis shook the very foundations of the European Union. Hence, the leading nations of the EU were in no mood to accept Orbán's phony figures.  It didn't matter how often they repeated that there are skeletons in the closet, no one believed them.

So, basically, the new government had to discard its cherished plan of "everything is the fault of the Bajnai government" and had to create an economic plan in a great hurry. That was initially done in three days and the result, the 29-point action plan, was a hodgepodge of odd steps that couldn't be called a coherent plan. One more effort was made to renegotiate the 3% deficit for 2011, but that also failed. Brussels refused to budge.

Orbán and his right-hand man, György Matolcsy, were in a quandary. They promised huge tax cuts, more money for the cities and towns, even more money for healthcare, higher salaries for government employees, and so forth. It would be a world free from austerity. But from what? Not to fulfill their promises would have been political suicide. It's enough to remember what happened to Ferenc Gyurcsány. And yet taking the sole step of lowering taxes would leave a gap of some 300 billion forints in the budget. Then came the bright idea of levying a new tax on the banks. Yearly 200 billion forints. That almost took care of the shortfall. But it seems that this was still not quite enough, and for days now there have been rumblings of further taxes on "those who have money."

Yesterday we found out what the government has in mind. In addition to the extra taxes on banks and other financial institutions, they are going to collect additional taxes from businesses in the energy and communication sectors. And while they were at it, they decided to tax supermarket chains as well. But it seems that this still wasn't enough. Unilaterally they decided to sit on social security payments that should be forwarded to private pension funds for fourteen months. More about that later.

Just to give you an idea of the scope of these steps: the newly levied business taxes amount to more than 2.5% of the Hungarian GDP. They will be collected this year as well as for the next three years. These measures most likely will be very popular at home. People loathe the banks and they are not terribly fond of the multinational companies either. Almost all the companies mentioned above are foreign owned, including the supermarket chains. Of the many banks in Hungary only OTP is Hungarian-owned. All the others are Austrian, German, Italian, or American. So it's a case of killing two birds with one stone: getting a lot of money from the "rich" and these "rich" are not Hungarians. The Hungarian rich are taken care of. Because of the flat tax to be introduced next year, the billionaires will pay only 16% of their taxable income to the government. The same rate as those who make 200,000 forints a month.

Hungarian businessmen are unphased by these business taxes. They are not affected at all. They are not in the communications or energy businesses. Here is a good example of a relatively well-off Hungarian businessman who welcomed Viktor Orbán's announcement. His name is László Parragh, president of the Hungarian Commercial and Industrial Association (Magyar Kereskedelmi és Iparkamara). Parragh announced with a certain glee that the steps announced by Viktor Orbán are reasonable because after all "they affect those sectors from which a lot of money leaves the country." These taxes certainly will not affect Mr. Parragh's business. He deals with bathroom tiles and fixtures. It should be noted, by the way, that some of the supermarket chains are actually losing money at the moment and the same is true about some of the banks.

Foreign reactions to these unusually high taxes on mostly foreign companies are slow in coming, but one can predict that the reaction will be negative. Business Week's immediate reaction was muted when its reporters announced that "Viktor Orban’s decision to reduce the budget deficit through temporary taxes delays the pain of tackling eastern Europe’s highest debt." The currency market reacted rather forcefully: while this morning the exchange rate was 270 forints to the euro, by the evening it had ticked up to 274 forints; during the day it even reached 275 forints. Magyar Telekom was hit hard on the Hungarian stock market. It fell 2.1%.

As for the withholding of social security payments. It was during the Horn government that the Hungarian pension system was revamped. One novelty of the system was that active wage earners had to invest one-third of their social security taxes in private pension funds. The whole amount was deducted from the pay check by the employer and sent to the Hungarian equivalent of the Internal Revenue Service which passed the appropriate amount to designated pension funds. Thus the Internal Revenue Service was simply the collector of one-third of retirement payments. Now, for fourteen months, the state will simply not pass the payments on to the private pension funds but will hang on to them and use them as it sees fit. Ferenc Gyurcsány called it "stealing" while a lawyer who phoned in to György Bolgár's call-in show corrected him, saying that strictly speaking it is embezzlement. But, he added, the government will simply introduce a new law that will make it all legal.

I'm curious whether the government will repay these "loans" with interest or not. It also looks as if the government has further plans for the "nationalization" of the private pension funds. Some people jokingly said that this tampering with the social security payments is even worse than Mátyás Rákosi's Peace Loans (Békekölcsön). Those loans were extracted from unwilling people, but at least they were told ahead of time and there was a signed loan agreement. This time Orbán et al. didn't even bother with such formalities. I suspect that the international business community will not be thrilled with Mr. Orbán's solutions to the Hungarian crisis.

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Johnny Boy
Guest
A few remarks: “the newly levied business taxes amount to more than 2.5% of the Hungarian GDP” The new taxes are less than 0.7% of the GDP, and the whole amount hardly surpasses 2% even if you count in all money kept from the private pension funds for a whole year. “They will be collected this year as well as for the next three years” This year the private pension fund money will be retained only for 2 months, which means an additional 60 billion this year instead of a whole year’s 360 billion. “Hungarian businessmen are unphased by these business taxes. They are not affected at all. They are not in the communications or energy businesses.” This is correct. And this is an extremely bad thing. “Parragh announced with a certain glee that the steps announced by Viktor Orbán are reasonable” This is incorrect, Parragh was basically a critic of the new steps, claiming that the new levies will be pushed on to the consumers. “Foreign reactions to these unusually high taxes on mostly foreign companies are slow in coming, but one can predict that the reaction will be negative.” This is correct too. After all, these steps are… Read more »
Johnny Boy
Guest

Sorry, I now see I was ambiguous when saying: “This is correct. And this is an extremely bad thing”
As “extremely bad thing”, I was referring to this:
“Hungarian businessmen […] are not in the communications or energy businesses.”

Passing Stranger
Guest

Hm. Temporary taxes have a habit of becoming permanent. You might want to look up the history of VAT, or closer to home, the Robin Hood tax which I understand is now ‘temporarily’ being extended.
“They are both wrong. Minister of Economy György Matolcsy said that the state will acknowledge all money by the payees, even with a due yield”
Then it is almost exactly like Rakosi’s Peace Loan, where the loans were also ‘acknowledged’, except then people could and did cop out by offering only small amounts of money.I must say, Orban is handling this much cleverer than Rakosi: more cash, and without all the fuss of having to organise a campaign or applying terror,

Pete H.
Guest

Just came across this title “From Dictatorship to Democracy: The Birth of the Third Hungarian Republic, 1988-2001” by Ignacs Romsics. Any thoughts on this book and author before I spend $30 on this?
Sorry that this is a little off topic, but I know there some historians who post here.

Eva S. Balogh
Guest

Dear Johnny Boy, I suggest that you write to MTI and complain that their reporting on both the size of the extraordinary text and Mr. Parragh’s words were outright lies. Both quotations come from their reporting.

Mark
Guest
Temporary windfall taxes are not only a Hungarian phenomenon – in 1997 Tony Blair’s Labour government applied a time limited windfall tax to telecommunications and energy utilities which enabled it to fund a job creation scheme for the young unemployed, while meeting its parallel promise to hit the deficit targets set by his Conservative predecessor. There is clearly a precedent here. The export of profits by energy utilities clearly creates external financing problems (and indeed so much so that I would argue they should never have been privatized). Furthermore there is something wrong when some of the owners of those utilities are effectively owned not by private entrepreneurs but by foreign governments, creating a perverse situation where bill payments by Hungarian pensioners could be subisidizing the more generous state pensions of their French equivalents. Certainly the tax on retailers seems odd, but there are good reasons for levying windfall taxes on energy and telecoms companies. The real problem here is what the revenue is being used for. It is paying for tax changes, which both result in lost revenue, will be effectively tax increases for most households (even with the concessions to those with children), and which will depress and… Read more »
Johnny Boy
Guest

Eva: I’m only commenting, and you didn’t name your sources.
I don’t really care about sources anyway, they all can be right or wrong.
Pete H: Ignác Romsics is an excellent historian, with an outstanding academic record and many awards. I don’t know the book you are referring to, but I’d bet it’s worth its price.
Passing Stranger: what makes you think Matolcsy is not telling the truth when he says the state will acknowledge the payees’ money?

Kata
Guest

There is something I can really not understand. After the financial crisis there was some more or less general consensus regarding the wrong doings of banks: cajoling people into debts, high bonuses, greed etc, There have indeed been talks in the western world about regulating and levying banks. ( several banks had to merge there was at least one which went into state ownership in the UK e.g.) So while does the Hungarian government’s proposal of levying banks meet with such big disapproval by many ? If it is Ok for the state to bail them out, why is it not OK for the banks to pay taxes? (I can only raise one argument that is they would infer the taxes back to the customers.) On the issues of imposing more taxes on those who have more money? I think that’s quite fair. In the UK the current CONSERVATIVE government e.g. have just proposed that rich families should NOT be entitled to child benefit. Sounds quite OK to me. They CAN manage without those benefits. (And I do not even consider myself a true socialist.) However, “difficult times call for drastic measures.”

Johnny Boy
Guest

Mark: most of what you write I think is true, except this very important point:
“tax changes, which both result in lost revenue, will be effectively tax increases for most households (even with the concessions to those with children), and which will depress and not increase demand, leading to lower and not higher growth”
The tax changes will not result in lost revenue, and certainly not for those with children who gain considerable concession. Thus, inner consumption will increase instead of falling back, inducing economic growth.
These steps are good, although I think the biggest with taxes lies in the subsidiary costs for companies on jobs. Lowering those would be the biggest help in creating more jobs, not necessarily the income tax cut.

Paul
Guest

Johnny Boy seems remarkably well informed.

Eva S. Balogh
Guest

I didn’t name my sources, but I’m not a liar although you, Fidesz people, suspect that everybody lies. For your information, my source for Parragh is: http://tiny.cc/qos8b
As for the 2.5% of the GDP: http://tiny.cc/1qsbp Enjoy!

Eva S. Balogh
Guest

Kata: “So while does the Hungarian government’s proposal of levying banks meet with such big disapproval by many ?”
Because banks in Hungary didn’t do what American banks did. They were not giving out loans to everybody and his brother. The problem was that the mortgages were taken out mostly in Swiss francs and meanwhile thanks to the beneficial moves of the Orbán government the exchange rate went up.

Eva S. Balogh
Guest

Johnny Boy: “The tax changes will not result in lost revenue”
Dream on! By all calculations: 300 billion forints will be missing.

Johnny Boy
Guest

Eva: “Dream on! By all calculations: 300 billion forints will be missing.”
For the budget, yes this amount will be lost, but not for the taxpayers and Mark was referring to them.
“you, Fidesz people, suspect that everybody lies”
1. Why do you call me “Fidesz people”?
2. Why are you repeatedly attacking me in person? Is it really that outrageous that I’m commenting on your blog?

Johnny Boy
Guest

Kata: you are right.
“So while does the Hungarian government’s proposal of levying banks meet with such big disapproval by many ?”
Don’t be deceived, the “many” are mostly those banks. And their loud objection is the best proof of the levy not being easily transferrable to the clients. Why would they make so much noise otherwise?
Remember, most of OV’s government’s steps are directed towards collecting money from those with larger assets, which happen to be almost exclusively non-Hungarians. This is why thte vast majority of comments from abroad are negative. Time will tell if banks “win” in this battle.

Johnny Boy
Guest

Eva: your referenced text on taxes say this: “Az új kormány megalakulása óta éves szinten a GDP 2,5 százalékát meghaladó mértékben jelentette be átmeneti adó- és járulékteher-kivetést”
The sentence begins with “the new government since their formation”, which means the 2.5% is calculated by counting in all new taxes so far, including the bank tax. From what stands in your post, one probably understands this value for the newly announced taxes.
However, considering all taxes together, they amount for 360 billion forints (minus the loss on budget side due to lowering the company tax), which still means less than 1.5% of GDP.

Kata
Guest

I’m not Fidesz, I’m an agnostic, inbetweener. 🙂
I would not like to see foreign investments and businesses chased away from Hungary. But I’d also like to see Hungarian busnissmen, farmers, teachers, etc. be given a chance to prosper and have a fulfilled life in Hungary if they choose to live there. What I see at the moment is that thousands of Hungarians are leaving the country to take up menial jobs such as cleaners, kitchen porters, waitresses , housekeepers etc. in foreign countries.
Does anybody have any figures about how much of the GDP has left the country in the past years? I am aware that there was an article in the Index about it the other day. However it did not make it clear for me whether Hungary profited from foreign investments in the country or not.

pgyzs
Guest

“However it did not make it clear for me whether Hungary profited from foreign investments in the country or not.”
This is a much too complicated issue to be described by a few numbers. They created jobs, boosted the economy created infrastructure and yes they made profit and take it out of the country. It is hard to tell if this happened in a balanced way.

An
Guest

@Kata: “After the financial crisis there was some more or less general consensus regarding the wrong doings of banks: cajoling people into debts, high bonuses, greed etc, There have indeed been talks in the western world about regulating and levying banks. …… So while does the Hungarian government’s proposal of levying banks meet with such big disapproval by many ? ”
Here in the US unscrupulous practices of banks were major contributors to the financial crisis, on top of that the government had to bail them out to prevent the total collapse of the financial sector. Hence the desire to regulate the banks (and the emphasis is on regulate, not necessarily to tax the hell out of them).
Exactly which bank had to be bailed out using taxpayer money in Hungary during the financial crisis? None.

Sophist
Guest

“Viktor Orban’s decision to reduce the budget deficit through temporary taxes delays the pain of tackling eastern Europe’s highest debt.”
Given the Hungarian people’s reluctance to pay taxes, and the Hungarian government’s reluctance to collect taxes, I have to wonder about the ‘temporary’ nature of these Taxes. Turning major industries into tax farmers is one way of financing government.

whoever
Guest

I’m no fan of Viktor, but I’m pleased to see that they are boosting the role of the local Savings Co-operatives, providing them with a stream of credit and hopefully, making it easier for new ones to be established.
As for the flat tax, I don’t think it will achieve its purpose in any case, and could prove generally detrimental.

Eva S. Balogh
Guest

Johnny Boy: “1. Why do you call me “Fidesz people”? 2. Why are you repeatedly attacking me in person?”
(1) Because you’re and (2) Personally attack? Did I say that you were stupid or you were a liar? No, I didn’t. That would be a person attack.

Eva S. Balogh
Guest

Johnny Boy: “the new government since their formation”, which means the 2.5% is calculated by counting in all new taxes so far, including the bank tax.”
Indeed, indeed! All the newly levied taxes amount to 2.5% of the GDP. What is the difference between the bank tax or taxes on energy and communication? Or on supermarkets? Nothing. The same extraordinary taxes that without the Orbán government simply wouldn’t exist

NWO
Guest
Mark is correct that these windfall taxes will help the year-end current account balance as they will limit dividends being paid out of the country. That will be good. But for sure, the effect of these taxes will be to retard further investment. For all the banks operating in Hungary (save OTP), Hungary will become a less core market and the relative attractiveness of incremental investment in Hungary will diminish. The private sector will not be able to grow without a growth in credit (one already sees a return of a healthy banking sector in Poland and Cz for instance), and this will slow this process. The tax on retail makes no sense to me. It is just a blunt way to plug a hole that will hurt the sector and the consumer where they are already most vulnerable. Orban/Matolcsy talk about a pro growth strategy, but they do not have one. Matolcsy only believes in Keynesian stimulus. Not that Matolcsy has fired one of the few experts in the Ministry on budget matters, it will be interesting to see what kind of budget he will be able to produce. Even my most staunch FIDESZ acquaintances find Matolcsy less than… Read more »
Passing Stranger
Guest

“Passing Stranger: what makes you think Matolcsy is not telling the truth when he says the state will acknowledge the payees’ money?”
The problem is, is that it is unclear how he will use the money. Normally it would be invested in a pension fund, but what will happen to it now?
If this money is mismanaged, the state will only be creating problems for itself later, when it needs to pay out the pensions.
I suspect, though, that this is a statistical trick, so that Hungary can count its pension contributions towards state income after all, and so reducing its budget deficit.

m
Guest

Are the selective taxes constitutional? Why is tile-trade preferred to energy trade or service trade?

Odin's Lost Eye
Guest
I am no account or economist, but all I see of the new Hungarian government’s budgetary plans is ‘smoke and mirrors’. Its focus is to defraud those who have little or no political clout (pensioners) ‘rip off’ foreign investors and bamboozle the Europeans. Hungary needs investment. The Hungarian people are reluctant to risk their money by investing in Hungarian businesses. They prefer to put their cash into large German cars, flat screen T.V.s, or houses. Why is this? I think it has 3 main causes • Culture and the longing for the ‘Good Life’ • History, the total lack of understanding of how a ‘Joint Stock’ company works (or should work). • The absolutely disgusting attitude of many ‘so called’ Hungarian Business people. They have no idea of working for the ‘long haul’. They just want to fill their own pockets, quickly, and do so by cheating their customers and siphoning off their investors money. The idea of super-taxes levied on companies owned by ‘outsiders’ may well cause this source of investment to dry up (probably quickly) and disinvestment to occur. That is the ‘outsiders’ will say to their Hungarian subsidiary ‘You are on your own’. This means that the… Read more »
Johnny Boy
Guest
Eva: “(1) Because you’re” Why should I be a “Fidesz people”? Because I counter your exclusively anti-Fidesz claims? “Personally attack? Did I say that you were stupid or you were a liar?” You called me brainwashed. Besides, most of your comments towards me focus on offense instead of factual content. They have no effect on me, so you may as well give up with them. “Indeed, indeed! All the newly levied taxes amount to 2.5% of the GDP” No, they are 360 billion forints (200+160) summed up, and that amounts to less than 1.5%. But this is not really important. “The same extraordinary taxes that without the Orbán government simply wouldn’t exist” True! And it’s an excellent thing that these taxes exist. Were it not for the Orbán government, these taxes wouldn’t exist at all, and the amount of at least 360 billion would be collected directly from the population. Would you prefer that? Passing Stranger: “The problem is, is that it is unclear how he will use the money.” Yes it may be unclear at this point. But they’ve already said that they will be releasing their detailed plan during the next week. So why not wait until that… Read more »
Eva S. Balogh
Guest

Johnny Boy: “. Were it not for the Orbán government, these taxes wouldn’t exist at all, and the amount of at least 360 billion would be collected directly from the population. Would you prefer that?”
Where are you getting that? The Bajnai government clearly stated that there was no need for further austerity measures. They can hold the deficit at 3.8%.
I’ll tell you why the present government needs all this money. I just read that 100 billion forints will to the Hungarian-owned credit unions (Demjan). As of January 1 they set up military reserve units. Those people naturally must be paid. Ten billion went for a so-called anti-terrorist group that is basically a bodyguard for the prime minister. Hende is planning to establish a new military college. I wonder how much that will cost. I hate to think how much money is being spent on the reorganization of the government. And I could continue.
As for the 2.5%. Don’t argue. That means all the new taxes introduced by the Orban government including the banktax.

Odin's Lost Eye
Guest
Johnny Boy. Long before I came to this land I used to invest part of my pay (and lord knows I got little enough it) in the markets. To make an investment I looked at many factors. These would include: – • RCI – Return on Capital Invested. If it was better than I could get from a bank or building society. I would look further. • The ‘Pay Back Period’. How long at the current dividend payment rate would it take to get my money back? The values I am looking for are between 7 to 15 years. Less than 5 years it is too good to be true over 16-17 years and you are very far into the long term and you would have to look much deeper into your potential investment. • ‘Gearing’. How much the company owes their bankers etc. You say ** “But there should be a maximum price to pay for that. I think we have far crossed that line” **. This brings me to another of my points and shows how little you know about the workings of ‘Joint Stock Companies’. Investments are not loans they are forever; the company you are investing… Read more »
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