Development and Finance from issue 2011/1

Péter Gál - Csaba Moldicz - Tamás Novák

Renewed growth? Catching up? Model change?

- Abstract -

 

In Hungary since 2006 there has been a continuous fiscal adjustment. In the next two years further strengthening fiscal discipline will be an important feature of the Hungarian economic policy, and this is coupled with the already very weak potential growth. Due to these two phenomena domestic GDP growth will be lower than in the Central European region. According to the convergence program sent to Brussels the government expects HUF 15 billion savings in 2011, HUF 550 billion in 2012 and HUF 902 billion in 2013. However, the structure of savings is extremely disadvantageous as it includes several items that may significantly worsen the economy’s competitiveness. The package is expected to cause negative changes in the currently efficient and competitive economic structure as well. A major feature of the new economic policy is its relative protectionism coupled with quasi import substitution. This policy is probably impossible and ineffective today and that was proved to be unsuccessful already a couple of decades ago.

Potential GDP growth in Hungary before the crisis was between 2-2,5%. We think that as a result of the currently pursued inadequate economic policy initiated in 2010 has further worsened the situation and less than 1% potential GDP growth can not be ruled out between 2011-2013.

In the medium term we expect the following negative consequences of the current economic policy:

  1. Income redistribution towards high income population, the breaking of social justice. The new tax system clearly prefers certain groups of the population and will further widen the gap between high and low income groups.
  2. Lack of stability. This especially relates to the spending of long term savings (private pension funds) on current budget expenditure and public debt.
  3. Selectivity. The introduction of sectoral taxes that in certain cases hurts the activity of a well defined circle of foreign owned enterprises can be considered as an open protectionism.

These negative impacts are to be felt in the economic performance. GDP can grow in 2011 and 2012 with 2-2.5% respectively and the growth rate of export and import volume slows down. Domestic demand is stagnating with 1% growth of private consumption and with decreasing public demand. Investments are also frozen and only a slight improvement is forecast for next two years. General government deficit is close to 7% of GDP without revenues from private pension funds. Despite of the large cuts in the spending side the government forecast for improving public balance in next years is questionable.


Péter Gál, professor of economics (Corvinus University of Budapest)
Csaba Moldicz, associate professor (Budapest College of Management)
Tamás Novák, associate professor (Budapest Business School)
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