Matolcsy's ministry has come up with its budget proposal for 2012. It is no ordinary budget. It is the "Budget for the Protection of the Nation" (Országmentési Költségvetés). Because if the prime minister a few days ago announced an "Action Plan for the Protection of the Nation" we might as well make this budget plan a prominent member of the "protection of the nation" family. We also seem to have a "Fund for the Protection of the Nation." I will have to do a little more research on that because at the moment it is not clear to me what this fund is for.
Commentators haven't had much time to analyze the budget proposal; the best thing they could come up with is that it is "realistic." Let's not underestimate the importance of that. After all, until now György Matolcsy hasn't displayed a keen sense of realism. He greatly exaggerated the economic prospects of the country. Originally he predicted a 3% growth for 2012 and that was his conservative estimate. In his more sanguine moments he talked about 6%. Then a few months ago he predicted a 2% growth, but today he announced a more modest 1.5% and some analysts think that even that is too optimistic.
He is also modest when forecasting the rise in domestic consumption–0.2%. I think we can safely say that the government is resigned to stagnant domestic spending, upon which the Orbán government had pinned its greatest hope for rapid economic growth. Matolcsy has also become more skeptical about employment. I assume we all remember the magic number of one million new jobs in ten years, but in a year and a half the number of employed people has actually shrunk. According to a report released by the Central Statistical Office (KSH) today, the number of unemployed in Hungary totalled 2,719,000 in July 2011. That means 18,000 fewer employed than in the same month in 2010.
What does Matolcsy promise for employment in 2012? Not much. The government is hoping for a growth of 1.5%. If I calculate correctly, that is no more than about 40,000 new jobs. A far cry from the promised 100,000 a year for ten solid years.
But it was perhaps the hike of the VAT to 27% that was received with the most surprise and dismay. The surprise came because Fidesz both in opposition and since the elections loudly proclaimed that they would never think of raising taxes. Raising taxes slows the economy. What the Hungarian economy needs is a lowering of taxes which would result in greater purchasing power. Hence the introduction of the flat tax, which turned out to benefit primarily the upper middle classes without at all helping people in the lower income brackets. The flat tax not only didn't improve consumption, it managed to create a sizeable budget deficit. Hence new taxes have to be introduced.
Most people suspected an impending tax hike, especially since last weekend when Matolcsy arrived with a folder in hand on which one could read the partial title: "Adóeme…" Well, what could the end of the word be? Surely "Adóemelés" (tax hike). And since reintroducing a higher personal income tax bracket after the much touted flat tax would have had been an admission of the failure of the policy, the government, specifically Viktor Orbán personally, opted to raise the already very high VAT (value added tax). Until now on almost all items, including food, there was a 25% VAT, together with Sweden and Denmark the highest in Europe. Now the regressive VAT will be 27%. There are many ways to lead Europe economically.
There will also be other tax increases. Social security taxes covering health costs will be raised by 1%, and the employers will also have to pay more for health coverage of their employees. That goes against all advice given to the government a year ago. Most economists thought that the payroll taxes that were already very high in Hungary should be lowered.
In addition, the central government will let about 5,000 employees go next year, about 15% of the workforce. Matolcsy announced that if a private firm employs any of the former civil servants it will receive a tax break for a year.
A few months ago when the Hungarian government announced that it was sticking to its 2.5% deficit target investors were satisfied. It seems that by now this government has completely lost credibility. After the announcement of the "Budget for the Protection of the Nation" the forint weakened against the euro. And I doubt that next week will be better.
The opposition parties are up in arms. According to LMP "this is the worst austerity package of the last twenty years." LMP might exaggerate. After all, as a result of the Bokros package of 1995 the income of the population fell by 16%. One of LMP's young economic experts used a slang expression to describe the author of the budget: Matolcsy's "medication rolled away." Meaning he has lost his mind. MSZP simply called it "the budget of poverty." Jobbik charged that the government "makes the poor people pay for the crisis."
Jobbik for once is right: Fidesz's economic policies blatantly favor the well-to-do and discriminate against the poorer strata of society. I'm curious how long the Hungarian people will take all this without a murmur.
The government seems to be afraid of the very Hungarian people it is claiming to protect. Seventy trade unions are planning a series of demonstrations where they say they could easily amass about 30,000 people. The police denied permission, claiming obstruction of traffic or, in another instance, preventing members of parliament from doing their work. But the demonstration in front of parliament was scheduled for Saturday! Surely, the government simply doesn't want to see 30,000 people in one place. On Monday we will find out what the court thinks of the police's decision.
And finally, here is a video. Unfortunately it is in Hungarian, but one doesn't have to know the language to understand its meaning. It is about the sinking of Atlantis, the imaginary island described by Plato. The leaders of Atlantis simply don't want to admit that the water is rising and here is the end of their kingdom. We know whom the authors of the video mean: