What does the Hungarian minister of the national economy (including finance) know and understand?

According to a press article,the minister of the national economy, Mihály Varga (this superministry integrated or rather melted into itself the finance ministry, ministry of economy, labour and the different sectoral ministries - foreign trade, commerce, industry etc.) declared that the Hungarian government will not follow the recommendation of the European Council (it is prepared by the Commission but descussed in the Council and signed by the president of the Council) to cut tax benefits to poor people. Apart from the fact that low earners in Hungary have no special tax benefits (they were abolished by the FIDESZ government to cover partially the costs of the flat personal income tax), the article states that Varga confused the tax wedge with the tax benefits as the coutry-specific recommendation to Hungary proposed to decrease the tax wedge for low earners (see point 3 on page 7). Actually the document complains in an earlier paragraph (number 12 on page 5) that the" tax wedge on single low-income earners is one of the highest in the EU". Probably Mr Varga should have read the Hungarian version. There, the translator (who knows why, certainly not fearing misunderstanding by an economist and economy minister) translated the tax wedge to "tax burden" (pages 5 and 8 as the Hungarian text is somewhat lengthier).
The recommendations are denouncing the sectoral extra taxes (with the following justification: "The application of different tax rates across sectors is an obstacle to the effective allocation of resources
and thus negatively affects growth" and recommend a more equitable tax system. This is no surprise. No surprise either but very instructive are, however, some other statements about the situation of the economy and about economic policy: "Notwithstanding the Central Bank's subsidised 'Funding for Growth' scheme for small and medium-sized enterprises, normal lending to the economy has not picked up in a sustainable manner." (see also in Hungarian: Why the "funding for growth" programme did not help?)
"The regulatory burden on the financial sector has been
further increased, thus limiting the capacity for capital accumulation. Measures like
the increase of the financial transaction duty have contributed to a pick-up in the cash
usage of the economy. The household portfolio has further deteriorated and the high
proportion of non-performing loans currently represents one of the biggest
challenges for the financial sector. Portfolio cleaning is hindered by the weak
efficiency of resolution proceedings."
Also interesting: "The youth unemployment rate has decreased in 2013, while the rate of young people who are not in employment, education or training has increased." -  hints to the phenomenon often discussed in the Hungarian economic press that employment figures may hide more than reveal the real processes. "The Public Work Scheme attracts the bulk of budgetary resources available for employment measures, but in 2013 less than 10% of its participants were able to return to the open
labour market after exiting the scheme."
"The business environment in Hungary is characterised by frequent changes in the
regulatory framework and limited competition in an increasing number of sectors.
New barriers have been introduced in the services sector and existing ones have not
been removed (e.g. pharmacies, waste management, mobile payment, retail tobacco
and textbooks)."
"Overall investment has declined particularly strongly in those sectors
where sector-specific surtaxes have been imposed in recent years. Between 2010 and
2013, nominal investment declined by 44 % in energy, 28 % in finance and 18 % in
the communication sectors, while increasing by 3.4 % overall."

And so on, and so on. So if after this, the minister of national economy says that Brussels does not require adjustment any more, obviously concentrating on the budget balance (in fact this is also a little false as the recommendations state: "Reinforce the budgetary measures for 2014 in the light of the emerging gap of 0.9% of GDP relative to the Stability and Growth Pact requirements, namely the debt reduction rule, based on the Commission 2014 spring forecast. In 2015, and thereafter, significantly strengthen the budgetary strategy to ensure reaching the medium-term objective and compliance with the debt reduction requirements in order to keep the general government debt ratio on a sustained downward path."), he forgets his role beyond being the minister of finance, to be very polite. For the uninitiated: a lot of criticism and recommendations target the governments pet measures, denounced also in Hungary even by economists who supported FIDESZ before.

There are problems also in the social area (another superministry is the Ministry of Humnan Resources): "The proportion of early school leavers is on the rise and the adoption of an early
school leaving prevention strategy has been repeatedly delayed." - and this in the context when compulsory upper schooling age has been decreased.

A final quote: "Review the impact of energy price regulation on incentives to invest and on competition in the electricity and gas markets. Take further steps to ensure the autonomy of the national regulator in establishing network tariffs and conditions. Take measures to increase energy efficiency in particular in the residential sector." - Another pet project, the "decreasing utility charges" is under attack. If we look what was written above about the investment scenario, we see why. The criticism of the public procurement system is very diplomatic, but sstill, recommends improvement. THis would, however, stop the government from distributing public work contracts to its cronies. No surprise but very sad that the minister shows himself deaf.

End of the excessive deficit procedure and publicity tax

The European Commission is proposing to the Council to release Hungary from the excessive deficit procedure. This is good news as the procedure has already lasted so long that remaining in it would mean loss of cohesion funds for the country. Given that 95% of public investments are financed partially from EU funds, this would have meant a grave blow to the Hungarian economy and also food for further “liberty fight” demagogy against the EU. On the other hand, it is a triumph for the Orbán government and some fear that by that the EU is losing leverage in constraining the Hungarian government in its economic and political actions which are harming the country and going against European democratic principles. The dilemma is not easy to resolve, almost impossible, like most of the dilemmas which are caused by - the contradiction that whenever the government is sanctioned, it is the people who pay the price and - the communication tricks which make the EU a scapegoat if it is acting and a weakling if not. Whoever followed the developments can, however, see through these tricks. As if to help this, the European Commission reiterated again the need – in the form of concrete measures proposed – for a more sustainable public finance. Nevertheless, it could not deny that with the latest measures (actually with the latest but one package of measures – let’s return to that below) the deficit will be under 3% of GDP for the rest of the term of this government. And this is what counts when deciding about the procedure. The latest measures are already the second tranche since the new Minister of the Economy, old-time FIDESZ economic heavyweight Mihály Varga took over – saying in his inauguration address that no further measures are necessary. But a third tranche was also in preparation. This included a tax on publicity revenues of media. Varga said yesterday that it will be introduced only when measures announced before are not sufficient. Today András Giró-Szász, the government spokesman announced that “in the interest of common burden-sharing” it will still be introduced. The statement of Varga – taken into account that the European Commission has initiated infringement proceedings against the sectorial extra taxes already – could be seen as a clever blackmail: if the Commission does not release Hungary, they can be blamed for that tax, if they do, they gave in to save the multinationals from this tax and by threatening them, the government cleverly got out the country from the excessive deficit procedure. The tax will in fact cut further into the profits of the two commercial television channels, one of which, already making losses, is under negotiation to be purchased by the strongest company group which wins almost all public procurements in Hungary and whose owner is the main financial expert around FIDESZ – more exactly, he was treasurer of the party and is expert in party and campaign financing and also owns most of the poster sites in town – which may not be without link to the fact that election publicity is enabled on these posters while prohibited in a number of other commercial media, including commercial tv. No further comment is needed, I assume.

The EC proposes to suspend structural funds to Hungary

Without precedent - why does the EU punish us? is the title of a (surprisingly objective if we look at the article but not at all surprising if we look at the author) article in the Hungarian financial and economic portal portfolio.hu. The author, István Madár, in my opinion one of the best macro-economists in Hungary (he taught my son but as he graduated already more than five years ago, there is no conflict of interest) who never associated himself to any party and was always realistic and politically neutral in his opinions. He did not publish much in political newspapers but slowly seems to appear more. He explains why Hungary is the first to suffer the freezing of part of the cohesion funds (the part of structural funds to be managed by the central government) due to its excessive deficit and why the Commission had no other choice. This is the logical next step - not to be postponed - in the excessive deficit proceedings under existing legislation and also under the new fiscal rules which were brought to almost-finalisation by the Hungarian presidency and of which the Hungarian prime minister is so proud.
It has to be noted that this is only a proposition which gives nine months to the Hungarian government to react and rectify the problems indicated.
In spite of the nice numbers about the primary budget balance, the structural balance is far from the required 0.5% and the outlook is bleak. And even the nice numbers are due to one-off drastic measures - confiscation of private pension funds, crippling taxes on foreign enterprises.
It makes thus no sense to speculate how much the conflicts on political issues have influenced the decisions - as there was no choice. Hungary is the country with the longest history of excessive deficit procedure. It is a little paradox that György Szapáry, who was the deputy president of the National Bank, and went to denounce the Gyurcsány-government at the EU when it wanted to avoid the excessive deficit procedure by transferring the motorway-building loans into a company, is so much in favour with FIDESZ that a law was amended to enable him to take the position of the Hungarian ambassador to Washington.
What is more important, though, is that the government should take measures to remedy the situation instead of waving the primary deficit numbers as the only defence.
Another paradox must be discussed here: A lot of people expect the EU to put pressure on the Hungarian government to preserve democracy and follow a reasonable and just economic policy. The measures taken will, according to some opinions, increase anti-EU sentiment in Hungary, however. I think that Hungarians should solve their own problems but again, the EU has no other choice than to speak up, and take measures, in defence of its common values.

What is the use of the IMF for Hungary

Looking at the path the Hungary has followed, it appears that turning to the IMF is just the continuation of a strategy, however abrupt a change it seems to be. By distancing i tself from the IMF the government got the necessary freedom of maneuvre to take the steps necessary to build its power base, occupy all institutions and prepare to make the next government a lame duck using the occupied positions. Also, it benefited from some "non-orthodox" steps and thus installed the mechanisms to favour its clientele and the party itself in distributing the financial resources of the budget. This almost brought the coutry to the brink. The sole announcement that it re-starts negotiations with the IMF has stopped the free fal of the forint and may enable the financing of the budget, independently whether an agreement will arrive or not. By this, the consequences of its past steps can be avoided - if not, Hungary is worse off also.
Another way to avoid consequences is a sentence hidden in the law containing the transitional regulations for the new Constitution. This law has been submitted to the Parliament by two members - I may return to this in a later post.

Hungarian indebtedness

The Hungarian government is proud that it could decrease the debt of the Hungarian state to 77 percent of GDP from 81 percent in a blow (and from about 90 percent where it stood when they took over). The reason: the funds in the private pensions funds were transferred to the state (not put automatically into the state pension fund) and almost half of these funds (4% of GDP) were in government bonds (as for security reasons they had to be by law) which were now eliminated.
Apart from how other assets will be sold, some of these funds were and will be used for current expenditures.
Also, the state purchased (for an amount 80 Bn HUF, a little over 300 Mn EUR more that for how much the previous government wanted to buy it when it was stopped by the then opposition FIDESZ) the share of Surgutneftegas, a Russian company in MOL, the Hungarian oil and gas giant (also active in the region) using deposits from the loan of IMF which was taken but not used by the previous government.
Thus a blog shows that even the gross debt has not really decreased, not to talk about the net debt, which increased to 20,218 billion HUF from 18,104 billion HUF between end of April 2010 and May 2011.
On top of that, although future pension obligations are not in the balance sheet, they exist as people whose private pension participation was transferred to the state, have to get the total of their pension from the state as opposed to a minimum guaranteed amount to which private pension fund members are entitled.
Why is the net debt more important than the gross? If I borrow and the loan is paid to me and I put it into deposit without using it, I increase the gross indebtedness. Until I spend this money, however, I can always use it to repay my debt. Thus, only if I spend it, do I have a real indebtedness.
OK, so why do states keep reserves which increase their indebtedness? Clearly for security reasons: if unexpectedly an amount has to be paid, the deposits can immediately be used while to get new loans takes time and effort and is also not sure to succeed.
Some analysts, however, also counter the statement that gross debt decreased, the chart on the blog quoted shows this.