“Tappanch”: Viktor Orbán’s phony wars

It doesn’t happen too often in the world of blogging that readers who are also avid and thoughtful commentators request that one of their own write a “guest post.” But this is what happened. “Tappanch” is always the first to find the salient news of the day. He is never satisfied with journalistic summaries but goes to the statistics. As you will see, he compares several sources of information to come up with his astute observations on the state of the Hungarian economy. I’m sure we will all learn from his considerable research on Viktor Orbán’s mostly lost economic wars.

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1. The war on debt

The “Basic Law” that replaced the Constitution on January 1, 2012 mandated that each yearly budget should decrease the “debt of the central government”/”complete domestic product” ratio (36 & 37). Subsequently, the Orbán government postponed the effective date of the start of this reduction to 2016. So it created a legal category that restricts the rights of the Parliament and Courts, contingent on the value of the “complete domestic product”, although there is no such notion in economics. Most people assume that the lawmakers meant GDP here.

On the other hand, the debt/GDP ratio depends on how we calculate the debt and how the GDP.

1.1 The denominator: How large is the Hungarian GDP?

The Central Statistical Office (KSH) currently gives three series of numbers.

(a) GDP in current prices.

(b) GDP in previous year’s average prices,

(c) GDP in 2005 average prices.

The three numbers for 2013 and, in brackets, for 2012 were reported to be

(a) 29114.43 [28048.07]

(b) 28360.18 [27175.44]

(c) 21984.68 [21742.74] billion HUFs on December 31, 2013 [2012].

The head of the potential government appointed “Budgetary Council,” Árpád Kovács, used slightly different numbers in a recent article for (a), namely: (a) 29203 [28048].

The GDP is quoted in HUF, but it is also meaningful to convert its forint value into EUR at some exchange rate. I will use the daily conversion rate of the European Central Bank, which can be found here.

The GDP values in EUR were

98.02 [95.96]

95.48 [92.97]

74.01 [74.39] billion EURs at the end of 2013 [2012].

Let’s see the numbers Hungary reported to the European Statistical Office.

2008: 105.54

2009:  91.42

2010:  96.24

2011:  98.92

2012:  96.97

2013:  98.07

So if one asks about the growth of the GDP in 2013, the answer will be at least sixfold. In HUF terms, we get to the numbers 3.80% [4.12% in Kovács’s article], 4.36%, and 1.11%, while in EUR terms, the growth was 2.15%, 2.69%, and -0.50%, an actual decline.

If we use unchanged HUF prices, i.e. (c), agriculture contributed to 0.9% of the 1.1% growth of the GDP.

In reality, the large volume increase in the corn and wheat production was offset by the significant decline in their price.

1.2 The numerator: How large is the national debt?

Are we talking about the debt of the central government? Do we include local governments or Social Security? Gross debt or net debt? Is the debt “consolidated”? Do we measure the debt in HUF or EUR? Which agency reports the debt?

1.2.1 The gross debt of the central government

This number stood at  19933.4 billion HUF when the Orbán government took over on May 31, 2010; at 20720.1 on December 31, 2012; 21998.6 on December 31, 2013; and 23569.3 on March 14. 2014.

So the gross debt has increased by 6.17% in 2013, but even this number was achieved by tricks to lower it artificially for a few weeks around December 31:

12.06:  22,728.0

12.13:  22,645.1

12.20:  22,365.5

12.23:  22,434.8

12.31:  21,998.1 (local minimum)

01.24:  22,862.1

01.31:  22,842.0

02.07:  22,899.3 (all-time high)

They asked the partially state-owned MOL and ordered the 100% state-owned Eximbank to purchase government bonds for 435 billion HUF. They were repaid in January.

If we count in euros, the debt has increased by a smaller percentage because of the declining value of the forint.

It was

72.35 billion EUR on May 31, 2010

70.89 on December 31, 2012

74.06 on December 31, 2013

74.93 on March 14, 2014

Thus the debt has increased by “only” 4.48% in euro terms in 2013. The debt of the central government has grown by 18.24% in HUF or by 3.75% in EUR since May 31, 2010. This last number looks great, unless we recall the fact that the Orbán government took over the private retirement funds (MaNyuP) of 2.9 million workers on May 31, 2011 and has spent it COMPLETELY by December 31, 2013.

How much of this money was spent for “debt reduction”? (The initial nationalization) + (subsequent voluntary offerings) + interest – (previous capital gains paid to the workers in 2011). The initial nationalization amounts to 2945.3 billion HUF. When I added up the items on the website of AKK, the office that handles issuing government bonds, I came up with the number of 2555.9 billion HUF, which might be a good approximation of the actual new debt the Orbán government created towards the future retirees.

If we add the spent fraction of the retirement forints to the debt, we come up with

19933.4 on May 31, 2010  [72.35 EUR]

22920.3 on December 31, 2012 [78.41 EUR]

24554.5 on December 31, 2013 [82.66 EUR]

26125.2 on March 14, 2014 [83.06 EUR]

So the Fidesz government has increased the debt of the central government by 7.13% in HUF or 5.42% in EUR during 2013. The total debt growth since May 31, 2010 amounts to 31.06% in HUF or 14.80% in EUR. The previous numbers came from the Treasury, which can be found at akk.hu.

The National Bank of Hungary, MNB, has gross debt numbers that are higher by about 1000 billion HUF than the sum of the debt reported by AKK and the spent retirement funds.

24085.5 on December 31, 2012 [82.40 EUR]

25598.8 on December 31, 2013 [86.18 EUR], a 6.28% rise in HUF or 4.59% in EUR during 2013.

The distribution of the gross debt in HUF and foreign currencies has changed since 2010, but the change is not as significant as some government propagandists suggest.

On 2014-01-31 [2010-05-31] {2008-05-31}

40.89% [45.70%] {27.77%} of the debt was owed in foreign currency, “deviza”

0.50% [ 1.26%] { 0.03%} in “other obligations”

58.61% [53.04%] {72.20%} in forints (Source AKK’s website)

1.2.2 Budget deficit and EU support

The budgetary deficit and the growth of indebtness has been mitigated significantly by the support Hungary receives from the European Union. The net EU contribution to Hungary in billions of EURs:

2008: 1.12

2009: 2.72

2010: 2.75

2011: 4.42

2012: 3.28

2013: 4.1  [low estimate, based on Lázár’s statement 4.1= 5.05-0.95]

2014: 4.22 [by the budget plan, 5.21-0.99 @296.9 EUR/HUF]

In this article I use the yearly currency exchange rates EUR/HUF and EUR/USD provided by Bundesbank.

In the 2014 budget plan (September 2013 version), the EU support amounts to more than 10% (!) of the expected revenue, while 7.4% of the outlays were designated to service the interest on the government debt.

Domestic revenue/outlays equals only 85% in the 2014 plan.

In the entire 2014-2021 European budget cycle, Hungary expects to receive 7200 billion HUF, i.e. more than €3.2 billion yearly.

The nominal deficit was:

2008:  3.87= 5696/1.4708

2009:  4.13= 5764/1.3948

2010:  4.22= 5599/1.3257

2011: -4.19=-5833/1.3920

2012:  1.93= 2481/1.2848

The nominal 2013 deficit was €3.13 billion according to financial minister Varga’s January statement.

Let us compare the nominal deficit numbers with those in Kovács’s article. Through 2012, he uses the same numbers Hungary reported to the European Statistical Office as “general government deficit”, which includes Social Security and local governments as well. See here and here.

2008: 3.94

2009: 4.23

2010: 4.15

2011:-4.28

2012: 1.98

2013: 2.32

Kovács contradicts Varga for 2013: Varga stated that the 2013 deficit was 929 billion HUF on January 22, while Kovács gave the 2013 number as 689 billion on March 13. But a recent (February 28) KSH publication puts the deficit of the central government at €3.30 billion (979.8 billion HUF), and the “consolidated” deficit at €3.13.

year: central budget; public finances (államháztartás); with local governments

2010: 3.10; 3.29; 4.07

2011: 6.18; 6.23; 5.73

2012: 2.11; 2.07; 1.76

2013: 3.30; 3.13; n/a

(See p. 26, p. 92 of KSH’s website)

The first two months of the 2014 produced a nominal deficit of 582/305= €1.91 billion euros, which leaves only €1.20 billion of deficit for the remaining ten months of 2014.

Let us calculate a more genuine deficit number, equaling the nominal deficit + the used retirement funds + net EU support

2008: 5.06 =   3.94+0+1.12

2009: 6.55 =   4.23+0+2.72

2010: 6.90 =   4.15+0+2.75

2011: 6.81 =  -4.28+6.67+4.42

2012: 6.49 =   1.98+1.23+3.28

2013: 8.57 =   3.30+1.17+4.1 [KSH data + AKK data + estimate from Lázár’s statement]

2013: 7.59 =   2.32+1.17+4.1 [Kovács data for the first number]

2013: 9.61 =   4.34+1.17+4.1 [see 1.2.3 for the first number]

2014: 7.33 =   3.11+0+4.22   [budget plan]

Simicska’s Közgép won at least 432 billion HUF in public tenders in 2013, so about 30% of the EU support goes through the company of the former treasurer of the ruling Fidesz party. We can state with certainty that the genuine budget deficit was the largest ever in 2013.

1.2.3 The debt of the local governments

Here we use the data of the MNB that can be found here.

The liabilities of the government in 10⁹ HUF at the end of 2013 [2012], growth in 2013:

Central government : 25598.8 [24085.5], 6.28%

Social security fund:  51.5 [  164.5] [the disappeared retirement funds do not appear as liabilities!]

Local governments :  637.4 [ 1280.4]

Total liabilities : 26287.7 [25530.4], 2.97%

“Consolidated” liabilities: 26131.5 [25281.7], 3.36%

“Consolidated debt”: 23067.8 [22392.8], 3.01%

“Consolidated” means that “sub-sectors of the general government” are excluded, as the second note in the MNB spreadsheet explains.

This “consolidated debt” is the number Mr. Kovács uses in his article cited above.

Assets of the government:

Central government:  5848.3 [6583.4], -11.17%

Social security fund:  396.1 [ 368.7],

Local governments:  1592.1 [1414.3],

Total assets:  7836.5 [8366.4], – 6.63%

“Consolidated”assets:  7680.3 [8117.8], – 5.54%

Total net liabilities:

Central government:  19750.5 [17502.1], 12.85%

All governments: 18451.2 [17164.0],  7.50%

“Consolidated” net : 18451.2 [17163.9],  7.50%

Notice that the 2013 general government deficit that can be be concluded from these numbers is (18451.2-17164.0)/296.87= €4.34 billion, and not the €2.32 Kovács or the €3.13 Varga and KSH reported.

Let me summarize: the net financial position of the government is worse than what the gross debt numbers indicate.

During 2013, the increase of the debt amounted to

net debt: 12.85% in the central government,

net debt:  7.50% in the central and local governments combined.

gross debt: 6.28% in the central government,

gross debt: 3.36% in the central and local governments combined.

1.3 The mystical ratios

If you have the right to choose your favorite numerator and denominator, the desired ratio can be achieved with ease. We saw that Budgetary Council chairman Kovács counts with a unique, much lower deficit for 2013 than minister Varga. He also uses a higher “GDP in current prices” for 2013.

His calculations for 2013 [2012]:

Debt: 23068/22393, an increase of 3.01% [“consolidated” debt]

GDP:  29203/28048, an increase of 4.12% [GDP in current prices]

ratio:  78.99% [79.84%]

Let us calculate the ratio using liabilities of the central government from 1.2.2!

Debt: 25598.8/24085.5, an increase of 6.28%

GDP : 29114.43/28048.07, an increase of 3.80% [data provided by the statistical office KSH]

ratio: 87.92% [85.87%]

So we found official data showing the “ratio of desire” up in 2013, contrary to the tenet of Fidesz’s own “Basic Law”.

The ratio from the “consolidated” deficit is the well published (23067.8-22392.8)/29114.43= 2.32%.

But the Maastricht criterion requires member states of the European Union to maintain the yearly ratio of (deficit of the central government + local governments + social security)/GDP below 3%.

This ratio was (18451.2-17164.0)/29114.43= 4.42% in 2013.

2. The war on unemployment

E = [employed in enterprises with at least 5 employees]

R = [employed in enterprises with four or less employees]

S = [self-employed]

N = [employed by non-profit organizations]

G = [employed by the government in regular positions]

F = [“fostered” workers, aka as “közmunkások”]

A = [workers abroad, who somehow are counted in the Hungarian numbers]

Employed = E+R+S+N+G+F+A

The last number A seems to be a closely-held secret, it was divulged only once. How many workers and their families work and reside abroad?

We can get some data from observed remittances to Hungary in 2012:

1. Germany: 105,000; $4100

2. USA: 83,000; $4800

3. Canada: 53,000; $4800

4. UK: 51,000; $2300

5. Austria: 40,000; $4600

6. Australia: 24,000; $4900

7: Switzerland: 17,000; $4000

8: Slovakia: 16,000; $3900

9: Sweden: 16,000; $4500

10:Israel: 13,000; $5700

11:France: 11,000; $5100

12: Romania: 8,000: $3100

13: Denmark: 4,000: $2800

14: Norway: 3,000: $3700

All other countries: 18,000

Total:  462,000

The low remittance from UK and Denmark might indicate that the workers there are more likely to stay with their families.

The second trick is to move some of the unemployed to the employed camp using the “közmunkás” category F. F is only an implicitly given number that can be calculated from the data of KSH.

The third problem is that some numbers are contained in moving averages, while others are disclosed every month. Here are the numbers for the three-month average of October-December 2013 [2012]* or for December 2013 [2012] :

E = 1825.7 [1791.7], +1.90% change during 2013,

R* =  785.6 [ 812.3], -3.29%

S* =  439.2 [ 454.9], -3.45%

N =   99.6 [ 104.5], -4.69%

G =  686.6 [ 658.9], +4.20%

F =  178.5 [  86.9], +105.41%

A =   99.4 [  91.4], +8.75%   [the data is on page 6]

If we add these apples and oranges together, we can come up with the victory propaganda numbers of “Employment” = 4114.6 [4000.5], +2.85%

But if we discount the “fostered” workers and the workers abroad included in the statistics, the growth in employment equals the less than great number of 0.38%.

Conclusions

So what do the numbers tell us? First of all, a lot of numbers are not public. Some numbers contradict each other.

Still, we are able to conclude that

1. The GDP growth in constant prices was 0.2% without agriculture in 2013. If agriculture is counted, the 1.1% growth in HUF becomes a 0.5% decline in EUR.

2. The Orban government has increased the debt to an all time high. The total debt growth since 2010-05-31 amounts to 31.06% in HUF or 14.80% [using ECB exchange rates] or 15.10% [using MNB exchange rates] in EUR, if we include the spent retirement funds.

3. The general government deficit reached a record high of €4.34 billion in 2013.

4. The number for the Maastricht deficit criterion was 4.42% in 2013.

5. The domestic employment without the “fostered” workers increased by 0.38%.

—-

P.S. Today, on March 18, 2014, Hungary sold $3 billion of new debt at 5.5% yearly interest. The official gross debt/GDP ratio will reach 84% to 85% at the end of March.

The 10-year bond premium over the 10-year US Treasury note. The data are from Portfolio.

2010: 2.65% (January)

2011: 3.10% (March)

2012: —-

2013: 3.45% (February), 3.25% (November)

2014: 2.875% (March) [over the US Treasury notes]

Attila Mesterházy and Gordon Bajnai on the campaign trail

I noted yesterday that the election campaign has begun. I should have added that Fidesz has been campaigning from the very moment its government took office in May 2010. With election comes what Hungarians call “the spreading of the goodies,” at least temporarily making the electorate happy so they will support the government at the next election. This practice, which cuts across parties, has been largely responsible for Hungary’s chronic indebtedness and its large budgets deficits. Very often this largesse was financed with borrowed money.

Prime Minister Viktor Orbán swore that it would never happen under his watch that Hungary would borrow money to pay for social benefits. In fact, he was so serious about national indebtedness, which he considers the source of all the ills of the Hungarian economy, that it was written into the constitution that “the Central Budget … will have to ensure that the level of the state debt does not exceed half of the value of the gross domestic product of the previous calendar year.” Right now the national debt is larger than ever and only yesterday the government announced that Hungary had submitted a registration statement to the SEC for the issuance of up to $5 billion in debt securities. This will be the second such bond issue in US dollars this year. I wonder what Viktor Orbán will do if his government is unable to fulfill its constitutional duty with respect to the level of the national debt? It’s not that I fear for Orbán’s political well-being. This government is very inventive, so I’m sure they would come up with something to avoid the resignation of the government.

While the government has the means to distribute money and other perks, the opposition must be satisfied with promises. As has happened in Hungary time and again, these promises turn out to be empty. The 2010 promises of Fidesz, including one million new jobs in ten years, couldn’t be fulfilled. In fact, it was just announced that fewer people have jobs today than a year ago. The Balatonőszöd speech was partly about putting an end to this practice and stop deceiving the electorate. For a while the opposition parties seemed to have paid heed and refrained from falling back on their bad habits. Their politicians kept emphasizing the difficult economic situation and the long road ahead. But as the election gets closer they seem unable to resist the temptation.

So, let’s see who is promising what. MSZP held a huge meeting in Miskolc, a town that was once an MSZP stronghold. The crowd responded enthusiastically when Attila Mesterházy announced that if the MSZP, hand in hand with Együtt 2014-PM, wins the election “the winners will be the children, the youth, the women, the employees, the small- and medium size entrepreneurs, and the pensioners.” In brief, everybody.

Fair enough. Almost everybody would indeed win if Fidesz were sent back into opposition. But what specifically did Mesterházy promise? From September 2014 on students will receive a free education at Hungarian colleges and universities. A year ago the socialists were talking only about a tuition-free first year, after which tuition would be charged based on academic achievement and social needs. But now, it seems, there is no qualification. We know from past experience that the Hungarian budget cannot possibly afford the luxury of totally free higher education.

The socialists also plan to create a situation in which at least one person in each family is employed with a decent salary. I assume that he does not consider the current salary of workers employed in public works projects, which is not enough to keep body and soul together, decent. According to Mesterházy, the desired level of employment can be achieved by abandoning “this idiotic economic policy.”

He promised more money for education and promised to build gyms instead of football stadiums. They will spend more money on healthcare. Unemployment insurance, which was truncated by the Orbán government, will once again be available for nine months. The socialists will make sure that public transportation for people over the age of 65 will be “truly” free. Mesterházy admitted that to achieve all these things one must have robust economic development, but he added that “yes, we will achieve this too.” MSZP wants to modify the across-the-board lowering of utility prices, which currently threatens the industry with bankruptcy. The socialists suggest lowering prices only for those in need. MSZP would also change the tax system and get rid of the flat tax, which has done a lot of damage to the economy.

As you can see, there are plenty of expensive promises here. The healthcare system is in ruins, and it seems that the same is true of education. Even with higher taxation on the “rich,” as Mesterházy called those whose incomes are above average, healthcare and education cannot be salvaged. As currently configured, healthcare is a bottomless pit. Throwing more money into it is no remedy. It’s time for some fresh thinking.

Source: publisherdatabase.com

Együtt 2014-PM also began its campaign, and it looks as if the party is concentrating, at least for the time being, on the under-35 generation. The party’s slogan is “Come home, stay home!” According to E14, the flight of young Hungarians is “one of the most serious problems today.” If they win the election they will open offices in each embassy and consulate where they would offer jobs in Hungary for those currently abroad. They would also assist those Hungarians who just finished their studies abroad and would like to return to Hungary. In addition, he promised that “he would guarantee a job or training that would lead to a decent job for all those under the age of 30 who hadn’t had a job in the last six months.”

Bajnai offered up a few numbers. He would spend at least 1% of the GDP on higher education and would again open the doors of colleges and universities to anyone who has the ability. Bajnai also promised 250,000 new jobs in four years. Well, that number is more modest than Orbán’s one million in ten years, but as we know governments cannot create jobs.

It’s not clear whether people actually believe these promises or whether, after all the unfulfilled and unfulfillable promises, they are jaded. Hungarians say they don’t believe politicians, but perhaps their belief is selective. Perhaps they believe promises from which they themselves will benefit and disregard the rest. Perhaps they believe some of the promises of their favorite candidate and none of the promises of the other candidates. Who knows? I doubt they would be honest with pollsters.

At any event, it’s tough to campaign with the message that people should prepare themselves for more lean years when opponents are promising a host of goodies in a “rising tide” economy. People want hope and change and a “yes we can” attitude.  (And a few more forints in their pockets one way or another.)  Disappointment that the government hasn’t delivered sets in only later.  Just ask Barack Obama.

Water and politics: The case of the Roma in Ózd

There are times, though not too often, when Fidesz and the Orbán government retreat and give up positions earlier thought to be sacrosanct. This usually happens when there is a big stink. Not just nationally but internationally. This is what happened with the public faucets in Ózd.

Ózd, a town with a population of 34,000, fell on hard economic times when the heavy metallurgical industry collapsed in the 1990s. Ózdi Kohászatai Üzemek had employed more than 10,000 workers. In 1975 67.3% of the men between the ages of 18 and 65 were gainfully employed. Now the unemployment in Ózd is extremely high. Ózd also has a large Roma population. Officially only 7% of the population declared themselves to be of Roma ethnicity, but according to some estimates one-third of Ózd’s population might be of Gypsy origin.

The Gypsies live in several ghetto-like sections of the town. Most of their houses don’t have running water, so these people must carry  water in buckets from public faucets. Apparently there are 123 faucets that serve about 8,000 people. Some of these people live in areas where city water was never hooked up; others don’t have service because they couldn’t pay their water bill. A family of four or five needs at least 100 liters of water a day and, especially in the areas where a lot of people live without city water, there might be as many as 100 people who use one faucet.

Since the city must provide water to the inhabitants, these people receive their water free of charge. The Fidesz-led town hall found the 13 million forints the city had to pay for the water used on roadsides too high. They claimed that the families living in those parts waste water. They use it for washing cars, watering their gardens, and for the children to splash around in. The city fathers, including the sole MSZP member, voted to restrict access to water at public faucets. They completely closed 28 of the 123 faucets and set the water pressure in another 61 very low to discourage the use of too much water.

There are conflicting claims about how slow these faucets became after the town hired a company to lower the pressure from 100% to 60%. The mayor and other Fidesz officials in town claim that lowering the pressure made little difference. (Then why do it?) One of the city fathers declared that the difference between full pressure and reduced pressure is negligible, but others figured that it now takes at least ten minutes to fill a ten-liter bucket with water. A family of five that needs 100 liters of water a day would have to stand for an hour and a half to fill the requisite number of buckets. The men are not around at this time of the year because they managed to get some seasonal work in agriculture, so it’s mostly women and children who carry these buckets. Ten liters of water is terribly heavy, especially for a skinny eight-year-old whom I saw on one of the photos. And he must make at least ten trips. Sometimes quite far. There are cases where they have to walk at least half a kilometer each way.

The water is barely trickling / Népszabadság photo by István Konyhás

It’s easy to blame everything on the Gypsies, but one of the city fathers admitted that it’s not the inhabitants of the “segregatums,” as one journalist called these Gypsy ghettos, who steal the city’s water but owners of weekend places outside of Ózd. They come by car and take away 200-300 liters of water. In fact, 444.hu received an e-mail from someone who called attention to a 2011 Google Earth video of a hose that led from a city faucet to a well appointed house in one of the wealthiest sections in town. You can see it on YouTube:

http://www.youtube.com/watch?v=P1msthmIB3o

It was inevitable that the decision of the Ózd City Council would become a national issue. Although the city fathers never mentioned the word “Roma” or “Gypsy,” it became a Roma issue. It couldn’t have been otherwise when it is the Roma population’s neighborhood that is without running water and when it is mostly the dirt poor Roma who can’t pay their water bills.

Opposition politicians were on hand, led by István Nyakó (MSZP) who is from these parts. László Varju (DK) arrived as did Aladár Horváth, a Roma activist. There were all sorts of useless negotiations between Nyakó and Pál Fürjes, the Fidesz mayor of Ózd. I don’t know in what language they tried to converse, but the two gave entirely different reports of their conversation. Nyakó understood that Fürjes promised to restore the standard pressure in the faucets while Fürjes claimed that there was no such agreement. Moreover, he made it crystal clear that the city will not move an inch. It is not fair that the majority of the city’s population has to pay for water while others don’t. As he put it, “perhaps the majority of people feel good when they steal, but someone has to pay for the water.” He neglected to mention that these people have no choice because they have no water hook-up.

Fürjes’s claim is especially distasteful in light of the fact that Ózd received 1.75 billion forints from the Swiss-Hungarian Cooperation Program for the express purpose of providing running water to the Roma ghettos. Opposition politician Péter Juhász of Milla and Együtt 2014-PM demanded to know the fate of this money. According to the website of the town of Ózd, work on the modernization of the whole system will be done between 2013 and 2017. Well, more than half of 2013 is gone and there is no sign of any work on the pipes. Fürjes immediately rebuked Juhász, saying that the Ózd Fidesz government is not like the Gyurcsány-Bajnai government which stole the country blind and was corrupt to the core. The money is there and work will begin in November. I must say November’s not the best time of the year to start such a project.

Negotiations between Nyakó and Fürjes led nowhere;  the city was ready to open only one faucet. Nyakó then said that he was going to call on Sándor Pintér, minister of the interior, to force the town of Ózd to restore all the faucets that had served the town’s Roma population.

I must say that yesterday I wasn’t very optimistic that Pintér would intervene, especially after the  Fidesz spokesman Róbert Zsigó threw the party’s weight behind Pál Fürjes. Since yesterday, however, a few things happened that changed the situation.  Zoltán Balog, whose ministry is responsible for Roma integration, announced that he considered limiting water to the Roma ghettos inhumane. Then came the bad publicity from BBC, Deutsche Welle, Der Spiegel, and a very long and detailed article in the Swiss Tages Anzeiger. After all, a lot of Swiss money was given to Ózd specifically for the purpose of making running water available in the Roma ghettos and now the mayor of the town limits water for them even at the roadside faucets!

In any case, Pintér gave a friendly or perhaps not so friendly telephone call to Pál Fürjes, who suddenly saw the light. In order to save face he repeated that the town’s action was entirely legal. But the extended heat wave that hit Hungary after the town council made its decision led him to revoke it. Tages Anzeiger immediately reported the good news. It would be interesting to know whether the Swiss, directly or indirectly, put pressure on the Hungarian government to change its mind on the issue of water supply in Ózd.

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 Portfolio.hu 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.”

 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

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.