A guest post on the Financial Times' blog by György Barcza is chief economist at Századvég Economic Research
Since taking power in a landslide election victory in the spring of 2010, the Hungarian government, led by Viktor Orban and his Fidesz party, has received much criticism regarding its economic policy – including the FT’s beyondbrics.
Yet in the main, critics have failed to offer any alternative, other than to return to the previous economic model of transition from centrally-planned communism.
We think there is a strong argument supporting the recent changes: in essence the government policy can be described as building a “workfare economy” – instead of the previous, debt-fare state model.
Quite simply, after the country ran into a crisis in 2008 and was able to avoid default only with the help of the IMF, maintaining welfare funded from debt had became unsustainable – a new path had to be found.
Hence the Orban government has set about reforming the key pillars of the economy in order to boost activity and employment.
Tightening the rules for early retirement, introducing a flat-tax (with tax allowances for families), mandating the shortest unemployment benefit periods in Europe, a cost-efficient education system, a work-based social-security system – all these reforms focus on one key point: building a work-fare state, where activity and employment ratios are encouraged to become as high as possible.
In 2009, i.e. pre-Orban, Hungary’s employment (participation) rate was 55 per cent, the second lowest in the EU after Malta, and the activity rate (the sum of the the participation rate plus those seeking jobs) was 62 per cent. By 2012 the former had risen to 58 per cent, and latter to 65 per cent, the highest figure in Hungary since 1993.
The Orban government has done more: it has consolidated the budget in order to keep the public-debt ratio below the widely-feared threshold of 90 per cent.
Some may say that this only came from the takeover of assets from the former mandatory private pension funds – but the public-debt rate also fell last year. And by curbing the budget deficit to 2.7 per cent of GDP, it means that a relatively slow pace of nominal GDP growth is enough to further reduce debt levels.
Critics also seem shy to note that Hungary has never managed to bring its deficit below 3 per cent of GDP since gaining membership of the European Union in 2004 – the Hungarian public had never known or experienced proper fiscal responsibility in all these years.
Some argue that this low deficit is unsustainable and only achieved because of the special taxes on some corporate sectors (namely finance, telecoms and energy), which amount to roughly 2 per cent of GDP.
Would a larger deficit – and growing, equally unsustainable indebtedness – be better? Or – if austerity measures were introduced – should Hungary risk social and political instability, as seen in countries such as Greece?
By introducing these taxes, the Orban government has ensured that the cost of building long-term stability is shared among those who made large profits before the crisis. We think this is only fair.
Managing the country during the eurozone crisis without resorting to external help was, in reality, a great achievement – it proves that Hungary is capable of good, macro-economic management, whereas previously this country always found itself turning to the IMF.
True, investors were negative at the beginning of 2012, but they have since become positive on Hungary’s debt outlook – Hungary’s debt market performance was one of the best globally in 2012. Current criticism mainly focuses on the lack of growth due to last year’s recession.
But the Czech Republic – previously a darling of those critics favouring the orthodox model – was not far behind Hungary in the size of its recession, and every other CEE country has also been hit by the Eurozone slowdown.
Moreover, note that most of these countries are incurring growing public debt and decreasing employment.
In short, the full picture is not just about growth. Hungary has had to tackle problems stemming from decades of economic mismanagement, which will take time. Success will come once the euro zone recovers and Hungary’s domestic demand is not blocked by the de-leveraging process.
This could be as early as the second half of this year. After Hungary comes out of this process, it may well be seen in future as a champion in Europe in terms debt reduction and restoring a work-based society.
Hungarians may not care much whether international institutions admit this or not. But – as evidenced by last week’s highly successful bond issue – the markets have clearly recognised this. Whatever, Hungary does this for its own fortune.
György Barcza is chief economist at Századvég Economic Research
