Thanks to the favourable economic processes last year, Hungary managed to regain its pre-global financial crisis level. However, economic performance still remains below potential,the revised optimistic Hungarian Convergence Program for 2015-2018 submitted by the government to the European Commission on April 30 says.
The government`s report presents a favourable outlook for the coming years. The Convergence Program, which is built up in accordance with the Financial Plan for 2016, is based on keeping the budget deficit permanently low, reducing the state debt and creating a predictable inflation environment. The Ministry of National Economy states that thanks to their “conscious and consequent economic policy” Hungary could significantly recover in 2013 and 2014, resulting in a growth of 3.6% last year, which is excellent even on a European Union scale.
The presented results not only contribute to reducing the vulnerability of the country but they also strengthen the general trust in Hungarian economic policy. The government is determined to preserve the achieved results and to create a stable and predictable environment that results in a dynamic economic development. This will be based on increasing private consumption, since both the improving situation on the labour market and relevant governmental measures will ensure that people will have more disposable income.
The acquisitionthat balanced the budget
The deficit of the state budget was permanently under 3% of Gross Domestic Product (GDP) in the past years. The Orbán government managed to balance off the high spending characteristic of the Socialist era to a certain extent with the so-called “acquisition” of the private pension funds. With this step the state did not only steal the responsibility that goes with the third pillar of the pension system, they also managed to put their hands on a fortune, gigantic on the domestic scale and accumulated by the citizens over a decade in their private insurance funds.
On the other hand, Fidesz could only persuade society to agree to this sacrifice of a financial dimension unseen in Hungary before by using a dirty trick: promising a secure state pension in the far future. This actually quite badly disguised stonewalling tactic was even applied towards the European Court, as one of the victims of the pension acquisition wanted to question the honesty of politics in trade. The claim was refused with the reasoning that the Hungarian Government did promise the pension – the common citizen should be satisfied with that.
The fact is that the ratio of the older generation above 65 years in Hungary will increase from the current 14% to 17% by 2020, and will continue to grow to reach 25% by 2040. In any case, this is what the outlook attached in the annex of the Convergence Program predicts for the coming generations.
In order that the ratio of people depositing in the state pension fund and the people claiming their pension from it does not change from the current situation, more people of active age must actively participate in the labour market, from the current 70% towards 80%. In the case of active men this ratio should even reach 85%.
Following the German path
It cannot be predicted right now if there will be any state pension in a couple of decades, or if it will be mathematically possible at all. It’s obvious that the chances are better when the state debt is lower. This is why the government is trying to make use of these relatively peaceful times to decrease debt payments in the long run and escape the debt trap by growing. Keeping the deficit low is a good way to achieve this.
In the previous year they managed to keep the budget deficit under 3% of GDP again; in the last period it was even lower than the advised 2.9%, going as low as 2.6%. Today, now that the macroeconomic data for the first four months of the year is available, estimations until the end of 2015 can be made in a braver fashion, and the outlook for mastering a deficit of 2.4% of GDP seems to be easily manageable.
For the next period the plans are even more ambitious: deficit values of 2.0%, 1.7% and 1.6% are planned for 2016-2018. No matter how many stadium constructions Prime Minister Viktor Orbán is planning to finance, this premise is for sure: Hungary is following the path of Germany, world master of saving. Knowing how fond Hungarians are of credits, this result is really respectable.
However, it’s not this easy to shove aside the debt hill accumulated over decades. The political stability that has been characteristic of the country since 2010 has helped to anchor the state debt around 80% of GDP in order to be able to introduce a well-planned saving plan. As a first step, Captain Orbán realised that you cannot drive a leaking ship full speed ahead. Years and years are needed to stuff the holes.
Today a balance has been achieved that helps to foresee a clear course: state debt will be decreased under 70% of GDP by 2018, which means a reduction of 10 percentage points. This process will be qualitatively supported by exchanging the foreign currency-based debt gradually for loans based on forints, in order to reduce dependability from abroad and reduce the scope for speculations. By the end of 2014 the ratio of foreign currency-based debt was reduced to 40%, and four years later it should be around 22-23%.
Back to convergence
The other magic trick is growth. Growth helps make accumulated debt harmless. Hungary is planning, according to the new Convergence Program, to keep up a conjuncture pace of around 3% in the middle term. This means that the scope of economic policy will grow by around HUF 1,000 billion each year, half of the money that needs to be spent on healthcare. For sure, this is not a small amount. It cannot be emphasised enough how important it is that Hungary has found its way back on the course of growth.
For the first time since the financial crisis in 2008, the country managed in the past two years to come close to the average growth pace of the EU 28. The convergence process after entering the EU in May 2004 demanded another dimension; at that time not only the target dates for the introduction of the euro were marked, but they also planned scenarios that outlined when Hungary could catch up with the southern EU countries such as Greece and Portugal, and later how the country could catch up to the middle field of Western Europe.
With all that on the side, the global economic crisis found the country in such a sorry state that bankruptcy could actually already have been declared in 2006. This is why it’s not surprising that Hungary was fully left behind after 2009. After the country seemed to catch up in 2011, the next sober awakening came in 2012. The years 2013 and 2014 brought a change here as well; now it seems that the foundation is laid down in a more stable way.
An extraordinary experiment
The positive trend is clearly visible, and in addition the government believes that the growth structure will be permanent. The fact that the current balance of payments recorded massive surpluses contributes to this new sustainability.
Export has been traditionally a driver of Hungarian growth, whereby the Orbán government added investments and private consumption to the package. (We can quietly note on the side that the magic of numbers contributes to this result, since the investments were laying very low for many years. Nobody knew which would be the next instant ad-hoc measure introduced by Fidesz; which branch would be burdened with a special tax again. This was the reason why many people preferred to stay away from investing.)
Boosting private consumption is an extraordinary experiment indeed. Leaning on a heavily modified tax system, the population, who have been beaten by every single new reform again and again, shall advance towards becoming a stable growth driver for the future. Okay then, EU funding and the automotive industry are doing their best in order that the ignition in conjuncture does not die down. The government, however, sees a balanced development on the income side as well, with company profits and salaries both having grown dynamically in recent times.
In consequence, the prognosis for growth this year was raised from 2.5% to 3.1%. Low oil prices and controlled inflation, an active labour market and the conversion of the foreign currency loans, investment – which is still growing thanks to the credit program for growth – and the continuous flow of EU funds and the super-relaxed monetary policy of the European Central Bank are helping to fight back geopolitical risks and the danger of a newly arising debt crisis in the eurozone.
In the meantime the Orbán government is making sure of a good atmosphere with increased family benefits and decreased taxes for personal income, the banking sector and value added tax on pork.