Leading companies in Hungary are seeing positive signs in the economy, they are optimistic about the government’s goals, but they have doubts about whether they can be achieved, speakers at the Budapest Business Journal’s 2011 Annual Business Forum said.
Hungary’s government is striving to create the most business-friendly environment in the CEE region, said Zoltán Cséfalvay, state secretary at the National Economy Ministry. According to the plans, the government would greatly revise the distribution of EU funds, allocating 50% of the total to business developments while also making conditions easer through lifting bureaucratic burdens.
The official’s statements came after a period that gave companies the impression that Viktor Orbán’s government is not particularly a friend of capital, especially foreign capital. First, a special tax was imposed on the finance sector, shortly to be followed by a similar provision on the energy, telecoms and retail segments. The overwhelming majority of the companies are multinationals, giving the tax a tone of anti-foreign sentiment.
Cséfalvay refuted the notion by pointing out that the taxes were targeted at certain industries without any regard to their nationalities. He also stressed that Hungarian companies, even smaller ones were also involved and had to make payments. Furthermore, he reiterated that the extra levies would be phased out by 2013 as initially promised.
He pointed out that the government’s Széll Kálmán reform package will have significant results, especially when it comes to job creation, and that innovation, both on an SME scale and in scientific research, is key to making the Hungarian economy more competitive.
However, the private sector also sees risks. According to Christopher Mattheisen, CEO of Magyar Telekom, the main problem with the plan is that it hinges on the economic growth targets forecast by the government being realized. He highlighted that predictability is also an issue for businesses in Hungary seeing that the crisis taxes went from idea to law in a matter of days. As he sees it, since the Fidesz government has a two-thirds majority, there is no guarantee that additional one-off measures will not be introduced if the growth targets are not achieved.
Batara Sianturi, CEO of Citibank likewise called on the government for stability even though he believes “that the first battle on the international capital markets has been won” referring to the success of the bond road show orchestrated by Hungary. Besides predictability and stability, János Takács, CEO of Electrolux would also like to see creativity in Hungary’s economic policies, since going with the mainstream could well lead to mediocrity.
At the same time, he also noted the need for better communication from the government since in capitalism, “sentiments also come into the picture”. Issues like critique of Hungary for its controversial media law or the ratification of a new constitution are all bad news, which, as Sianturi put it, “travels fast in a global and digital world” and undermines confidence in the country.
In contrast, EU expert Zoltán Pogátsa highlighted confidence-building factors, like the successful management of Hungary’s EU presidency. Despite the numerous concerns before the term, the feedback has been positive, showing that Hungary is running an efficient presidency. Regarding the fast spread of any news, he stressed the need to separate domestic and continental matters.
Another aspect where the government could improve the country’s situation is the greater promotion of transparency, said Jacques de Jager, CEO of executive search firm Spengler Fox. “The lack of transparency is when things go wrong,” he said.
Cséfalvay highlighted that Hungary is committed to making Europe competitive, especially considering how far it is behind the United States or Japan in terms of innovation and R&D spending. At the same time, it is also important to advocate competition within the EU and that is a competition that Hungary aims to win, he added. To achieve this, the whole system must be changed, one of the first steps of which was the introduction of a flat personal income tax rate.
A tax rate, which according to Mattheisen can never have the desired effect if there is no confidence towards the country, since the rates may leave more money in high-earners’ pockets, but if the situation is uncertain they will not reinvest it and it will not trickle back into the economy. He stressed that any measure that genuinely improves the public’s spending power is appreciated, since that is what a business like telecoms can thrive on. His notions were echoed by Sianturi, whose company is likewise closely monitoring exactly how the new 16% income tax regime impacts people and what this translates to in terms of business.
Takács found that employees at his company - just as anywhere else - do not necessarily care about how they are taxed, only the net salaries that they will eventually take home. As such, he welcomes any change that could lead to higher net wages, which is basically what motivates workers.
Pogátsa highlighted that the government goals of extensive job creation, based largely on hopes that the reduction of the tax rate in itself would facilitate this is a “bit optimistic”. And while he commended the government on recognizing the need for job creation, he stressed that without a review of the education system, the targets can never be achieved.
Jager found that the issues in Hungary have a deeper rooting in the overall business mindset. He pointed out that a large number of companies are still in the “grey” economy and pay their employees in envelopes instead of properly registering them. Without changing this, the tax rate in itself will not have the desired effect, he said.
Generally, the panelists agreed that the key issue is not necessarily the competitiveness of multinationals in Hungary, but the competitiveness of Hungary on an international scale. This, however, requires positive steps and building strong confidence. As the state secretary concluded, the government is “on it”.
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More on the event
The BBJ's Annual Business Forum, titled Hungary and the EU: integration or isolation? was organized on April 19, 2011 at the Kempinski Hotel Corvinus. It was attended by more than 200 high-level guests including ambassadors and CEOs of leading companies in Hungary and foreign correspondents. The event was an official accompanying event to the Hungarian EU presidency.
Euroclick – the BBJ's blog on the EU and the Hungarian presidency
The EU documents on innovation referred to by Mr Cséfalvay can be downloaded here:
Future perfect – a report on research, development and innovation in the EU and in Hungary
Be innovative, go international – a report on SMEs in the single market