Hungary

   

Economic Policies

#38
Key Findings
Showing significant but likely unsustainable gains over time, Hungary falls into the bottom ranks (rank 38) internationally with regard to economic policies. Its score on this measure has improved by 0.9 points since 2014.

Real GDP growth has been strong for several years, though this has been primarily driven by EU transfers, and thus may be difficult to sustain. Economic policy has been driven by power politics and state capture, exemplified by a concentration of banks in the hands of pro-government oligarchs. Deficits have risen due to pre-election pro-cyclical spending, and debt levels remain relatively high.

Unemployment rates have dropped significantly in recent years, in large part due to a broad public-works program that rarely produces long-term labor-market integration. Significant emigration has also played a role, creating a brain drain that has led to skilled-labor shortages in many fields.

Tax reforms have shifted the burden from direct to indirect taxes. Tax policy has been instrumentalized to favor oligarchs close to the governing Fidesz party, and to penalize independent civil society groups. R&D spending has been significantly increased, but the government has moved to centralize and control research institutes and university research funding.

Economy

#35

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
4
Real GDP has grown by more than 4% in 2017 and 2018. However, the strong growth is not sustainable, as Hungary has not followed the big innovative – industrial and digital – “revolutions” in the world. Instead, growth has been primarily based on a high level of EU transfers which will drastically decrease with the new EU financial framework. Moreover, economic policy has been subordinated to power politics and state capture by the “royal court” around Orbán. In 2018, Lőrinc Mészáros, a close friend of Prime Minister Orbán, seems to have purchased a new firm or won a new project in public procurement almost every day. The new wave of FDI by the German carmaker BMW in Hungary has been directed to Debrecen, a Fidesz stronghold under the absolute control of Lajos Kósa, a key figure in the party. Another case in point is the concentration of banks in the hands of pro-government oligarchs. After purchasing foreign-owned banks, the government has privatized them to its friends in nontransparent ways. With new mergers ahead, there is a danger of a financial collapse due to the cross ownership and lack of transparency in the banking sector. Because of the presence of state capture and the lack of legal certainty, Hungary normally ranks last in business environment rankings for the Visegrád countries.

In the new Orbán government, the Hungarian National Bank (MNB) has become the center of decision-making in Hungarian economic policy and other areas when it comes to general strategy-making. The latest Competitiveness Report by the MNB – written in 2017 and rewritten in 2018, after the elections, is a summary of the Orbán government’s economic policy, or in practice, the main strategic tool in safeguarding the consolidation of the Orbán regime. György Matolcsy, the governor of MNB, is the strong man of the “royal court” around Orbán, accompanied by Lájós Palkovics, the new minister of the Innovation and Technology Ministry (ITM). They have recently elaborated a model of authoritarian modernization that involve making major changes to the budget’s structure.

Citations:
European Commission (2019): Country Report Hungary 2019. SWD(2019) 1016 final, Brussels (https://ec.europa.eu/info/sites/info/files/2019-european-semester-country-report-hungary-en.pdf).

Labor Markets

#34

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
4
Recorded unemployment has declined significantly since the resumption of economic growth in 2013. However, low unemployment has largely been achieved by controversial public-works programs and an increase in the number of Hungarians working abroad. The public-works programs have provided “workfare” rather than “welfare” and have seldom resulted in the integration into the first labor market. Participants perform unskilled work under precarious conditions and for very modest remuneration. The main beneficiaries of the program have been local mayors who are provided with access to cheap labor to perform communal work. The number of Hungarians working abroad is estimated at 600,000, many of them highly educated and skilled. The resulting brain drain has become a major obstacle to the acquisition of FDI and to economic development in general. The salary boom in the first labor market during the last years has been driven by the lack of qualified labor, arguably the main current challenge to labor market policy, and the resulting increase in competition among companies to find a qualified workforce. Approximately 80,000 open jobs are waiting for employees. The government’s “coming home” programs have so far failed to turn the tables. A new idea is to turn Corvinus University into a top international university attracting Hungarians working abroad and international scholars by paying them internationally competitive salaries.

Citations:
Vidra, Z. (2018): Hungary’s punitive turn: The shift from welfare to workfare, in: Communist and Post-Communist Studies 51(1): 73-80.

Taxes

#38

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
4
Hungary’s tax system has become less equitable under the Orbán governments, as the tax burden has shifted from direct to indirect taxes. While the government adopted substantial tax reductions in 2016 and 2017, the tax-to-GDP ratio is still above the level of regional peers, and the tax wedge remains one of the highest in the EU. With the introduction of the lowest corporate income tax rate in the EU (9%) in 2017, the tax burden especially on larger companies has substantially decreased. However, companies still struggle with frequent changes in taxation and a complex tax regime, including the high sectoral taxes. Moreover, tax policy and tax administration have been instrumentalized to favor oligarchs close to Fidesz and to punish outsiders. The classification of businesses as “reliable,” “average” or “risky” by the National Tax and Customs Authority (NAV) combined with the promise of preferences for “reliable” taxpayers, has smacked of favoritism. So has the government’s attempt to induce companies to contribute to sport organizations by granting them tax deductions (“tao”), but also secrecy and a special taxpayer status. The government has even used taxation as a political weapon in weakening civil society. As part of its 2018 measures to criminalize aid and support to migrants and asylum-seekers, it introduced a special 25% tax on organizations assisting refugees.

Citations:
European Commission (2019): Country Report Hungary 2019. SWD(2019) 1016 final. Brussels, 17-18 (https://ec.europa.eu/info/publications/2019-european-semester-country-report-hungary_en.pdf).

Budgets

#36

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
5
In the run-up to the 2018 elections, Hungary’s fiscal policy has turned pro-cyclical in 2017 and 2018. Despite the strong economic growth and buoyant tax revenues, the general government fiscal deficit rose from 1.6 % of GDP to almost 2.5% in 2018, and only a moderate improvement is projected in the next years. In 2018, Hungary’s fiscal deficit was one of the highest in the European Union, and public debt has also remained high for Hungary’s level of development. The structural deficit rose by 2 percentage points of GDP between 2016 and 2018. Against this background, the Council of the EU launched a significant deviation procedure addressed to Hungary in June 2018. The Orbán government’s fiscal policy has also been criticized for its lack of transparency. Budgets are being passed already in May or June, when important information about the coming year is not yet available. Eurostat has continued to criticize the official Hungarian data on the public debt for not including some relevant transactions, most notably those by the state-owned Eximbank and the various foundations of the Hungarian National Bank.

Citations:
European Commission (2019): Country Report Hungary 2019. SWD(2019) 1016 final. Brussels, 10, 39-40 (https://ec.europa.eu/info/publications/2019-european-semester-country-report-hu ngary_en.pdf).

Research, Innovation and Infrastructure

#31

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
4
After years of neglect, research and innovation policy has become a cornerstone of the technocratic modernization project of the fourth Orbán government. The 2019 budget provides for a substantial increase in public R&D spending which, for several years, was among the lowest in the EU. At the same time, the centralization of research and innovation policy that set in under the second government dramatically increased. By intensifying the control and colonization of scientific research and higher education, the government has sought to capture one of the remaining autonomous social sectors. After the 2018 elections, the government established a National Council for Science policy, whose president and members are appointed by the government, and set up a new Innovation and Technology Ministry (ITM). The 2019 budget shifted large parts of the Hungarian Academy of Sciences’ (MTA) budget to the ITM. In September, a government decree further enlarged the ITM’s competences by also granting the ministry the control over the bulk of the universities’ research budgets. The ITM has announced plans to restructure the MTA’s research institutes and to liquidate some of them, including the prestigious Institute of Economics. The All European Academies (ALLEA) organization has protested – in vain – against this serious constraint on research freedoms.

Citations:
ALLEA (= All European Academies) (2018): Statement on the inappropriate political infringement on academic curricula in Hungary, Berlin (https://www.allea.org/allea-publishes-statement-on-the-inappropriate-political-infringement-on-academic-curricula-in-hungary/).

Global Financial System

#36

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial System
4
Being neither a member of the euro group nor a big lender, Hungary’s role in international financial markets is limited. The Orbán government has recently emphasized its commitment to euro zone membership, although it is not clear whether this reflects genuine political will or is merely rhetoric. As the country is on its way to meeting the Maastricht criteria, an introduction of the euro seems possible.
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