Hungarian Rhapsody: How to boost potential growth?

If there’s something that never works in Hungary, then it’s the economy. Unfortunately, this is not only a bad joke, but the reality.

Hungary’s economy was severely damaged by the financial crisis – public debt has soared to almost 80 % of the GDP, national currency (forint) lost more than 25 % versus the euro when the crisis peaked, unemployment rate reached its historical maximum at 10,3 % at the end of 2009 and may even increase in 2010. What structural weaknesses have led to the current situation? Well, inefficient allocation of resources, distortionary taxation system, low employment and high social expenditures are some of them.

This is the bitter truth and the boring numbers, but since every failure holds the possibility of success, let’s be optimistic and forward-thinking. I was thinking of some suggestions that , in my view, may shake up the Hungarian economy and boost the potential growth. Just to make it clear, my goal is not to give a detailed picture of the Hungarian economy, nor to find solutions to every economic challenge, however Hungary’s problems are not unique and may serve as a good lesson for others.

Foster employment

Hungary has low employment rate and productivity comparing to most EU countries that can be explained with low activity among economically active population and those who are employed work less than they could. Why? Because the welfare system does not encourage people to seek for job. Sometimes it occurs that they would get less money doing a part-time job, than receiving the unemployment benefit. Therefore it is crucial for Hungary to implement reforms that would accelerate workforce supply and enhance its flexibility to the changing circumstances. Employers should get more tax allowances for employing students and deprived people, so finally it will worth working for everybody.

Support MNE’s

Small and medium sized enterprises are the engine of every economy, so they should receive more privileges like multinational companies do. Entrepreneurs find regulation system as the main obstacle for their businesses, especially high taxes and social contributions, unpredictable economic regulation and time-consuming administration. It has become clear that the MNE’s problems can only be solved implementing long-term economic, regulation, educational, institutional and infrastructural reforms. Predictable tax and social contributions cuts and long-lasting bureaucracy reduction plays a key role at this stage, because without them all the other reforms would have only partial impact on the performance of the economy. So what can be done to change the current complicated, slowly, inefficient and expensive administration?  Rigorous supervisory of public institutions, stable statutory law, extension of e-communication, reduction of tax administration and number of taxes, tax returns simplification.

Cut expenditures

There are 4 state functions that take more money than in countries similar to Hungary: administrative costs,  interest payments, social and economic expenditures. Interest costs are given burden for the time being, however succeeding in cutting expenditures may result decrease in the strikingly high spreads and consequently in the interests as a matter of fact.

Alike many European countries, pension expenditures and social aids proportion to GDP is increasing, which is not sustainable, therefore a restriction on early retirement and on gas price subsidy is needed. The main problem is not the subsidy itself, but the fact that most applicants attempt to find a loophole for being eligible for it, although they do not need it. Unfortunately, this relates to most state aids and subsidies in Hungary.

There are also some other hot issues that I have not mentioned, but it was not an aim to give a detailed analys of Hungarian economy or find solutions for every problem. However, this overall picture is good for understanding what challenges faces not only Hungary but the whole Central-Eastern Europe region.

Note: This post was written by Roman Konsztantyinov, student participant of the 13th World Business Dialogue.