Consume if you can

This is the fifth year of Viktor Orbán’s governance. What has his “central national government” delivered so far and what can we expect in the next three years? Before we get lost in analysing the pros and cons, we have to point out one principle that can be clearly experienced: the primacy of politics over economics.

Some people are praising Viktor Orbán to the heavens while others say he should go to hell: the Prime Minister, who is governing for the third time and whose position is more secure than ever, splits opinions like no other person. In international context he is mainly criticised for a lack of knowledge and for experimenting instead of sticking to the beaten path. For his fellow Hungarians the fact that Orbán is making almost arbitrary decisions and looking for consensus less and less often, while nobody around him bothers to make any studies about the potential risks and side effects of these ”brilliant ideas“, is much more critical.
After the years of stabilisation the foundation of a national-minded economy is being built up. The execution is being rushed, as if Fidesz did not have time for working with a completely formed concept. In the meantime there are ideas thrown around not only every week but rather every day, which are now really having an effect on everyone.
Taxing cafeteria to such an extent that it will no longer be worth dealing with it. Introducing internet tax, or rather not because people are just misunderstanding it all again. Reinvent the Green Point and let the audited service companies get another audit by a monopoly; connect more and more cash registers online. Require the transport companies to record all cargo data electronically (EKAER system). Impose a massive fee on retailers, claiming it is necessary in order to provide higher food safety…

Clear the field as much as you can before you get cleared!

Orbán is a lawyer, so he feels completely comfortable when rewriting the rules of the game. By doing that he already freed several branches of the national economy from the “rule of the foreigners“: Following the bank and energy sectors, now the media and trade are the battlefields.
The special taxes applied to the banks for several years have not failed to have an effect. Takarékbank, MKB and Budapest Bank were bought out from the German and American investors; beside the local cooperative banks they are working on building up a strong Commercial Bank to offer another alternative beside OTP.
The German, French and Italian groups, which entered the country in the middle of the 1990s during the privatisation process, are drawing back from the energy and utility sector thanks to the absurdly patronising manner of the government, and they are leaving the field open for the MOL Group and MVM, the state-owned energy holding.
The government is now also looking after the “extra-profits” of the evil multinational companies, such as RTL and Tesco and co. The retailers have to deal with a whole range of measures announced by the hyperactive government at the moment, among which the closing of stores on Sundays – which is being implemented in a way neutral to competition – will be causing only the smallest bump in their normal way of working.
Besides the increased fee for better food safety that has already been mentioned, which is supposed to skim the “extra profits” of only the big chains, the Ministry of National Economy led by Mihály Varga is attacking the foundation of the market economy by revoking the licence of such companies that are not turning up any profits for two consecutive years.
Note that only large companies with a turnover higher than EUR 160 million are impacted; in consequence, the largest domestic retail chains are not subject to the rule, because CBA, Coop and Reál are using mixed franchise systems.
Foreign investors have to understand that they had better leave the field voluntarily in Orbán’s Hungary, since the domestic companies are free to copy their business know-how without further ado. On the other hand in the manufacturing and technology sectors the foreign investors are not only welcome but they are needed, as a driving force to build the way for the Hungarian small- and medium-sized companies. Orbán would like to have around 12,000 exporting Hungarian companies instead of the present 2,000, for which he is opening the Eastern markets and weakening the forint.

When the lights go out at the good multinationals

The investors courted by Orbán are not allowed to notice that there is something wrong with the current Hungary. They are enthusiastic about the most liberal Labour Code on the continent, because where else could you exploit the performance of the expensive machines in 168 hours a week?
It’s true that there are unions in most of the production plants but labour disputes are not characteristic of the peaceful Hungarians. Infrastructure and logistics are developed to a high level and everybody is talking about the good qualifications of the Hungarian workforce, who are still miserably paid (with EUR 800 gross average salary countrywide).
However, these courted companies all have business partners such as banks or energy suppliers. János Lázár, the leader of the Prime Minister’s Office, said about two years ago that if the energy network collapses, the flagship of Mercedes-Benz in Kecskemét will also come to a stop. This was a moment of enlightenment, however within a few years the lights might actually go out.
The fact is that the legislator had still not provided the operational conditions for 2015 by the middle of December. Utility-providing companies that are not working according to the bizarre standards by which the government is still working will not be able to present bills to their customers within a few months. Without a remedy to this problem hundreds of suppliers will go bankrupt in the course of the upcoming year. Of course, this will not happen, and neither will the lights at the car manufacturer in Kecskemét go out.
Just like in the case of the absurd and unrealistic idea of the EKAER, there will be a compromise found for this problem at the last minute as well. However, the current insecurity and anger of the affected parties will not be undone by a compromise. The feeling of security, that being a manufacturing company in Orbán’s Hungary is just like having a guardian angel by your side, will be damaged.
The courted multinationals will also notice the problems of their employees at some point, of course. Hungary has the highest value added tax (27%), although the ones earning better – the multinationals pay on average 25% more than the Hungarian employers with the same branch – are doing better in the taxing system of the Orbán government, thanks to the modest 16% unified income tax and the generous tax benefits for families.
The cafeteria is an important element of the remuneration policy; its scope can amount to even the sum of two monthly salaries in the case of many employees. However, the government is planning to raise the taxes and fees on cafeteria services in such a radical way that companies will be better off paying cash to their employees – a smaller amount, of course.
The proposal, which was once again announced without any prior consultation, would lead to a significant drop in real wages, especially at small companies, and besides that it would suck air from the upswing in tourism. Since the SZÉP card, which is offered within the cafeteria system, had a considerable role in ensuring that domestic tourism grew by a two-digit percentage last year. Because of the public uproar caused by the announcement, the law proposal was “refined“ later on, making the SZÉP Card the Jolly Joker: this will be the only service that can be chosen over the annual amount of HUF 200,000 without having to apply a penalty tax on top.

Consume for higher welfare

If you can spot a clear line of economic policy in all this squabbling, you certainly have a great talent. Orbán wants to turn this country into one of the highlights of Europe. For this he needs solid public finances and solid growth, since the ambitious plans need to be financed.
Hungary finished last year in the top field with more than 3% GDP growth. However investments are already slowing down because there are no more car factories to be built and in 2014 there was a top amount of EU funds received, which is unlikely to be repeated. Industry remains tied to the German conjuncture, which is still quite restrained, and agriculture just had two great years. The general plan lying in front of National Bank governor György Matolcsy builds upon private consumption as the driving force behind growth.
However, the visions of this former minister for national economy who switched to the central bank of growth of 5-7% will not even nearly be achieved while society, which is supposed to consume, is bleeding from countless wounds due to his countless saving measures. He did lower interest as much as possible so that demand may revive again – the problem is only that the last two generations of Hungarians have already seriously burnt their fingers with taking loans.
Real wages are not really growing in the total national economy because the unemployment statistics are only looking nicer thanks to underpaid jobs. Nevertheless, the government did introduce a lot of measures with the expressed intention to boost consumption. The retail sector will grow by around 5% this year according to the current statistics; people will spend around HUF 400 billion more in the shops.
In order to take over the role of driving force of gross domestic product, private consumption must be further induced. The shop-stop Sunday – another one of those “spontaneous ideas“– will surely have a counter-productive effect on this.