Europe, Financial sector

Economic policy and macroeconomic developments in Hungary


At first sight, the economic situation in Hungary has been getting better in recent years, with economic growth reaching nearly 4 per cent in 2014, the fastest rate in the EU. But are these numbers really as good as the Orban government claims? Gabor Oblath, senior research fellow at the Institute of Economics of the Hungarian Academy of Sciences, member of the Monetary Council in 2002-2009, and member of the Fiscal Council of Hungary in 2009 – 2010, tried to answer this question during the 143rd mBank – CASE Seminar “Economic policy and macroeconomic developments in Hungary.”


The bright and the dark side of Hungarian economic performance since 2010

In 2010, Orban’s party FIDESZ won parliamentary elections for the first time. The government has touted that this even has led to an impressive change in economic performance in Hungary for the better.  In addition to growth, Hungary’s fiscal balance has improved significantly; after many years of being one of the most indebted European countries, it managed to join the group of countries without the EU Excessive Deficit Procedure.  

However, taking a closer look at the data, it turns out that Hungary’s improvement is only very recent, with 2014 the beginning of a turnaround. As Professor Oblath noted, the overall picture is less clear-cut, with the growth of the last two years unrelated to “unorthodox” policies pursued by the Orban government. In particular, the fiscal consolidation required a number of difficult and mostly orthodox reforms. These included a flat tax on personal income, many sector taxes, and nationalization of private pensions. While social groups protested against such reforms, the reality is that such reforms have been used by other governments and do not represent a new or fresh approach to economic thinking. As Professor Oblath explained, the approach is more commonly associated with Marxist ideology, which assumes that services are unproductive and the capital stock should be under national ownership.

Indeed, in Professor Oblath’s view, the Hungarian government has been more effective in communicating with the public than in actually breaking new economic ground. On the streets of Budapest, Professor Oblath gave examples of posters which present government official information about successful reforms introduced by the government. But the statistics trumpeted by this information campaign only come from 2014; when we compare the performance of Hungary to EU countries over a longer period, the Hungarian economy is actually performing at a below average level.


The main consequences of “unorthodox” policy

According to Professor Oblath, the main problem associated with the policy of the Hungarian government is a significant deterioration of the institutional environment. This represent the major threat to long-term growth prospects, as weak institutions will lead to low investment and outflow of labor and capital. Without fundamental improvements in basic institutions, the country’s growth is expected to be rather low, making convergence to the more affluent nations of the EU improbable. This reality has consequences for Poland, which had recently had a lively discussion on adopting the Hungarian example. Professor Oblath showed that this approach is not a good model for countries to follow, if they want to continue converging to EU levels.