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All eyes on February reforms

Market players are skeptical regarding the government’s optimistic plans of boosting economic growth in the next few years, but they are eagerly awaiting promised reforms to be announced in February. Although no one is expecting a comprehensive program of structural reforms, the creation of a stable business environment is a minimum requirement.

Analysts agree that Hungary’s economic growth will continue to be driven by exports and industrial production in 2011, while the main risks remain weak lending activity and the low level of investments. There will be a slow improvement in the labor market and in domestic spending due to government measures that will positively affect household income. GDP growth forecasts vary between 2.1% and 2.7% for 2011.

Minister for National Economy György Matolcsy’s promise that the New Széchenyi Plan will improve Hungary's investment rate by an annual 5 percentage points to 25% by 2014, while GDP growth is expected to rise from the current 1% to 4%–6%, has not shaken markets. “The problem with this forecast is that it was announced by politicians, and we do not yet see its economic basis,” András Szántó, the head of investment services firm Equilor’s foreign currency department, said at a press conference.


According to the analyst, there remain several question marks concerning economic growth. “My main concern is that the new personal income tax system does not support growth, as it does not reach one of its main goals of increasing domestic spending,” Szántó said. The new tax system favors the highest earners, while it is hurts low-income Hungarians. Since richer consumers typically spend a large portion of their income on foreign high-quality products, rather than domestic goods, a further increase in their net income will not raise domestic spending, he pointed out.


Instead of personal income, payroll taxes should have been cut to boost employment, Szántó said. In addition, the crisis taxes also hamper the expansion of the economy and the labor market. While these taxes hurt only a limited number of companies, these are big firms. For instance, Tesco is the second or third biggest employer in Hungary, he stressed. “How will there be one million new jobs, if employers are not in a position to create new workplaces?”


Quest for change


“The Széchenyi Plan will only work if the way people are currently thinking changes,” noted another analyst, Quaestor’s Bálint Háda. An entrepreneur could benefit from lower taxes and the Széchenyi Plan if these funds can be invested and there is demand for the new goods or services. As long as households and businesses do not have a planning horizon of at least five years rather than the current one year or even less, these programs will not reach their goal. But if confidence is restored, the framework is there to boost growth, he noted.


In the wake of the crisis, economic tools have been used unsuccessfully to solve several problems, according to Háda. Giving someone a loan or not is not merely a business decision but also a question of trust, as both the creditor and the debtor must have some kind of confidence in their future. A good example is that the multiplier effect fell to less than one after the Fed pumped huge funds into the US economy. This means that this money is sitting at the banks rather than fueling the economy. The banks had the possibility to disburse loans, but they did not want to because they did not trust the potential debtors, while those who were deemed creditworthy did not have the slightest intention of taking out a loan.


Structural reforms


The much-awaited government reforms to be announced in February will not bring drastic changes, according to Equilor analysts. Nevertheless, the measures, which will probably affect all the main segments of the economy, are expected to result in more radical changes than before, which could lay the foundation for a more comprehensive reform later. However, they probably still won’t be deep enough to free the country from its state of high indebtedness and economic slump.


The launch of comprehensive reforms in the health sector, education and the pension system, as well as at state-owned companies, is a common interest, Equilor said. A more streamlined operation and the elimination of parallel or redundant activities in these systems could result in annual savings of billions of forints.

Equilor pointed out that the government and society both have to make significant sacrifices in the short run in order to ensure a permanently improving macroeconomic environment, as well as the sustainability of the reforms. The measures, which are likely to come with huge one-off costs and restrictions, will show the first results no sooner than three to five years from now. Although Equilor believes that there is a good chance of launching such measures, but shortsighted political interests could torpedo the process even at the last minute.


According to the latest press reports, Hungary's planned fiscal reforms will help cut the central budget deficit by HUF 600–650 billion in 2011–2013. This is lower than the originally proposed HUF 600–800 billion and the breakdown is less favorable as only about two-thirds of the total would come from spending cuts, while the remaining amount would be financed from additional revenues such as a green taxes related to emissions and waste disposal, Equilor noted.


The government aims to trim 1% of GDP, or HUF 200–260 billion in 2011, and 2% of GDP, or about HUF 400 billion, in 2012 and 2013, by reducing unemployment benefits, drug subsidies and spending on public transport. “This also came as a disappointment, as we previously thought that the entire cut would be made this year,” said Háda. (Gabriella Lovas)


The Hungarian economy in 2010–2011




GDP growth



Industrial output






Trade balance (€ billion)



Budget deficit without local governments (HUF billion)






Unemployment rate



Source: GKI forecast