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)

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.

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%.

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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.

The Hungarian scene: From economics to parochial schools

It is hard to pick just one topic to discuss today because too many important events have taken place lately.

The biggest bombshell yesterday was the final word on the Hungarian economy’s performance in 2012, which turned out to be worse than expected.  Hungary is still in recession, with the country’s GDP shrinking by another 1.7%. Hungary is the worst performing economy in the region and it doesn’t look as if there will be any change in the trend. After all, in the last quarter the economy performed even worse: the GDP decreased by 2.7% year on year.

The government blames the sluggish economy of the European Union and last year’s drought for the dismal numbers.  György Matolcsy naturally predicted that next year the Hungarian economy will be booming, and in his weekly essay for Heti Válasz he said that in twenty years Hungary will catch up to the living standards of the Scandinavian countries. He loves long term predictions, perhaps because he stumbles when trying to deal with the next few months. The brand new budget for 2013 will have to be readjusted because of the Hungarian government’s ill-advised purchase of E.ON. It is almost certain that new taxes will be levied either on businesses or on consumers in order to balance the books. And new taxes will put further pressure on growth. I may also add to that bad news another growth killer: the cost of agricultural products grew by 18.1%  in December year on year and by 15.4% during 2012. All in all,  Hungary has had the worst performing economy in the whole region in the last three years.

Yet Viktor Orbán goes on with his success stories. Every Friday morning we learn that all is in order. This time the story is that “five indicators in the Hungarian economy are all right; there is only one which is not and that is growth.” Naturally, receiving relatively high amounts of money per capita from the European Union is also a sign of Viktor Orbán’s political genius. As he repeats time and again, after Latvia Hungary received the most money per capita. But that is not something one ought to be proud of. It actually means that, after Latvia, Hungary is the country in which the economic problems are the greatest within the European Union.

It is hard to know when Fidesz supporters will realize that something is very wrong with the economic policy of the Orbán government. Even conservative economists, including Zsigmond Járai and László Csaba, are critical of György Matolcsy, and yet it doesn’t look as if Orbán is planning to get rid of him although naturally MSZP is demanding his resignation. At least Orbán announced this morning that he doesn’t plan any changes in his cabinet. But almost everybody is convinced that Matolcsy will be appointed the next governor of the Hungarian National Bank and that Mihály Varga, until now minister in charge of the nonexistent negotiations with the IMF, will replace him. Skeptics claim that nothing will change even if Varga takes over because the orders come from the prime minister, who seems to be an economic illiterate.

On the level of undersecretaries, on the other hand, there were changes in the last few days. Zoltán Balog decided to get rid of some people who were giving him headaches one way or the other. He dismissed László L. Simon, undersecretary for cultural affairs, admitting that he couldn’t work with the man. Rózsa Hoffmann was demoted, although my feeling is that Balog wouldn’t have minded parting with her. According to rumors Orbán saved Hoffmann’s skin, most likely not because of his personal feelings for this schoolmarm but because her dismissal would have created trouble between himself and his loyal supporters in the Christian Democratic parliamentary caucus. So, she relinquished all duties connected to higher education; she will be in charge only of elementary and high school education.

Orbán and Balog decided to pick István Klinghammer, former president of ELTE, to replace her because they were hoping that he would, because of his experience with university students, be able to find the right tone in negotiating with the rebellious students. However, I very much doubt that Klinghammer’s dictatorial style and his apparent disdain of the students will endear him to this bright young crowd. Because of his age (72) he spent almost his whole life in the Rákosi and the Kádár regimes, and his educational philosophy seems to reflect those days when Hungarian universities were no more than extensions of high schools. Hoffmann is seven years younger than Klinghammer, but she is also of that generation. These people reject anything considered to be progressive educational thinking. Klinghammer thinks that there are far too many young people going to the university and that they study Mickey Mouse subjects. He was against the Bologna system (B.A., M.A., Ph.D. sequence) and I’d bet that, if he could, he would return Hungarian higher education to those good old days when, in his and Hoffmann’s opinion, Hungarian education was the best in the world.

And while we are on the subject of education and Zoltán Balog’s ministry, let me touch on something that made my blood boil this morning when I read the report about what happened in an elementary school in Balatonfüred that had been taken over by the Hungarian Reformed Church. Let’s keep in mind that Zoltán Balog is a Hungarian Reformed minister. According to the article, two teachers were dismissed from the school because “they did not pray with sufficient devotion.” Mind you, the Hungarian Reformed Church promised at the time of the takeover of the school that there would be no discrimination on the basis of religious affiliation. Now, however, the Hungarian Reformed minister in Balatonfüred referred those who complained about the dismissal to §44 of the Hungarian Reformed Public Education Law that makes it a teacher’s duty to help the students become committed members of their church and country. In addition, the students should become believers. When the parents wanted to know what the two teachers had done wrong, they were told that “they behaved strangely.”

Devotion

The officials of the Hungarian Reformed Church obviously lied when they promised religion-neutral education to all children. And the naive parents didn’t read the Hungarian Reformed Public Education Law. All this while the school is entirely financed by the Hungarian state. On all the taxpayers’ money, including the atheists’.

At least before the nationalization of schools in 1948 parochial schools were maintained by the churches and by tuition fees. Then it was crystal clear that in a parochial school there would be a large dose of religious indoctrination in addition to the compulsory subjects. In theory children of “other faiths” were left alone. They didn’t have to attend church services or the religious instruction offered in school. But in the school I had to attend out of necessity for two years the nuns made it quite clear that non-Catholics were simply tolerated and handled differently from the Catholics, who were in the great majority.

Churches certainly can have their own schools, but they should also finance them. Parents who think that their children would benefit from attending parochial school should pay for the privilege. And before parents are misled, as it seems the parents of this elementary school in Balatonfüred were, they should read all the paragraphs of the parochial schools’ public education laws. Very carefully. In this case, I’d bet a good number would change their minds.

IMF delegation’s report on the economic health of Hungary in 2012

The IMF delegation was back in Budapest, but the visit was not part of the non-existent official negotiations between the International Monetary Fund and the Hungarian government. It was simply a routine examination of the Hungarian economy. Every six months, according to an agreement signed after Hungary received a substantial loan from the IMF, the officials of the Fund have the right to assess the financial well-being of the country.

The delegation arrived on January 16 to look over the balance sheet of 2012 and to suggest steps to correct perceived mistakes in the economic governance of Hungary. Mihály Varga, the man in charge of the non-existent negotiations, told the press that “all talks with the IMF are after all about the loan guarantee Hungary would like to receive.” The Orbán government wants to have a financial arrangement that would allow them to pursue their uniquely Hungarian economic policies without anyone looking over their shoulder. They sure don’t want to have those pesky IMF officials poking around.

IMF-Hungarian government negotiations, January 16, 2012
Photo László Beliczy / MTI

Mihály Varga simply doesn’t understand why the IMF is reluctant to extend a loan guarantee to Hungary without no strings attached when, according to him, everything is swinging. The deficit is low, the government bonds sell well, the price of their credit default swaps is reasonable, and the Hungarian economy is stable. But, it seems, the IMF sees all this very differently.

The unofficial negotiations continued off and on throughout the two weeks the delegation spent in Hungary. For Varga the question was “whether the IMF is willing to accept Hungary’s current model of economic policy as the basis of negotiations or it insists that we change the structure of our economic governance.” The answer came on January 28. The IMF does not accept György Matolcsy’s unorthodox economic model, and it insists on a different course of action. If Hungary does not comply, there can be no question of a loan. Forget about a guarantee.

It is unnecessary to summarize the contents of the fairly lengthy IMF report here. It can be found on the IMF website. The gist of  the report is that “a new policy course is needed to deliver the required medium-term fiscal adjustment in a sustainable way to support growth and confidence, repair the financial sector, and promote structural reforms to boost the potential of the Hungarian economy.”

The weak performance of the Hungarian economy is due both to structural factors and to specific domestic policies. The IMF doesn’t share the Hungarian government’s claim that Hungary’s problems are due solely to the weak performance of the European Union as a whole. The report argues that the “increased state interference in the economy and frequent and unpredictable tax policy changes, particularly on the corporate sector, undermined private sector activity. This contributed to a negative feedback loop between slow growth, weak investment, bank disintermediation, and high public debt.”

If the current policies are continued, the IMF report predicts, the general government deficit will increase in 2013-15. The IMF, like most Hungarian economists, predicts that there will be revenue shortfalls. As a result, the deficit will be above the maximum 3% necessary to exit the European Union’s Excessive Deficit Procedure.

In addition, the IMF delegation was deeply concerned about Hungary’s potential growth. They predicted that growth, if there is any at all, will be in the 1.0-1.5% range in the next two years. In order to foster growth the IMF would like to see “increased policy predictability, a level playing field for all businesses, and structural reforms.”

The Ministry of National Economy immediately reacted to the IMF, but it was as brief as possible. It simply stated that according to the government the “Hungarian economy in fact is in a much better situation than is portrayed in the IMF’s report.” Moreover, “the steps taken by the government are not ad hoc but will remain permanent features of the system.” Well, if this is true, the Hungarian economy will be unlikely to recover in the medium term.

The government’s take on the country’s economy is optimistic, and the ministry of national economy contradicts the IMF assessment on several points. For example, they do not admit that government policies contributed to the recession. In a report of its own, the ministry blames the problems on outside factors: recession in the euro-zone, the drought that produced a poor harvest, and the economic decline of several foreign businesses (Nokia, Flextronics, for example). Otherwise, they list a number of reforms the ministry considers “structural.” Among them, taxation, changes in education, healthcare, pensions, public transportation, and solving the problem of municipal indebtedness. The document can be read in its entirety on the government’s website.

Mihály Varga tried to shift the blame for the sluggish Hungarian economy to the European Union. After all, Hungary was forced by the EU to lower the deficit and to put into place austerity measures that resulted in economic contraction. He also insists on continuing the exorbitant tax levies on banks that has further stifled economic growth because of the lack of credit from banks that can barely keep their heads above water.

In contrast, most of the media described the IMF report as “devastating.” HVG emphasized the real possibility that because the IMF-EU delegation predicts a higher than 3% deficit  Hungary might remain under Excessive Deficit Procedure. That would be very bad news for Hungary. I assume that one of the topics José Manuel Barroso and Viktor Orbán will discuss in Brussels tomorrow will be the delegation’s critical remarks about Hungary’s economic policies.

On the right, the economist György Barcza, who used to work for ING Bank (2001-2012) but moved over to the pro-Fidesz Századvég last November, was the first one to raise his voice against the IMF’s critical report. He claimed that “the IMF didn’t dare tell the truth.” The members of the delegation criticized but did not say what remedies the Hungarian government should implement.  Barcza claimed that if the tax levies on banks and on international companies were lifted the budget would lose about 800 billion forints. In order to make up this sum the government would have to take drastic measures. It would have to introduce a 0.5% property tax. The tax rate for those who earn more than 4 million forints per year would be 50%. In addition, the government would have to stop the generous tax rebate to which families with three or more children are entitled.

Well, I’m no economist but I have other ideas that might solve the problem of the missing 800 billion. For example, the government could sell its MOL stock for which they spent billions, not in forints but in euros. I would suggest getting rid of the recently purchased shares in Rába. They shouldn’t have spent billions on a Hungarian-language university in Romania.  They shouldn’t have spent 13-14 billion forints on TEK (Terror Elhárítási Központ). It was really not necessary to spend 2-3 billion on a 400-member guard for the parliament. They shouldn’t be spending billions on recruiting voters abroad. Hungary doesn’t need several new football stadiums, each costing 10-20 billion forints.  And what about taking over the loans of municipalities that under Fidesz leadership piled up debts they can’t pay? I’ll bet that one could easily make up those missing 800 billion forints.