Nationalist neo-liberalism: Orbán's risky gamble

Hungary’s centre-right government introduces a flat income tax of 16% and a very low taxation of small and medium enterprises. The government claims that this would kick-start economic growth. One would expect that the neo-liberal pundits are overjoyed that Hungary joins their camp. However, this is not the case. On the contrary, Prime Minister Viktor Orbán’s budget plans are heavily criticized by international financial institutions and neo-liberal economists. Comment by Joachim Becker

The criticism is sparked by several reasons. First of all, times of financial crisis are not the right times for cutting taxes. The example of Ireland (>>> Ireland: The implosion of a miracle) has demonstrated that a low level of taxation diminishes the fiscal space for dealing with a financial crisis.

* Special taxation of foreign capital

Secondly, the Hungarian government introduces special taxes for certain branches which are primarily in the hands of foreign capital – banking, insurance, telecommunication, energy and trade. It claims that these taxes are to be temporary. In the case of the tax on banking, a clear link to the crisis can be established. The mostly foreign-owned banks in Hungary contributed decisively to financial vulnerability by providing high foreign exchange credits to middle class households. This made these debtors extremely vulnerable to depreciations of the forint. Up to the crisis, the Hungarian Central Bank did not restrict this type of lending. Thus, weak regulation played a role, too. Nevertheless, the government can make the point that those who had a significant share of responsibility for the crisis have to share the costs of the crisis.

Thirdly, the Hungarian government intervenes into the privatised pension system. In 1997, an obligatory private pension was introduced in addition to the public system. 8% of the gross wage is channelled into the private pension funds. For the next 14 months, these contributions are to be channelled into the state system. Those who insist to stay in the private system are to lose their state pension. In an interview with the German daily Frankfurter Allgemeine, Zoltán Cséfalvay, state secretary in the Ministry of National Economy, argued that the privatised pillars causes “more costs than benefits” and is very burdensome for the budget. In addition, he pointed out that the private pension systems have proved to be very vulnerable during the crisis. This is a fundamental critique of the privatised pension system. Taken seriously, such arguments would rather advocate a permanent rather than a temporary change of the pension system.

* A new strategic project?

The budgetary policies have been characterised by some degree of improvisation. It is not yet clear which measures will stay, and which measures will be temporary. It might be that these policies outline a new strategic project in Hungarian policies: Tax relief for the Hungarian upper middle class and small and medium enterprises partially financed by higher taxes for the transnational corporations. This might be called nationalist neo-liberalism or liberal nationalism. This policy would clearly favour the electoral base of the governing Fidesz party. It might be complemented by reducing financial vulnerability.

Both, the changes in the pension system and the restrictive policies that have been adopted against providing foreign exchange credits to private households point into this direction. This is the national conservative component of Orbán’s policies. There is a specific rationale behind these measures. There are clear winners and losers.

* Economic kick-start is not taking place

The policies, however, will only in part have the announced effect. The taxation policies will not kick-start the economy. Progressive taxation which would favour expenditure of the poorer strata could be much more effective for economic recovery. However, financial vulnerability indeed might be reduced by returning to a public pension system.

The Fidesz government has removed potential domestic obstacles to its desired tax and pension policies. The Constitutional Court has been disempowered. The government decided to dissolve the Budgetary Council. Just before Christmas, the Hungarian parliament passed a law that establishes tight government control over media. Thus, the Fidesz government is rapidly centralising power in its hands. However, the external circumstances are not favourable to Orbán’s strategy. On the eve of Hungary’s rotating presidency which begins on 1 January, European partners are extremely sceptical of the political course of Budapest. And due to the high degree of foreign exchange household debt, Hungary’s financial system is highly vulnerable. This is Orbán’s real Achilles heel.

Joachim Becker is a Professor at the Economic University of Vienna.

Posted: 30 Dec 2010

Recommended citation: Joachim Becker (2010) 'Nationalist neo-liberalism. On the eve of Hungary's European Presidency', World Economy & Development In Brief, 30 Dec 2010, Luxembourg (www.wdev.eu)

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