Here we continue with the critical look at the various doubtful elements and figures of the Hungarian economy in the last several years.
5. The budget deficit reduction to 3% has been a top goal of the Orbán government, because EU cohesion funds disbursements depended on it and these funds represented 95% of all public investments, which in turn financed the projects invariably awarded to supporters and clients.
And reduced it was, all economists agree, by increased taxation, mainly by way of special/ additional taxes on multinationals like banks, telecommunication and retail companies. “At the same time the tax burden on some groups of low-income earners remains among the highest in the EU.” Country Report. The reversed Robin Hood principle practiced by the Orbán regime is an interesting subject, but outside our scope here.
Nominally the budget deficit went from the very high average 7.1% GDP of the 2003-2007 period before the crisis (high, even if considered against the avr. growth of 3.5% for the same period), spiking to whopping 9.3% in 2006, then stabilizing at 5.1% in 2007 and gradually easing to 2.6% in 2015.
“The budget deficit has been contained, keeping the public debt ratio on a gradually declining path..” says the Country Report.
But again, what is the real deficit considering the many doubtful elements in the equation?
6. Various figures indicate that the main budget items of health and education carry massive debts (from HUF 200 to 450 billion) hidden at lower levels or by the lack or the delay of consolidated data.
While the unpaid bills are easy to add up, it is much more difficult to quantify the systematically decreased or deferred capital expenditure or the reduced workers income in these systems.
The Orbán regime boasts with its “unprecedented investment in medical facilities”, but in fact the upward trend, e.g. an increase of +6.9% in the period 2009-2011, was reversed in 2011-13 downward to reduction by -3.4%. Now the government spends just over 4% of GDP on health services, one of the five lowest in the OECD 34 countries where the average is 7% of GDP.
Both systems have been starved to the point of collapse, which has started to show, e.g. the meek teachers are protesting and preparing to strike, medical staff had been departing in droves for years leaving many hospitals without the legally required minimal staff.
Another way to keep the deficit low is the government’s almost complete withdrawal from infrastructure development: 95% of the finance in all government projects comes from the EU cohesion funds.
Finally, there is notable factor not often discussed – after the appropriation of the PPF monies, the Orban regime stopped contributing to such funds, this way “saving” approx. HUF 350 billion per year according to Mária Z. Pecsnik in her interview Klub Radio March 7th, 2015. (Notably, the government contribution in the crisis year 2009 was HUF 354 billion.)
This item alone represents 2.4% of the government budget or 1.2% or GDP, so in the old set up the budget deficit would have been 3.9% GDP and probably more than 5% after adding some of the other items above. One way or the other the prospects are grim.
7. Employment is another area of government boasting and of serious doubts caused by inconsistent or contradicting data.
Orbán personally vowed to create 1 million new jobs and full employment (!). Silly as these were, in the absence of substantial progress and, above all, to cover for this nonsense the administration resorted to the habitual chicanery. It offers a mishmash of probably false claims, which are hard to reconcile, e.g. how does one create 200 000 new jobs in a year with stagnant 16% of GDP investment, or where is the increase of private spending which would result from such hike in employment?
To improve the figures the government decided to include the Hungarians working/living as tax residents abroad in the domestic employment statistics. I don’t even want to elaborate on this point.
The government claimed to have created 172 000 new jobs in 2014 alone, an increase of 14%.
This would have required HUF 750-770 billion new investments and KSZH (Central Statistical Office) shows that HUF 5 216 billion were invested altogether in 2014 Q4, which is HUF 730 billion or 14% more than in 2013. Seems an almost perfect fit.
However, with HUF 32 180 billion GDP for 2014 the above investment of 5 216 billion is still only 16.2% of GDP. Such a low rate covers just the amortization requirements and leaves nothing for new capacities. Don’t ask me how they reconcile this contradiction.
The reality is closer to an estimate by Mr. Romhanyi, head of the Institute for Responsible Budget, of only 3 000 real new jobs and to the figures of the EU report Employment and Social Developments in Europe 2015 – Statistical Annex according to which the total employment was 3.9 mil in 2005 vs 4.1 mil. in 2014 or 0.5% p.a. increase over the period, a far cry from the regime’s claims.
The unemployment figures in the EU’s Statistical Annex don’t look better even as embellished to some extent by the Hungarian KSZH row data: 302 000 out of work in 2005 and 343 000 in 2014. Please note that the standard pitiful benefits paid for three months dampen the number of applications too.
After the worst figure in a decade – 441k appeared in 2013, the government quickly applied a magic trick and reduced the unemployment by 22% in a year, believed it or not.
8. The Orban chicanery continues with another dark area that is the ever changing Public Works Scheme, which was introduced in 2011. In effect it replaced the unemployment and some social benefits, where many unemployed were given often meaningless menial work to improve the statistics. The figures were inflated by various tricks like counting a person working 4 or 6 h days for longer than three months as fully employed for the whole year.
A pretty alarming trend, according to the Country Report, is the fact that:
“The … cost of the scheme has quadrupled over the last four years, to 0.8 % of GDP, ..and is expected to double again [by] 2018” diverting resources away from real improvements, training and other assistance to facilitate participation in the labour market, but “does not seem to sufficiently improve the employability of the participants.” – or not at all, since I remember something like 4% of participants turning properly employed. To emphasize the inefficiency of the scheme one has to consider that the monthly income of those involved is around HUF 50-75 000 or € 160-225 per month, below the legal minimum net wage of €225.
9. The political risk may sound as an abstract issue to many, but it’s a center point of reference which influences all aspects of the economy. The issues below all reflect on the quality of decisions, legislation and executive action, as well as on the predictability of policies, all issues correlating with the well-being of the economy.
The budget, an important tool of government, is being prepared and submitted ever earlier in the year, e.g. April/May, for the Orbán regime considers this a prestige point. Working with 10 month old data instead of two months old obviously increases the risks in planning.
At the same time budgets are being modified at the drop of a hat, up to seven times.
The process of government decision making is always obscure, often a black box, e.g. no records are kept of the cabinet meetings, no consultations are conducted, even when required by law, and consensus seeking is alien concept for the Orbán regime. The process has been highly centralized and subjected to authority rather than expertise. The public service has been flooded with political appointees with low, if any, expertise and experience resulting in dramatic deterioration of both legislation and government.
There is no point in discussing the appalling process of legislation, because the current Hungarian parliament has become a rubber stamp body of no resemblance to proper legislation or control.
The unpredictable and shifting policies and the authoritative interference of the Orbán regime into the free market processes have been decried by all analysts, e.g. mentioned as an crucial issue in the Moody’s repot, as detrimental to investment and growth.
The so called “opening to the East” proved to be an costly dud and in tandem with the antagonistic attitude toward multi nationals, foreign capital and the Western free economies probably meant many missed opportunities.
The lack of innovation and development policies, the withdrawal of funds and the sinking quality of all levels of education reduce the prospects of economic growth and development, while the exodus of the most skilled and enterprising youth guarantees its deterioration in the medium term.
Corruption has become endemic to the point of significantly affecting the economy in financial terms. It is also a distorting factor which skews policies and specific decision in favor of various private interests often contrary to the public policies and interest. The quality of services provided under corrupt contracts is often sub-standard.
Finally the economic risk should be mentioned, for if the Hungarian economy, even with the its embellished indicators, is not performing very well in the period of good recovery and satisfactory growth in the OECD world, what awaits the country if things turn sour worldwide.
The above-mentioned important elements and indicators give raise to grave doubts regarding the official Hungarian data and regarding the real status of the economy. The problem with all hardened liars is that at the end even they don’t know how much truth is there and how much is smoke and mirrors.
March 24, 2016