József Papp: The Dutch with no hatred toward Hungarians

József Papp is professor emeritus at Budapest Corvinus University. The Hungarian original of this article appeared in “Új Világ,” a blog that publishes articles by prominent Hungarians.

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The Dutch prime minister steps forward on behalf of public interest by pushing for a limit on non-repayable grants and for keeping to the rule of law. Taxes missing from the Hungarian budget, government support provided to entice multinational companies to Hungary and tax breaks are paid by no one else but by Hungarian small and medium enterprises and the citizens. Mark Rutte does not hate Hungarians but, in fact, wants the best for them.

After tough debates, at the price of serious trade-offs, the prime ministers of the EU member states reached an agreement on the budget framework numbers for 2021-27. The biggest obstacle to coming to an agreement was the demand by Mark Rutte, the Dutch prime minister, talking as the advocate for the “frugal four,” to tie the disbursement of EU funds to keeping to the rule of law. However, he also insisted on reducing the ratio of (non-repayable) grants.

Viktor Orbán hailed it as a victory that the principle of rule of law would not be applied for the time being and said of Rutte, “the Dutch guy hates Hungarians.” In his regular Friday morning radio show he used the condescending “libernyák” term to describe his discussion partners in Brussels. But is he right? Had the decision makers read the report that uncovered flagrant violations and breaches around the EU-funded railway development at Pusztaszabolcs before they reached their agreement, Viktor Orbán might not have gotten away so easily.

The Pusztaszabolcs development, which is bleeding from all wounds

Here you can find practically everything that would be a red flag for the prime minister of a real liberal democracy (“libernyák”). The railway reconstruction presented in the report is carried out by Mészáros és Mészáros Kft., owned by the main ally and confidant of Orban, the number one exploiter of EU-funded public procurements. The investment is grossly overpriced, as it costs relatively three times the amount paid for a Polish investment with similar technical content. It is being built with clearly unnecessary components (such as an excessively long platform), totally ignoring the interests of residents, with no funds left for an overpass, and with a narrow new crossway compared to the old one.

After reading the report, it will be quite clear to anyone who better represents the interests of Hungarian people — Mark Rutte or Viktor Orbán, who was elected to do so.

Humans are fallible, especially when giving away someone else’s money

The Dutch prime minister is, in fact, coming forward to defend the public interest when he urges a curb on the ratio of grants. In a market economy it is a sin if a profit-oriented company can apply for a “gift” – as grants are gifts, financed from public funds. Humans are fallible, especially when handing out someone else’s money. The grant financed from taxes will sooner or later go to those who give back the most, or, God forbid, will be given to our own folks. Especially in countries where the rule of law is not particularly observed or cared about.

The Czech prime minister also succumbed to temptation, but the Czechs at least reacted by showing their anger with huge demonstrations. If the distribution of grants is a hotbed of corruption and these public funds may be stolen before the very eyes of the public, then Rutte is totally right by saying that the funds from rich member states to poorer ones should be provided in some other forms to reach beneficiaries. I suggested already back in 2009, with the unfolding financial crisis, that for Hungary it would be much more favorable to spend a part of the EU funds to pay down public debt.

Taxes imposed to finance public debt, as well as the huge interest burdens incurred due to the poor credit rating of the country, sucked the life out of Hungarian small and medium sized companies. It is not a public-fund hand-out they need (which will be paid by them to be covered), but reasonable (low) taxes and a stable, predictable environment. Unnecessary redistribution is an impediment to their growth, and this is what the EU fund distribution system is all about: one third of this funding, totaling three billion EUR, is footed by the budget of Hungary (i.e. the Hungarian taxpayer). If member states deemed to be in need would receive only the net funds and their own contribution would be “waived,” EU bureaucracy would be streamlined, and corruption would also decrease.

The trap of one-sided economies

This EU redistribution also involves another serious anomaly, which affects member states with one-sided economies. (I have a longer analysis on this topic.) The economy of newly joined countries, like our country, falls into this category, where a growing ratio of GDP is produced by local subsidiaries of parent companies registered in the donor countries and where the subsidiaries export their complete output to their parent country. The tax computed on the added value created in Hungary by these subsidiaries, VAT, is paid into the budget of the countries where the owners live, not in Hungary, where they pay their dividend tax. And these are usually the donor countries.

To demonstrate the size of the funds we are talking about, we can form a picture just by looking at the balance of investment incomes in Hungary (without including companies typically with no real economic activity or a specific purpose) since 2010, showing an annual EUR 6–9 billion, or in GDP-ratio a 6-9% deficit.

This translates to an annual EUR 0.7-1.5 billion computed with the Hungarian dividend tax rate paid to the countries exporting the capital and not in Hungary. It is easy to play the donor from this amount and from the tax on the added value produced in our country!

Taxes missing from the Hungarian budget and subsidies, tax breaks offered to entice multinational companies to settle here must be paid by somebody, which in this case again are the Hungarian small and medium sized companies and the citizens who pay for it. As a result, we have the highest VAT rate.

This is one of the reasons that we do not have enough companies growing strong enough to expand internationally. This anomaly, however, can only be remedied if Hungary is also able to export enough operating capital (FDI) by registering subsidiary companies abroad. As a result, dividend tax and the VAT on reexports can offset the budgetary deficit arising from this one-sidedness.

Could this help to build multinational companies?

Another obstacle to Hungarian companies growing internationally is a factor which is demonstrated so well by the Pusztaszabolcs railway development. Sticking by the rules of democracy-based market economy would be the single most important prerequisite to the growth engine, the sector of small and medium sized companies, so that they could operate in a stable and predictable environment. An especially important pillar of this environment, if EU funds are available, is to ensure that these funds are distributed on the principle of the rule of law. This approach was already highlighted in 2013 in one of my publications, without knowing Rutte’s views at that time. The winners of NER (popular mosaic word for Viktor Orbán’s System of National Cooperation) raised with government help, sucking resources away from small and medium sized companies will never grow into successful multinational companies. Every forint invested in them is a waste, just going down the drain.

Implementing the demands raised by Mark Rutte is an elementary interest of Hungary, both tying EU fund disbursements to the principle of rule of law and curbing the ratio of grants. Mark Rutte not only does not hate Hungarians, but clearly wants the best for them.

August 2, 2020