22 August 2017

Reclaiming National Sovereignty

"The detractors notwithstanding, many of the instant measures we adopted in 2010 seem rather bold in hindsight, but we made it. First of all, we stabilised the national budget, without increasing the burden on households. This was why we decided to levy a Robin Hood tax on the industries least affected by the meltdown. (Subsequently, these special taxes were phased out.) By mid-2013, the European Commission had no choice but to admit that Hungary was capable of meeting the sub-3.0 per cent deficit target as expected by the Union..."


 

Reclaiming National Sovereignty

 
 

Reflections at the Award Ceremony of the Friends of Hungary Foundation

 

 

Among all human ties, those of friendship are perhaps the most hallowed;

and thrice happy is he who can say in full faith, ‘I have friends’.1


 

It is by quoting this observation by István Széchenyi that I am pleased to greet all Hungarians coming back from abroad, along with all friends of Hungarians, and all supporters and staff of the Friends of Hungary Foundation.

I can safely declare that you have made, and shall continue to make, a vital, irreplaceable and valuable contribution to the Hungarian nation by the work you do with the aim of strengthening our cohesion and sense of belonging, deepening scientific, scholarly, economic and personal relations among Hungarians living within and outside our borders, and, last but not least, by spreading our good repute throughout the world at large.

For it is of the utmost importance for us to increase the ranks of those receiving value-oriented but unbiased information about our achievements, problems, and visions of the future. This is the only way for us to secure the empathy and support that we as a small nation so badly need.

The supporters of the Friends of Hungary Foundation – all of them outstanding professionals in the own fields – are capable of conveying to the world our triumphs, the arguments underpinning our actions, and the goals we have set for ourselves. Hungary, the sum total of us Hungarians, is a fortunate nation. We are fortunate because we can proudly say that we Hungarians always cherish a sense of belonging together no matter where we happen to live, and because we enjoy the friendship of many. We all know that, in recent years, Hungary has often been caught up in the crossfire of criticism that cannot always be termed benign. Some of the decisions we have made – such as voicing our position regarding the IMF or the settlement of foreign exchange-based loans – have been accused of putting our country in jeopardy. We have had far less positive feedback from the world concerning the fact that virtually all of these decisions of ours have succeeded in what they set out to accomplish. Yet, as we speak, we find ourselves in the line of fire once again.

I therefore wish to provide a comprehensive overview of where we started from seven years ago, how far we have come, and what long-term objectives we have envisioned. I am confident that no account of Hungary’s policy can be complete without taking each of these aspects into consideration.

As for the foundations, I could do worse than quote Gyula Szekfű and say that we implemented the shift in economic policy “deeply embedded in national traditions and in constant, self-conscious harmony with the values of the past”. To extend the quote a little further: We accomplished this “without compromise in the matter of reform, and never for a moment straying from our genuine national heritage”.2

In the wake of the democratic turn, Hungary became a model of successful transition to market economy, widely regarded as the “poster child” of the region. By the early 2000’s, the country’s economy had embarked on a path of growth:

thanks to a stable fiscal policy, the government debt began to drop to sustainable levels, reaching 52% of the GDP;

we succeeded in bolstering the forint and putting the reins on inflation;3

the Széchenyi Plan promised a stronger Hungarian middle class and rising living standards.

Then the Socialist government took over in 2002, implementing several ill-advised political measures and rash decisions, while putting off reforms that would have been key to the nation’s competitiveness. As a result, by the mid-2000’s, we had lost our lead in the region and, in terms of economic performance at least, begun to lag behind the rest of the Visegrád Four. It was in this already weakened, vulnerable position that we were hit by the crisis of 2008–2009.

The global uncertainty scaled back the profitability of corporations, unemployment skyrocketed, and making payments on foreign exchange loans and mortgages imposed an increasingly unbearable stress on families and businesses. Government debt topped 81 per cent of the gross domestic product. In an unprecedented move, Hungary became the first member of the European Union to apply for an IMF loan.

These circumstances at once defined the tasks we faced when we took over at the helm of government again in 2010. People placed their trust in us because they expected us to come up with fast answers to these problems. Yet these answers also had to conform to the targets we set our sights on for the longer term, in an effort to ensure that our breaking free of the crisis will be followed by permanent growth. First and foremost, then, we had to bring measures enabling us to transform a loan-based economy into one building on work and savings.

This economic policy was organised around the recognition of the need

to boost employment as soon as possible;

to decrease the country’s financial vulnerability;

to set the economy on an orbit of growth.

We would have failed to do any of this had we not increased our room for manoeuvre by re-establishing the sovereignty of our economic policy. As I have mentioned before, these measures – including the introduction of the flat personal income tax rate, the conversion of FX loans, and the various Robin Hood taxes – met with fierce international criticism and debate.

The detractors notwithstanding, many of the instant measures we adopted in 2010 seem rather bold in hindsight, but we made it. First of all, we stabilised the national budget, without increasing the burden on households. This was why we decided to levy a Robin Hood tax on the industries least affected by the meltdown. (Subsequently, these special taxes were phased out.) By mid-2013, the European Commission had no choice but to admit that Hungary was capable of meeting the sub-3.0 per cent deficit target as expected by the Union, and discontinued the excessive deficit procedure that had been brought against our country nearly a decade before. It became clear that a sound fiscal balance and an economic growth that could be termed dynamic by European standards were both simultaneously achievable rather than mutually exclusive goals.

Concurrently, we had to begin carving away at the exceptionally high, 81-per cent government debt in order to meaningfully reduce the annual burden of servicing it, and to mitigate our currency exposure vis-à-vis external debt. In a broader context, the government debt of Hungary has dropped from over 81.0 per cent to a low of 74.1 per cent since 2010. Meanwhile, other countries in the Union have gone in the opposite direction. Overall, the bloc’s average indebtedness ratio has been on the rise since 2010, reaching around 85.0 per cent today.

Additionally, we have managed to ease the burden on citizens to a remarkable degree. The introduction of the flat tax has served as an incentive for extra work performance and increased readiness to seek employment, while the family tax allowance has aided many families. By phasing out the foreign exchange loans, we have rescued hundreds of thousands of families from being entrapped in a spiral of debt. At this point let me recall once again that, by the time we completed the loan conversions to the national currency and settled with the banks, messages of recognition had been coming in from the international community.

We also took several simultaneous steps toward boosting employment, by making our labour law provisions both more flexible and more amenable to competitiveness from the point of view of employers, and also identified solutions for incentivising activity in the labour market. Finally, gearing up for the future, we embarked upon a comprehensive programme of reforming specialised and vocational training and adult education.

In short, we left no stone unturned in our efforts to get the economy back on its feet. We overhauled virtually the entire system of economic regulations and fashioned a business-friendly tax system and a general climate conducive to enterprise.

The measures encompassed a broad field from tax cuts through loan programmes to the allocation of EU funds. As Minister for National Economy, I am proud to say that our results speak for themselves. Currently, each of the Big Three credit agencies rates Hungary BBB – Stable Outlook, that is, relatively low-risk for investment. If I add that a positive turn has recently occurred in the assessment of Hungary’s economy by the OECD, the IMF and the European Commission, it will not be necessary to labour the point that our efforts have been reconfirmed and recognised by all the major organisations that matter.

Let me add, however, that the market itself had far preceded these organisations in “pricing” our achievements, so to speak. In other words, the large statistical majority of innumerable decisions made by market entities had already affirmed a favourable verdict on Hungary’s economic performance. This rise in ranking comes in response to the fact that, for several years running, Hungarian government bond yields have settled at or above the rating of countries like Poland. Indeed, the position of external institutions is proven to have been well founded, given the absence of any macroeconomic indicators which we have not managed to improve materially in recent years. Examples I could cite include the trends in the balance of payments and the GDP, the rate and structure of the government debt, or the positive changes in the labour market.

In June, the National Assembly passed the Budget Act for 2018, which reflects a new situation in spite of being in every way an organic extension of the policy we have followed thus far. Now our economy is firmly and clearly planted on the path of stable growth. 2018 could be the sixth year in a row of continuous growth, and at a rate exceeding the EU average.

Our gross domestic product was up by 4, 3.1, and 2 per cent respectively in 2014, 2015 and 2016. We forecast growth of 4.1 per cent this year, and 4.3 per cent next year. It is a particularly auspicious sign that Hungary’s economy performed above the EU average last year, despite the petering out of funding from the EU.

Owing to the fiscal policy implemented by the government, in 2016 the forecast fiscal deficit clocked in at 1.8 per cent, while the GDP to debt ratio dropped to 74.1 percent – both instrumental in reducing our vulnerability to external processes.4 Moreover, we improved the foreign exchange ratio in the composition of the debt from 60 to 29 per cent (a massive improvement), which was tantamount to mitigating our vulnerability to a considerable extent.

Another success we are proud of is having increased the number of the employed by nearly 700,000. The majority, 480,000, of these people found jobs in the private sector.

Speaking of our economic results, I am quite confident in asserting that the hard work of the past few years has begun to pay dividends by laying the foundation for sustained growth. We tackled the challenges in 2010 head-on, and met almost every one of them successfully. The measures we implemented now enable us to shift the focus of economic policy from crisis management to accelerating growth, catching up with advanced industrialised nations, and maximising the qualification of our work force.

Today, our task number one is to stand fast in the heat of global competition, in the midst of breakneck innovation, digitalisation and reshuffled processes in the global economy. The key obviously lies in industrial development, which in turn is the token of and main driving force behind research, innovation, enhanced productivity and, ultimately, export sales. We stepped on this path years ago by devising programmes for our economy to close the gap separating us from advanced industrial countries. Indeed, these plans have now entered the phase of implementation.

Having said that, things are not much easier for us today as we strive to put our theories of economic development into practice. As for the European climate, it is apparent that the Union is facing multiple challenges simultaneously, including those of growth (and, intimately associated with it, competiveness), the unfavourable shape of demographic trends, and the fallout of Brexit, just to name a few.

It is also true that decelerating growth is not confined to the Union; it is a global fact. The OECD’s report from November last year devotes an entire chapter to the new phenomenon that the growth of global commerce has for years lagged behind the growth rate of global GDP, which means that it fails to support economic growth. As they put it, the global economy is presently in a low-growth trap, where stubbornly weak international demand exerts a negative influence on the supply side. The OECD predicts low global growth rates of 3.5 to 3.6 per cent for 2017 and 2018, and only 1.8 per cent for the Eurozone.5

It is further apparent that the incentives of monetary policy in advanced economies have reached the limits of their efficacy. In fact, in certain cases, the low-yield environment is now producing financial risks. The emerging international professional consensus is that the only way out of this predicament is for each national government to adopt its own pro-growth policies. To put it differently, they must make sufficient room for fiscal manoeuvres to lend momentum to growth by promoting investment, creating new jobs and cutting taxes.

I can tell you that Hungary’s economic policy-makers adopted such decisions years ago. Our industrial policy is centred on incentives for development, with special attention being paid to preparing for the challenges of the 21st-century digital revolution. We keep our sights on an economic growth driven by know-how and innovation, and are committed to strengthening the ties between the economy on the one hand, and education and research and development on the other. We have several other plans in the wings to boost Hungary’s competitiveness, including further easing the burden of taxes and contributions on labour, and cutting more red tape. Moreover, the government of Hungary is ready to deploy dedicated programmes, regulations and resources to maximise the acceleration of growth.

I hope to have succeeded in convincing you that Hungary, the government of Hungary, is now pursuing unambiguously clear goals of economic policy, not unlike those articulated by the advanced countries.

On the other hand, we are aware of the toughness of the battles we will have to continue to fight in the arenas of domestic and foreign policy, and that we must often find ourselves abandoned to our own resources as we strive to shore up Hungarian identity, to brace and preserve our economic and political sovereignty. Yet these are the very principles that have enabled us to achieve what we have achieved, reclaiming our independence in all fields, forging a national unity, and overcoming the consequences of the economic crisis.

Our economic performance now stands proven beyond any shadow of doubt, as do the manifest results of the measures we have adopted for the benefit of Hungarian families. And our prospects are very bright indeed. We are on the fast track to building a country with solid economic foundations that grows at an impressive pace and offers its citizens a real chance for the pursuit of happiness.

For all the reasons I have outlined to you, we will stick to speaking for the best interests of the Hungarian people, and will remain steadfast in our commitment to uphold our national, political and economic independence. As my opening quote suggested: “Without compromise in the matter of reform, and never for a moment straying from our genuine national heritage.”

Translation by Péter Balikó Lengyel


(Revised version of an address at the gala dinner of the Friends of Hungary Congress, May 6, 2017.)

 


 

NOTES:

1 István Széchenyi, ”Utolsó czikk” [Last article], Jelenkor, No. 14, 19 February 1843.

2 Gyula Szekfű, Három nemzedék és ami utána következik [Three generations and what comes afterwards], p. 487.

3 For all intents and purposes, this ensured compliance with the Maastricht criteria for adopting the euro subsequent to acceding to the Union.

4 In recognition of Hungary’s fiscal discipline, shrinking government debt and the overall performance of the economy, the Big Three credit agencies in 2016 observed the judgement of markets and followed suit by promoting Hungary to the category of countries deemed worthy of investment.

5 The forecast for Hungary is 2.2 to 2.5 per cent.




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