Another austerity program introduced in Hungary, but they call it a “freeze”

It was not quite a month ago, on June 20, that Mihály Varga, minister of national economy, triumphantly announced that he “convinced the European Commission that no further austerity measures are necessary for Hungary to keep the 2.9% deficit target” that would ensure the receipt of investment funds from the European Union. Previously the Commission had expressed its misgivings about the feasibility of achieving the prescribed goal. According to Varga, the Commission was impressed by the recent positive results of the Hungarian economy: low inflation and rapidly decreasing unemployment figures.

So, great was the surprise that, after all, the government ordered a freeze of 110 billion forints worth of government expenditures in order to make sure that the deficit target is met. Varga tried to calm the nerves of Hungarians by saying that the freeze “will not affect families and businesses.” So, what will it affect? It looks as if Investment Fund expenditures will be substantially affected and several projects will be postponed. Across all ministries there will be an almost 40 billion forint spending freeze. Reserves for extraordinary measures, like floods, snowstorms and such, will be greatly reduced. The freeze will lower the GDP by .036%. He emphasized that these measures are not really necessary; they are only precautionary.

Yet Varga gave himself away once he began listing the reasons for the freeze. He explained that the favorable economic developments of late had actually had a negative effect on the state’s budget. For instance, a lower inflation rate than expected reduced excise tax and VAT revenues. Moreover, he added that “Hungary is facing some possible punitive measures from the European Union” which would affect certain funds coming from Brussels. Commentators judge that figure to be close to 100 billion forints. As for lower tax revenues, Varga could have added that due to the newly introduced state monopoly of tobacco the state lost about half of its former revenues from this source. Varga of course did not want to mention the substantial expenditures on the nationalization of several large private concerns. In addition, thirteen infringement procedures are currently underway, the latest being an impending fine to the tune of 60-90 billion forints over the tenders for the toll system introduced about a year and a half ago. All in all, the budget is not in great shape.

According to Levente Pápa, an Együtt-PM politician who deals with economic matters, the government has loosened the purse strings of late. The public works program was greatly expanded just before the national election. The same will be true in the coming months, this time because of the municipal elections in October. Sándor Burány of MSZP, who usually responds to issues connected to the economy, also called attention to the so-called “prestige projects” undertaken for the election year.

This morning Viktor Orbán explained the reason for the freeze. This year’s budget is tight, “at the very edge” of 3%, and thus it is a good idea to make it clear to the whole world that Hungary will hold the deficit under the maximum allowed. Then he tried to teach the Hungarian public, which is not too sophisticated when it comes to economics, that “Hungary must continually take up loans in order to finance its earlier loans and it is not immaterial under what terms the country gets these loans. Interest rates are greatly influenced by whether investors consider the budget stable.” Hence the freeze.

At this point the servile reporter who conducts these Friday morning interviews asked Orbán whether it hurts that the building of stadiums must be suspended. Naive man. Orbán announced that “luckily” one does not have to worry about these projects. There is always money for the prime minister’s pet projects. Moreover, he said that some of the expenses connected to stadium construction will occur only next year. Let’s worry about them then.

It is certainly worth taking a look at yesterday’s Magyar Közlöny (Official Gazette) which contains the details of this latest adjustment of the budget figures. The three ministries affected most are the Ministry of Human Resources (9,671.1 million), Ministry of National Economy (8,378.3 million), and Ministry of Agriculture (5,552.0 million). It is true that the Prime Minister’s Office will be able to spend less money from here on (1,446.5 million), but that is a relatively small cut, especially if we compare it to the 3,785.5 million taken away from projects financed by the European Union.

Even more interesting is appendix #2, which lists the exemptions. These are projects that the ministries cannot touch while adjusting their budget figures. One of the first is the prime minister’s protocol expenses. But no one can chip away at the enormous “government communication” budget either. Although I did not know that Viktor Orbán was keen on horses, the “development of the Horse Center in Szilvásvárad” is also exempt. The reconstruction work in the Castle District (Szent György tér, Mátyás templom) must go on. The Ludovika Campus reconstruction, including sports facilities, will continue uninterrupted. This is where military officers and civil servants will receive a proper Fidesz education. Monetary gifts for excellence in sports must remain the same as before. And then we have an incredibly long list of stadiums and sports facilities: Győr, Debrecen, Bozsik Stadium in Budapest,  Ferenc Szusza Stadium also in Budapest, Pécs, Nyíregyháza, Zalaegerszeg, Kaposvár, Kecskemét, Paks, Pápa, Békéscsaba, Mezőkövesd, Siófok, Dunaújváros, Gyirmót, Ajka, Balmazújváros, etc. etc. etc. Too long to list them all.

This how the Ludovika Campus will look like

This is what the Ludovika Campus will look like

But there are other sacrosanct items worth mentioning: aid to art collections of churches, aid for the teaching of religion in schools, financial assistance to priests and ministers serving localities with populations of less than 5,000, financial support of priests and ministers serving abroad, aid for the Piarist order, aid to the Hungarian Reformed school in Debrecen, aid to religious organizations abroad, and finally financial aid for the organizations of ethnic minorities.

It is perhaps not surprising for those who are familiar with the Orbán government’s modus operandi that the largest amount is being taken away from the ministry that looks after healthcare, education, and culture. At the same time the government is spending billions and billions on at least three dozen stadiums all over the country. There is no question where this government’s priorities lie.

The Hungarian economy as reflected in the World Bank’s 2012 GNI per capita figures

Each year on July 1 the World Bank revises its classification of the world’s economies based on estimates of gross national income (GNI) per capita for the previous year. The current income classifications by GNI per capita are as follows: low income = $1,035 or less; lower middle income = $1,036 to $4,085; upper middle income = $4,086 to $12,615; and high income = $12,616 or more.

If we take a look at the figures between 2008 and 2012 we find that until 2012 Hungary belonged (just barely) to the high income group. But last year the GNI per capita dropped below $12,616, the cutoff number. To be precise, Hungary’s GNI per capita income in 2012 was $12,390. With this drop Hungary joined the group of upper middle income countries and left the high income ones.

The World Bank list that summarizes the changes between 2008 and 2012 is revealing in more than one way.  Somewhat surprisingly, Hungary’s 2009 GNI ($12,980) was higher than the year before, but by 2010 it fell back to the 2008 level. The range over the first four years of the survey period, however, was not significant, as you can see from the graph below. By contrast, last year’s drop was substantial: from $12,860 down to $12,390. So, Hungarians are not living better.  It doesn’t matter what Viktor Orbán tells his people about the brilliance of Hungary’s economic policies that the whole world should imitate.

All of the countries in the region with the exception of Hungary improved their per capita GNI. Bulgaria, the poorest country in the region, moved up from $5,700 in 2008 to $6,870 in 2012. With the exception of 2010, Romania improved every year (from $8,050 to $8,420). Poland likewise–from $11,870 to $12,670–which means that Poland moved into the high income countries while Hungary dropped out of this elite group. Although Croatia’s per capita GNI declined somewhat in 2012, the country is safely in the high income zone with a figure over $13,000.

This chart, which was published in today’s Index, is telling. For instance, Slovakia was far ahead of Hungary between 2008 and 2011 and shot up even higher in 2012, reaching $17,170.

GNI/capita changes between 2003 and 2012 in the East-Central European Region / World Bank / Index
GNI per capita changes between 2003 and 2012 in the East-Central European Region / World Bank and Index

Sharp-eyed observers noticed that while there were thirteen countries globally that moved into a higher category, there were only two that dropped into a lower one: Southern Sudan and Hungary.

Opposition politicians immediately responded to the news. Csaba Molnár (DK) recalled that in Brussels at the latest summit Viktor Orbán indignantly said that he found it strange that all those countries that are so unsuccessful at handling their own economies criticize the only country in the European Union that is successful. Molnár called particular attention to Lithuania and Latvia, two countries in the region that managed to get into the high income category. Latvia’s figures are truly impressive: between 2008 and 2012 it went from $12,020 to $14,180. Lithuania also did well: $13,850 in 2012 as compared to $12,000 in 2008.

In the Hungarian miracle economy, it turns out that the deficit (as of June) is much higher than expected. Unless revenues increase dramatically in the rest of the year, Hungary’s deficit will not be under 3.0%. Actually, in the first five months the deficit reached 3.8%. As the case of Cyprus showed, the European Commission can easily put Hungary under the excessive deficit procedure again if it fails to meet its target, which would be an awful blow to the Orbán government.

In order to avoid such a calamity yet another austerity package might have to be introduced. And if the state of the treasury doesn’t improve, the planned increase in teachers’ salaries as of September 1 will have to be scrapped. As it is, the current budget doesn’t include the several billion forints that would be needed to give a modest salary raise to teachers. That may mean that Orbán’s plans for raising salaries just before the election might have to be abandoned. According to one of the trade union leaders, it is more than possible that the majority of teachers voted for Fidesz in 2010 because of its promise to raise the very low salaries of teachers. For three years nothing has happened and the teachers’ patience is running out. There are more than 100,000 teachers in Hungary. That’s an awful lot of voters whom Fidesz may lose.

MSZP suggested that the figures on poverty that were due to be released in June are being held back. Opposition politicians suspect that the figures are horrendous and that’s the reason for the delay. Whatever the cause, one suspects that poverty has risen sharply since the inauguration of the Orbán government. When will the Hungarian public reach a point of no return?

As for the government’s efforts to turn Hungarians against the European Union, they have not yet borne fruit. The majority of Hungarians still think that Hungary’s place is within the European Union. Some opposition politicians think that perhaps the 2014 election should be a kind of  referendum on Hungary’s membership in the Union. This might be a savvy political strategy. Especially if the opposition hammers home the dire consequences of leaving the EU and being isolated and locked inside the country’s borders after almost ten years of total freedom of movement across the 28-country Union. Show the people the changes that abandoning the Union would bring to their everyday lives–from an increase in the price of goods and an economic slowdown to needing visas to visit their relatives in Slovakia and Romania. I’m sure they would think twice before voting for a party that wants to keep the country totally independent. Independence has a price. Just as Hungary’s independence from Austria had a price. A very high price.

Another austerity package: The eleventh since the Orbán government took office

The online newspaper Stop warned on May 29, after the news broke that the European Commission would recommend to the Economic and Financial Affairs Council (Ecofin) of the EU that the excessive deficit procedure against Hungary be lifted, that “Brussels is still watching.” Well, it seems that they didn’t watch closely enough. Here we are three weeks after the news so loudly trumpeted by the Hungarian government as a huge victory for its sound economic policies. And it appears that the great planners of the economy in the Ministry of National Economics realized, perhaps with some help from Brussels, that after all the numbers don’t add up.

In today’s Hungarian edition of Portfolio one of the headlines reads: “Surprising austerity package was announced by Varga: Tax hikes are coming.” I don’t know why the financial reporters of Portfolio are surprised. I think it was predictable, given the economic climate in the country, that the deficit was unlikely to be kept under 3% this year. And if it isn’t, Hungary could easily end up being under excessive deficit procedure again in no time.

There was another headline that caught my eye. According to HVG, financial analysts cannot agree on whether this latest austerity package was really necessary. The “expert” from TakarékBank claims that this step was unnecessary and only shakes investor confidence in a more predictable economic policy that everybody was hoping for after the departure of György Matolcsy. His colleague at BudaCash, on the other hand, detected a one hundred billion forint shortfall because only half of the anticipated revenues from the new taxes actually reached the treasury.

I was also fairly amused when I discovered that a Hungarian-language blog awarded Mihály Varga the Pinocchio Prize. At first I thought that awarding this “prize” to the minister of economics was a response to his announcement of the new tax hikes, but I soon discovered that the article was posted at 8 o’clock in the morning whereas Varga’s press conference announcing the new taxes took place only two hours later. The blogger was talking about the exaggerated descriptions of a booming economy very much in the style of György Matolcsy. As several newspapers said, the Hungarian population is still supposed to believe the government “fairy tale.”

Did the government have to adjust the budget again? Was it necessary? You can bet your bottom dollar that it was necessary. Let’s not forget that Ecofin will reach its final decision on the excessive deficit procedure two days from now, on June 19. I wouldn’t be at all surprised if we found out that the Hungarian government received word from Brussels that the figures they submitted didn’t quite add up. Now the only question is whether this last-minute scramble for additional funds will satisfy Brussels’ demands for an economic policy that ensures sustainable economic growth. Or whether they will change their minds, claiming that these periodic adjustments are no remedy for Hungary’s economic ills. In fact, they exacerbate them. One could argue that the very heavy taxation imposed on both consumers and companies may lead the country back into recession.

Here are the main points of the package: (1) a hike of the financial transaction tax (FTT) rate on non-cash transactions to 0.3% from 0.2%; (2) an increase in the FTT rate on cash transactions to 0.6% from 0.3%; (3) an increase in the telecom tax to HUF 3 from HUF 2 per minute or per SMS and a higher cap for corporations from HUF 2,500 to HUF 5,000 per month; (4) an increase in the mining royalty fee to 16% from 12%; (5) a 6% health care contribution to be paid on interest and capital gains; (6) and, what Varga forgot to mention in his press conference, banks will have to pay a 7% tax on the amount of their loans to the municipalities that the national government took over. The rationale? The state is a more reliable borrower than the municipalities. So, the “reliable customer” will not pay back what he owes in full! What can one say?

There are some who have plenty to say. LMP announced that Varga’s economic policy is not one whit more reliable than Matolcsy’s. Its spokesman Gábor Vágó emphasized the need for a total economic turnabout. Együtt PM called attention to the fact that a week ago Varga still claimed that the budget’s cardinal numbers were solid and needed no adjustment. There is still something very wrong with the Ministry of Economics.

The blog that handed the Pinocchio Prize to Varga  published an estimated total of the ten “packages” since the Orbán government took over. They arrived at 3 trillion forints. This last package, the eleventh, is also quite large. Experts estimate it at anywhere between 100 and 200 billion forints.

Estimated amounts of austerity measures (2010-2012)

Estimated amounts of austerity measures (2010-2012)

The forint survived the announcement relatively well. It is still hovering around 291 to a euro. Unfortunately the BUX (the Budapest Stock Market) did not fare as well, with heavy telecom and banking (OTP) losses.

When Varga took over the ministry he indicated that perhaps the government will stop some very expensive and not urgently needed projects such as soccer stadiums and refurbishing the square in front of the parliament. But soon enough it became clear that for Viktor Orbán these mega-projects that symbolize the greatness of his regime are far too important. The government would rather introduce new taxes to pay for his pet projects. Especially if on Wednesday Hungary is released from bondage by Ecofin. In fact, there is speculation that the government never seriously thought of abandoning these “prestige projects.” It was only a ploy to show the EU that the Hungarian government is even willing to sacrifice stadiums on the altar of economic stability.

I predict that this is not the end of the austerity measures. I wouldn’t be at all surprised if within a few months, most likely well before the end of the year, there is another announcement about new taxes. This time to avoid being returned to the group under excessive deficit procedure.

Some good news for the Orbán government, but there are still many questions

Viktor Orbán received a couple of nice presents today for his fiftieth birthday. One was from the Hungarian Central Statistical Office (KSH) and the other from Olli Rehn, European Commissioner for Economic and Monetary Affairs and the Euro.

According to the Statistical Office, the unemployment rate ticked lower to 11.0% in the three months ending in April from 11.8% in the first quarter of 2013. On the surface this improvement seems both rapid and substantial. But, as points out, “The change in the number of employed shows the same strong fluctuating pattern as in the previous years. The main cause of the fluctuation is the year-end stoppage of public work schemes.”

Hungarian unemployment Another possible reason for the improving unemployment numbers (although this does not address the issue of seasonality and would take more time to be borne out) is that unemployment benefits run out quickly in Hungary. The Orbán government reduced eligibility for benefits to three months, the lowest perhaps in all of Europe. Whether these people simply drop out of the officially tracked work force after their benefits run out or find a job is hard to say, but we do know that the number of employed workers grew by 61,000 over the same period last year. Some of these people may have found part-time work paying below the minimum wage as employees of the public works program that began full-scale under the Orbán administration. Only a month ago, one of the undersecretaries of the Ministry of National Economy boasted about the very high number of people in the program: 300,000 this year as opposed to 261,000 last year. If his figures are correct, almost 65% of the recent job gains come from the public works program. These people don’t produce any real profit. In fact, they are a drag on the central budget–this year a projected 153.7 billion forints. So I think we should wait before passing final judgment on the employment figures.

The other piece of news came from Brussels in the early afternoon, and it was not much of a surprise to anyone. It has been clear for at least a week that it would be very difficult not to recommend lifting the excessive deficit procedure in Hungary’s case. Due to a series of tax hikes, mostly levies on businesses and banks that affected the population only indirectly, the government managed to decrease the deficit to under 3.0%. Naturally, the government considers this a major victory that vindicates Budapest’s economic policy.

Viktor Orbán had single-mindedly pursued the goal of getting out from under the excessive deficit procedure. Some people argue that he was acting out of fear of a cutoff of EU development funds. But there was never any serious threat of the country’s being deprived of funds because of its deficit, which pales in comparison to the deficits of some other European countries. I suspect that what Viktor Orbán really wanted was to stop the EU monitoring that went hand in hand with being under the excessive deficit procedure. After all, he backed away from IMF funding because they would have closely monitored the Hungarian economy. But, I fear, Viktor Orbán is mistaken. The number crunchers in Brussels will continue to monitor Hungarian economic data closely. Viktor Orbán won’t have a free hand. Hungary, being part of the EU, is expected to follow its advice. If it doesn’t, Hungary may find itself under the excessive deficit procedure once again. Such a possibility is not unheard of. After all, this is most likely what will happen to Malta.

Hungarian deficit between 2001 and 2014 / Ecostat, Népszava, graphics by Szilvia Kőszegi

Hungarian deficit between 2001 and 2014 / Ecostat, Népszava, graphics by Szilvia Kőszegi

Unfortunately, Hungary’s unorthodox economic policies aimed at lowering the budget deficit were costly to both the population and the economy. Trying to hide economic austerity from the general population, the government taxed businesses and banks to death and was unable to stave off an economic recession. Yes, the deficit is low at the moment, but how long can the government continue an economic policy that does not produce growth?

The Orbán government was also fixated on reducing the national debt, which was not higher than in most European countries. They confiscated 95% of all private pension funds, in part to lower the debt. Since then that enormous sum of money has evaporated. Some of it was absorbed into general funds and more than half of it went to the bottomless pit of the national debt burden. Because Viktor Orbán was unwilling to accept the terms of a low interest rate IMF loan, the country was forced to borrow at market rates. The sad result is that the Hungarian national debt is higher today than it was in 2010.

Yes, Hungary is off the hook for the time being, but Brussels made several recommendations and suggested specific steps the country should take to achieve sustainable economic growth.

The European Commission was critical of the Hungarian government for concentrating on the revenue side of the ledger.  They suggested restoring the former competence of the Fiscal Council and advocated a return to normal lending by decreasing the bank levies. They criticized the newly introduced flat tax which favors the rich and over-taxes the poor. They maintained that Hungary should concentrate on employment. Hungary has one of the lowest rates of labor market participation in the Union. They called the attention to the social situation that continues to worsen with 31% of the population at risk of poverty.

They suggested that the country “create a supportive business environment, in particular restore an attractive environment for foreign direct investors, by making the regulatory framework more stable and by fostering market competition. Ensure the prompt implementation of measures envisaged to reduce the administrative burden, improve competition in public procurement and take adequate measures to tackle corruption.”  They criticized the measures introduced in the field of education. As opposed to earlier years when fewer people were dropping out of school, this trend was reversed in 2011. They are concerned about the “ongoing education reform” in higher education. And finally they criticized the regulation of energy prices. In their opinion these regulations should be gradually phased out while “protecting the economically vulnerable.” Public transport should also be more cost efficient.

These are precisely the steps that the Orbán government doesn’t want to take. But if they do not follow this sound advice, it is unlikely that considerable economic growth can be achieved in the long run.

The end of the Hungarian recession?

The big news of the day is that the Hungarian recession has ended. Well, this is technically true, that is, if the quick estimates prove to be correct. A common back-of-the-envelope definition of recession is two consecutive periods of shrinking GDP. By this definition Hungary was mired in recession throughout 2012. The Central Statistical Office (Központi Statisztikai Hivatal) now claims that GDP grew in the first quarter of 2013 by 0.7% when compared to the last quarter of 2012. Measured year over year–that is, comparing the first quarter of 2013 to the first quarter of 2012, however, Hungary has experienced a 0.9% decline in GDP. As Gordon Bajnai’s Együtt 2014-PM said, “a slower rate of decrease is not growth. It simply means that the decline is diminished somewhat.”

Needless to say, the government is ecstatic. András Giró-Szász, the government spokesman, announced that the government’s efforts have paid off. From here on there is no question that Hungary’s economy will grow rapidly. The somewhat surprising figure is considered to be an important watershed. Some right-wing papers compared the Hungarian figures to the disappointing news of the European Union’s deepening recession by pointing out that while the Hungarian figures are in positive territory, the EU reported a 0.7% decline. Yes, but the 0.7% decline must be compared to the Hungarian 0.9% decline on a year over year basis. And, by the way, few Hungarian newspapers bothered to report that Romania’s GDP grew by 2.1%.

Mihály Varga acted as if the government’s predictions made at the end of 2012 were right on target. They knew all along that 2013 would be a turning point, at least for economic growth. Considering how bad the budgetary and economic predictions of Varga’s ministry were, I take his claim with a grain of salt. Viktor Orbán himself predicted that 2013 would be “the year of reaping.” In February 2012 Orbán said that 2010 was the year of collaboration, 2011  the year of renewal, 2012 the year of take-off, and that 2013 would be the year of growth. Since 2012 wasn’t the year of take-off, Orbán’s prediction might be equally wrong for this year. Even the most optimistic predictions talk about only modest growth, under 1%.

One thing that is worrisome is the steep decline in industrial production over the last year. Although the overall decline was only 0.9%, industrial production was down by 2.9%.

An article that analyzes and tries to explain what these new GDP figures mean puts it this way: “Is it growth? Is it a decrease? Is it stagnation?”… None of the above.” After this introduction the author of the article explains that since growth is measured on a year on year basis, Hungary is not out of recession. It is troubling that the figures for the first quarter of 2013 are even worse than the truly terrible figures for the first quarter of 2012. The small growth over the last three months came largely from the building industry and agriculture, which is good news for the poorest section of Hungarian society. On the other hand, it is worrisome that industrial production hasn’t yet regained its 2010 level. Car production has declined and Hungarian-produced durable goods are down a staggering 30% compared to a year ago.

Let me add that the construction industry’s relative growth is most likely heavily influenced by government expenditures.  We have only to think of the billions spent on redesigning Kossuth Square in Budapest and building new football stadiums. If these projects are halted, the construction industry might fall back to its previous dismal performance.

There are also worrying signs as far as the budget is concerned. The cash registers that are supposed to report straight to the Hungarian equivalent of the Internal Revenue Service will not be functioning by July 1 as planned because of technical difficulties, and therefore the rather large amount of revenues that was supposed to come from this source most likely will never reach the treasury. The same problem exists with the e-toll scheme I wrote about earlier. In both cases the Hungarian companies who were chosen couldn’t come up with any acceptable solution.

Longer-term economic growth might be sacrificed for the sake of trying to keep the budget deficit under 3%. (Mind you, building useless stadiums or remaking Kossuth Square to resemble its 1944 self are not productive investments, although Orbán is especially infatuated with “a work-based economy.”) In part because of the heavy tax burden placed on them in an effort to shrink the budget deficit, multi-nationals aren’t exactly swarming into Hungary. And it’s highly unlikely that the small and medium-sized Hungarian businesses that the government is trying to promote can contribute enough to GDP to make up for government and foreign investment shortfalls. Hungary has yet to come up with a compelling growth plan, orthodox or unorthodox.