Hot off the press! According to Viktor Orbán, the list of IMF/EU demands he was talking about in Sárvár yesterday is not the one the IMF/EU delegation left behind for the Hungarian government to ponder. No, this is a brand new one, received only the day before yesterday. This is what the prime minister said this morning in his regular Friday morning interview on MR1, the premier public radio station. In this document, Orbán emphasized, there are specific demands. He counted about thirty of them.
Orbán obviously thought that with this announcement he could resolve the contradiction between his two statements regarding the Hungarian attitude toward the IMF negotiations. Because on Wednesday he was all optimism concerning an early conclusion of the negotiations while on Thursday he announced that the demands of the IMF/EU were unacceptable. So, he emphasized that the news of these tough new demands reached the Hungarian government sometime between Wednesday afternoon and Thursday evening.
What Viktor Orbán couldn’t have known was that by Friday afternoon Index would have this “brand new” document in hand and would summarize in detail the contents of this letter that came from Brussels.
Viktor Orbán, it turns out, lied again. The letter was not dated yesterday as the prime minister claimed but a week ago, August 31. (And I doubt that it was sent by regular post.) Moreover, the document doesn’t contain any specific demands. This fourteen-page economic and financial analysis of the Hungarian situation was written by economic experts attached to the European Commission and it basically reiterates the contents of the letter that the IMF/EU delegation left behind in Budapest at the end of July. There is not a word in the document about lowering pensions, property taxes, and increasing VAT. On the contrary, the experts in Brussels mentioned that the flat tax increased the tax burden on the poorer strata of society and in fact suggested a lower tax rate for those receiving very low pay.
Among the general observations, the authors of the document complained about the overly optimistic GDP growth figures for this year and next. This year’s budget is calculated on the basis of a 0.1% growth in GDP while next year the ministry of national economy is counting on 1.6% growth. The EU, on the other hand, expects -1.o% this year and next year only 1.0%. Thus the budgets based on these figures are most likely unrealistic.
In order to fulfill the obligations undertaken as part of the convergence program, further steps must be taken. The Kálmán Széll Program 2.0, on the basis of which Brussels decided to resume the issuance of payments under the cohesion program, has since been superseded by new government announcements of additional spending.
As for the deficit, this year it may be only 0.25% higher than the promised 2.8%, but next year it may be as high as 4% instead of the promised 2.2%. The Hungarian government insists that there will be an increase in tax revenue coming from better tax collection, but “that is such an uncertain factor that they cannot take it into consideration.” The experts also think that less money will be coming in from financial transaction taxes than the government expects.
Although the Hungarian government is very proud of its achievement in reducing the sovereign debt, the European Commission projects that by 2020 the debt may be 100% of the Hungarian GDP instead of the current 80%. Therefore “serious fiscal steps must be taken to keep the Hungarian economy on the path of sustainable growth.”
But let’s return to some of the most interesting points on taxation. While Viktor Orbán tries to make out the IMF and EU economists as heartless number crunchers, according to this document they seem to worry more about the Hungarian poor than the patriotic Orbán government does. The document points out that childless workers earning the minimum wage had a tax burden of 4.8% before the Orbán tax reform. Today their tax burden is 16%. The general tax burden, including payroll taxes, grew from 38.8% to 48.8%, one of the highest rates in the European Union. “This reform increased the budget deficit more than 2% of the GDP without having any kind of beneficial influence on employment.”
There is a special section on the problems of the banking system. The extra levies and the financial transaction taxes reduce the ability of banks to lend. The answer is the creation of a stable and properly functioning market economy. Instead, “the government wants to remedy the situation by the state taking a larger role in financing through the Hungarian Investment Bank, a state institution.” Loans that are supported by the state may have a role to play, but “in the long run they do not help.” The Hungarian banking sector tried to explain that fact of economic life to the members of the government to no avail.
Another section deals with the necessary “comprehensive” reforms that have not been undertaken by the Hungarian government in the last two years. The Commission expects reforms in education, in energy policy, and in mass transport. The experts note that as far as the reorganization of MÁV, the Hungarian state railway system, is concerned, not much has happened except promises of future reforms. Still only about 10% of passengers pay full fare.
There are a couple of observations that should be of concern to the European Union. One is the unfair treatment of non-Hungarian companies. The Hungarian government doesn’t hide the fact that they give preferential treatment to domestic companies at the expense of the multi-nationals. The document, for example, specifically mentions the piece of legislation that is commonly called “plaza stop.” Foreign companies are prevented from opening new stores because of a size limitation.
These are the most important suggestions coming from the European Commission. They all sound reasonable to me. But if we can take Viktor Orbán’s statements of yesterday and today at all seriously, I don’t think that the Hungarian government will give in on certain key issues. For example, the flat tax, which is a very important part of the unorthodox economic policies of this government.
So, we can continue to guess about the final outcome of the dueling views of the IMF versus the Hungarian government. This non-debate has been going on now for the last two years.