Ferenc Gyurcsány: "Orbán is ruining us"

I thought you might be interested in the blog Ferenc Gyurcsány published yesterday. There is certainly interest in what he had to say about Viktor Orbán's "economic policies."  Up to now 1899 comments were received.

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We became guinea pigs because what Orbán calls "economic policy" is no more than an unbelievably risky experiment. There are several very weak points in the prime minister's suggestions.

Let's start with the philosophical portion of them. The gist of his message is that "public interest is good while private is sinful." One immediately becomes suspicious because this is the claim of every despot. Especially when these people, full of self-confidence, act as if the interest of the public cannot be anything else but what they consider it to be. Their claim is that they are the only credible spokesmen of public interest. It sounds familiar, doesn't it.

Democrats think differently. They say that society is divided along the interests of many different groups. There are millions and millions of different kinds of interests present at the same time in every given society. In addition, naturally there is such a thing as the public interest. But the more complex a societal group, the more difficult it is to determine what its common interest is. Surely, an unemployed worker will have a different notion about the public good than a manager of a company.

The definition of public interest is not the result of someone's pronouncement but of discussion. Public good is not a statement but the result of many statements which in fact are changing with time. For example, what is the public's interest before the tragedy of the red sludge and after?

A democratic society must find an equitable harmony of different interests. It acknowledges the variety of interests and tries to reconcile them. At times it gives primacy to one and other times to another.

Often the interest of the worker must be defended against that of the company. For example, we don't allow workers to toil from morning till night even if that might be good for the company. We don't believe that for the sake of law and order the state can do whatever it wants. The police cannot come without reason into our houses, the state cannot deprive us of our pensions if we had paid into social security earlier, and not even in a crisis situation can it decrease child support from one month to the next.

Orbán's current message doesn't recognize that the rights of the individual are just as important as the interest of the state. I might add that he didn't always think that. For example, when he initiated a referendum against co-payment. Then he said that the interest of the people--that is, that they don't have to pay--is more important than a well-run healthcare system that would serve the common good.

But here is something else. Orbán's decision to "steal" our savings deposited in the different pension funds. This is unconstitutional. Tamás Bauer writes in Galamus.hu: "The Constitutional Court decided earlier that social security contributions must be treated as private property and as such must have constitutional guarantees." The prime minister wants to take away our own property. If we allow him to do so, we deserve what we get.

But there are other problems with Orbán's economic "package" as well. According to the Költségvetési Tanács, the watchdog over the budget, these extra taxes decrease consumption and slow growth while they increase inflation. It should be clear that these extra taxes don't help to create new jobs even as the prime minister is promising one million new employment opportunities. (We might as well add here that the Költségvetési Tanács's estimation is that one-third of the extra taxes, sixty billion forints, will be passed on to consumers. That is the same amount of money as two years of co-pay would have been.)

The greatest problem, however, is the continuing upkeep of the whole system. The measures the government is introducing will allegedly expire in 2012. Until then yearly 700 billion forints worth of taxes will be received. But only for three years. However, in exchange the government gave up other sources of income, mostly by lowering the personal income tax rates and some business taxes. Not for three years but forever. One doesn't have to be a rocket scientist to realize that something is wrong here. In exchange for temporary revenues one cannot accept long-term obligations. But Orbán does exactly that.

What is the prime minister hoping for?

The answer is obvious. He can avoid a total collapse of the financial equilibrium in 2013 only if by then, if not earlier, he can substitute for the extra taxes levied on certain business sectors something else. What can the source of these revenues be? One must think that he is hoping that the tax cuts will stimulate the economy and therefore the budget will receive considerably more tax forints. But let's calculate a bit! The table below shows what the size of the tax revenues will be in comparison to the gross national product.

On the first line we have the figures calculated on the basis of the convergence program. The last line shows that the Orbán stimulus package indeed creates a very substantial decrease in taxes: more than 5%. It is especially large when there is no more extra taxation on businesses and no more money comes from the withheld social security taxes. So how can that problem be solved? We have to assume that Orbán knows what he is talking about when he attacks the private pension funds and urges us to put all our social security taxes into the state budget. Let's suppose that he is successful in this endeavor and 75% of the members actually listen to him and put their money into the common pot. Thus the state revenues will grow. By how much? The table below shows the results.

 

Well, even with that extra money there is still not enough. Tax revenues will still come up short of the necessary amount of 37% by 2%. So we examined by how much the economy would have to grow to compensate. The result was that in 2012 we would need 8.2% growth in the GDP and in 2013 a whopping 9.1%. Is this realistic? Of course not.

Therefore we took a look at what Fidesz can do under these circumstances. The simplest solution would be to play with the pensions. We suspect that the government will not return to the system of increasing pensions based on the Swiss model and naturally will not pay the so-called pension premium that was supposed to compensate the pensioners somewhat for the loss of their thirteenth month pension that had to be taken away as a result of the economic crisis. That would mean a certain amount of "savings." On the next table we figured out the results of such fiddling with the pensions.

 

So what are our conclusions? That we are in big trouble. Fidesz set up a budget trap. Even if the government manages to convince 75% of the people to abandon the private pension funds, one would need an unimaginably  high economic growth. If we add into the mix a reorganization of the pensions the situation is a bit better but not much. The figures we are arrived at are still unrealistically high: 5.4% in in 2012 and 6.1% in 2013. Who can believe that?

And we didn't even mention that there are a number of things one ought to spend money on. For example, healthcare, education, the police force, local governments. Not a penny can go to them even if unimaginable economic growth is awaiting us.

So, the government led by Viktor Orbán is ruining us. A new brave world is coming.

 

Comments

[whoever]

I'm not so sure about this. The government can raise taxes at a later stage, just as quickly as it has lowered them. I wouldn't expect the new rate of 16% to be permanent. Far from it.

Hungary wasn't on the road to widespread prosperity a year ago, and perhaps that road is still the same distance away, just from a different side.

Keynes didn't only advocate a counter-cyclical loose monetary policy in a downturn, as the US/UK are pursuing with QE. He also advocated a loose fiscal policy, and didn't rule out the use of tax cuts to achieve this. I'm not convinced of the Orbán measures, but neither am I convinced that they spell disaster, in the current context.

From what I can deduce, I see a mild-to-moderate reduction in the level of investment of the multinationals affected by the levies. If this is combined with measures to improve the skills and competencies of SMEs - there's little evidence of this - then there might be positive effects.

Consumption is set to be a mixed picture - as I think that services and construction might be boosted by the flat tax, and a certain degree of confidence is restored in some sectors.

Despite the barely concealed resentment and hysteria of this article, it's hard to see real, make-or-break conclusions resulting from all of this. Yes, the rich will get richer, and probably the poor will get poorer. But Mr Gyurcsány has done little to help the majority of those on lower salaries, and the behaviour of his own party provided little justification for such high levels of taxation, and tax bands applied so low in the salary scale.

The neo-feudal reality of modern Hungary, from which both Orbán and Gyurcsány have benefited as chieftans, will continue, as the country does not currently have the cultural or material resources to affect its own genuine moment of reconstitution. Hungary doesn't have enough rebellion in its soul. We can argue why that is the case. 1956? In the meantime, we will have a long period of right-wing dominance.

[An]

@whoever: "The government can raise taxes at a later stage, just as quickly as it has lowered them. I wouldn't expect the new rate of 16% to be permanent."

Wonder which government is going to increase taxes when it's needed.... seems like a political suicide. Lowering taxes is ALWAYS easier than increasing them, so if the flat tax doesn't work out (i.e. it fails to boost the economy); good luck convincing the taxpayers that taxes need to be raised.

As for the fairness of the tax: even the US, with its traditionally reluctant social solidarity for the poor, have progressive taxes.

[Alias3T]

"The government can raise taxes at a later stage, just as quickly as it has lowered them. I wouldn't expect the new rate of 16% to be permanent."

Personal income tax rates won't rise during the life of this government, unless OV stops being PM. Everything we've seen, all four hastily thought-out windfall taxes and the emergency pension raid, shows that the flat tax with incentives to sprogging is sufficiently totemic that everything else is subordinate to it. The windfall taxes will cover them for three years. After that it's an election year, and regardless of the growth picture, you can be sure they won't raise taxes ahead of an election.

(Analysts will be amusing in 2014, though. "Hungary's borrowing has risen sharply in the first quarter, but we believe Hungary's centre-right government will announce austerity measures after April's parliamentary election.")

"measures to improve the skills and competencies of SMEs - there's little evidence of this - "

- but much evidence to the contrary. In the past two days we've seen at least three public tenders - one of them for Ft5bn - being handed to companies linked to ministers. The state will continue to be a piggy bank for wealthy, well-connected individuals, and there's no chance of money being spent on helping SMEs rise up the value chain.

Yes, Gyurcsany's reasoning is self-serving, and the numbers look cherry-picked. But the problems are obvious: Hungary can muddle on as it has for ages, but the pressure is growing.

I'm curious to see what foreign government bond holders will do now that there are no domestic pension funds to provide liquidity in the market. It's now much harder to sell on your Hungarian debt. It was a high-yielding, but liquid asset because domestic pension funds were always ready buyers. Now it's a high-yielding, but hard-to-shift asset. That will lead institutional investors to cut their holdings, making it that much harder for the government to borrow. It means that, when the next bout of panicky risk aversion hits, Hungary could find it very hard to raise money.

[Mark]

Alias 3T: "I'm curious to see what foreign government bond holders will do now that there are no domestic pension funds to provide liquidity in the market."

I've been waiting for the business press to wake up to this. This dimension of the private pension fund raid is potentially hugely significant.

[Rigó Jancsi]

It's the right of the opposition to criticize, and it's good that Gyurcsáni is not using the same plump rethorics as OV. But I wonder, apart from criticiziing what the government is doing, does he have useful suggestions how it could be done better? My Hungarian is not good enough to read Népszabadság or HVG and really understand the details. So I wonder if Éva could scan the media and provide information on the suggestions of Gyurcsány and/or the rest of the opposition (maybe except Jobbik), how the situation should be handled. "Borrowing" the payments to the pension fonds surely isn't the way to enlightment, neither are the taxes on Eon, Vodafone & Co. But is strictest austerity the only other possibility, or are there better ideas on the "market"?

[Mark]

Rigó Jancsi: "But I wonder, apart from criticiziing what the government is doing, does he have useful suggestions how it could be done better? ..... But is strictest austerity the only other possibility, or are there better ideas on the "market"?"

I think the answer to the first question is that I have yet to hear anything from the MSZP that would suggest that they are doing anything other than engaging in cheap point scoring. I see no sign that they are willing to recognize their own errors that have contributed to this mess.

"Strict austerity" failed. In financial terms the Bajnai government failed to hit its agreed budget targets, because of the effects of its austerity measures on the broader economy, and thus on tax revenues. Basically in trying to cut its own spending, it reduced its own income stream. It failed economically. If one looks at the second quarter growth figures industrial production rose substantially on the back of German demand. However, in Hungary, and largely because of the IMF package the rest of the economy was so weakened that even the most favourable international circumstances imaginable were not able to place Hungary on a growth path. Growth recorded was 0%. And thirdly, politically it was a complete failure. It failed to ensure its own political sustainability and has left a parliamentary constellation and a political one where the government would find it impossible to introduce austerity measures even if it wanted to.

Of course, all this was entirely predictable, and some of us did predict it.

The problem here is that Orbán has been left with an enormous mess to clear up. The ways out of it are likely to be painful (HUF devaluation, debt restructuring) as they will involve reductions in living standards over the next eighteen months to two years. And Orbán is neither capable of securing the international support, nor the popular consent (because of his own opposition to his predecessor's unpopular measures), nor would I suggest has he the political skill to carry it through.

[Eva S. Balogh]

whoever: "it's hard to see real, make-or-break conclusions resulting from all of this."

I'm no economist and even if I were I don't think that one could prove or disprove these figures. However, here is an other source, a very different source: György Kopits, conservative pro-Fidesz economist who is heading the independent council that oversees the budget figures.

According to him 2010 will be fine. Enough money will be come in. But by 2012 there will be 200 billion forints will be missing while in 2013 the amount will be 700 billion. So, two people with very different political views say practically the same thing.

Kopits was the guest of Ma Reggel (I think yesterday) and the new reporter who decidedly pro-government was extremely frustrated. Kopits refused to support the Orbán-Matolcsy plan. Details in English here:
http://www.bloomberg.com/news/2010-10-19/hungary-needs-budget-steps-to-close-gap-fiscal-council-chief-kopits-says.html

[Mark]

Éva: "So, two people with very different political views say practically the same thing."

One doesn't have to accept Gyurcsány's forced and overly elaborate analysis to see the major budget hole opening up under the government. Orbán's gamble is based on high economic growth produced by his tax cuts. For reasons given earlier I think they will produce no growth and will destabilize the balance-of-payments. Furthermore, the credit freeze that is a consequence of the bank tax could very easily tip the economy into a second recession.

I suspect for these reasons the real question is whether Hungary faces a serious financial crisis before the budget hole becomes apparent - not whether the budget hole leads to the financial crisis.

[Eva S. Balogh]

Mark: "One doesn't have to accept Gyurcsány's forced and overly elaborate analysis to see the major budget hole opening up under the government."

Yes, I see very serious problems myself. As for Gy's overly elaborate analysis, I think that for him it is not enough to say what Kopits says. He has to "prove" that his conclusions are correct. Moreover, I think that he has a professorial streak in him. Perhaps not the best trait for a politician.

[wolfi]

The statements here on the Hungarian economy are very interesting, though I'm not an economist. But the near future looks very bleak - I have several acquaintances, neighbours and friends here who don't know how to manage the next months ...

Some probably won't be able to pay their electricity and gas bills - and there is no miracle in sight.

A few are worried they might lose their jobs - with no new jobs in sight ...

The whole situation is really depressing!

PS:

And I live near Héviz, which is one of the more affluent regions of Hungary - don't want to imagine the situation in other parts of the country ...

[Mark]

wolfi: "But the near future looks very bleak - I have several acquaintances, neighbours and friends here who don't know how to manage the next months ... Some probably won't be able to pay their electricity and gas bills - and there is no miracle in sight."

This is why it is obscene that when the state ought to be using what room for manouver it has to protect the most vulnerable, it is instead intent on giving the very wealthy a huge handout through its proposed tax changes.

[whoever]

I have a suspicion that the flat tax will be temporary - the rate of 16% will remain for some, but at least one, and probably two more higher rates will be added in the next few years. The government will then point to the number of people it has brought into the 'white' economy as proof of the policy's success. In addition, they are also able to use differential rates of VAT and may flirt with property taxes. However it seems that they are at least partially motivated by Social Darwinism, their love of motherland does not extent to their disadvantaged compatriots!

[latefor]

To whoever -
What???? "Social Darwinism"????
I pray to God that they are not even "PARTIALLY motivated by Social Darwinism".
God bless us all and pray for the improvements......that is all we can do.

[whoever]

If there is compassion or ambition for the less wealthy within the programme of this government, I simply don't see it.

In terms of praying, I'm sure the new Constitution will provide a sound legal basis for such an appeal to Higher Forces.

Not really reported on this blog, but there has been a recent mushrooming of strikes about the non-payment of workers - probably there are dozens of such disputes currently going on. Hungary's future at least partially depends on the ability of these workers to demand and claim for a modicum of social justice. If their claims go unanswered, Hungary is heading for a very ugly outcome indeed - the rule of the economic jungle. And that is Social Darwinism.