The deadline was April 15 and an English version was prepared to be sent at the very last minute. The Hungarian version, when it becomes available again, might not be a mirror translation of the one the financial gurus of the European Union will be scrutinizing in the next few weeks. On April 14 the cabinet was still pondering the details of the new austerity program. By that time the English version had to be ready to go.
The document, entitled “Convergence Programme of Hungary, 2011-2016. Based on the Széll Kálmán Plan,” is long. Over seventy-two pages although there is an awful lot of padding. I’m no economist, but there also seems to be a lot of wishful thinking in this program.
Not surprisingly, the first few pages are devoted to the unacceptable economic policies of the socialist governments between 2002 and 2010. But then came the Orbán government, which began a very successful economic recovery program. The authors of the document admit that their remedies are “unorthodox” and rely on an economic philosophy we call “supply-side growth strategy.” Of course, the problem is that in no country has such a policy managed to create sustainable economic growth.
Early in the document one encounters statements that are more or less true but incomplete. A good example is the statement that “households [in the early 2000s] were pushed towards Swiss franc denominated (mortgage) loans by high domestic interest rates, which made them extremely vulnerable to the global financial crisis that started in 2008.”
Yes, but Mr. Matolcsy–because I assume he is the chief architect of the document–doesn’t mention the fact that at this time inflation was still high and thus the interest rate really couldn’t be lowered. Moreover, it was Viktor Orbán’s man, Zsigmond Járai, the chairman of the central bank, who was quite capable of raising the interest rate not half a point here and there but three full points overnight to as high as 12%. Under these circumstances it’s no wonder that people took out mortgages in foreign currencies with much lower interest rates.
The document claims that its supply-side economic strategy is “an important pillar of [the goverment’s] debt reduction plan.” Matolcsy further claims that the two “action plans” announced shortly after the formation of the government have already made a significant change for the better in the Hungarian economy. He tries to sell the idea that these hodgepodge economic announcements, including tax-free pálinka distilling, “were inevitable in order to increase the labour supply, to boost employment and thus to increase long term growth.” The truth is that since last May the unemployment rate has grown. Just in the last couple of months about 90,000 people lost their jobs.
I’m not at all sure whether the financial experts in Brussels will buy the claim that the “nationalization” of private pension funds was actually a “pension system reform.” Then there’s the statement that the “pension system reform” and the “temporary crisis taxes” were “aimed at ensuring the stable financing of the 2010 budget without further increasing public debt.” All I can say is that the government’s aim was off. Even with these measures the government was unable to stick with the 3.8 percent deficit and just lately had to admit that the deficit is more like 4.2 percent or perhaps even a little more. Moreover, as far as I know, the public debt actually rose during this period. Surely, the guys in Brussels are familiar with Hungary’s economic development in 2010.
At last we learn from this document what the Kálmán Széll Plan is all about. Or at least what Matolcsy calls it. According to the document, it is a “Structural Reform Programme.” As we know only too well, the program doesn’t introduce any structural changes. Here is just one example. The Hungarian Railways (MÁV) will receive 100 billion forints so that the company can pay its debts. Otherwise, no serious reorganization of the company seems to be on the table. So, within a few years MÁV will be just as debt-ridden as it is now. Once again the government can bail them out.
The Structural Reform Programme “focuses on the following areas: labour market, pension system, public transport, higher education, pharmaceutical subsidy system, local governments, and the administrative burden on businesses.” Reducing the adminstrative burden on businesses is a worthy goal but saves very little money. However, I suspect a considerable chunk of change can be saved by Matolcsy’s plan to address the ills of the Hungarian labor market: “the rise in the labour market participation rate, which is extremely low in international comparison, will be supported by eliminating disincentives to work.” The implication is that the unemployed live the life of Riley on unemployment insurance or some form of dole. They don’t want to work. Undoubtedly, there are many people who don’t want to work, but the sad fact is that there are not enough jobs available at the moment to go around or where there are jobs there aren’t enough qualified workers to fill them. Reducing unemployment insurance to three months or depriving people of assistance will not create more jobs; it will only make people’s financial lives increasingly perilous. Welfare to workfare costs the government money; welfare to poverty comes cheap.
Mr. Matolcsy admits that although “it is very difficult to estimate the exact effects of the structural reforms on growth,” he shows a more conservative and a more dynamic picture of the future of the Hungarian economy. Herewith his graphs:
As you can see, Mr. Matolcsy’s expectations even in the conservative scenario are not exactly modest. In 2010 GDP growth of both the EU-27 and the Eurozone was around 1.8%. “Following the period of recovery, 2011-2012 can promise a slightly slower rate of world GDP growth at approximately 4.6% with a continued divergence in the rate of growth experienced by developed and developing countries.” Assuming that Hungary is a developing country, it should outperform the developed world. Admittedly, that’s textbook thinking, but it’s not at all guaranteed that the government’s “unorthodox” methods will deliver the textbook results.
Tomorrow I will follow up with more details on the actual steps to be taken to achieve the projected outsized economic growth.