Economic Policies
#36Key Findings
With government spending used as a political instrument, Hungary falls into the bottom ranks internationally (rank 36) with regard to economic policies. Its score on this measure has improved by 0.9 points since 2014.
After an initially slow response to the pandemic, the Orbán government instituted wage subsidies and other expansionary spending. A massive GDP drop of 14.2% in mid-2020 was followed by a sharp bounce later that year, and a return to modest growth. The government used the crisis as an opportunity to redistribute resources to allied oligarchs.
Official unemployment rates remained modest throughout the crisis, reaching nearly 5% in mid-2020. Public works programs were expanded to ameliorate joblessness. Companies were allowed to deviate from working hour and minimum wage rules. While the flat corporate tax is low, tax policy is used to favor figures close to the ruling party and punish outsiders.
The government pushed through numerous popular spending measures ahead of the 2022 elections, leading to record deficits. R&I spending has been increased, but structural reforms have infringed on academic freedom, and are likely to weaken R&I performance overall.
After an initially slow response to the pandemic, the Orbán government instituted wage subsidies and other expansionary spending. A massive GDP drop of 14.2% in mid-2020 was followed by a sharp bounce later that year, and a return to modest growth. The government used the crisis as an opportunity to redistribute resources to allied oligarchs.
Official unemployment rates remained modest throughout the crisis, reaching nearly 5% in mid-2020. Public works programs were expanded to ameliorate joblessness. Companies were allowed to deviate from working hour and minimum wage rules. While the flat corporate tax is low, tax policy is used to favor figures close to the ruling party and punish outsiders.
The government pushed through numerous popular spending measures ahead of the 2022 elections, leading to record deficits. R&I spending has been increased, but structural reforms have infringed on academic freedom, and are likely to weaken R&I performance overall.
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How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?
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9
Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
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Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
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3
Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
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1
Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Hungary achieved relatively rapid economic growth in the second half of the 2010s. Economic growth before the COVID-19 pandemic strongly benefited from EU transfers worth 4–5% of GDP, high remittances from Hungarians working abroad and the favorable global economic climate. In a regional comparison of competitiveness indicators, however, the Hungarian economy has lost ground relative to other new EU member states. The reliability of the economic framework has suffered from pervasive corruption, the state capture by the “(royal) court” (udvar) around Orbán and erratic government interventions. In spite of massive foreign and domestic investment, labor productivity relative to the EU average has remained low. The Orbán governments have sought to promote investment and economic development by keeping wages low and disciplining labor, while neglecting human capital and R&I (Pogátsa 2021, Scheiring 2020).
The Orbán government did relatively little to limit the economic fallout of the first wave of the COVID-19 pandemic. It has seized the opportunities presented by the pandemic to further redistribute resources to oligarchs close to the government, and to push through economically and politically dubious infrastructure projects, such as the Chinese-backed modernization of the Budapest-Belgrade railway link.
With the parliamentary elections in 2022 approaching, the Orbán government has turned populist. In 2021 and 2022, it has kept fiscal deficits high in order to buy political support. At the beginning of 2022, the monthly minimum wage increased from HUF 167,400 (€473) to HUF 200,000 (€542). With almost 20%, this was the highest increase in the European Union in 2022. Along with a lax monetary policy, these measures have helped to boost economic recovery in the short-term. However, they have also aggravated the inflationary pressures associated with higher energy prices. The government reacted to soaring inflation by imposing a politically popular, but economically controversial fuel price cap in November 2021, which was further extended in February 2022.
Citations:
Pogátsa, Z. (2021): The Political Economy of Hungary: Managing Structural Dependency on the West, in: Ellen Bos, Astrid Lorenz (Hrsg.), Das politische System Ungarns: Nationale Demokratieentwicklung, Orbán und die EU. Wiesbaden: Springer VS, 153-162.
Scheiring, G. (2020): The Retreat of Liberal Democracy: Authoritarian Capitalism and the Accumulative State in Hungary. Cham: Palgrave Macmillan.
The Orbán government did relatively little to limit the economic fallout of the first wave of the COVID-19 pandemic. It has seized the opportunities presented by the pandemic to further redistribute resources to oligarchs close to the government, and to push through economically and politically dubious infrastructure projects, such as the Chinese-backed modernization of the Budapest-Belgrade railway link.
With the parliamentary elections in 2022 approaching, the Orbán government has turned populist. In 2021 and 2022, it has kept fiscal deficits high in order to buy political support. At the beginning of 2022, the monthly minimum wage increased from HUF 167,400 (€473) to HUF 200,000 (€542). With almost 20%, this was the highest increase in the European Union in 2022. Along with a lax monetary policy, these measures have helped to boost economic recovery in the short-term. However, they have also aggravated the inflationary pressures associated with higher energy prices. The government reacted to soaring inflation by imposing a politically popular, but economically controversial fuel price cap in November 2021, which was further extended in February 2022.
Citations:
Pogátsa, Z. (2021): The Political Economy of Hungary: Managing Structural Dependency on the West, in: Ellen Bos, Astrid Lorenz (Hrsg.), Das politische System Ungarns: Nationale Demokratieentwicklung, Orbán und die EU. Wiesbaden: Springer VS, 153-162.
Scheiring, G. (2020): The Retreat of Liberal Democracy: Authoritarian Capitalism and the Accumulative State in Hungary. Cham: Palgrave Macmillan.
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How effectively does labor market policy address unemployment?
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Successful strategies ensure unemployment is not a serious threat.
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Labor market policies have been more or less successful.
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Strategies against unemployment have shown little or no significant success.
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Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Recorded unemployment declined significantly after the resumption of economic growth in 2013 and stood at about 3% in 2019. However, the national statistics tend to sugar-coat the situation, as they do not count all unemployed. Moreover, low unemployment has largely been achieved by controversial public-works programs and an increase in the number of Hungarians working abroad. The public-works programs have provided “workfare” rather than “welfare” and have seldom resulted in the integration into the primary labor market. The main beneficiaries of the program have been local mayors who are provided with access to cheap labor to perform communal work. Participants in public-works programs have been pressured to vote for Fidesz. The number of Hungarians working abroad before the pandemic was estimated at 600,000, many of them highly educated and skilled. The resulting brain drain has become a major obstacle to economic development. The salary boom in the primary labor market before the COVID-19 pandemic was driven by the lack of qualified labor and the resulting increase in competition among companies to find a qualified workforce.
The Orbán government’s initial labor market response to the COVID-19 pandemic focused on relieving the negative impacts on employers. In mid-March 2020, the government effectively suspended the labor code, allowing employers to deviate from regulations concerning working hours and the minimum wage. In April, these measures were complemented by a wage subsidy scheme similar to the German short-time work benefits model. Only about 5% of workers were covered by the scheme, one of the lowest shares in the whole of the OECD (Györi et al. 2021: 64). In order to limit the increase in unemployment, the government expanded its public work programs and substantially increased the military’s intake. The number of persons enrolled in public work programs increased from 84,071 in March 2020 to 94,560 in December 2020, a 12% increase over the first year of the pandemic.
Despite these measures, unemployment increased substantially during the COVID-19 pandemic. According to OECD data, the unemployment rate jumped from 3.4% in December 2019 to 4.9% in June 2020. Though Hungarian unemployment benefits are rather low and are paid for three months only, Hungary was among the few countries that have not raised unemployment benefits during the pandemic (Aidukaite et al. 2021). In September 2020, half of the 323,000 unemployed did not receive any support from the government (Györy et al. 2021: 64). The economic recovery that began in 2021 has gradually reduced the unemployment rate.
Citations:
Aidukaite, J., S. Saxonberg, D. Szelewa, D. Szikra (2021): Social policy in the face of a global pandemic: Policy responses to the COVID-19 crisis in Central and Eastern Europe, in: Social Policy & Administration 55(2): 358-373 (https://doi.org/10.1111/spol.12704).
Györi, G. et al. (2021): Hungarian Politics in 2020. Budapest: Friedrich Ebert Stiftung/ Policy Solutions (http://library.fes.de/pdf-files/bueros/budapest/17181.pdf).
The Orbán government’s initial labor market response to the COVID-19 pandemic focused on relieving the negative impacts on employers. In mid-March 2020, the government effectively suspended the labor code, allowing employers to deviate from regulations concerning working hours and the minimum wage. In April, these measures were complemented by a wage subsidy scheme similar to the German short-time work benefits model. Only about 5% of workers were covered by the scheme, one of the lowest shares in the whole of the OECD (Györi et al. 2021: 64). In order to limit the increase in unemployment, the government expanded its public work programs and substantially increased the military’s intake. The number of persons enrolled in public work programs increased from 84,071 in March 2020 to 94,560 in December 2020, a 12% increase over the first year of the pandemic.
Despite these measures, unemployment increased substantially during the COVID-19 pandemic. According to OECD data, the unemployment rate jumped from 3.4% in December 2019 to 4.9% in June 2020. Though Hungarian unemployment benefits are rather low and are paid for three months only, Hungary was among the few countries that have not raised unemployment benefits during the pandemic (Aidukaite et al. 2021). In September 2020, half of the 323,000 unemployed did not receive any support from the government (Györy et al. 2021: 64). The economic recovery that began in 2021 has gradually reduced the unemployment rate.
Citations:
Aidukaite, J., S. Saxonberg, D. Szelewa, D. Szikra (2021): Social policy in the face of a global pandemic: Policy responses to the COVID-19 crisis in Central and Eastern Europe, in: Social Policy & Administration 55(2): 358-373 (https://doi.org/10.1111/spol.12704).
Györi, G. et al. (2021): Hungarian Politics in 2020. Budapest: Friedrich Ebert Stiftung/ Policy Solutions (http://library.fes.de/pdf-files/bueros/budapest/17181.pdf).
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How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?
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Taxation policy fully achieves the objectives.
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Taxation policy largely achieves the objectives.
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Taxation policy partially achieves the objectives.
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Taxation policy does not achieve the objectives at all.
Since 2010, successive Orbán governments have transformed the Hungarian tax system. In 2011, the progressive income tax was replaced with a flat tax. In 2012, the standard VAT rate was increased from 25% to 27%, the highest level in the European Union. In 2017, a uniform corporate income tax of 9% replaced a two-tier system with rates of 10% and 19%. Between 2017 and 2018, employers’ social security contributions were cut by seven percentage points. These changes have resulted in a small decline in the tax-to-GDP ratio since 2016. The move to a flat income tax combined with the strong reliance on the taxation of consumption has made the Hungarian tax system less redistributive.
With the introduction of the lowest corporate income tax rate in the European Union (9%) in 2017, the tax burden especially on larger companies has substantially decreased. However, companies still struggle with frequent changes in taxation and the complexity of the tax regime, including the many sectoral taxes. Moreover, tax policy and tax administration have been instrumentalized to favor oligarchs close to Fidesz and to punish outsiders. The classification of businesses as “reliable,” “average” or “risky” by the National Tax and Customs Authority (NAV), combined with the promise of preferences for “reliable” taxpayers, smacks of favoritism.
During the COVID-19 pandemic, the government has sought to lower labor costs by reducing social insurance contributions. It enacted a two-percentage point cut to employers’ social security contributions from 17.5% to 15.5% starting in mid-2020, which will be partly financed by a new levy on the retail sector. In June 2021, the government announced a further cut in employers’ social security contributions to 13% as of January 2022, combined with the abolition of the 1.5% vocational training fund contribution. By contrast, the employees’ social security contribution rate has been left unchanged at 18.5%. Before the 2022 parliamentary elections, the government introduced hefty tax rebates for families and reduced the tax burden on young people by scrapping personal income taxes up to the average salary for taxpayers under the age of 25.
Taxation has hardly been harmonized with environmental sustainability and/or quality. Although environmental tax revenues in Hungary were slightly higher than the EU average, there are still many problems with Hungary’s tax structure due to the many exemptions and special taxes (e.g., subsidies for the reorganization of the coal sector).
With the introduction of the lowest corporate income tax rate in the European Union (9%) in 2017, the tax burden especially on larger companies has substantially decreased. However, companies still struggle with frequent changes in taxation and the complexity of the tax regime, including the many sectoral taxes. Moreover, tax policy and tax administration have been instrumentalized to favor oligarchs close to Fidesz and to punish outsiders. The classification of businesses as “reliable,” “average” or “risky” by the National Tax and Customs Authority (NAV), combined with the promise of preferences for “reliable” taxpayers, smacks of favoritism.
During the COVID-19 pandemic, the government has sought to lower labor costs by reducing social insurance contributions. It enacted a two-percentage point cut to employers’ social security contributions from 17.5% to 15.5% starting in mid-2020, which will be partly financed by a new levy on the retail sector. In June 2021, the government announced a further cut in employers’ social security contributions to 13% as of January 2022, combined with the abolition of the 1.5% vocational training fund contribution. By contrast, the employees’ social security contribution rate has been left unchanged at 18.5%. Before the 2022 parliamentary elections, the government introduced hefty tax rebates for families and reduced the tax burden on young people by scrapping personal income taxes up to the average salary for taxpayers under the age of 25.
Taxation has hardly been harmonized with environmental sustainability and/or quality. Although environmental tax revenues in Hungary were slightly higher than the EU average, there are still many problems with Hungary’s tax structure due to the many exemptions and special taxes (e.g., subsidies for the reorganization of the coal sector).
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To what extent does budgetary policy realize the goal of fiscal sustainability?
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Budgetary policy is fiscally sustainable.
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Budgetary policy achieves most standards of fiscal sustainability.
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Budgetary policy achieves some standards of fiscal sustainability.
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Budgetary policy is fiscally unsustainable.
Hungarian public debt gradually declined from almost 80% of GDP in 2012 to less than 67% in 2019. This debt reduction and the resulting increase in independence from foreign creditors featured prominently in the Orbán government’s success propaganda before the COVID-19 pandemic and allowed the government to present itself as a fiscal savior. Upon closer inspection, however, fiscal performance has been less impressive. The decline in the debt-to-GDP ratio from 2012 to 2019 reflected strong economic growth rather than an ambitious consolidation policy. In the run-up to the 2018 parliamentary elections, Hungary’s fiscal policy turned pro-cyclical in 2017 and 2018. Despite strong economic growth, the fiscal deficit widened and became one of the highest in the European Union, so much so that the European Council launched a significant deviation procedure for Hungary. While the government tightened fiscal policy in 2019, the envisaged decline in the structural deficit was smaller than recommended by the European Council. Fiscal policy has also suffered from weak fiscal institutions and a lack of transparency. Budgets are passed as early as spring, before important information about the coming year is available. Fiscal planning has remained narrowly focused on the annual budget
As for budgetary policy, the Orbán government initially reacted reluctantly to the COVID-19 pandemic. Supported by the Budgetary Council, it originally hoped to keep the 2020 deficit below 3%, despite the pandemic. Many economists thus criticized the government for a lack of fiscal stimulus. At the end, however, the Hungarian central budget closed 2020 with a record deficit of almost 8% of GDP, up from the pre-pandemic prognosis of a historically low 1%. While this was partly caused by the revenue shortfalls and extra spending needs associated with the pandemic, the government also seized the opportunity presented by the crisis to push through some of its pet projects and to adopt a number of popular measures in the run-up to the parliamentary elections in April 2022. With a view to the parliamentary elections in April 2022, budgetary policy remained highly expansive in 2021 and early 2022, with the government frontloading many popular measures in the months before the elections (Virovacz 2022). As deficits were threatening to run out of control, the government was forced to surprisingly freeze some planned investment at the end of 2021 (Than 2021).
Citations:
Than, K. (2021): Hungary trims 2022 budget deficit target to shield local bond market. Reuters, December 17 (https://www.reuters.com/markets/rates-bonds/hungary-cuts-2022-budget-deficit-target-49-gdp-59-2021-12-17/).
Virovacz, P. (2022): Hungarian budget deficit balloons. ING Bank, March 8 (https://think.ing.com/snaps/hungarian-budget-deficit-balloons-february-2022).
As for budgetary policy, the Orbán government initially reacted reluctantly to the COVID-19 pandemic. Supported by the Budgetary Council, it originally hoped to keep the 2020 deficit below 3%, despite the pandemic. Many economists thus criticized the government for a lack of fiscal stimulus. At the end, however, the Hungarian central budget closed 2020 with a record deficit of almost 8% of GDP, up from the pre-pandemic prognosis of a historically low 1%. While this was partly caused by the revenue shortfalls and extra spending needs associated with the pandemic, the government also seized the opportunity presented by the crisis to push through some of its pet projects and to adopt a number of popular measures in the run-up to the parliamentary elections in April 2022. With a view to the parliamentary elections in April 2022, budgetary policy remained highly expansive in 2021 and early 2022, with the government frontloading many popular measures in the months before the elections (Virovacz 2022). As deficits were threatening to run out of control, the government was forced to surprisingly freeze some planned investment at the end of 2021 (Than 2021).
Citations:
Than, K. (2021): Hungary trims 2022 budget deficit target to shield local bond market. Reuters, December 17 (https://www.reuters.com/markets/rates-bonds/hungary-cuts-2022-budget-deficit-target-49-gdp-59-2021-12-17/).
Virovacz, P. (2022): Hungarian budget deficit balloons. ING Bank, March 8 (https://think.ing.com/snaps/hungarian-budget-deficit-balloons-february-2022).
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To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?
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Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
The innovation performance of the Hungarian economy has been relatively low (European Commission 2021). The innovation capacity of domestic SMEs has been limited and multinational enterprises have not done much R&I in Hungary. The weak financing of universities and the R&I sector, along with the Orbán governments’ assault on civil rights and political liberties, has contributed to a substantial brain drain.
After years of neglect, the fourth Orbán government has recognized the growing significance of R&I for economic development and has realized that the European Union will focus more strongly on R&I in the common budget. The 2019 and the original 2020 budget provided for a substantial increase in public R&I spending. At the same time, however, the government has initiated highly controversial structural reforms that have infringed upon academic freedom and are likely to weaken the country’s R&I performance. The creation of the new and powerful Ministry of Innovation and Technology (ITM) has gone hand in hand with a “privatization” of the universities and the “ruining” of the Academy of Sciences (MTA). The process of privatizing universities has involved placing eight universities under newly established “private” foundations controlled by loyal Fidesz supporters. The MTA has been deprived of its research institutes. Instead, the Lóránd Eötvös Research Network (ELKH, Eötvös Lóránd Kutatási Hálózat) has been created. Officially justified as an attempt to make the public research sector more competitive, these changes have drastically reduced the autonomy of the institutions.
Citations:
European Commission (2021): European Innovation Scoreboard: Innovation performance keeps improving in EU Member States and regions, Brussels, June 21 (https://ec.europa.eu/commission/presscorner/detail/en/IP_21_3048).
After years of neglect, the fourth Orbán government has recognized the growing significance of R&I for economic development and has realized that the European Union will focus more strongly on R&I in the common budget. The 2019 and the original 2020 budget provided for a substantial increase in public R&I spending. At the same time, however, the government has initiated highly controversial structural reforms that have infringed upon academic freedom and are likely to weaken the country’s R&I performance. The creation of the new and powerful Ministry of Innovation and Technology (ITM) has gone hand in hand with a “privatization” of the universities and the “ruining” of the Academy of Sciences (MTA). The process of privatizing universities has involved placing eight universities under newly established “private” foundations controlled by loyal Fidesz supporters. The MTA has been deprived of its research institutes. Instead, the Lóránd Eötvös Research Network (ELKH, Eötvös Lóránd Kutatási Hálózat) has been created. Officially justified as an attempt to make the public research sector more competitive, these changes have drastically reduced the autonomy of the institutions.
Citations:
European Commission (2021): European Innovation Scoreboard: Innovation performance keeps improving in EU Member States and regions, Brussels, June 21 (https://ec.europa.eu/commission/presscorner/detail/en/IP_21_3048).
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To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?
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The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
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The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
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The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
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The government does not contribute to improving the regulation and supervision of financial markets.
As a member of the European Union, Hungary has taken part in the European Union’s attempts to improve the regulation and supervision of financial markets. However, the country has not introduced the euro and has stayed outside the European banking union. As oligarchs profit from deregulated financial markets and less strict control mechanisms, a stronger government engagement in this respect is highly unlikely. As a country with a very low corporate income tax, Hungary has opposed G7 and OECD attempts to introduce a global minimum corporate income tax.