György Matolcsy’s economic ideas in 2008 and 2011

I found an old article of mine from July 2008 that has special relevance today. It was about an interview with György Matolcsy that appeared in the July 14 issue of Népszabadság. One didn't hear much about the former minister of economics in the second half of the first Orbán government prior to that date, and therefore the interview deserved attention.

After reading the interview it became clear that György Matolcsy's influence on Fidesz's chairman, Viktor Orbán, was still considerable. People who followed Matolcsy's career after the lost elections knew that in 2003 he became a party member. In 2006 he successfully ran for parliament where he didn't disturb much water. In four years he rose only twice to deliver a speech. In "civilian life" he was director of the Institute of Economic Growth (Növekedéskutató Intézet) about which it is very difficult to obtain much information, but it seems that it is a private enterprise owned by Matolcsy himself. He was also on the board of a Fidesz-financed foundation.

The interview was especially interesting because only a few months earlier Viktor Orbán claimed that Mihály Varga, his former minister of finance, was in charge of short-term planning while Zsigmond Járai, Varga's predecessor and later president of the National Bank, was responsible for long-term economic planning. Matolcsy in this interview claimed that he was in charge of "national economic strategy," whatever he meant by that. His claim was that Fidesz has a "long-distance picture of the future" on which "a national strategy, social and political conceptions as well as economic policy are built."

Given Matolcsy's activities as minister of economics in the last year and a half perhaps it is worth recalling what kinds of plans he outlined in 2008. One thing became apparent from the interview: Matolcsy was still looking for "a new economic model" that could make Hungary unique. It would be, he asserted, "an amalgam of the continental social market and the Anglo-Saxon liberal economy." Although lately I read a claim by some commentator that Matolcsy wasn't in favor of a flat tax before the 2010 elections, this statement is wrong because he made it quite clear in the summer of 2008 that he would introduce a flat tax. Instead of putting the emphasis on a personal income tax, however, most of the taxes would come from consumption. He envisaged five different kinds of VAT. The problem with such a plan then and even now is that within the European Union there cannot be five different levels of VAT. Matolcsy's answer in 2008 was that "at the moment this is the case but later it can be changed."

Matolcsy is surprisingly single-minded when he comes up with an idea. Just yesterday he wrote a letter to the EU commissioner in charge of taxation asking him to consider raising the upper limit of VAT from 25% to 35%. He would like to introduce a 35% VAT on luxury items. According to experts on EU taxation law, even if there were general enthusiasm for such a tax hike in the EU countries, which is unlikely, the change would take at least two years to implement.

He also talked a lot about the low rate of employment in Hungary, which has been stuck for years around 56%. He would like to see 70% employment, which would be higher than the European Union's average of 64.6%. But we know only too well that Matolcsy is an ambitious fellow. In order to achieve this magic number, Hungary needs 1 million new jobs. So, now we understand the source of Viktor Orbán's promise of 1 million jobs in 10 years.

Most likely Matolcsy is also responsible for the often repeated Fidesz claim before 2010 that in two years' time Hungary could save a trillion forints simply by investors having trust in a new government. Naturally, a government headed by Viktor Orbán. This way, Matolcsy insisted, one could save at least 400-500 billion forints a year by being able to take out new loans at lower interest rates and paying back earlier debts that carried higher ones. (As we know, this idea was dead on arrival. In fact, interest rates on Hungary's sovereign debt rose after the elections.) Another 200 billion a year could be saved by lowering taxes, with the result that  "the economy would immediately move into higher gear." Also, by creating 200,000 new jobs in two years there would be a sizeable reduction in the unemployed and in those receiving welfare payments.

It was clearly an unrealistic plan which even under the best of circumstances couldn't have materialized. It struck me at the time as an exercise in daydreaming. I added that "it is hard to imagine that anyone with any intelligence could take this nonsense seriously." However, judging from Viktor Orbán's statements on the economy, he found Matolcsy's economic ideas sound. The last year and a half amply showed that Matolcsy's "unusual methods" of handling the economy are a failure. But Orbán is not ready to admit defeat and change course. Just the opposite, he wants to accelerate the country's "renewal."

The only thing I found in this old Matolcsy interview that was different from the current policy was his ideas about higher education. He called attention to the fact that only 20% of those employed have university degrees. This, in his opinion, is too low. He would like to double the number of university graduates. This would do miracles for the economy. The income level of the work force would rise considerably and "therefore there would be no need for the current strong social net. And if the country spends less on social welfare the government would need less income."

We'd better not probe too deeply into the economic rationale behind this thinking. Here I only want to point out that the Orbán government's thinking on the subject of higher education is exactly the opposite of Matolcsy's in the summer of 2008. They want to reduce the number of students. An absolutely suicidal move. This decision is most likely based on several considerations: (1) a lack of money and the reluctance to introduce tuition, (2) Undersecretary for Education Rózsa Hoffmann's conviction that more selective college acceptance would produce higher qualified students, and (3) Viktor Orbán's hobby-horse about "a work-based society." That seems to mean physical workers toiling on the land and in factories instead of a highly educated work force.

I'm really curious how the Orbán government will manage to get out of the currently close to insoluble problems György Matolcsy created. The simplest would be to sack him, but everybody says that this will not happen. As some informers told Ildikó Csuhaj, a reporter for Népszabadság with good connections in Fidesz circles, Matolcsy in Orbán's eyes is "an icon." 

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Ron
Guest

What I never hear from any politician in Hungary, what the effects or their decision is on the economy of Hungary.
In Holland every political party (especially during election time) hand in their political and economic program to the Central Statistic Office, which calculate, based upon the models available, the impact of such program on employment, gdp, deficit/surplus, etc. And the political parties use this to sell their program/ideas.
I never hear about the program calculations in Hungary. Perhaps a law should be made, that all parties should hand in the program to the KSH to see what the impact of their program is on the future.

Eva S. Balogh
Guest

Ron: “I never hear about the program calculations in Hungary.”
Actually in former governments conducted such calculations. However, since Orbán took over no such calculations have been made. The excuse is that there is no time to have impact studies. Fast, fast, immediately. No discussions, no studies, no nothing.

Paul
Guest

It’s rather difficult to calculate the economic impact of “we promise you everything, and it will cost you nothing”.

Minusio
Guest

“The simplest would be to sack him, but everybody says that this will not happen.”
I tried to point out before that authoritarian regimes are characterised by very little fluctuation in the cast. The reason why is easy to see: As everything is decided by the autocrat, the person playing the role of minister is of no importance. Even János Martonyi is still around…
Who would know by heart any minister in Belarus, Cuba, Venezuela or even Russia for that matter?

Jano
Guest

The reason he won’t fire Matolcsy or at least not now is that he tied himself to much to him and admitting that Matolcsy is delusional would make him look really bad. A thought he probably can’t bear. Instead, he plays the ballsy guy (no offence Mutt:) ) and the innovative know-it-all those mean uptight experts don’t understand. This is a very common con from the playbook, I find a lot of similarities with the “so called healthcare reform” of the MSZP-SZDSZ government. Of course, just as Ágnes Horváth, Matolcsy is going to go eventually as he’s ideals are already fallen apart and reality has already wiped the floor with him. Take it as a sign is that the newly announced austerities couldn’t be farther from his original ideas. The government is retreating and doing casualty minimization, they just “can’t” admit defeat (e.g. by abolishing the flat tax).

Member

“They want to reduce the number of students. An absolutely suicidal move.”
It’s tragicomic the way the are scrambling to find reasons to tax the population. The latest gem is from Miklós Réthelyi (Minister of National Resources). This genius wants to tax the college degrees. So people with college degrees would require to put money into a found that would cover the education of the future generations. This would accelerate emigration in an unprecedented level. What’s next? The “rain tax”?

Eva S. Balogh
Guest

Mutt Damon: “The latest gem is from Miklós Réthelyi (Minister of National Resources). This genius wants to tax the college degrees. So people with college degrees would require to put money into a found that would cover the education of the future generations.”
I just heard that. I almost fell off the chair. I have never seen such a bunch of morons.

Member

“people with college degrees would require to put money into a found that would cover the education of the future generations.” Well, they will “tax” the poor for being poor too, They are proposing to fine people who are caught going through garbage or sleeping on the streets. If they cannot pay they will end up in jail. I am not sure how would homeless pay the fine when they obviously going through the garbage as they have no money for food. There was no referendum on the new Constitution but there will be a referendum for this latest gem of the Orban government for 30,000,000 Ft.

Ron
Guest

Some time ago Mszp suggested tandij, which was shot down by Fidesz, so Fidesz cannot introduce it now. A collage degree tax is the next best thing in Fidesz eyes.
Again Fidesz is introducing a retro active tax. Question is do they have list of people with this diploma and where these people are now. Or alternatively, it will be a line on the tax statement. In other words how can they control this.
Again I think Fidesz shot themselves in the foot.

Jano
Guest
Yesterday I heard that at least people leaving the country after graduation will have to pay tuition and then I said and instead of state financed programs, there will be state fellowships. Then I said well, even though they just introducing a concealed tuition (the only way they can introduce it without spitting themselves in the face), that was something I agreed with. And then comes Réthelyi with this nonsense. There is a reason why taxing is in connection with wealth not with anything else. Then I read that they did not make up their minds if it was going to be mandatory or optional. How can somebody be that naive to think that given the current level of trust people have towards the state, anybody is going to donate part of his salary to Réthelyi who in turn promises that it is going to go to the right place. Really, he swears… With all this said, the optional version is not at all bad. Personally, I wouldn’t mind doing charity this way (this could be connected with some benefits in exchange, like priority treatment in official issues, etc. – just an idea) if I knew that my money is… Read more »
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