Varga: dependence on EU funds moves economy in ‘wrong direction’

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Hungary will continue to focus on the automotive industry as one of the main catalysts of GDP growth. It is important to develop the supply chain, involving companies able to enter the world market with their own products, Minister for National Economy Mihály Varga said in an interview with business daily Világgazdaság.

Regarding other elements supporting GDP growth, Varga pointed to internal consumption, the construction sector and agriculture. Services are also growing, not just with call centers, but also through financial companies and enterprises setting up service centers in Hungary, the minister noted.

However, Varga added, GDP growth will slow, and EU funds will also terminate, so that Hungarian companies will need to finance their investments from market sources. He said the government could respond with fiscal stimulus to a possible slowdown in economic growth after the European Union funding cycle ends in 2020.

"The main task remains to reduce state debt. But if we see the engine of growth is slowing and needs another boost, the government will have the opportunity to provide fiscal stimulus. We must be flexible," he said. "We have to return to the normal way of doing things, and companies will be forced to finance their developments from the market. Iʼm looking forward to this period, because one has to see that the dependence on EU funding, which has become apparent at some companies, moves the economy in the wrong direction."

Varga noted that the HUF 2,000 bln in EU funding absorbed in Hungary each year generates HUF 6,000-6,500 bln of investments.

"Thus the scale of extra investments flowing into the Hungarian economy is such that there isnʼt sufficient capacity," he explained.

No move on VAT for the moment

Regarding VAT, which is the highest in Europe, Varga said that the government is analyzing areas where VAT can be lowered, but that this is all for the time being.

When asked if the government would extend the preferential VAT rate on home construction, Varga said it is "not yet the time" to speak about tax laws applicable in 2020. The government lowered the rate from 27% to 5% for a four-year period starting in 2016.

"I believe the question of the VAT rate is not the real barrier for development at the moment; rather, it is the use of capacities and the competition for skilled labor," he said. "It will be useful already this year to thoroughly analyze the impact of home construction measures taken thus far. The tax question can be dealt with afterward," he added.

Pressed about Hungaryʼs low rate of productivity in regional comparison, Varga said it was "remarkable feat" that the countryʼs productivity and competitiveness had not deteriorated with the inclusion of the former unemployed, and in large part unskilled, Hungarians in the labor force within the framework of the fostered work scheme. Now, the government aims to manage unemployment by offering "more targeted, tailor-made" solutions, he added.

The government has started to reduce gradually the number of Hungarians in fostered work schemes from over 200,000 in 2015 and 2016, noted state news wire MTI.

Varga reiterated the governmentʼs goal to adjust Hungaryʼs education and vocational training system to the needs of the labor market.

"The long-term goal is for a 14 or 15-year-old child to have picked in their mind a workplace and a profession, and then to ensure that the proper kind of school is at their disposal," he said.

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