Feb 24, 2016

Stability, growth, jobs: The Hungarian model of economic recovery

In 2010, Hungarian voters went to the polls looking for change. Eight years of mismanagement of the economy by socialist-liberal governments left the country badly exposed in the financial crisis. Consumer confidence had collapsed, unemployment and the debt to GDP ratio was on the rise and so too was social instability and extremism.

Unable to sell state bonds on the market and saddled with high deficits and spiraling debt, Hungary had narrowly avoided a Greece-like crisis with the help of an emergency bailout in 2008 from the IMF. When Fidesz took power in 2010, it introduced innovative economic policies, measures often regarded at the time as “unorthodox.”

The cornerstones of this new economic model include:

  • Restoring responsibility to state finances, reducing the budget deficit and state debt;
  • Reducing taxes on wages and small- and medium-sized businesses to stimulate growth and reward hard work;
  • Putting Hungarian families at the center of economic policy, applying tax breaks and other financial support; 
  • Reducing utility costs in order to strengthen the financial stability of households;
  • Transforming the welfare-based society into a work-based society by creating opportunities and incentives to return to work and boost productivity, supporting disadvantaged groups.

The program has had impressive results. According to Morgan Stanley’s Vulnerability Scoring Indicator, Hungary’s economic vulnerability decreased between the 2008 financial crisis and 2015 by more than any other country in the region. “In 2008, Hungary screened as the most vulnerable country in CEEMEA, but its impressive external turnaround means it screens as much safer now,” reported Morgan Stanley in February 2016.

Since 2010, Hungary’s debt has been falling and is significantly more manageable, less exposed to risk, because more of the debt is now denominated in domestic currency. Hungary’s GDP growth has put the country among Europe’s top performers. The unemployment rate has fallen to an historic low. Increased interest in Hungarian state bonds have made it possible to keep the base interest rate low, and the budget deficit has remained below 3 percent since 2011. For the first time in many years, Hungary’s economic growth is not financed by rising debt, and the country’s economy has become a credible player.

In 2010, the unemployment rate had reached 11.8 percent, one of the highest in the country’s history. By 2014, it had shrunk to 7.3 percent and then to 6.2 percent in 2015. Those are the lowest levels of unemployment since the democratic transition in 1990. Hungary has put in place a public work scheme, offering higher wages than the unemployment benefits and encouraging those that had been unemployed for long periods and had left the labor force to return to the active labor force and gain work experience. Compared to 2010, the number of people employed has risen by 550 thousand to a total of 4.3 million in 2015. 

Hungary’s debt-to-GDP ratio fell to 75.5 percent by the end of 2015 from a level of 81 percent prior to 2010, and in 2014, the GDP returned to the pre-financial crisis level, with a 3.7 percent growth that year. In 2015, GDP grew by 2.9 percent. The government expects a further reduction of the debt-to-GDP ratio, making progress toward the 60 percent target rate laid down in the Maastricht rules. An economy on a growth track while debt is coming down point to a healthy economy in which productivity is not fuelled by taking on more debt. Stability and real growth remain fundamental goals in Hungary’s legislation. Even the new Fundamental Law, adopted in 2011, puts a ceiling on state debt. 

As another positive trend, foreign exchange debt as a share of the total amount of government debt has also been on the decline. It fell from 45 percent four years ago to the current 36-37 percent. This continues to reduce the country’s exposure to risk.

In 2013, the European Commission lifted the Excessive Deficit Procedure that had been imposed on Hungary since the country joined the EU and throughout the entire pre-2010, Socialist period. These negative trends are difficult to reverse at a time when Europe is in the middle of a financial and economic crisis, but Hungary has made dramatic progress in slashing the deficit. In 2015, the budget deficit dropped to 2 percent, beating earlier projections. To improve stability and predictability in financial planning, the government initiated the practice of submitting the following year’s budget to parliament for a vote prior to the summer recess.

Inflation remains near zero, despite continued growth in domestic consumption. Most of economic growth, however, comes from sectors that export products and services. The trade surplus reached 8.1 billion EUR in 2015, which is the best data ever recorded for Hungary, a 28.6 percent growth over the previous year’s 6.3 billion EUR surplus. The dynamic growth of the tourism sector also contributes significantly to Hungary’s economic output, generating 9 percent of GDP and creating jobs for 11 percent of the total workforce.

That’s not all. Hungarian borrowers have been relieved of the foreign currency-denominated loans that once burdened so many households, further boosting consumer confidence and stimulating domestic consumption.

In 2010, Hungary stood before a Greece-like crisis as its deficit and debt grew, and only an IMF intervention saved the country from running off the economic cliff. Since 2010, the Orbán Government has not only turned the economy around but made it one of Europe’s leading performers. Although this work is never done, the economic measures once dismissed as “unorthodox” are producing tangible results.