Hungary

   

Economic Policies

#34
Key Findings
Showing significant but likely unsustainable gains in recent years, Hungary scores relatively poorly (rank 34) with regard to economic policies. Its score on this measure has improved by 1.2 points since 2014.

Real GDP growth has been strong for several years, topping the EU at nearly 5% in the recent period. Investment has reached record levels due to easy financing conditions, an expansionary fiscal policy and an inflow of EU funds. The sustainability of this boom is questionable due to labor shortages and state capture by Orbán allies.

The budget deficit has declined to 1.8% of GDP. The overall unemployment rate has dropped to near 3%, driven in large part by public-works programs. Significant emigration has also played a role, creating a worrisome brain drain. Numerous workers have been imported from neighboring countries, as well as Vietnam and Mongolia.

A series of 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 outsiders. Following the dismemberment of the country’s independent Academy of Sciences, the government has established a research network controlled by Ministry of Innovation and Technology (ITM).

Economy

#33

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
5
The Hungarian economy has been growing strongly since 2014. In 2019, Hungary was one of the few countries to withstand the international slowdown in economic growth. Its real GDP growth rate of almost 5% was the highest in the European Union and OECD. Investment has risen to a record level, thanks to easy financing conditions, an expansionary fiscal policy and a large inflow of EU funds. However, the sustainability of economic growth looks doubtful, given the counterproductive streamlining of the education and R&I systems, growing labor shortages, and the state capture by the “(royal) court” (udvar) around Orbán. Hungary normally ranks last in business environment rankings among the Visegrád countries, and looks ill-prepared for Hungary’s looming challenges (e.g., cuts in EU transfers), a global recession or structural problems in the car industry.

The challenges ahead have featured prominently in the open and sometimes impolite debate between the two economic policymakers of the Orbán regime. On one side, Mihály Varga, the Minister of Finance, has suggested a cautious approach with the accumulation of reserves for hard times. On the other side, György Matolcsy, the governor of the Hungarian National Bank, has nourished the dreams of a rapid catching up with the West – mentioning, as is usual in Hungary, Austria – by 2030 with the continued accelerated growth. In his speeches, Orbán has mentioned both scenarios alternatively – sometimes the cautious one warning about the coming global crisis, sometimes the optimistic one boasting that Hungary is the fastest developing country in the European Union and referring to the dreams presented by Matolcsy – in order to legitimize his regime.

Citations:
European Commission (2020): Country Report Hungary 2019. SWD(2020) 516 final, Brussels (https://ec.europa.eu/info/sites/info/files/2020-european-semester-country-report-hungary-en.pdf).

Labor Markets

#31

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
5
Recorded unemployment has declined significantly since the resumption of economic growth in 2013 and now stands at about 3%. 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. The main beneficiaries of the program have been local mayors who are provided with access to cheap labor to perform communal work. Moreover, participants in public-works programs have been pressured to vote for Fidesz. 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. Despite its campaign against migration, the government has imported a large army of “migrant” workers from abroad, not only from neighboring countries (Ukraine and Serbia), but also from remote countries like Vietnam and Mongolia.

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

#33

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

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
Since 2010, successive Orbán governments have transformed the Hungarian tax system. In 2011, the progressive income tax was replaced with a flat tax. In 2012, the standard VAT rate was increased from 25% to 27%, the highest level in the European Union. In 2017, a uniform corporate income tax of 9% replaced a two-tier system with rates of 10% and 19%. Between 2017 and 2018, employers’ social security contributions were cut by seven percentage points. In addition, Hungary’s recent governments have introduced a panoply of sectoral taxes.

The tax-to-GDP ratio initially rose, but has been declining for some time. It now stands at about 37% of GDP, which is below the EU average, but higher than in most countries in the region. As the recent fiscal deficits show, revenues have not been sufficient to cover spending.

The redistributive effect of the Hungarian tax system is limited. The country has a flat income tax and the tax burden has shifted from direct to indirect taxes.

With the introduction of the lowest corporate income tax rate in the European Union (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 many 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.

Taxation has hardly been harmonized with environmental sustainability and/or quality. Although environmental tax revenues in Hungary were slightly higher than the EU average (6.6% compared to 5.97%), there are still many problems with Hungary’s tax structure due to the many exemptions and special taxes (e.g., subsidies for the reorganization of the coal sector).

Citations:
European Commission (2020): Country Report Hungary 2019. SWD(2020) 516 final, Brussels, 20-21 (https://ec.europa.eu/info/sites/info/files/2020-european-semester-country-report-hungary-en.pdf).

Budgets

#33

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 parliamentary elections, Hungary’s fiscal policy turned pro-cyclical in 2017 and 2018. Despite strong economic growth, the fiscal deficit widened and became one of the highest in the European Union, so much so that the European Council launched a significant deviation procedure for Hungary. In 2019, the government tightened fiscal policy. The general government fiscal deficit is projected to decline from 2.3% of GDP in 2018 to 1.8% of GDP in 2019. While the structural deficit is expected to decline, the decline has been smaller than recommended by the European Council. Fiscal policy has also suffered from a lack of transparency. Budgets are being passed as early as May or June, before important information about the coming year is available. Fiscal planning has remained narrowly focused on the annual budget.

Citations:
Council of the EU (2019) Recommendation on the 2019 National Reform Program of Hungary. 10170/2/19 REV 2, Brussels (http://data.consilium.europa.eu/doc/document/ST-10170-2019-REV-2/en/pdf).

European Commission (2020): Country Report Hungary 2019. SWD(2020) 516 final, Brussels, 4-5, 19-20, 21-23 (https://ec.europa.eu/info/sites/info/files/2020-european-semester-country-report-hungary-en.pdf).

Research, Innovation and Infrastructure

#33

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 provided for a substantial increase in public R&I spending, which, for several years, was among the lowest in the European Union. The Orbán government has recognized the growing significance of R&I for economic development and has realized that the European Union will focus more strongly on R&I in the common budget.

However, the increase in funding has gone hand-in-hand with a centralization of research and innovation policy. 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. The dismemberment of the Hungarian Academy of Sciences (HAS) has been highly controversial, and has led to massive protests inside and outside Hungary. In the process, some critical scholars and scientists have been dismissed. The fact that the government has ignored all criticism and all reform suggestions from the HAS has increased the bitterness in academia about the loss of academic freedom. While a new research network (ELKH) has been established under the control of the Ministry of Innovation and Technology (ITM), which is led by the new strongman of the Orbán government, László Palkovics, the future institutional structure of the R&I sector remains unclear.

Global Financial System

#35

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 area membership, although it is not clear whether this reflects genuine political will or is merely rhetoric. It is unlikely that the government wants to hand over steering capacities to the ECB. Instead, all available (financial) instruments are and will be used to serve the government’s policy ambitions. As the oligarchs profit from deregulated financial markets and less strict control mechanisms, a stronger government engagement in this respect is highly unlikely.

Citations:
Mérö, K., D. Piroska (2016): Banking Union and banking nationalism: Explaining opt-out choices of Hungary, Poland and the Czech Republic, in: Policy and Society 35(3): 215-226.
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