A day before yesterday I mentioned briefly that in addition to the extraordinary taxes on mostly foreign owned businesses (banks, telecommunications, energy, and retail chains), the government pulled a fast one by withholding payments due to private pension funds for the duration of fourteen months. According to calculations these new taxes on banks and businesses amount to slightly more than 2.5% of the GDP. By not passing on fourteen months’ worth of social security payments the government will receive an additional windfall worth 1.5% of the GDP. Thus, although on paper the Hungarian government will be able to show a deficit of no more than the promised and required 3.8%, the actual “spending money” will allow the Orbán government a great deal more leeway.
I would like to remind people that Viktor Orbán and his economic team based all their calculations on a deficit of 7.5%. That is, they wanted to convince the European Union and the IMF that the budget of the Bajnai government relied on phony figures and that the actual deficit is twice as large. Despite desperately trying to convince the EU financial commissioner and his staff of a much higher deficit, their efforts were in vain. The message was: “If you come back with a higher figure you will see what will happen. We might just cut off the subsidies you are receiving right now and out of which you are planning to launch the country’s economic recovery.” So, eventually, they had to realize that the original plan was not a workable solution.
And here comes a series of brilliant moves. The government still claims, especially when talking to audiences at home, that the budget was after all fraudulent and therefore they have to levy all sorts of new taxes in order to keep to the original 3.8%. So, let’s see what is probably going to happen. The current deficit, mostly because of the reckless spending of the new government, is 4.4%. Add to that figure 2.5% coming from the extra taxes and 1.5% from the pension funds. And here we go. They managed to accumulate plenty of extra money for tax cuts and other spending, allegedly to stimulate the economy. As much as if not a little more than Orbán and his economic advisors were projecting when they talked about a deficit of 7.5%. And the incredible thing is that most people, including spokesmen of the businesses affected, believe the story. They keep repeating that the temporary taxes are understandable given the “crisis situation.” Some of these people add that these measures will be beneficial only if the government uses this money to put the country’s economic house in order.
But is the government in fact using the money wisely? Here are some projects I have heard of in the past few months. The minister of defense wants to establish a reserve army and found a new military college. It reintroduced subsidies on natural gas consumption. It poured more money into MÁV, the Hungarian Railroad Company. The prosecutor’s office will get 250 new prosecutors. New county government offices will be set up and there have been talks about reviving an even smaller unit, the járás. All these new offices will need staff.
As for tax cuts: they are minimal for people in the lower tax brackets but substantial for the rich or well off. Business taxes on paper are a great deal lower than before (instead of 19% only 10%) but these tax cuts will affect very few people because only small businesses will receive the tax cut. And most of them haven’t been paying any taxes at all because their profits were very low or nonexistent.
There is talk about providing 100 billion forints in loans to the credit unions especially popular in villages where bigger banks have no branches. These credit unions at the moment have only a 5-6% share of the banking business, but because they are Hungarian owned Orbán favors them. He is planning to make these credit unions the vehicles of the New Széchenyi Plan.
Foreign reactions to the Orbán-Matolcsy plans are not at all favorable. The forint immediately weakened and it hasn’t recovered since. The European Union has already inquired about the tax on telecommunications, something that is forbidden by Brussels because Europe considers the sector vital for the economic growth of the Union. According to The Street.com (New York) “markets have given a big thumbs down to the austerity measures announced by Hungary this week.” The suspension of the social security payments to private pension funds “has raised eyebrows, as this is the sort of accounting gimmick that only serves as window dressing.” And these financial gurus don’t even realize that a nationalization of the private social security funds might be in the offing.
Today Viktor Orbán named Gabriella Selmeczi (Fidesz MP) “commissioner in defense of social security” charged with an investigation of “losses people suffered” because of the private funds. Two days ago we were told that the retention of the social security payments was necessary to bring the budget in line. Today the story morphed: “the government must act very quickly because otherwise a situation might develop similar to what happened in the United States with Lehman Brothers.” If they don’t move immediately, the social security payments will simply disappear. I’m afraid the people may also believe that story.
My feeling is that some of these latest moves of the Orbán government might not be acceptable to the European Union. Actively supporting Hungarian-owned credit unions against foreign-owned banks is certainly against the rules and regulations to which Hungary is supposed to adhere. Putting your hands on other people’s money without their consent should certainly be unconstitutional. In any case, the spokesman of the association representing the private social security funds said that they will fight in all international forums against this arbitrary move of the new Hungarian government.
The Austrian retail chains are up in arms and I’m sure that the rest of the multinationals will follow. Although the government insists that the affected companies will not pass the cost on to consumers, normally this is the case and the government has no way of preventing it. Ordinary Hungarians who hate the foreign banks and businesses in general might be very happy right now because they believe that the government is taxing the rich and defending their financial interests, but they don’t realize that these taxes will be paid by them even if indirectly.
What will happen to the Hungarian economy in the long run? I don’t think that Viktor Orbán worries about the future. He wants popularity now, and he has it.