Wednesday, 8 December 2010

The Hungarian Budget - An Alternative Way?

On the day that Ireland announced an austerity budget that included cuts of unprecedented proportions, Hungary agreed its own budget which offered different solutions to reducing its deficit.


Hungary has been one of the countries worst affected by the global financial crisis. In 2009 GDP fell by nearly 7% and it was one of the first countries to turn to the IMF and EU for financial aid. As a condition of the loans provided by the IMF and EU, the previous Hungarian government was compelled to introduce new austerity measures. Furthermore these came in the wake of the Hungarian government having already reduced its budget deficit from 9% to 3% between 2006 and 2009. Combined, these policies led to the collapse of the unpopular Socialist led government and to the creation of a right-wing administration led by the Fidesz Party, under the leadership of Viktor Orban.


The Hungarian economy has gone through a series of turbulations since the collapse of Communism in 1989. Initially it was declared as the model for emulation as it rapidly opened itself up to the world economy and sold off huge chunks of its industrial and financial sectors to foreign buyers. By the late 1990s, foreign capital's ownership share had reached 63% in telecommunications, 51% manufacturing industry, 36% retail trade and 44% financial services The proceeds from these privatisations were used to fill the public coffers and to maintain political compliance through sustaining social spending. When these privatisations began to slow and the inflow of foreign capital reduced then the imbalances within the Hungarian economy were revealled. In 1998 Hungary underwent a financial crisis as capital flowed out of the country. This was largely as a result of the repatriation of profits by foreign owners and the lack of funds from privatisations after the country's most desirable assets had been sold.


At the beginning of the present crisis in Hungary, the Forint underwent a huge devaluation - falling by 15% alone between October 2008 and February 2009. This again was a consequence of an outflow of captial from the country and helped to instigate a sharp downturn in the economy. A devaluation in the Forint was particularly painful for Hungary as huge numbers of personal loans had been taken out in foreign currencies (particularly Swiss Francs).

The overbearing dominance of foreign capital in Hungary meant that it became the source of frustration for those disastisfied with the realities of contemporary capitalism. This has particularly been the case during times of economic crisis. The involvement of the official left, around the Socialist Party, in pushing through this course of reform has meant that opposition has tended to come from the right. This has allowed for the nationalist-right, primarily around the Fidesz Party, but also with more extreme right-wing versions such as the Jobbik Party, to articulate an 'anti-reform' agenda based upon nationalism, sometimes racism (particularly towards the Roma community) combined with an anti-market/globalisation rhetoric.


The government showed its intentions shortly after coming into power when it announced that the public debt it inherited was actually bigger than it had thought and that it may default on its repayments. This again pushed down the currency, raised the cost of borrowing and ended up with the government soothing the international markets by stating that these claims had been 'unfortunate'. If this was a way of testing the water, then the new administration certainly learnt that it was hot. They have since agreed to comply with the demands laid down by the IMF and EU, to meet their debt repayments and to bring down their budget deficit in line with expectations. How they plan to do this, however, differs from that being carried out in most other European countries.


This week's budget includes plans to introduce large taxes on banks and other firms alongside its decision to bring $14bn in privately held pension assets back into government hands (see previous post). According to the government's calculations this equals around 4.4% of GDP and should help to bring the budget deficit down. At the same time the government has continued with its own public spending cuts, although these are less than in many other countries. In this budget it has also decided to launch a 16% flat personal income tax and a 10 percent small business tax.


It is likely that these policies will meet some positive social appoval as they seem to punish the culprits (large, foreign capital), partially protect public spending and reduce the tax level for local businesses and individuals. The budget seems particularly designed to meet the approval of the middle-class and local small/medium busniesses. However, the government is trying to balance something that perhaps cannot be balanced. The budget does not include a programme of investment in the economy - which ultimately is the only way for the economy to grow. If economic growth slows then its attempts to meet its budget targets will fail. Despite its rhetoric the government is suppressing public spending and meeting the draconian demands of its international creditors. Also the danger exists that it will take individual pension assets out of the pension funds (an action that is wholly rational and justified) but use them to temporarily fill its budget deficit. In this way bodies such as the EU will be pacified through drawing upon the savings of millions of Hungarians.


The solutions being proposed by the Hungarian government are certainly different from those being introduced in countries such as Ireland. However, they do not add up to a coherent alternative solution to the crisis facing many countries on Europe's periphery and carry with them some dangerous ideological undertones.

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