"The year of cutback": Fidesz on the state of the Hungarian economy and the budgetary perspectives for 2004

Dátum: 2003-11-20 13:08:00, eredeti URL: http://archiv.fidesz.hu/index.php?Cikk=17519
KCMDB-be feltöltve: 2024-05-04 19:10:14.638702, Feltöltő: fidesz_hu_scraper_v2

Introduction

The center-right Orbán-government pursued an effective, active economic policy with starting a demand-stimulating economic policy package shortly after 11 September 2001. Instead of hoping that economic growth would be preserved by domestic consumption, however, this package focused on stimulating investments. It stimulated further the housing construction business, provided preferential loans to businesses for job creation, increased budget share of infrastructure development, and included export promotion and enhanced tax breaks. Altogether, this package increased economic growth by 1-1,5 percentage points. The Fidesz-led government kept its promise of keeping a balance between investments, developments, stimulating job creation, and the measures aimed at the improvement of living standards, for the sake of stabile growth.

After May 2002, the new socialist-led government was unable to follow the changes in the global economic environment. This is well demonstrated by the fact that its economic decisions made late 2002 still reflected the fictional environment of a global economic boom. Hungary's economic situation staggered as a result. A year and a half after the change in government, all economic indicators present a bleaker picture than in May 2002.

Economic indicators

GDP-growth is stagnating. With only 2,4 percent in the second quarter of the year 2003, Hungary is now lagging behind other EU-accession countries: GDP-growth is approaching or even exceeding the 5-percent mark in Romania, Slovakia, Bulgaria, Latvia, Lithuania and Estonia.

State debt has increased by HUF 2250 billion since the change of government. Budget deficit has been steadily increasing, reaching projected end-of-the-year levels by September. Current account deficit exceeds the most pessimistic expectations.

For the first time since 1997, inflation is on the rise again. The government planned this year's budget with a projected inflation of 4,5 percent. However, all analysts expect a figure exceeding 5 percent by the end of the year, whereas the government itself expects that avarage inflation reaching 6 percent next year.

Foreign investors are becoming increasingly uncertain about Hungary. For the first time in 13 years, the inflow of foreign direct investment was less than the investment amount leaving the country.

Budget for 2004: incoherence and austerity

In its report about next year's projected budget, the National Audit Office addressed very serious critique to the government. It is unacceptable that priorities are unclear in the projected budget and that the Parliament regards the Public Finance Act as an infinitely flexible one, the report said.

The Medgyessy-government is still unable to clarify its position and makes contradicting statements, regarding wage increases, for instance. On the one hand, the government is communicating that it was worthy emptying the state treasury in 2002, as there was ample funding for welfare measures. On the other hand, the prime minister is also warning ominously about the decline of the welfare state, meaning that the welfare turn heralded by the socialists in the election campaign was a mere sham. This contradiction is evident also in the budget bill, in which the government admits that the cause of imbalance, unfavourable developments and structural deficiencies in 2003 was extravagant spending.

Negative tendencies were aggravated by further flawed economic decisions as the devaluation of the forint last summer, which devaluated citizens' savings, caused serious financial damage to the state treasury, disturbed the market, raised interest rates significantly and shook investors' confidence in the Hungarian economy. This mistake was repeatedly recognised by the state secretary of the finance ministry.

Coherent economic policy is replaced with a pile of ideas on austerity measures: new and increased taxes, cutback on welfare services. Unchanged socialist concepts on the economy, experienced already in the 1980's, is highlighted by the fact that a year and a half after the Medgyessy-government took office, Hungary is badly indebted again: accumulated debt has increased by more than HUF 2000 billion during this period.

Taxation: unprecedented burden in ten years

The inrease of general tax burden projected for next year has been unprecedented for ten years. Generally speaking, all Hungarian citizens will have to cope with a higher tax burden than in 2003. Austerity measures in this field include the abolition of tax allowances, increased taxes and excise duties on comsumption and new taxes for entrepreneurs.

The government has decided to cut back, in addition to those carried out already, on the tax allowance related to housing loans, affecting an estimated 200,000 persons. Until now, in the case of a family redeeming a debt, the allowance available may have reached HUF 240,000 per year. The government has now decided to halve the available tax allowance (to HUF 120,000 a year), to be implemented even on running debts. In addition to the social consequences, the abolition of housing loan tax allowances will lead to a fallback in the real estate market and the construction business.

The government has also decided on the repeal of tax allowances related to private pension fund membership, introduced by the previous socialist government. This would especially affect those with or below the average income.

Significant increase of VAT in many consumption categories (energy, medicines, real estate) is also a means of increasing state reditribution. Prior to the government decisions the effective VAT rate was already far above the European Union average. Due to government action, the effective rate will rise to 17,5 percent, an incredibly high level which even exceeds the maximum level used in Europe (14,6 percent in Denmark).

Next year also marks a significant increase of excise duties, i.e. the tax content in the of petrol, alcohol products, cigarettes.

Negligence on the threshold of the European Union

Wasting precious time prior to EU-accession is a historic negligence by the Medgyessy-government. State-sponsored investments and developments were lacking, the only consideration being spending the state funds accumulated by the economic policy of the Orbán-government in the run-up to local elections in autumn 2002. Overspending prevented the cabinet from noticing that global recession would force the Hungarian economic policy to operate "internal engines" to offset slowdown. The government is doing the opposite of what other acceeding countries had been doing prior to entering the European Union.

Instead of an active economic policy, the socialist-led Hungarian government acted irresponsibly by not preparing small and medium-sized enterprises for European competition, endangering hundreds of thousands of jobs. According to some estimates, about 15-20 percent of small and medium-sized enterprises may go bankrupt following EU-accession. The government, just before EU-accession, injures their competitiveness by introducing new taxes (innovation tax and environmental tax), by a significant rise in taxes related to company assets (e.g. cars) and of employers' contributions. Average corporate tax burden on enterprises will rise over the 10-percent mark next year, whereas average personal income tax burden increases to over 21 percent. At the same time, a tax allowance aimed at the accumulation of savings is repealed.

Financial insecurity threatens Hungarian farmers in the year of EU-accession. Despite the fact that agriculture in the EU is financed posteriorly, the draft Hungarian budget does not provide for the equivalent of these payments, to be transferred in advance to farmers. Neither does it provide for the supplementary 30-percent national contribution, agreed in Copenhagen last December. Moreover, in spite of the fact that Hungarian famers will only get a quarter of the amount of direct agricultural payments than their colleagues in current member states, the government has made no measures to increase their competitiveness, despite commitments to the contrary.

The year of cutback

At the same time, austerity is presented by the socialist government as overwhelming generosity. The government is communicating about "economising" (i.e. austerity), whereas ministers are talking about being perfectly satisfied with the funding their respective ministries get for 2004.

The minister of labour is talking about a success in employment, whereas there are 30 thousand more people out of work than a year ago. Central state administration is preparing to fire 7000 civil servants as a part of an austerity package next year, and lay-offs continue unabated in the private sector, with job creation strategies lacking.

The minister of health presents the 2004 budget as a personal success, whereas doctors and nurses are permanently protesting about their deteriorating living standards. Their unions are saying that the wage funding provided for the sector next year may only preserve its value in real terms with lay-offs.

The minister of interior is talking about ample funding for local councils, whereas the report of the National Audit Office clearly stated that a third of them faces bankruptcy and this number is increasing, with a continuing sell-off of property and indebtedness. Local councils may be forced to fire a further 50,000 employees next year as a result of increased tasks and decreased funding.

State-sponsored infrastructural investments drop by more than 25 percent. Funds assigned railroad developments have suffered a cutback of several billion. Funds allocated for highway construction for next year account for about as much as spent by the Orbán-government for this purpose in 2002. (The socialists promised the contruction of 800 kilometers of highway during their tenure.) Only about 5 percent of a comprehensive four-year anti-flood dam construction programme, heralded by the Orbán-government but delayed by the Medgyessy-government until now, will be spent next year.

The gap between rhetoric and action is perhaps best illustrated with the cabinet's attitude to handicapped persons. This government portrays itself as the government of equal opportunities, and a minister without portfolio was nominated to supervise this area. In spite of this, central funding for all handicapped unions is being decreased by more than 20 percent, support for some special programs is cut back by 40-50 percent next year.

Budapest, 18 November 2003