A defense of Hungarian economic policies and prospects

It seems that Hungary has climbed out of its slump and it is now growing at 2.5 percent a year, at least during the last quarter.  This interesting but self-serving editorial serves up a few reasons why:

We are increasing small- and medium-size businesses’ access to capital through grants and loan programs for product development, and reducing corporate-income taxes for these firms to 10% from 19%—among the lowest in Europe. These businesses are vital to Hungary’s export-driven recovery. As they continue to grow, so will private-sector employment, which in turn will reduce the heavy burden on our welfare system.

We would rather receive the same total tax revenues from a larger number of employers—each paying less tax—and have more employed Hungarians spending their wages and driving consumption. We’ve significantly lifted the tax burden off consumers by slashing the personal income-tax levy to a flat rate of 16%, from a tiered system where the highest rate was 32%.

We are also tackling welfare reform. Our government-run system has been plagued by spiralling costs, systemic abuse and inefficiencies that were exposed by the deteriorating economic conditions after the financial crisis. We believe that any welfare cuts should aim to boost employment and embed a work ethic among Hungarians. So we have reduced unemployment and disability benefits and pharmaceutical subsidies, and are in the process of reducing back the red tape that makes employing workers complicated and expensive.

I would stress caution is interpreting these arguments and note they are from a member of the current government.  Luck, positive real shocks (agriculture), and mean reversion are also at work.  Still, it is interesting to see that the Hungarian recovery is far outpacing that of the PIIGS countries; Hungary of course is not on the euro and it has avoided wrenching deflation, instead experiencing mild inflation.  Furthermore the Hungarians seem to be putting a spending freeze into operation and they are addressing pension liability problems.  It is unlikely that is the cause of their recent turnaround, but it hasn’t hindered it either.

All this is true:

Our economy has grown for six consecutive quarters, unemployment levels are falling and the Hungarian forint is one of the world’s strongest-performing currencies this year.

Budapest is now an expensive city, and it no longer makes for a good cheap vacation.


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