A few days ago GKI Gazdaságkutató Zrt. came out with a study of Hungarian sovereign debt from a historical perspective. The result of the study is that Hungarian national debt has been high ever since the 1970s with the exception of the period starting in 1995, lasting about five or six years. The drastic reduction in sovereign debt during this time was the result in large measure of the stringent austerity program of Lajos Bokros and Gyula Horn announced in March 1995. In 2001 the debt again began to grow until today it has reached 80% of the Hungarian GDP.
At the time of the change of regime in 1989 the national debt was already high, 73% of the GDP, and it kept growing until by the end of 1994 it was 90% of the GDP. There were several reasons for this incredible rise in the debt load, but the overarching reason was that the Hungarian economy practically collapsed as a result of the changeover from a socialist mode of production to capitalism.
This was the situation when MSZP won a resounding electoral victory in 1994 and Gyula Horn formed a coalition government with the liberals. Horn, somewhat like Viktor Orbán in 2010, was most reluctant to use drastic measures to rescue the country from economic doom and waited nine months before he allowed Lajos Bokros, his new minister of finance, to introduce austerity measures. The shock was considerable. People's living standards, low in the first place, plummeted. But by the end of 1997, that is before the formation of the first Orbán government, the national debt had shrunk to 62%. Robust economic growth was primarily responsible for the reduction, although one mustn't forget that at that time there were still a number of valuable state assets that were sold off. The large amounts of money received from these sales were used to pay back some of the sovereign debt.
During 1998-2000 this trend continued. Although Viktor Orbán promised all sorts of things before the elections, he prudently didn't keep his word. For example, the Horn government in the last few months raised pensions, but Orbán refused to follow suit. Something that didn't go over too well with the pensioners. Even today one can hear older folks complaining about the money they lost in the last twelve years as a result. Although the Horn government promised to contribute to the building of a new section of the Budapest metro, Orbán simply refused to fulfill the obligation, finding some kind of legal loophole. Meanwhile the economy grew rapidly, reaching 5-6% a year, and thus by 2001 the national debt dropped as low as 52% of the GDP.
With elections looming, the Orbán government changed tactics. It was in 2000 that Zsigmond Járai, until then finance minister, was appointed chairman of the Hungarian National Bank and György Matolcsy took his place at the head of the ministry. Orbán wanted to spend more money on items that would raise the spirits of the electorate and Matolcsy promised an easy solution to cover the costs: raise internal consumption. Thus Orbán began to spend. He raised certain government salaries by 70% and cooked up a scheme by which the state subsidized purchases of houses or apartments up to a value of 30 milion forints, which cost the Hungarian state 300 billion forints a year. He lost the election nonetheless and the next government was stranded with promises made by Orbán as well as by his successor, Péter Medgyessy. The result was predictable. From 2001 on the sovereign debt grew year after year until 2007, when it reached 66% of the GDP.
Fidesz while in opposition opposed any kind of fiscal restraint, and during the election campaign of 2006 Orbán was still promising an extra month of pensions over and above the one granted by the Medgyessy government earlier. And he promised that certain drugs would be entirely free if he became the next prime minister of Hungary.
But the reality was that both parties excelled in making irresponsible promises. The final result was that government expenses during the 2001-2007 period grew by 3.2% while tax revenues shrank by 1%.
Although Fidesz politicians love to intimate that MSZP politicians spent the money they received, mostly from abroad, on their own pleasures (they carried the money away in wheelbarrows is the favorite charge), the bulk of the money went to Hungarian households–into the pockets of pensioners and people who worked in the public sector–as well as for subsidies for natural gas consumption, subsidies on housing, and infrastructure. In addition, there was a decrease in taxes.
But the situation was still manageable. After all, according to the Maastrich criteria, in order to join the eurozone the sovereign debt should be under 60%. With some effort that could have been achieved within a few years. But then came the international financial crisis. It was only in the 2008-2010 period that Hungary's indebtedness climbed to 80% of the GDP. The GDP dropped by close to 6%, the country had to borrow from the IMF and the EU, and the Hungarian forint weakened. The combination was lethal.
An 80% indebtedness is not extraordinarily high within the European Union, but the problem is that the borrowed money comes largely from foreign sources: almost 60% of the Hungarian sovereign debt is financed by foreigners. And these foreign investors demand sustainable economic growth that would lead to a decrease in the sovereign debt. According to GKI Zrt. that could be achieved by keeping the deficit under 3% and maintaining a 3% yearly economic growth. The economists of this research institute maintain that only ordinary prudent handling of the economy is required to meet this goal; extraordinary austerity measures are unnecessary.
I suspect that the somewhat hysterical reaction to the sovereign debt issue is only a ploy on the part of the Orbán government to prove to the people that these austerity measures are necessary because of the heavy indebtedness of the country. This way they can claim that they are compelled to introduce this new package in order to pay off the debt that was created by the irresponsible socialist-liberal governments. At the same time they are whipping up anti-foreign sentiment by pointing out that the fruits of Hungarian hard work are going to foreigners. And the population laps it up.