Fidesz and economic policy risks
The information revealed so far refer to that the party doesn’t have a coherent economic policy program yet – contrary to the statements of its leaders. Among the concrete program points we can find detailed, mature proposals that can strengthen trust in Hungarian economic policy, but also risk-increasing, moreover extreme ones as well. While the detailed economic policy of Fidesz leaders cannot be foreseen from declarations of the last weeks, it became obvious that the next government also will have a tight room for fiscal and economic manoeuvring. In this context decisions that are painful seems to be inevitable. However, the fact that Fidesz increased the distance from the populistic, demagogic rhetorics has reduced risks significantly.
Brainstorming for the business elite
Early elections have become a likely scenario in Hungary. This situation generates great expectations and increasing pressure on the main opposition party, Fidesz-as a potential governing party-, thus more and more information appears in the media about the economic policy plans of an expected government led by the party. All conceptions that came to light (about investments, pensions, taxation, energy policy) were either confirmed or denied, however all of them are in favour of several goals:
- Proving the party’s ability to govern;
- Embroidering the party’s image among (domestic and foreign) economic decision-makers by articulating their own plans.
- Testing the party’s ideas in the business elite
- Preparing the public opinion for the prospective austerity measures.
The ideas of Viktor Orbán and the economic aides inside and around the party can be considered as an improvisation, rather than an accurate economic program, since there are several groups in Fidesz with different economic policy notions (among others are former finance minister Mihály Varga, former minister of economy György Matolcsy, former NBH governor Zsigmond Járai). Furthermore there are outsider professionals also who influence the final Fidesz-program (which is in a materializing period): György Szapáry (whose name was mentioned by the party president), Péter Ákos Bod, Attila Chikán and some analyst institutes. The differences between the concepts can be discovered in the issue of the government debt for example. According to Viktor Orbán the debt burden is one of the greatest problems of the Hungarian economy, meanwhile Péter Ákos Bod – referring to the Polish example – says that debt consolidation wouldn’t really help the economy. There is no consensus either on the subject of taxation: while Zsigmond Járai seems to support flat rate taxation, Mihály Varga and further politicians in the party prefer the so-called family taxation.
It is hard to see which rivaling notion will make it to a potential government program, it depends on the outcome of the combat between the professionals, and also on the personal composition of the future government. Viktor Orbán obviously tries to keep being uncommitted to any of the concepts, furthermore he named different professionals from the people mentioned above, as potential economic leaders of the party. Under these circumstances the economic program of Fidesz hardly can be sketched, only a few elements can be projected.
Changes in tax reduction timing
In the last period several statements by Fidesz politicians made it clear that the party had no complex remedy for the current economic troubles. However these market-friendly statements predict notable conflicts with the market players. Since Fidesz heads to minimize its loss of credibility, the party – sometimes plainly, sometimes obliquely – is compelled to mention some expectable measures that are unfavorable for different groups, including the business elite.
1) Budget consolidation and tax reduction
The former prescription of the party was the reduction of taxes and social security contributions, which – according to them – simultaneously benefits economic environment and cuts back the budget deficit as the tax-paying moral gets better and tax revenues increase. Nevertheless in the last few weeks Fidesz-politicians’ statements have certainly changed: the consolidation of the budget comes first, tax reduction follows.
For example, one of these days Mihály Varga ranked the new governments’ tasks: „first we have to regain credibility (…), the fiscal consolidation comes afterwards, and then an economy stimulus package needs to be set in, which makes the introduction of Euro possible. (4 June, Napi Gazdaság)” Viktor Orbán consonantly mentioned a (two year long) temporary governing period with austerity measures, while Zsigmond Járai stated that the stabilization of the economy takes 4 or 5 years. Thus it is probable that tax cuts and the simplification of the taxation system are to be delayed and seem to appear on the middle-term at best. In the climate, where most market-players expect quick and overall tax reform (which attitude was partly generated by Fidesz), this shift can discourage the business elite.
2) Debt relief
Although it was denied by his party, last week (at an event organized by Baross Gábor Society) Viktor Orbán indeed mentioned his plans for rescheduling Hungary’s debt payments as a possible solution to the fiscal problems. According to his words the new government ought to make a “new agreement, maybe not on a debt relief, but on some sort of sensible debt conversion. Reschedule, swap, or god knows what technique that our experts have on their minds, which need a cooperating ambience.”
This idea of rescheduling the national debt payments certainly increases the political risks of Hungary; furthermore it contrasts the declared economic policy goals of Fidesz.
- Partly rescheduling the public debt would worsen market judgment, as it sends a message that the government is close “default” on its debt, while Fidesz claims that its first priority is to restore the credibility of the economic policy
- Rescheduling might worsen interest rate conditions, and may involve fiscal risks on the long run (as it prolongs the period of repayment).
Hungarian public debt mainly consists of publicly issued bonds held by institutional investors and households. Loans denominated in a foreign currency account for the smaller, insignificant part. Rescheduling or swapping debt may only concern these loans as “rescheduling” the bonds would cause panic among investors. A panic would cost lot more on the long run (loss of credibility) than its short term benefit (temporary decrease in fiscal expenditure).
The structure of the central budget's debt elements, March 31 2008, detailed (Source: Government Debt Management Agency Private Company Limited by Shares)