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.