Wednesday

12th Aug 2020

Opinion

Orban's risky bet in economic response to coronavirus

  • Hungarian prime minister Viktor Orban, here in Budapest with EU Council president Charles Michel. 'Hungary's government was slow in announcing its economic policy response relative to its regional counterparts' (Photo: Council of the European Union)

Recent reports about Hungary's response to the coronavirus have focused on a controversial new law approved by parliament that allows prime minister Viktor Orbán to rule by decree without a set time limit.

At the same time, Orbán's economic response to the crisis has largely gone under the radar, despite the associated economic and political risks.

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Unveiled in several pieces over the last weeks, the Hungarian government's scattershot economic response is unlikely to sufficiently cushion the country's economy as it faces the fallout from coronavirus.

Two other concerns loom large: a large part of the stimulus that the government is offering is directed towards particular industries where oligarchs are particularly influential; and the government's policy response does not address the needs of large swaths of the population in dire straits as the economy slows and unemployment soars.

Hungary's government was slow in announcing its economic policy response relative to its regional counterparts.

Data published by the International Monetary Fund (IMF) suggest that Hungary's main economic response package came one to three weeks after measures were announced in Austria, the Czech Republic, the Slovak Republic, and Poland.

An earlier analysis by Brussels-based European think tank Bruegel of steps taken in March estimated the immediate fiscal impulse provided by Hungary's government at 0.4 percent of GDP vs 6.9 percent in Germany.

The most recent round of fiscal measures goes further but the total size of the response is still considerably smaller than the resources other countries have marshalled to combat a possible economic meltdown.

The government's Anti-Epidemic Protection Fund contains €1.88bn, while its Economy Protection Fund contains €3.82bn -the two funds come out to less than four percent of GDP.

But this number is misleading: while neighbouring countries are financing their large fiscal responses from substantial increases to their budget deficits, as the IMF notes Hungary's government is proposing to fund its response largely from taxes and the reallocation of budgetary funds without much new spending.

Most likely for political reasons, budget reallocations include substantial cuts of local government budgets and a 50 percent cut in state funds allocated to political parties.

The latter measure represents just €3.4m, 0.2 percent of the costs of the government's plan but puts opposition parties on the brink of bankruptcy.

Under the government's plan, Hungary's 2020 budget deficit would move from 1 percent to 2.7 percent.

As a point of comparison, the Czech government has approved a plan that includes a five-fold increase in the country's budget deficit. The primary risk of the government's focus on the deficit over stimulating the economy is that the recession could be deeper and longer than necessary.

But there are other risks involved beyond the economic fallout. The government is doing much less to protect jobs than most of the region.

The Slovak Republic's government announced weeks ago that it will pay 80 percent of the wage of workers of firms forced to shut and similar wage subsidies have been adopted in Slovenia, the Czech Republic, Romania, and most notably in Germany, under its short-term work (Kurzarbeit) program.

Hungary's government passed "a special Hungarian version of Kurzarbeit" that is limited to employers that reduce working hours by at least 15 percent but no more than 50 percent (later increased to 75 percent), compensates 70 percent of the lost working hours for three months, and comes with a complex application procedure that runs the risk of funds being allocated in a non-transparent and inefficient way. Government wage payments are capped at €315 a month.

The government has also not adopted any measures that would address the needs of the large number of Hungarians who face job loss.

The three-month duration of unemployment insurance was the shortest in the European Union pre-crisis and no extension has been announced.

There have been no announcements of any substantial income support programs to support families in need either. The government has instead focused on a program "work-based society": the idea is that people should not get government transfers unless they work.

In line with this idea, the government has allocated €1.28bn to support job-creating investments and created special programs to help the industries that it considers hardest hit and most deserving of government help.

This includes a staggering €1.7bn spent on tourism alone. Part of the help offered by the government to the tourism industry will come from increasing limits on tax-exempt cafeteria plans that can be spent in hotels and restaurants, an overtly-regressive change to tax policy.

In another strange move, the government has announced across-the-board pension increases starting in 2021, despite pensioners as a group not being the hardest hit and without any special dispensation for pensioners most in need.

Short-sighted and risky

The government's response is short-sighted and risky: it prioritises political ideology over the needs of Hungarians and Hungary's long-term economic interests.

We have recently offered a five-point plan that we believe would allow for a more efficient, equitable and sustainable response to this unprecedented challenge.

Our proposals include:

1. The full implementation of a program under which the government guarantees workers' wages based on policies implemented in Germany.

2. The replacement of income losses that cannot be addressed by guaranteeing wages through transfer programs.

3. The extension of unemployment insurance, the increase of cash assistance to families, and an expansion of transfers to individuals who are unable to work.

4. The provision of substantial financial support to local governments and non-governmental organisations who carry out crucial work at this time of crisis and who are able to offer direct and personalised help to those most in need.

5. The involvement of the more fortunate members of our society, making sure that the idea of solidarity is central to our economic response.

A reduction in non-essential spending along with a substantial increase in government spending overall, as an increasing budget deficit should not hinder effective government action.

No country will come out unscathed from this crisis.

But policy-makers still have significant latitude in influencing the length and the depth of the recession and just as importantly have the ability to significantly affect how much different members of our societies will feel its impact. We believe that for successful crisis management, we need to work towards shared goals in a broad framework of trust and solidarity.

Author bio

Péter Bihari: Former Member of the Monetary Council of the Hungarian National Bank, Péter Ákos Bod: Former Governor of the Hungarian National Bank, Attila Chikán: Former Minister of Economy, Péter Felcsuti: Former CEO of Raiffeisen Bank Hungary, Dóra Győrffy: Pázmány Péter Catholic University, Júlia Király: Former Deputy Governor of the Hungarian National Bank, Tamás Mellár: Former President of the Hungarian Central Statistical Office, Zoltán Nagy: Former President of the Hungarian Competition Authority, Gábor Oblath: Former Member of the Monetary Council of the Hungarian National Bank and Former Member of the Fiscal Council of Hungary, Éva Palócz: CEO of Kopint-Tárki Institute for Economic Research, Mária Zita Petschnig: Senior Researcher at Pénzügykutató Financial Research Institute, Dániel Prinz: Harvard University, Werner Riecke: Former Deputy Governor of the Hungarian National Bank, Ágota Scharle: Executive Partner of Budapest Institute for Policy Analysis and András Vértes: Chairman, GKI Economic Research Institute.

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

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