Máté Veres, research associate of Gazdaságkutató Zrt., published this study in Új Egyenlőség at the beginning of the year. The article was translated by “Observer,” who added the following notes:
This article offers a set of indicators to reveal the state of the Hungarian economy and society. We think, however, that the situation is somewhat worse than Veres’s assessment because there are additional detrimental factors not discussed here, e.g.:
- The very low investment rate as a percentage of GDP
- The budget deficit hidden in subsystems down to individual units like hospitals or schools districts
- The consumption boost by the remitted earnings from abroad, which are to decline in time
- The poor ratings of the Hungarian places of higher education, the outdated, retrograde education model and policies, the very low number of people with IT or foreign language knowledge, etc.
Analyses of these points will eventually be presented in another article. I’m grateful for the work and care “Observer” took in translating this important article for us.
♦ ♦ ♦
Analyzing the results of the second Orbán government [and third as from 2014] after seven years of freedom fight and other kinds of struggle and hundreds of millions of euros from the EU spent, it’s time to draw a picture of how the Hungarian economy and society are doing compared to 2010 in the light of the latest figures available.
After [the election victory in] 2010 the government benches have been widely using the already well known “past eight years” phrase. It was used by Fidesz and the Christian Democratic politicians as their favored counter-argument when the opposition tried to challenge government actions. The performance of the governments between 2002 and 2010 in many areas could have been criticized (as we did in our analyses), but in general the “last eight years” argument has always been a simplistic communication tool, often used to bypass substantive discussions. In our evaluation of the Fidesz government performance we now follow a different path and instead of summary political statements we shall stay with the facts and figures to show what the “past seven years” were like.
Seven years are already a sufficient horizon for an evaluation of the government’s achievements. For this purpose, however, in addition to showing the changes in numbers, we need to find explanations for the results, and therefore – where possible – to compare the results with those of our regional competitors as well. So now we’ll consider some areas of key importance to the future of the country.
It was 10.3% in 2010 and only 5% in 2016, according to the KHS (Central Statistics Office-CSO), or 6.8%, according to Eurostat.
Apparently the situation has improved, but it is worth adding that the [2008 world financial] crisis played a major role in the exceptionally weak 2010 numbers, while the much better 2016 numbers include both those working abroad and those fostered workers vegetating on subsistence wages (USD 180/month).
The same factors underlay the Eurostat numbers showing a miraculous growth of employment in Hungary (59.9% in 2010 and 68.9% in 2015). According to official figures we caught up with the EU average, but without those working abroad and the fostered workers we just caught up with the eastern [EU] member states. In any case, there is an improvement, primarily due to the EU-funded, labor-intensive construction projects.
2010 – 36th place, in 2016 – 44th
Human development is an indicator introduced by the UNO, a concept of human well-being wider than the GDP indicator. It is generated by averaging three numerical indicators: life expectancy, education and standard of living (GDP Purchasing Power Parity per capita). In this area we not only managed to fall significantly behind, but all our V4 [Poland, Czech Republic, Slovakia and Hungary] regional competitors overtook us, while Poland was still behind us in 2010.
EUR 7,844 mil in 2010, 5,683 mil in 2016
A clear success can be booked in this area. The composition of the debt is just as important as its size, as the crisis taught a large part of the Hungarian middle class. Until 2010 the household debt of the Hungarian population grew at a rate remarkable even by regional standards, and in foreign currency, which was mainly due to the bad interest rate policy of the Hungarian Central Bank (HCB) and to the lack of regulation. The central bank’s interest rate policy between 2001 and 2007 encouraged the population to borrow in foreign currency.
In 2010 the PD was HUF 20,420 billion or 78.8% of GDP. Seven years later, in 2016 it was 25,393 billion or 75.5% of GDP.
This figure has fluctuated during the second Orbán government. It had been over 80% GDP too, but at the end of the year ‘with hundreds of tricks’ – the best known being the seizure of the pension finds – they always managed a decrease from the previous year [the government publishes and uses only a single figure – that of Dec. 30th). There is a lot of uncertainty as to whether the government can sustain the downward trend, given the scale of the debt, but if it manages to keep the balance of payments at zero, the government can eventually claim a clear victory on this front.
TAXES ON LABOR
In 2010 the total was 54.1%; in 2016, 49.0% There is a sizable literature on the issue. The differentiated and on average higher taxes on labor and/or profit are not at all problematic, if they are used by the state to provide high-quality, accessible to all, health, education and other services. This is evidenced year after year by the results of the economic systems of Sweden, Norway, Denmark and Finland, known as the “Nordic model”, since the above-mentioned countries have figured at the top of the lists in competitiveness, innovation and the environment for decades. However, in Hungary things are developing in a direction exactly opposite to the Nordic Model. This question is also interesting because the Fidesz government proclaimed itself to be the government of tax cuts.
Social security expenses in the European Union, 2014
It is clear that if we look at the overall situation, the taxes on labor have decreased. Although it’s worth adding that in international comparison while in 2010 we had the second largest burden rate in the OECD, by now we managed to move up only by two places, occupying fourth place from the bottom. This small success is mainly due to the introduction of a flat personal income tax and its rate reduction to 16%.
However, it’s worth mentioning that the replacement of the progressive tax system used until then by a flat tax rate opened a HUF 444 billion hole in the yearly budget and benefited only the richest. In addition, never has labor in Hungary been burdened by such a wide variety of taxes as today. Actually the situation here is the worst in the region. Meanwhile the government promised a massive tax burden reduction in the medium term and a single-digit company tax. There has been a long-standing debate about the need for a significant reduction of the tax burden with regard to the competitiveness of the economy.
In any case, despite the 2010 promise, we surely didn’t get any closer to the “beer mat-sized tax return” [as V. Orbán half-jokingly promised in opposition]. However, with the new flat and extremely low 9% company tax rate, another 2010 slogan – “we shall fight the offshore knights” – now seems to have morphed into “join the offshore knights’ race.” Similar to the effect of the flat-rate personal income tax, now once again the richest (and the big companies) will do really well as not the Hungarians, but the multinationals, such as General Electric (GE), already did under a special agreement with the government.
Between 2004 and 2010 the growth amounted to 9.9% or in absolute terms USD 114.2 billion to 129.4 billion (a 15.2 billion difference). Between 2010 and 2015, in the same length of time, the Orbán government boosted the GDP from USD 129.4 billion to 138.8 billion (a 9.4 billion difference). The right side of politics clearly underperformed. These numbers, however, may be deceptive because much depends on external factors. But if you just look at our competitors in the region, save for the Czechs and Bulgarians almost all Eastern European member states, even Romania, performed better.
The [public transport] ticket price in Budapest in 2010 was 320 Ft., in 2016 – 350. The ticket prices in the region were as follows in 2016. Sofia – 158 Ft., Bucharest – 90 Ft., Warsaw – 240 Ft., Prague – 275 Ft. So the situation remains unchanged, we are the most expensive.
FREEWAY CONSTRUCTION COST
During the Gyurcsány government overpricing [in public projects] gained notoriety, but there are still no authoritative studies regarding its extent. Interestingly, according to Zsuzsanna Németh, Minister of Development 2010-2014, the Hungarian freeway construction cost per kilometer had decreased steadily during the Gyurcsány government, and in 2010 was 1.8 billion Ft. on average. Compared to this, according to the same Ministry led by Zsuzsanna Németh, the freeway construction unit cost had increased to 2.3 billion per kilometers in 2013. But there were also sections where the costs reached almost 4 billion forints.
BIG MAC INDEX
[Or how many minutes you have to work for a Big Mac]
Crisis or not, the change here is clearly positive: in 2009 – 59 min., in 2015 only 44 min. That said, we still haven’t overtaken anyone in the region, we are on par with Bucharest. It is also important to point out that the Big Mac index focuses on cities, and while Budapest is clearly catching up, the country is dropping behind compared to the other EU Member States. And this worsening trend continued during the past seven years just as before.
BUDAPEST (CENTRAL HUNGARY) GDP PPP / CAPITA compared to EU average
In 2010 144%, in 2014 143% where 100% means the EU average
Only Budapest is above the EU average, the second best county – Győr-Moson-Sopron stands at only 77%. In the light of the foregoing it is worthwhile showing also how the best performing Hungarian regions – where the situation in this area has worsened since 2010 – compare to our V4 competitors. In 2014 in the same category Prague was stood at 173%, Bratislava 187%, Warsaw 197%. Notably in the case of Budapest, Pest County is also part of the region.
GDP per capita by purchasing power parity, 2015
IMPORTED FOODS SHARE
In 2010 24.5%, in 2015 22%
The more food is produced by local, domestic producers the better, both environmentally and economically. According to a relatively recent Corvinus University study, positive, if modest changes have taken place in this area.
THE REAL VALUE OF PENSIONS
It is so far growing in the second Orbán government period, due in part to last year’s persistently low inflation, the third year in a row, and, on the other hand, partially due to the inflation-indexation of pensions introduced by the Gyurcsány government and which during the Fidesz government was often surpassed through the use of small tricks.
In 2008 the gross benefit was HUF 28,500, in 2016 just as much. In international comparison, this is dramatically low.
PRIMARY SCHOOL TEACHER GROSS ANNUAL WAGES
In 2009 it was USD 9,500, in 2015 – 9,149.
The biggest change in the area of earnings in the past period, as mentioned before, was the flat personal income tax, which benefitted primarily the affluent. At first glance the above seems even a decrease, but due to the significantly weakened forint exchange rate in the period the balance is rather a positive one. This fact doesn’t make for any exuberant joy because according to the OECD data, admittedly in need of updating, the approx. USD 9,500 earnings (just as a few years ago) was sufficient only for the last place among the EU member countries.
PEOPLE LIVING IN EXTREME POVERTY
In 2010 – 3 million, in 2016 – 3.6-3.8 million
In addition to this terribly high number, perhaps it is most important to note that after nearly a quarter of a century, in 2011 the CSO stopped publishing any figures about exactly how many people live below the poverty line. (The Policy Agenda think tank, however, has calculated that by 2015 the number has grown to 41.5%. See our article on all of this.)
Actual Individual Consumption in the European Union, 2014
Furthermore, the CSO had calculated that at least 87,351 Ft. monthly net earnings were required (in 2014) for living at a subsistence level. In comparison the net minimum wage in 2016 was still 73,815 Ft. In the first case it seems there was finally a move forward. Thanks to the tenacious struggle of the trade unions in 2018 the minimum wage will reach the subsistence level of around 90,000 Ft. However, thanks to the far higher 35% tax burden, in net terms the minimum wage is still light years behind that of our competitors in the region regarding the increases carried out between 2008 and 2016. In addition, Hungary has the highest proportion (72.2%) across the EU of households that wouldn’t be able to pay any unexpected expense.
HOSPITAL BEDS NUMBER
In 2009 – 70,971, in 2014 – 66,000
The population has been declining steadily since 2010, but we surely aren’t so many fewer. Actually there are more elderly. Therefore we need more, not fewer beds.
Not only compared to 2010, but in fact never has any government since 1990 spent so little on healthcare, as a percentage of GDP, as in the past several years. And this is not only a basic requirement for a more successful functioning of the economy but also a factor that could have improved significantly the overall mood of the whole country. Recent research has shown that the overall satisfaction level in a country is not best raised by increasing the earnings of the inhabitants but by spending relatively larger amounts on problems of well-being. There is also a demand for it. According to the 2016 European Social Survey the Hungarian society is in a terrible state compared to the other European countries: in Hungary people consume the smallest quantities of fruits and vegetables, Hungarian women are moving the least, compared to the Hungarian men only Lithuanians smoke more, compared to the Hungarian men only more Czechs are overweight, Hungarian women are the most overweight, we have the largest proportion of men in poor or a very poor state of health, compared to the Hungarian women only the Spanish women are in a worse state of health, among the Hungarian men are the most showing signs of depression, and the Hungarian population, both men and women, is most affected by cancer. After that, perhaps it’s not surprising that we visit doctors most frequently among OECD countries.
Similar to the health care case, counting from 1990 we have never spent so little of the GDP in this sector as during the Orbán government. Yet the word education could safely be replaced by “future,” since it is basically influenced by the country’s medium and long-term competitiveness. We are rank penultimate in Europe [in spending], so such investment here would bring the biggest return among the OECD countries. The results are visible: we are sixth from the bottom in the OECD in the number of researchers employed in the country; there haven’t been so few studying in higher education in the last seventeen years. We spent the least for developing computer skills, and our students have the largest number of school hours for non-essential knowledge (e.g., ethics [compulsory alternative to religion], etc.) as opposed to essential ones (e.g. reading, writing, literature, mathematics, natural sciences, second or other language). In view of the above, the recently published PISA results, which understandably caused an outrage, probably represent only the tip of the iceberg.
One of the few positive steps in the past few years is that those who cannot find work are, finally, offered free training, but the training offered by the National [Vocational] Training Register (Országos képzési jegyzék) is unlikely to boost the highest added value production areas. In addition, the participants’ livelihood is not guaranteed during the course; hence the training can only be used by jobseekers with a better financial cushion or those enjoying a patronage. Improving job qualifications is needed to raise our incredibly low average salary, which already inhibits economic growth.
CORRUPTION PERCEPTIONS INDEX
In 2009 – 46th place, in 2015 – 50th place
Even the people in Saudi Arabia, Botswana, Qatar and four-fifths of our region feel their governments are less corrupt.
No previous government has shown less interest in this area. The Orbán government’s response to the day-by-day worsening problem of global warming was to abolish the Environment Ministry and to do nothing about the few concrete promises it made before the election – including the creation of a green bank. In the meantime, they managed to earn the glory of the “tree-felling government” title, since probably no one has cut down so many trees as they have done in the last seven years in Budapest, and they have plans for more. Moreover, we are perhaps the only country in the world to impose taxes on solar panels while indebting Hungary by a loan equal to at least 10% of GDP – if not more – for the sake of a twentieth-century technology for [Russian nuclear reactor blocks] Paks 2, which, in the bargain, will surely never produce a return.
Meanwhile, despite all the flag waving and freedom fighting the external exposure of the Hungarian economy has not been reduced at all. And here it is not primarily the foreign currency denominated debt segment that counts most, nor the export-import volume, which reached 200% of GDP, but the fact that less than half of the exported added value is created in Hungary. In other words, more than 50% of the added value produced in Hungary is by foreign-owned companies, which is unique in the European Union. It is no surprise that of the EU money arriving here for business development – after the government has carved off its significant slice – almost 70% is awarded to multinationals.
Such a level of foreign investor influence is extraordinary even by regional standards, although in Eastern Europe we are all rowing in the same boat, i.e. in what the literature calls a dependent market economy. That is, our economies are wholly dependent on Western investments. This is particularly true for the car manufacturing brought to Hungary, because it accounts for more than 20% of Hungarian exports, and this situation hasn’t changed since the year 2000. Meanwhile a leading Fidesz politician says that nothing can be done because “Hungary is a determined country, where it’s impossible to pursue other economic policies.” But it was precisely the Orbán regime which showed that it is. Over the last fifty years countries such as South Korea, Taiwan and Singapore went through economic development with substantial state assistance, which took them to where we are heading today. Big companies like Samsung, LG and Hyundai were heavily subsidized by the state, which in return set certain export expectations, so these companies were forced to continue spending on innovation. While it is a widespread view that the international rules made impossible this type of government intervention, we can see that the Orbán regime can support their oligarchs without any sanctions. The problem is that instead of innovation the regime expects only political loyalty. Despite its references to them as a model, none of the East Asian models’ components has been employed.
In light of the above it is not surprising that there have never been so many who wanted to emigrate from the country. Meanwhile the middle class is eroding and the differences in wealth between the richest and the poorest are increasing.
There is money available though, since up to now the government has spent HUF 300 billion on state companies and a further HUF 100 billion on its own (i.e. our) soccer pet. Overall, we spend four times more on this prime minister’s mania than on road maintenance, while the number of spectators is steadily declining. There are other outlays that went wrong too – the György Matolcsy-led National Bank has had HUF 250 billion pumped into dubious foundations or spent for the purchase of art objects. In addition, another HUF 850 million was sunk into the Felcsút narrow gauge railway, never to produce any return, and HUF 6.7 billion credit was extended to Andy Vajna for the purchase of TV2. Speaking of Andy Vajna, it is worth highlighting the greatest of all items, in regard to which the government didn’t do anything, namely the offshore [knights racket]. Moreover, Hungary is actually moving in this direction. Even in the face of the couple of years old study finding that the almost unfathomable amount of USD 247 billion of untaxed income has left the country in past decades. In the course of this offshore racket we have suffered the second largest losses in Europe.
WHAT FOLLOWS FROM ALL THIS?
Looking at the numbers the government could demonstrate quite serious achievements compared to 2010, primarily in the area of balancing the budget and public debt. The GDP growth rate could have been included but for the fact that this growth was due mainly to the accelerated EU investments and not to a better performance of the domestic economy. In fact our productivity has been stagnant since 2008.
On the other hand, the social inequalities have increased dramatically during these seven years. It is unlikely that these short-term favorable macro-economic data can be sustained in the long term, mainly because the Hungarian society’s human capital indicators have significantly deteriorated as a result of the dramatic underfunding of the public subsystems (healthcare, education, social policy, public transport). That is, the economic growth is due to a great extent to the EU investment funds and the short-term budgetary balance to huge austerity measures. Both are unsustainable.
February 19, 2017