Critics line up to attack Hungarian govt's economic policy

By bne IntelliNews October 10, 2011

Kester Eddy in Budapest -

Lajos Bokros, MEP and the former Hungarian finance minister who oversaw the largest privatisation sales in the mid-1990s, on Friday, October 10 savaged Hungary's current economic policy, deeming it a "complete failure" and accusing the Fidesz government under prime minister Viktor Orban of "mortgaging the future" of the country and its people with measures such as the nationalisation of the private pension funds.

Never far from controversy as a minister, Bokros' wide-ranging attack comes at a time of renewed worries over the Hungarian economy, caused by the crisis in the Eurozone, weakening demand for exports from Germany, and growing mistrust of the Hungarian government's self-declared "unorthodox" policies - the most recent of which enables mortgage lenders to pay off their foreign-currency loans with forint at a discount of some 25% on current market exchange rates, causing consternation among the banking industry and beyond.

Bokros told a press conference hosted by the Freedom and Reform Institute, a right-leaning think-tank of which he is president, that the Orban government's economic policy "is irrational, unprofessional, unsuccessful and dishonest," and is set to make Hungary "totally uncompetitive" vis-a-vis its peers in Central Europe.

While the Fidesz administration, which regularly denounces Hungary's communist past, is typically described as a centre-right regime, its economic policy is far from the classical conservative line, Bokros argues. "The ruling party's view is that a western-style economy, based on the principles of freedom and markets, has failed. [So] the time has come for a big, strong state, for governments to determine the functioning of markets, and to intervene deeply into the lives of businesses... This concept echoes the Chinese and Russian models, and gives rise to an economic policy which is completely irrational in a small, open and converging economy," he said.

Bokros focused some of his ire on the foreign-currency mortgage repayment scheme, denouncing it as "legalised robbery." The banks, already suffering from a crisis tax imposed last year that largely wiped out profits, are outraged by the latest move, and have threatened to appeal to the European Court against it. Bokros warned that if the banks lose out, ultimately "trust and confidence will shrink, savings and investments will fall, and a credit crunch will set in."

Partly as a result of the Eurozone crisis, but also due to the growing worries over Hungary, the forint had weakened at one point in the past week to within a whisker of HUF301 to the euro - a loss of 9% in a month and it's lowest level since the spring of 2009.

Taxing times

Tamas Fellegi, the Hungarian minister of national development, champions the newly introduced flat tax as a key element of Fidesz policy, returning "HUF500bn to the people." But critics say the tax - set at 16% in theory, but 20.3% in practice - has left a hole in the budget, only benefited high-income workers and failed to produce the promised boost to consumption.

Despite improving the fiscal balances and state debt in its first year of power, the outlook for the Fidesz government is not improving; the normally buoyant Ministry for National Economy (the former finance ministry) has toned down growth predictions to a mere 1.6% this year, followed by 1.5% in 2012.

As a result, the 2012 budget increases the standard VAT rate from 25% to 27%, delays various planned tax cuts and hikes the legal minimum wage by 18% (to around €300) - all moves criticised by Bokros. "Changes to the personal income tax system and the unrealistic increase of the minimum wage will destroy jobs with low-added value," he said.

Other critics point to the low rates of investment, despite headline news in the auto sector such as the expansion of Audi in Gyor and arrival of Mercedes in Kecskemet. "The fact is, we are not renewing our industry fast enough to keep up with it's amortisation - it's wearing out. If you take out the incoming foreign direct investment, the situation is even worse," Peter Rona, a Hungarian economist, told a Hungarian TV station this weekend.

As a political force, Bokros is lightweight; he was elected to the European Parliament as the sole representative of the MDF, the most popular conservative party in 1990, but which has since disappeared from parliament in Budapest - largely through defections to Fidesz. However, as the author of the controversial "Bokros Package", a series of structural reforms implemented in 1995 which radically (and painfully) improved Hungary's fiscal position and competitiveness, he retains a political brand - albeit a negative one for many Hungarian voters.

The government side, asked to respond to the Bokros criticisms, failed to do so by deadline. However, the chances of any policy changes appear slim indeed. Speaking last month of the government's proposed legislation to the American-Hungarian Chamber of Commerce in Budapest, Fellegi said: "I can assure you, whether it's a positive thing for you or not, the government is not willing to change the established policy [or] the established strategic direction... this means that the programme of providing job opportunities for people and to protect and develop further the proportional [flat] tax system in Hungary is a major goal."

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