In the midst of all the turmoil going on in Europe’s Mediterranean region, let’s not forget that other countries are struggling as well. Hungary is one example, not only because it is desperately trying to save its welfare state, but also because its incumbent government seems eager to deny it is having any fiscal problems to talk about. In fact, the incumbent Secretary of Treasury, György Matolcsy, is so eager to make his government’s public finances look good that he is willing to use whatever fiscal cosmetics he can come up with.
Such cosmetics works as an immediate, superficial and entirely artificial fix for what is really a deeper economic problem. In October he therefore declared that…
The huge problem of fiscal consolidation is over … . Since taking office in 2010 the Fidesz-government has achieved breakthrough in five areas: consolidated the budget, started to reduce public debt, increased the number of jobs due to the public work scheme, reduced the unemployment rate and pushed current account into the positive territory, Matolcsy said.
By “fiscal consolidation” Treasury Secretary Matolcsy means balancing the government budget as quickly and as easily as possible. This in turn means tax hikes and spending cuts – in the Hungarian case mostly the former. Interestingly, they have used a similarly artificial mechanism to “reduce” unemployment: they have simply put more people on government payroll. Not exactly the right way to improve an economy: not only does this counter any effort to balance the budget – genuine or artificial – but it also puts further stress on taxpayers for the foreseeable future.
In reality, the Hungarian economy is in a precarious state. Government is trying to hold on to its big entitlement programs at all cost – same as in the rest of Europe and same as the Obama administration is trying to do here in America – which has opened up for even more fiscal trickery than the measures just mentioned. In October I reported that the Hungarian government was trying to save its welfare state by raising taxes. Then in November the Hungarian parliament approved…
a bill that will levy a HUF 125-per-meter tax on utility lines from the start of next year. The bill, approved in an urgent procedure, levies the utilities tax on the owners of water, sewage, gas, district heating, electricity and telecommunications lines, as well as the operators of state- or local council owned utilities companies. … The tax was originally set at HUF 100 per meter, but the amount was raised before the final vote to ensure it generates the targeted revenue of HUF 30 billion.
A few days later the parliament was presented with a bill that would let government borrow money more broadly:
A bill submitted to Parliament on Thursday would allow the National Asset Management Company (MNV) to issue securities “connected to financial assets owned by the state”. The minister responsible for the general government and the minister responsible for state assets – the economy and the development ministers – would, this year, authorise MNV to issue the debt, according to the text of the bill submitted by Parliament’s budget committee. The bill would also exempt the transaction from a rule that subjects contracts on state assets exclusively to Hungarian law and puts them solely in the jurisdiction of the Hungarian courts.
If fiscal consolidation is over, then why would you continue to introduce new taxes and find new ways to borrow money?
Keep an eye on Hungary. It is not yet the next Spain, but the combination of high unemployment, tepid growth, bigger government and an overall fiscally arrogant and ignorant attitude of the treasury secretary is a big reason to be worried about Hungary.