Saving money in the short-term may haunt the Hungarian government in the long-term

2021-02-11

States implemented unprecedented measures restricting private life in response to the coronavirus pandemic, severely damaging entire economic sectors. In turn, governments introduced novel, high volume social and sectoral aid programs to mitigate the long-term negative effects of the crisis. The size and specifics of economic stimulus packages vary from country to country. Hungary also tried to carve its own path amidst this unprecedented crisis.

The Hungarian government reacted swiftly to the developing situation in spring 2020, introducing relatively tough lockdown measures in the framework of the state of emergency in effect at the time. Thus, the country survived the first wave of the pandemic with a relatively low number of cases. Soon after the implementation of restrictions on private life, the cabinet introduced its first “economic protection plan.” Several key decisions were introduced as a part of this plan: the Hungarian version of the “Kurzarbeit” scheme (a wage supplement for those employed for limited hours due to the pandemic), the loan repayment moratorium originally envisioned to expire on 31 December 2020, a moratorium on employers’ tax contributions to be paid after workers in critically affected economic sectors, a moratorium on tax payments for some self-employed workers, and a loan program for firms worth HUF 2000 billion. The National Bank of Hungary (MNB) did its part by implementing measures that help improve liquidity and launching the COVID-specific version of its Development Loan Program for enterprises (NHP Hajrá!) with a total allocation of HUF 1000 billion which has been doubled since then.

After easing lockdown measures for the summer, a new wave of the pandemic hit Hungary in the autumn. The government, this time, reacted much later. While in the spring, restrictive measures were introduced when there were a few hundred registered coronavirus patients in the country, in the autumn, the number of cases reached 80,000 before such a decision was made. PM Viktor Orbán argued - based on the results of the government’s national consultation - that the cabinet wants to maintain normal economic operation as long as possible. According to the media, the gap between the unexpectedly low economic performance (-14.6% fall in Q2 2020, -6% over 2020) in regional comparison, and the Ministry of Finance’s (PM) and the MNB’s earlier predictions (PM: -0.3% over 2020, later revised to -3%, MNB: +2-3% over 2020) led to the decision to delay the second lockdown..

Restrictions introduced in November 2020 were followed by new economic stimuli measures. First, the wage supplement scheme and tax contribution programs were relaunched in the tourism-hospitality sector. Second, the government pledged to pay compensation to lodgings worth 80% of fees for services previously reserved by guests. Third, the cabinet cut the VAT on food delivered to clients to 5% to help maintain demand. In October, the government announced that they would extend the loan repayment moratorium for certain at-risk groups until July 2021. In December, they decided to extend it for all citizens. Additionally, the Kurzarbeit scheme and the tax contribution moratorium were extended for December-January, the local industrial tax for SMEs and the self-employed was cut to half, and a home renovation subsidy and loan program was launched for families. In February, Viktor Orbán announced a three-phase Action Plan to Reboot the Economy. This consists of a targeted VAT cut for new houses and loans for SMEs in the first phase, followed by higher education reforms, green economy and digitalization projects in the second and third phases.

The International Monetary Fund (IMF) estimates that Hungary spent 2- 5% of its GDP on fiscal stimuli, which is low in international comparison. The government itself estimates it spent 8% of the GDP on managing the crisis, but their calculation encompasses loan guarantees, which cannot be considered as direct financial help for those affected.        

What can we say right now about the effects of the measures introduced in 2020? One of the key indicators is the unemployment rate, which was considerably lower (3.7%) than the EU average before the pandemic. The unemployment rate increased to 4.6% in Q2 2020, falling to 4.3% by November - considerably better than the EU27 and Eurozone averages. The employment rate reached its nadir in April-June 2020, when 103,000 less individuals were employed in Hungary than a year earlier, according to the Central Statistics Office (KSH).

The second key indicator is economic growth, which – as we noted before – fell short of expectations in the first crisis-hit period, producing the steepest GDP fall in the region in Q2 2020. This was followed by a similarly extraordinary rebound (11.4% in Q3 2020). While the Purchasing Manager Index (PMI), generally the first to respond to changes in the performance of manufacturing firms, returned to pre-crisis levels by the end of the year, the more general economic growth index has not yet achieved that goal. 

How do economists and the most affected actors evaluate data and the efficacy of the government’s measures? Early on in the crisis, 15 acknowledged independent economists established a group called ‘Economists on crisis management’ and a blog commenting governmental decisions. They published a pessimistic statement in reaction to the cabinet’s economic package in April. Among others, they claimed that the package “is dissatisfactory, and does not even mention the social catastrophe.” They criticized the cabinet for underestimating the extent of the incoming recession, its decision to finance the program primarily from budget reorganizations and cuts to the funding of local municipalities, as well as for disregarding the masses who had lost their jobs, for instance, by not expanding the globally extraordinarily ungenerous unemployment benefit.

Only a limited evaluation of the efficacy of crisis management measures is possible due to insufficient data. János Köllő and Balázs Reizer, researchers at the Economic and Regional Science Center’s Economic Science Institute, published a study in the journal entitled ‘Munkaerőpiaci Tükör’ on the effects of the crisis on the labor market and enterprises. The analysis found that small firms, and those employing less experienced or skilled workers faced the toughest challenge. János Köllő highlighted that the employment data often featured in the media (employment and unemployment rate) are problematic and they underestimate the extent of the shock. Employment data disregards the 6% fall in working hours, while unemployment statistics are influenced by the fact that many were hoping for a swift return to normal life, which discouraged job-seeking and registrations as unemployed. Moreover, those who worked illegally were never included in official data. We also know nothing about people sent on unpaid leave. Employment surveys show an increase in the number of workers who are employed legally but did not work a single hour during the week before the survey was taken.

Balázs Reizer assessed what had happened to companies in Hungary in the period in question based on quarterly and monthly industrial production data. The official KSH database concerns manufacturing firms, so trends in the services sector are not visible in it, but the results are concerning nonetheless. Reizer found that around 5% of these businesses failed by summer 2020, but when he weighed results based on the number of SMEs, this increased to 9, suggesting that smaller firms coped worse during the crisis. In 2020, more companies were deleted from the database than over the entire year during the 2008 economic recession.

Balázs Reizer told Euractiv that it must be taken into account that there had never been a crisis such as this one, so “governments acted in ad hoc manner everywhere” as there was no tried and tested strategy for economic management. However, it is noticeable that Hungarian economic stimulus efforts often involved budget reorganizations instead of new resources. The state would have spent these sums anyway, only on other areas, so the cabinet added little to the expense side. Hungary’s state debt skyrocketed to a 25-year peak regardless, which is the result of industrial production reaching its nadir in Q2, falling state revenues, and the level of fixed expenses being maintained. As he said, the government likely overestimates the effects and costs of its own measures. This is illustrated well by the example of the moratorium on tax payments for some self-employed Hungarians. It was said the benefit helped 200,000 citizens but in sectors where demand essentially dried up, most would have temporarily suspended their enterprises anyway, so they gained little by not having to pay anything for this period, only saving on social security contributions.

Reizer believes their data can be explained by the fact that the economic stimulus measures hardly benefit smaller domestic firms while the extent of the aid was not large enough to help them. These enterprises often have less professional managements, they have very little cash reserves and their access to liquidity loans is more limited so “they would have required more support.” To help such firms specifically, many other states swiftly offered aid to cut their costs, while in Hungary, few of them received aid, and when they did, they got less funding than their regional counterparts.

Macroeconomist Éva Palócz, the head of Kopint-Tárki Institute for Economic Research, shares this opinion. As she told Euractiv, it became clear already in April that Hungarian economic packages are rather small in an international comparison: the government has not been providing sufficient help to the unemployed and has not done enough to preserve jobs. “The first version of Hungary’s Kurzarbeit was the bare minimum. Responding to outrage from affected companies, they improved the scheme but it did not go far enough.” The decision might have been affected by the overly optimistic prediction of the government on the depth of the crisis as it was based on the expectations of a few industrial companies and not on the consensus of economists. As a result, they tuned the economic stimulus package to misguided expectations.

Palócz thinks the loan moratorium was an important and good step by the government, but it needs to be considered that this will come back to bite as those who opted to delay will have to cover missed interest payments. She also looks favorably upon the MNB’s measures: the loan programs and liquidity for banks constituted real help.

The autumn package, says the head of Kopint-Tárki, was aimed at a relatively tight circle and came with tough administrative requirements. In addition, there were delays in payments, which, as a consequence, might have come too late for some companies.

The 15 economists analyzing crisis management efforts say that the 2020 GDP result will presumably be somewhat worse than that of regional competitors. However, it is currently hard to tell how much role insufficient economic protection efforts played in this result. “The lack of focus on maintaining jobs and companies might only make its effects felt in the long term” because many companies, even if they survive, might make it out of the crisis with a competitive disadvantage. For instance, the economic structure of Slovakia is similar to that of Hungary - tourism and car manufacturing play an above-average role in both - but they spent much more on maintaining jobs.

The plight of the tourism and hospitality sectors depicts well the questions surrounding economic crisis management and direct subsidies transferred to economic actors. One of the most important interest representations of the sectors, the Association of Hotels and Restaurants (MSZÉSZ), already sounded the alarm before the introduction of lockdown measures in the autumn because of the unprecedentedly weak season and the end of state support schemes in the summer. Chairman Tamás Flesch emphasized regularly that the gravest threat is losing the experienced workforce built up over the years, which would render it hard to get the sector back up on its feet even after demand returns. Interest representations estimated job losses to amount to around 100,000 or 30-40% of pre-crisis levels in the sector. The MSZÉSZ and its partners applauded the measures aimed at the sectors (50% wage supplement, moratorium on tax contributions) which they believe could be enough to help employers avoid firing further employees, albeit it was not known at the time that in some cases, payments would be months late. The 80% subsidy paid after reservations that could not be honored due to lockdown measures sounds great on paper but in reality, reservations were already low due to the unpredictability of the situation. Some firms could not preregister their own reservations in the data sharing system, so they were ineligible for support. In early 2021, there was considerable tension because of the non-transparent distribution of subsidies by the Hungarian Tourism Agency. Since the start of the year, more and more hospitality sector workers, event organizers and artists raise their voices because of what they consider insufficient help.

It must be noted that the government distributed serious funds to encourage investments and create jobs throughout 2020 under the slogan of “creating as many jobs as the crisis took away.” Minister of Foreign Affairs and Trade said in January that since the start of the pandemic, the government had helped create 12,603 jobs worth HUF 1676 billion. Éva Palócz noted that there were considerable funds spent on achieving this, and balancing job creation and maintaining jobs in a crisis situation is a matter of choice. At the same time, it would have been better to spend (some of) this money on maintaining the pre-existing economic network because if it disintegrates it can cause more severe damage in the long-term.

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