A costly victory?

History

The Central Statistics Office delivered quite a shock when it revealed that Hungary’s 2012 budget deficit was not only within the 3% of gross domestic product limit required by the European Union, but was almost 1% better than what international organizations and even the government expected.

The government has long been expressing confidence that the Excessive Deficit Procedure that has been in effect against the country since joining the EU in 2004 can and will be lifted this year, following deep-cutting corrections in 2012. And while the EU and the International Monetary Fund have projected bigger gaps for this year and next, the government now has the 2012 2% figure and the low base it means for 2013 to support its case. The campaign to reduce the deficit has so far been a success.

But the cost of this venture is already showing and it is becoming a painful prospect that these efforts have led to sacrificing any growth that can be achieved in the near future.

The excessive taxes that allowed the formidable reduction of the gap have shaken investor confidence in the country, ruling out any major uptick in investments that could aid the labor market and consequently boost consumption, while companies already active in Hungary are looking at how they can cut their losses.

RWE has announced that it has scrapped 50% of its planned investments for this year. Magyar Telekom is considering exiting the Hungarian energy market altogether, leaving the state as the obvious buyer and the taxpayers to bear the costs of the necessary investments.

Despite high central hopes for the new electronic motorway tolling system, the freight industry fears for its competitiveness as result of the boosted costs, while gambling service providers are starting to have serious doubts about whether they could be legally active in Hungary at the fees demanded.

The Orbán cabinet’s method of trying to heal the economy has always been blunt amputation rather than laser surgery, especially when dealing with the business sector. There may well be a cruel realization down the road that limbs don’t just grow back.

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