Csongor Gáll: Three per cent is the new joker in the pack. Following the 3 per cent Home Start Programme, SMEs will now receive a 3 per cent fixed-rate loan with the help of the Hungarian government. Hello everyone, and welcome to the latest episode of the Economx “Money Talks” podcast. Our guest on today’s show is Viktor Orbán, Prime Minister of Hungary, and here with us in the studio we also have Elek Nagy, President of the Hungarian Chamber of Commerce and Industry. Welcome to the studio, and thank you for accepting our invitation.
Thank you for having me.
Elek Nagy: Thank you very much.
Csongor Gáll: First of all, we can talk about this completely new construction. In this regard, I’d like to clarify a few details right away. For example, who will be eligible for these 3 per cent loans?
Elek Nagy: Let’s start at the beginning. But if you’ll allow me, I’d like to add something to enable the audience to understand why this is so important. Over the past year and a half there have been continuous small reductions in these KAVOSZ [Hungarian Small Business Loan Agency] loans. It’s important to note that KAVOSZ loans account for approximately half of all loans to small and medium-sized enterprises in Hungary. This is a very significant amount, and it’s important because when times are tough, we need to provide quick and – how should I put it? – targeted support to businesses. “Provide” means that we make a recommendation, and the Government considers it and decides whether or not to follow through. This isn’t necessarily long-term, it doesn’t have to be low for decades, but it must be provided when it’s needed. And now it’s needed, because we’re going through difficult times. We’ve analysed this together with the Ministry for National Economy and concluded that reducing loans to a general 3 per cent will obviously burden the budget with an additional 50–60 billion forints over some years – but not this year, as this year’s increase is minimal. But there’s another very important consideration, which is that these businesses produce, generate a surplus, create value, and therefore cause GDP growth. And I think it’s very important to consider these two aspects together. All in all, both overdraft facilities and investment loans will now operate at a general interest rate of 3 per cent.
Csongor Gáll: So essentially the current Széchenyi Card Programme will be transformed from the current interest rate to a 3 per cent interest rate?
Elek Nagy: More precisely, it will be reduced to that.
Csongor Gáll: That’s what I meant – it will essentially be reduced. Will there be any changes to the structures, availability, and the bureaucratic procedure for accessing them?
Elek Nagy: Even though we fight against bureaucracy, in this case I don’t consider the bureaucratic procedure to be a bad thing, because it’s very easy to take out a KAVOSZ Széchenyi loan. So businesses can get it very quickly. But here too, we’re softening some of the conditions. I don’t want to go into details now, but there’s been some feedback which we’ve noted, and we’ll act on it – but this is minimal, so that’s not the point. The point is that if someone gets, say, 100 million forints, they’ll save one and a half million in a year. They can use this for development and investment, and it will benefit the country.
Csongor Gáll: Will there be no restrictions on this, just as there are none at the moment? Is it right that there will be no territorial restrictions, and the only one will be a ceiling of 150 million forints?
Yes. My request to the Minister for Economy was to conclude an agreement with the Chamber – for which I’d like to thank the Chamber – which represents the simplest and most accessible source of financing for everyone.
Csongor Gáll: This is essentially another interest rate subsidy scheme and, as I mentioned in my introduction, there’s also the 3 per cent Home Start Programme. The Hungarian government has recently announced several measures that will provide certain benefits to Hungarian families, and which will burden the budget in the future. These include the family tax allowance for mothers with three children, and countless others. Where will the money come from to cover these costs next year, in two years, and in five years?
Contrary to what some reports suggest, the Government is a serious institution. We can’t just pull a number out of a hat and say we’ll give this, that, or the other – that’s not how it works. What’s more, the Government itself has almost no freedom to spend a single forint. Hungary has a parliamentary system. This means that a budget Act dictates how the Government should manage its finances and how much it should spend. The Budget Act must be debated in public, and there will be revenue and expenditure; if the two are balanced that’s fine, but if not there will be a deficit, and the budget must also include a plan for covering the deficit. In addition, this budget is reviewed by the Fiscal Council, to ensure that it’s realistic, reasonable, and rational. And then it’s approved by Parliament. That’s the framework within which we can manage our finances. The current budgets that are already defined – for 2025 and 2026 – provide the financial resources for these measures. And it will be the same in 2027, if we’re in government – which we’re very confident we will be. So this can be covered, and the Hungarian economy is capable of generating all of this. Furthermore, as the President has just said, let’s not forget that we need to be very careful when money is allocated to welfare or social spending. When you allocate money to the economy you also need to be careful, of course, but the risk is lower; because it’s true that if you give money to the economy – and do it right – it increases the economy’s performance. This is why we need the Chamber – so that it’s not the bureaucrats who decide who gets what and how, but rather the economy that provides the knowledge, telling us not to give it this way, but rather that way, or a third way. And if we allocate it well, it will bring extra economic performance. If the economy performs better, it will also generate more revenue for the budget. So I always say that, if possible, we should leave as much money in the economy as possible: it’s best to leave it there, with low taxes; but if there’s a way to return the collected taxes to the economy, we should always prioritise that, because it will bring in money.
Csongor Gáll: At the press conference following the announcement it was mentioned that negotiations and consultations on certain tax cuts are underway. Can you tell us what taxes this will affect, what the consultations are about, and what scale we’re talking about?
We’re actually discussing what salaries should be next year. As you know, salaries are generally determined by the market. So what employers and the owners of capital pay as salaries is what people receive. Of course some people are employed by the state, but in that case we’re also the employer. This is a simpler case. The more complicated case is how much the minimum wage will be in Hungary. Because although it’s a market wage, the Government still has the power to intervene in what the minimum wage should be. And that level then either pulls down or pushes up other wages. And in order to set the minimum wage, three parties have to agree: one is Mr. Elek Nagy, president of the employers’ side; then there are the employees; and there’s the Government. When participating in negotiations on this issue, governments choose different tactics. Our philosophy – which is also my personal philosophy – is to let market players come to an agreement. If they can agree on something, the unions on one side and the employers on the other, then the economy will probably be able to deliver. So we don’t force the economy to do something that it can’t produce. But since the unions have their own minds, and the capital owners have theirs, they can agree with each other; but they always say that if the Government were to cut taxes here or there, we could agree on an even higher minimum wage. And now, in order to reach a double-digit minimum wage agreement that they could negotiate with each other, we’re at the point at which they say that the Government should reduce the tax burden on private enterprises, enabling them to pay higher wages. It may sound complicated, but that’s the situation. And then there was a similar agreement covering several past years, when we were able to reduce the taxes paid by employees, the taxes that employers pay on behalf of their employees. And there are similar proposals on the table now. I don’t want to get ahead of myself, because we’re still in the middle of negotiations, but events are moving in the direction of the Government having to commit to some kind of tax reduction in order to raise the minimum wage. We’re still discussing exactly how much, how, and when this will happen. Therefore I’m not supporting tax cuts for businesses in order to reduce their tax burden, but rather to make concessions in order to achieve a higher minimum wage.
Csongor Gáll: So a double-digit increase in the minimum wage can only happen if the social contribution tax is reduced?
This may sound harsh, but that’s pretty much how it is. Legally, of course, this isn’t the case, because ultimately it’s the Government that decides what the minimum wage should be. I could take a guess and come up with a figure, but that would ruin the economy. So if you’re strong, and in this area the Government has very strong powers, you need to know how to use your power. And the art of using power is actually knowing when not to use it. And this is precisely a situation in which the Government shouldn’t use its power, but should strive to reach an agreement. We could decide on our own, but that wouldn’t lead to anything good. In such cases we need to take a step back, reach an agreement, and offer our help instead. That’s my philosophy, and that’s why some tax cuts will now follow.
Csongor Gáll: President, how are the negotiations progressing?
Elek Nagy: I think that what the Prime Minister has said very clearly shows that a good compromise is taking shape here. I’d just like to add that the role of the Chamber is different from that of, say, the large interest groups, MGYOSZ [Confederation of Hungarian Employers and Industrialists], VOSZ [Confederation of Hungarian Business], and other such major interest groups; because as a public body we have to take into account the economy’s general interests. So, unlike a trade union, for example, which is interested in only one thing, namely getting as much pay as possible, as a public body we must ensure that the Hungarian economy is balanced and stable. So we mustn’t go to extremes, like in a Moroccan market, where it’s a case of, “Listen, if you give me this, then I’ll give you that.” Instead, when we have proposals of this kind, we present them with calculations showing what the consequences will be. And this is a typical example of what the Prime Minister has said. I’d like to add one more thing to this. Since you asked about this, as you know, in August it was already public knowledge that we, as a chamber, when in May we consulted with Minister Márton Nagy on the basis of our very detailed and innovative agreement concluded with the Government, it included tax relief. Precisely for the sake of stability, we proposed that over the next three years the tax for sole traders – and here we’re talking about half a million people, that’s how many there are – be raised from 22–24 to 18–20. This means security, because they’re sure that we’ll raise it. This will mean a few tens of billions in the budget, but again, at the same time, now we can see that the limit is 18, and for some reason no one is going above 18. Well, no one thinks that they won’t work, but immediately will go over to the black economy. It’s not in our interest for people to go into the black economy, and this way it will be predictable. Another big thing – and the Government seems to be open to this, but we haven’t finalised it yet – is that we’ve officially announced that the deductible cost ratio for sole traders, the proportion of their income they can count as expenses, should be 50 per cent instead of 40 per cent. Today a sole trader pays an average of 27 per cent in taxes. With these reductions, it will be around 22–22.5 per cent. If the Government supports this, sole traders will pay almost 20 per cent less in taxes. I see that there’s openness to this, but we haven’t yet agreed on it. So, again, this is a typical case of us giving – and entrepreneurs giving to the economy – so that we can grow.
Just so there’s no misunderstanding about what the President said earlier, 18–20–24 are the figures after which they can simply pay lower taxes. So we’re not talking about tax increases.
Elek Nagy: Oh, no, no, no, sorry.
Gáll Csongor: Be careful with these...
Nagy Elek: Yes, yes, yes, yes.
When you say increase, it means a reduction.
Nagy Elek: Yes, yes, the VAT exemption threshold is from 18 to 20, 22 to 24, meaning entrepreneurs can continue invoicing without VAT up to that point.
I can add to this, perhaps from a social philosophy or social construction perspective, that for us the self-employed or individual entrepreneurial lifestyle is also valuable as a way of life. So I don’t just see the numbers. It’s also important – as the President said – what they contribute to the Hungarian economy. But, after all, a country is made up of the character of the ten million people in Hungary, and the Hungarian nation is made up of the character of fifteen million Hungarians, and in a society there are different characters. And when we talk about economic policy, I look at this too, and not just at the numbers. And the character of a self-reliant individual entrepreneur is a good character – a valuable character, a strong character. The more people there are like that, the better it is for the country. The more people there are in the country with that character, that temperament, that bearing, the better for us: it strengthens the whole country. This is why I always take a positive view of these proposals.
Csongor Gáll: Has the reintroduction of KATA [simplified flat tax for sole traders], in any modified form, been discussed at all over the past year?
Elek Nagy: To be honest, I see this much more as a political issue from the entrepreneurs’ side. When you read that they want to bring back that version of the KATA system through which money could be taken out of companies with a 5 per cent tax, while the lowest tax on capital income – the dividend route – is around 22.5–23 per cent, that’s just not competitive. This is why I believe that KATA, which is currently between sole traders and the private market, is effectively money that’s taxed. This is what it’s about today. We can think about this, and we’re discussing it with the Government, that maybe there’s this capacity that companies have. But then the taxation of that must be in line with what others pay. Because how can it be that the highest tax rate is 22–23 per cent, which sole traders can pay, and then there’s a small group that pays 5 per cent? That’s certainly not fair. So there could be one approach or another for the introduction of different types of tax. Let me give you an example: for those working in the cultural sphere or even in the media, we could come up with cultural taxes that could offer certain benefits to them as entrepreneurs. I think this is more an issue of tax philosophy.
I’m glad that we’re on a programme that isn’t political in nature, even if there’s obviously some overlap with politics – because, if I’m not mistaken, it’s possible to talk calmly and sensibly about politically sensitive issues. And KATA is one such issue. And if we talk calmly about KATA, as if I weren’t involved in politics, then I’d have to say that we were the ones who first came up with KATA. So the introduction of KATA was a political approach – let’s put it that way. This is why I said what I said earlier. Because we consider the character – the entrepreneurial character – behind KATA to be a valuable character, and we wanted to support it. I think KATA was a good idea. This is why KATA still exists today. You know, Hungarian brains are also part of our character, and after we introduced KATA – which we invented specifically for a certain occupational or workplace group, and which really did enable preferential taxation – people cleverly came up with a bunch of techniques for how to stretch it to apply to other people as well. And I can’t even tell you how much abuse of this there was. I don’t want to offend anyone, but...
Elek Nagy: Unfortunately, that’s how it is.
...because it’s a good thing that Hungarians are clever, but it’s not so good when they cheat on their taxes. But when they’re creative it’s very good. So all I want to say is that the state has a responsibility to regulate this properly. And when we came up with it, it was good, and we started to expand it. And then it went wrong. So I was speaking to a businessman, a company manager, and I asked him how much he earned. He said he earned this much, plus this much in cash. I said: “What? What?” And it turned out that part of his salary was paid in cash. Well, that’s not what we designed! We designed it so that self-employed individuals would have a favourable system. That wasn’t what it was for. It started to grow, and this led to a lot of tax fraud, abuse, and wheeling and dealing in a grey area – and we wanted to put that right. This, of course, turned into a political scandal. But this must be kept in order. What the President is talking about is that today the types of invoices that can be subject to KATA taxation or accounted for in that way are subject to very strict rules, for the reasons I mentioned earlier. We’re afraid that we’ll slip up again, that our good intentions will lead us astray, and that we’ll once again open the door to abuse. But we’re discussing how to open up or broaden the scope of KATA so that invoicing can be done more freely, just as the President says. But here I am, someone who has burned his mouth once with hot milk, so that now I blow on cold water before drinking it. This is true for the tax system: I’m drinking it cautiously, very carefully. I want to make sure that in wanting to do something good again, we don’t open up some rule, expand the possibilities, and then find it turns into making abuse possible. I’m constantly asking for guarantees from the Chamber on this, and then we can move forward.
Csongor Gáll: Prime Minister, when at the end of February you spoke at the Chamber of Commerce and Industry’s event marking the start of the economic year, you said that this year will be a breakthrough year. Previously, there was talk of a flying start, which was very widespread and thus entered public consciousness. From the data for the past few quarters it’s already clear that this success, this breakthrough success, hasn’t arrived in Hungary, and that over the past three years the Hungarian economy has consistently fallen short of its targets. Can we say that in recent years the Hungarian economy has effectively stagnated?
Let’s start with the breakthrough and the flying start. This did happen, but not from 1 January. So, if I may say so, I wasn’t wrong about the year, but about the month. I wanted to launch the programmes we’re talking about now – for example, the 3 per cent fixed-rate loan for businesses, which is why we’re sitting here – on 1 January. But for various reasons we were unable to launch them at the beginning of January, and only on 1 July. I still maintain that the programmes we launched on 1 July will bring about a breakthrough in the economy and represent a real flying start, because increasing the family tax allowance by 50 per cent is a flying start. The fact that mothers with three children don’t pay tax is a flying start. The fact that you don’t have to pay tax after receiving infant support benefits and childcare allowance is a flying start. The 3 per cent first-time home loan is a flying start. So too is the 3 per cent fixed loan for businesses. So if I miscalculated anything, it wasn’t the situation itself or the measures, but the point in time when the Hungarian economy would become capable of this. And that wasn’t January, but July. So I think that regardless of the unfavourable macroeconomic figures, these programmes all represent a breakthrough. There’s one more thing that can be understood from your question. If I understand the global economy correctly, and what I’m able to comprehend from the technological changes in the world and what’s written about them, they all tell me that the global economy and the European economy are also on the threshold of a new era. Technological changes are coming that will result in an economy that’s completely different from what we’ve had so far: robotisation, artificial intelligence, digitalisation. So now we should no longer think in terms of whether or not the Hungarian economy can get going, as in the old logic, but rather whether the Hungarian economy will enter this new era equipped with the necessary weapons, clothing and tools, and whether or not it will be a winner. When I look at the technological and economic changes of the past hundred years, Hungary has generally missed the boat. So I can’t mention any major economic change in the past hundred to hundred and fifty years when the Hungarian economy was prepared to embrace change and be at the forefront. I want to change this now, so I’d like all of us in the Government to work towards ensuring that the Hungarian economy is well prepared to lead this technological change on the front line and for it to claim its place among the winners. To achieve this we also need the Chamber; it’s no accident that in most of our discussions we talk about artificial intelligence and training.
Elek Nagy: Yes, I’d like to add to this and perhaps echo the Prime Minister in saying that until now, we’ve really had a model based on cheap labour, subcontracting industry, with an emphasis on low-skilled repetitive production. And now we’ve reached a very desirable level. But this is where technological change comes in – and technological change means knowledge. So it’s very, very important, and it’s no accident that every day – preferably several times a day – we talk about a knowledge-based Chamber and a knowledge-based economy, because we believe that this is the only way forward. So in the coming years, in the second half of this decade, we need to achieve a change. It’s no accident that the concept of critical mass also exists in economics, and we must succeed in implanting it into the mindset of businesses – and many of us already know how we want to change on our own and how we can become more efficient. If we can achieve this kind of change. I’m convinced that we will, and then we’ll be very successful.
Csongor Gáll: When will the effects of the aforementioned upturn be visible in the Hungarian economy? When will we be able to say that the figures and macroeconomic analyses will show that the Hungarian economy is picking up?
I’d advise caution on that, because when we talk about the economy, we need to be clear about what we’re talking about. So when we talk about the economy, are we talking about ten million people, or are we talking about the competitiveness and performance of the Hungarian productive sector? These are two different things. Because if I include people in the economy, which for a politician seems quite logical, for the Prime Minister to see the economy as including people, at least ten million of them, then what is expected of me is the following. Everyone should have their own home. Everyone should have a decent – preferably rising – wage. And everyone should have a secure pension. Most people aren’t interested in anything else. So we – and I as the Prime Minister of the country – must somehow manage the economic transition in such a way that these few basic demands on the economy – which aren’t related to economic productivity – can be met. Because if there’s no political stability and people feel that they can’t afford their first home, if they aren’t paid fairly, have no prospects, their wages aren’t rising, and they’re uncertain about their retirement, then this will lead to political instability, which in turn will lead to economic instability and upheaval. And no economy can function well with an unstable background. So I also have to ensure political stability for the economy. I say that if businesspeople vote for us, and I hope they will, then they’ll do so mainly because they expect us – and me – to be able to provide a stable economic and social background for their economic ideas. But I can’t exclude ten million people from the economy. So my first answer to your question is that everyone will have their own home. There will be decent wages in Hungary – where they don’t exist they will exist, and we’ll raise wages, right now the minimum wage by at least double digits in 2026. And people’s pensions and our pension system will mean that their old age will also be secure. The Government must guarantee this, and I guarantee it. Now, after all this, the other issue is the economy as a matter of performance: When will everything we’re talking about now be visible in the macroeconomic figures and in technological efficiency? Now, I’d say that there are areas where this is visible, where the child is about to be born – let’s say it’s in the birth canal; and there are areas where we’ll still have to wait some time for it to come into the world. So, for example, in the automotive industry and electromobility, the child has already been born. It’s clear that Hungary is at the global forefront of electromobility, and will remain there. It was risky, I took part in many professional debates, but we’ll also win the battle over the new industry created by electromobility – namely the battery and energy storage industry. In this, Hungary won’t be a minor player in terms of per capita volume of production, but will be the third largest in the world – after China and the United States. This is what the coming period in the automotive industry will be all about: the transition to electromobility. And we’ll be at the forefront of this. We’ve only allowed companies that are already producing elsewhere to enter Hungary’s electromobility sector, such as the battery industry. So we’ve not taken the risk of letting them experiment here. They’re already producing somewhere in the Far East or South Korea or China, and they’re successful and more competitive than their European counterparts. What’s more, developments over the past few months have shown that in this race Europe is unable to compete: the only major battery factory project necessary for electromobility, based on purely European know-how and capital, has been shut down. It’s failed. And since the transition process will take longer than planned, the Far East won’t be making many investments in Western European countries. So they’ll increase the capacities that already exist in Hungary. So I think Foreign Minister Szijjártó has hit the jackpot, or completed his bingo card, won the grand prize, or whatever you want to call it; because over the next five to ten years it will become clear that in this regard Hungary will be at the forefront of technological change. And there’s another area of technological change in which we have good chances – but I wouldn’t say that we’re as well positioned as we are in machine manufacturing. This is the healthcare industry, pharmaceutical manufacturing, where we’re very strong. All kinds of technological changes are taking place there too – but it will require money, knowledge and many other things. And I have a third comment. For some mysterious reason we generally like to think badly of the Hungarian economy, even though it has scored some quite remarkable global achievements; and few people know that in the category known as “economic complexity”, Hungary is in the top ten in the world or thereabouts. So despite the fact that we’re an economy of ten million people, this isn’t a monocultural economy, nor is its industry monocultural: Hungary is among those economies with the most complex structures. This is probably because we’re a smart, intelligent people, and we’re skilled at everything: we’re good at agriculture, we’re good at IT, high-tech industry, machine manufacturing – we’re good at many things, and when we set our minds to something, we can do it very efficiently. So Hungary needs to choose two or three industries in which we really need to push forward: electromobility and pharmaceuticals, to name two – and I think agriculture and the food industry also belong here. In the meantime we also need to maintain those areas that are smaller in volume but result in a very complex Hungarian economy; because the way the world is changing, nothing will go well at the same time, and nothing will go badly at the same time. So the advantage of complexity, of a complex structure, is that even if one part is doing well and another less so, it still delivers an average performance. So I think there’s value in not pushing the Hungarian economy towards monoculture, but in maintaining its complexity. This requires very sensitive cooperation between the economy and the Government. We don’t know how to do this, the Government can’t guarantee it: we need a mediator, the Chamber – which, incidentally, pays attention to this complexity, keeps track of every industry, every small, competitive area, and constantly brings proposals to the Government on what we need to do in industrial policy. This is why the two of us are sitting here, and this is why the quality of the Chamber is a key issue.
Elek Nagy: If I may, I’d like to add that, of course, there are siren voices asking why there are so many batteries – but there’s no question that there will be an automotive industry. So yes, there will always be crises and difficult periods, but this is what will happen. I’d like to draw attention to another thing, which is already being analysed very seriously in China, namely that there are two types of batteries: one type is mobile, and the other is fixed. And the market for fixed batteries is at least as big – if not bigger – than that for mobile batteries, because everywhere from households to production, the moment we generate a different type of electricity, we need to store it. So one of the vital issues in the future will be storage capacity. And, of course, if, say, we need to install this type of battery, there’s no question about where we’ll install it. It will be either where it can be manufactured with minimal modification, or we’ll relocate to a greenfield site. I don’t think that’s a difficult question to answer. So from that point of view I think it was a very good strategic decision.
Elek has touched on something here – energy storage – that I’d like to say a few words about, if I may. In Hungarian public discourse the word “battery” has negative connotations, but “energy storage” is perhaps a more understandable and politically less loaded term. The more green energy there is – energy produced by the sun, for example – the greater the need for storage, because the sun doesn’t always shine. Of course now we’re building power plants, gas-fired power plants, which generate electricity from gas when there’s no sunshine. There are two or three such large investments underway in Hungary, which is good – but it would be even better if we could reach the technological level at which we’ll be able to store the solar energy generated by the sun. This is something we don’t usually talk about, but I’ll say something now – don’t try to get everything out of me, because we’re not yet at the point where I can reveal everything. On this there are two major programmes underway here. We’re negotiating with very deep-pocketed groups – mainly foreign ones, but there are also Hungarians involved – about how to build huge fixed industrial batteries, not for cars, but fixed ones next to our factories, where small solar power plants are already operating. This is a major programme. The Arabs have invested a lot of money in this recently, and they’ve also invested in France and the UK. And now I’m negotiating with them on how to put Hungary on this map. And the other thing – which is perhaps even more important to people, although perhaps less significant from a macroeconomic point of view – is how we can provide money for this. We’re dividing, multiplying and calculating, which is why I said that you shouldn’t ask me for more information or try to get more out of me at this point. We’re dividing and multiplying to determine how we can provide support to people’s houses so that they can have their own home batteries to store the energy generated during the day. This will cost a lot of money, as we’re talking about hundreds of thousands of families. I think we might be able to pull it off, but we don’t yet have the business model completely figured out.
Csongor Gáll: Just a very quick question. Wasn’t this considered a possibility for apartment buildings and system-built housing estates? Because there we’re talking about even greater capacity...
We’re working on this, on how we can provide energy storage opportunities for families. We’re calculating what we can contribute in terms of technology and financial support.
Elek Nagy: But I’d like to say that, for example, in cooperation with the Ministry of Energy, a similar energy storage programme has been launched for businesses. So, to be very clear, this is interesting. We’ve been able to give the Ministry countless suggestions, to which they’ve said, “Wow, we hadn’t thought of that, but it’s a great idea”, and they’re already incorporating them. This is why the tenders in which the Chamber can participate are increasingly successful, because we can communicate the needs of businesspeople.
Here I’d venture to make a stronger statement, without exaggeration: I believe that from the perspective of international capital investment, in the next five to ten years a decisive factor will be the availability of energy – whether it’s available, and at what price. Therefore investors will avoid countries, regions and cities that are unable to provide energy at competitive prices. Without investors there will be no industrial development, no jobs, no money, and no economic growth. So I feel – and this is why we’re so committed to the Paks II nuclear power plant project – that one of the keys to Hungary’s economic performance, one of the hinges on which success or failure will depend, is whether we’ll be able to provide industry with energy at prices below European levels. If we can, then bingo, we’ve won the game. If not, then we’ll have difficulties.
Csongor Gáll: I’d like to move on to another area. In the spring would the Prime Minister have thought that by autumn all of us in Hungary would become tax experts, and that the political punches being thrown would be about who would reduce taxes more?
I thought that in every normal country one of the most important issues before every election is what will happen to people’s money: Will the money I earn stay with me, will I have even more, or will the state take it away? I thought that this would be an unavoidably important issue before an election.
Csongor Gáll: And now, of course, I’m thinking of the political competition related to the Tisza Party, which has started campaigning by saying that it will be the government of tax cuts and saying how much it will reduce taxes. Meanwhile, for about fifteen years Fidesz has been continuously saying that it’s reducing taxes, and that it’s the government of tax cuts.
We’ve now reached a difficult point in the conversation, because we’re slipping into politics and will no longer be talking about the economy. I can make a couple of pointed remarks, but then we can return to the economy. As far as I’m concerned, there’s no Hungarian opposition party – certainly not on the Left – that doesn’t represent Brussels’ agenda. So, to be honest, I don’t care what the Tisza Party writes or stands for. How was the Tisza Party formed? It was formed when I had a falling out with Angela Merkel over the issue of migration, and then I had a falling out with the European People’s Party. By every means possible they tried to force us to let in migrants, they said that if we didn’t give in we’d have no future in the People’s Party, and they started to push us out. And they told me it to my face: I didn’t have to guess, they told me, Mr. Weber told me, “You guys are out, and we’re going to build something, we’re going to find a way for the European People’s Party to have representation in Hungary, representing Brussels and European federalist ideas.” Their initial plan was to remove Fidesz, keep the KDNP [Christian Democratic People’s Party] in, and build the KDNP into a Brusselite party. That’s why we left the European People’s Party, while the KDNP remained as long as it could. But they couldn’t transform it. I don’t know why they thought that was possible. They couldn’t transform a Christian party based on Hungarian Catholic traditions into a European Brusselite party. That was a pretty difficult undertaking, and it didn’t work out, so now they’re out of the European People’s Party too. So they said they’d build a party. Tisza is a European Brusselite project. It’s a Brussels creation. It doesn’t matter what they say. Tisza’s programme is written in Brussels. And I know what Brussels wants. That’s why I say that I’m arguing not with Tisza, but with their masters. I know their masters, the ones who created them. The poor things don’t even know who their mother and father are – or maybe some of them don’t know, but I know how they came into being. And every year Brussels lays down what it expects. It expects tax increases. Tisza will raise taxes, but not because they want to raise taxes. I don’t know who wants what, because it’s hard to figure out what they’re saying, but I know for sure that they’re a Brusselite party: Brussels wants tax increases, and Tisza will implement them if the Hungarian people agree to that. With that, I’ll finish talking about politics.
Csongor Gáll: With regard to the tax system, do you think it can be said that Hungary currently has a flat tax rate and that it’s working? What I mean by this is that the number of people who are now exempt from personal income tax is quite large. This has been in effect since 1 October. Previously it was for those under the age of 25, and from 1 January it will be further extended for families.
Let’s return to economic issues. There’s a vast body of literature on flat tax, as these fine Anglo-Saxons call it. Before we embarked on this path in Hungary, we studied it, and I myself studied part of it. Classically, a flat tax means that all taxes are at a single rate – not just income tax, but everything. At that point the entire tax system is as unbureaucratic as possible, as transparent as possible, as easy to comply with as possible, and as difficult to circumvent as possible. That’s the classic model. In 2010–11, György Matolcsy and I looked into whether we could create a classic flat tax covering all types of tax. But the math didn’t work out: the Hungarian economy had – and still has – too high a level of debt to operate a tax system with such a rate. If our national debt weren’t 73–74 per cent, as it is now, but, say, 20 or 30 per cent, then perhaps we could even try that. But it’s not possible until we can get to that point. So the classic flat tax didn’t come into being in Hungary. This is why we thought we’d do it with income tax. We’re building a work-based economy. There’s a rather low-level political debate here – which I won’t bring up now – about whether there’s a contradiction between the knowledge-based economy mentioned by the President and the work-based economy I’ve mentioned. Let’s leave that aside for now. For some mysterious reason, from time to time academics like to contrast the knowledge base with a work-based society or economy.
Elek Nagy: Without work, there’s no knowledge.
I grew up believing that knowledge and intellectual work are real work – but never mind, let’s put that to one side for now. I think it’s work. But the point is that we put all our energy into improving Hungary’s employment indicators, because in terms of how many people of working age were actually in work, Hungary was one of the worst performers in Europe. I took over the reins of government in 2010 with unemployment above 12 per cent. And we wanted a tax system that would help people get into work. The flat tax came in handy for that, so we introduced it and used it to create one million jobs. Now I shouldn’t really be saying this here, because it probably belongs to the world of libertarians, but I think that the best income tax rate is zero. Unfortunately Hungary can’t afford that at the moment. This is why what we’re doing – or what I always support – is lowering the flat tax rate for certain groups that are particularly valuable to Hungary. So there’s a 15 per cent flat tax rate, but we’re lowering it to zero for mothers who have given birth to at least two children, for example. Or for those who are raising children, we give them family tax credit through their income, through their work, and then they too are below 15 per cent. So I think it would be best if all taxes in Hungary operated on a single rate, but that’s not possible at the moment. So let’s be happy that income tax is at a flat rate, but let’s move from there towards even lower income tax, because we need to let people work. What I’m getting at is that a country’s future depends on whether people want to work. If you take away the money they’ve earned, they won’t work. And the more money you leave them, the more they’ll want to work. So people should be allowed, and even encouraged, to perform well. This is good for them, because they want to live well, and it’s also good for the country. So if you’ll excuse a little pomposity on my part, according to my philosophical approach low taxes are the best economic policy.
Csongor Gáll: The current tax system is based on domestic consumption, which is indisputable, but this doesn’t necessarily go hand in hand with GDP growth. How do you plan to adjust the VAT rate in some form, in any form, even in the next cycle?
We’ve removed those products that we considered to be the most burdensome from the high VAT rate and moved them to the 5 per cent or zero per cent bracket. We don’t have complete freedom here, because Brussels imposes various regulations on national economies – justifiably, perhaps – which must be complied with. But we’ve removed many items from the 27 per cent rate: we’ve moved them to 18 per cent, then to 5 per cent, and there are one or two that can even be exempted from tax. For the time being I don’t see any possibility to reduce VAT beyond those products already excluded from the 27 per cent rate. If there was more money in the Hungarian economy than there is now, and we had to decide what tax to reduce, I’d still be in favour of an income tax reduction that supports families.
Csongor Gáll: So, essentially, we can’t expect a VAT reduction.
That’s right. But I consider the statement that growth in Hungary is based on consumption to be exaggerated or – how should I put it? – in need of nuance. There are multiple sources of growth and, as the economic situation changes both at home and around the world, one or other of them become more important. I don’t believe that economic growth can’t be built on consumption in the long term, but it can be built on investment and development. The current situation in Europe, however – with high energy prices, war and sanctions – is such that investment is faltering everywhere, and investment isn’t able to add enough energy to growth. This is why the focus has shifted to consumption. But this isn’t good. What’s more, I’m not even sure if consumption is a good thing. But of course if we ask the President he’ll say that it’s good, because if there’s higher consumption, then people will buy businesses’ products. But for people there’s an optimal level of consumption, and some reserves need to be built up. So I see thrift and saving as valuable, at least as valuable as consumption – and in fact we were brought up not to spend more than we have. So I consider saving to be even more valuable, and additionally the state can mobilise it for its own financing. That’s the end of my digression. So I consider it suicidal for a country to base its economic growth on consumption. It must be based on technology, investment, development and work. Consumption should be such that people feel good in their own country and can buy what they need for themselves. But consumption shouldn’t be seen as a special economic tool. I see such theories, and there’s debate about this among ministers, but I don’t sympathise with that approach.
Elek Nagy: To this I’d add that, to be honest, I don’t believe in the kind of tax policy that artificially stimulates consumption, because consumers always have their own well-being in mind, and not these economic and political arguments. And any measure that increases consumer welfare serves the interests of the economy. But, as we can see, in Hungary growth is driven by the fact that we’re an export-oriented country. And we can see that both the current account balance and exports are in surplus, so I don’t think there’s any particular problem there. The problem is productivity and efficiency. I think we need to work on that, and that will obviously help internal processes.
Let me add one comment to this, just to make it completely clear that Hungary is an export-oriented country. Take Hungarian agriculture, for example. Hungarian agriculture can produce enough food in a year to feed twenty million people. So we can feed twenty million people, but there are only ten million of us. This means that the food we produce for the other ten million people has to be exported. This is the situation in this country. And I could give examples from other sectors besides agriculture where it’s essential that we sell our products – which means that we have to produce rather than consume. The truth is that others have to consume so that we can sell them the products we produce. So what’s important isn’t our own domestic consumption, but that Europe – our largest market – and China consume, so that we can sell them our goods.
Elek Nagy: And I’d like to follow up on what the Prime Minister said. Indeed this is what needs to be done with these agricultural products, but it’s clear that we export them, and then the processed products are sold back to us from abroad for exorbitant profits. So it’s important for us to support our own processing industry. And as we’ve seen over the past ten to fifteen years, the Government has provided a lot of support to tourism, and there have been a lot of debates about that, but it’s grown almost threefold. So you were able to support the sector to the maximum extent possible. And that’s why we in the Chamber recommend that the Government implement a few targeted programmes in the manufacturing and pharmaceutical industries, which the Prime Minister mentioned, as these could be driving forces for growth, and because we have the necessary resources.
Csongor Gáll: Since we’ve already mentioned exports, was the appointment of Mihály Varga [as Governor of the Central Bank] intended to strengthen the forint? Because it’s significant impacting on that.
The Government doesn’t have an exchange rate target, but there’s no doubt that the decision to appoint him as Governor of the Central Bank has consequences. The identity of the Governor has consequences. This might not be openly admitted, but it’s true. For example, if the Central Bank lowered the general interest rate, the President and I wouldn’t have to worry about 3 per cent interest rates on business loans and we wouldn’t have to support such cheap loans with a government programme. That would be the case if the Central Bank were able to maintain interest rates at a level at which business loans could be available at 3 per cent without government support. But when we asked Mihály Varga to take this position I was well aware that even if that happens, and I hope it does, it won’t happen overnight – because the Governor of the Central Bank is a cautious man. So he won’t rush into anything.
Elek Nagy: And he’s also a Calvinist!
Someone who doesn’t yank at the steering wheel, who doesn’t throw himself into big adventures. So interest rate cuts, which I’d very much like to see, will happen much more slowly than we’d like, because there’s a very cautious person at the head of the Central Bank. This is why it’s important who sits there. I know the Prime Minister shouldn’t say this, but I think interest rates are higher than they could be. But I know who’s in charge, and I know that if there’s going to be a cut, which I think there should be, it will always be done very cautiously – because in his mind, the stability of the forint must be maintained. So, although we didn’t give him such a mandate, the person who went there is someone who likes stability, including the stability of the forint.
Csongor Gáll: In the Prime Minister’s mind...
Elek Nagy: If I may, I’d like to say that if we look at the Act on the Central Bank, the Central Bank has inflation targets. This is very important! So its goal isn’t the exchange rate, but instead it must pursue inflation targets. In other words, the Central Bank is interested in price stability, and when there’s price stability, it leads to market confidence. And I think that’s what’s happening in Hungary today.
I don’t want to talk too much about these trade secrets, although we’re obviously sitting here so that people can learn more than if I weren’t sitting here. But this has to be done in the right way. I really don’t want to burden the public with my own professional difficulties, but if you have an adventurous finance minister or economy minister, it’s good to have a cautious central bank governor. If your central bank governor is dynamically interventionist, then your economy minister should be cautious. So when making personnel decisions and recommendations I have to take many factors into account.
Csongor Gáll: Prime Minister, if I understand correctly, would you like to see interest rates cut?
Well, isn’t that normal? The question now is not whether I want it. We could suddenly stop here and ask the cameramen and those taking notes what they want, and everyone would want lower interest rates. Right? Well, that’s normal! Where are they? Interest rates are sky-high. So again, where does that leave us? It matters who you are – because if you come from a family of bankers, you think completely differently, because you make money from money. But I, at least, don’t come from a family of bankers, because in the village of Felcsút there are relatively few bankers per square metre. So I think it’s good when money goes into the economy, creates value there, gives people jobs, gives them opportunities in life, and then through work this turns into even more money. So you have to make more money out of money by putting it into the economy, where it creates value – and then the banker, or whoever provided the loan, will have even more money. But it isn’t good for us that the money doesn’t go into the economy but is kept somewhere as cash, and high interest rates are charged, and loans are granted to people outside Hungary. And for the money to go into the economy, business owners have to take out loans. But if the interest rate is high, business owners won’t take out loans. And then what happens? I come along, or the budget comes along, and we announce a subsidised loan – because after all, business owners need loans. So it would be better if the budget could be left out of this chain, and business owners could get cheap commercial bank loans at a low central bank base rate, without the Government’s involvement. But we’re not there yet, and at such times the Government must step in, because if interest rates are high, business owners won’t borrow, there will be no economic performance, people will be laid off, there will be unemployment, the entire economy will be disrupted, and people will suffer. This is why we, personally, the Government, must step in when necessary with decisions on interest rates and subsidised interest rates, so that business owners have access to low-interest loans that promise rational conditions for business success and profit. I’d be happy not to have to sit here and talk about this, but this is the situation: wars, sanctions, high energy prices, a cautious central bank governor. Well, what can we do?
Gáll Csongor: Do you have a desired forint-euro exchange rate in mind?
Not really, and for some mysterious reason it seems that the forint-euro exchange rate is determined mainly by the weakening and strengthening of the dollar. That’s a world of expertise that I wouldn’t venture into. Let’s have a forint that’s strong enough to be good for the economy. Let’s have as many people working as possible, earning as much money as possible, and let the exchange rate serve that goal.
Csongor Gáll: Could the introduction of the euro be on the agenda again in the next cycle, or is this absolutely not a topic of discussion at government meetings at the moment?
It certainly won’t be on my agenda. I think the European Union is in trouble, but that’s a topic for another interview, and one that would take an hour. In my opinion the European Union is in a phase of disintegration – right now it’s falling apart. And this process will continue, and the European Union will become a passing chapter in our lives if it doesn’t undergo a radical transformation within a year or two – something which I don’t see it being capable of today, just as I don’t see any intention or ability for that either from the Brussels bureaucrats or the leaders of the principal nation states. This is why Hungary must not tie its fate more closely to the European Union than it already has done. And the introduction of the euro would be the tightest tie of all.
Csongor Gáll: It seems that America, through Donald Trump, wants to squeeze Europe and all other competitors out of the market, and this is having very serious implications for the competitiveness of the European Union. America has basically called its multinational companies back home, and Donald Trump automatically expects them to bring their capital back to America. What impact could this have? Do you think Hungary can do anything about this as part of European Union integration in order to remain competitive over the next five to ten years?
The American president is a businessman, so this question should be addressed to Elek, to President Elek Nagy, because he knows better how a businessman thinks when he’s the American president – let’s say, if he imagines himself behind that desk. But I can also say something about this, perhaps not as comprehensively and with as broad a perspective as the President of the Chamber could. What you asked, and the phenomenon you described in your question, is true – so I agree with that. The question is, what will Hungary do? We’re putting together this major American–Hungarian economic package, which I’ve been working on for months. And we’re also going to invest in America. So the American president really wants every country in the world to invest in America. I’m looking for opportunities and measures that are still reasonable, and we’ll invest there, but that’s not what’s interesting. What I’m working on is achieving a situation whereby they’re investing several times that amount here. So it’s fine that Hungary will invest something in America, that’s fine; but I’d like to see America investing several times that amount in Hungary.
Csongor Gáll: And is that possible?
I’m doing well, we’re doing well, because since President Trump took office, we’ve already brought in 150 billion forints worth of American investment. So, while the American president is siphoning capital back home from everywhere, we may be the only country – I’m not entirely sure, but I wouldn’t be surprised – out of which America isn’t taking money, but investing it here in this country, in Hungary. We’ve received 150 billion forints worth of investment – I think seven investments, and all of them are high-tech. These are not “here today, gone tomorrow” companies, but valuable companies that employ highly skilled people that are now here in Hungary. So now, when I meet the American president, we have to put the final figures together. Of course the bottom line is that this should be included and that should be included, but overall the Hungarian economy should benefit from American–Hungarian cooperation. I am working on this, and I think I can get the American president to accept it.
Elek Nagy: Yes, and what’s very interesting is that recent research shows that the influence of these international companies is declining – now it may be obvious that there are various factors at play, such as China, Trump and so on, but let’s put that aside for now. At the same time, the power of local communities can grow. The question is, who will fill this space? And I keep saying that the answer is a knowledge-based economy, a knowledge-based Chamber. Because Hungary is currently in a classic middle-income trap. Before this broadcast we were talking with the Prime Minister about how the way forward is Brazil or Mexico, because they’re in the same situation – or Singapore or Taiwan. We’re somewhere between the two, but it’s clear that we must follow the path of knowledge. Then we too can be a little Singapore, a little Taiwan in the European Union – and we have all the capabilities to be that. And I’d like to add that, of course, there’s a war, tariffs and everything, but if we do nothing else but increase internal efficiency, then that increase in efficiency can lead to GDP growth. Here, for example, we can achieve results in the very short term by using artificial intelligence, as in that way we can achieve an increase in efficiency of up to 40 per cent. It’s true that the risk is around 20 per cent, which is why we need human oversight. But if we consider that SMEs account for half of Hungary’s GDP, and if these SMEs did nothing else but operate 10 per cent more efficiently, it’s not difficult to calculate what kind of GDP growth this would result in. So even in this difficult situation we have internal resources that we can use. And this is where the Chamber comes in: to provide this to businesses through this network. And what’s good for businesses is also good for the country.
And this is where the Government comes into the picture. Because I understand everything the President has said, and I think I agree with him; but here again I have to understand the economy not only as economic efficiency and economic actors, but all ten million Hungarians, and I have to translate everything we’ve just heard from the President into a social programme. And we’ve done that. There’s a debate – somewhat vague, unfocused, and unfortunately not of much interest to the press – about the goal we’ve set, which I’ve also assigned to the ministers: that Hungary must become one of the five most liveable countries in Europe. This is more than just competitiveness: it encompasses several quality elements. Minister Navracsics has been tasked with developing a measurement technique to determine where we currently stand, and what needs to be included in this. So Minister Navracsics has a very serious programme underway, the aim of which is to identify the elements, the segments that together determine the quality of life of a country’s citizens. In this respect we want to be in the top five, and then I think that will take us upward, out of the trap of middle economic development that the President has spoken about.
Csongor Gáll: Allow me one final question, Prime Minister. In recent times several European countries have made changes to their pension systems. Are there any plans to change the system in Hungary? For example, will the retirement age or early retirement for women after forty years in work stay the same – or are there plans to expand it?
We have no such plans. I’m very cautious. This is favourable terrain for adventurers. The numbers are huge, so the pension fund is huge. And political adventurers tend to think that money should be taken from where there’s a lot of it. But that’s the logic of highland bandits. Economic policy isn’t like that: it’s the opposite, you have to think in the opposite way. You can’t take money from where it is without knowing what you want to do with that money. So the pension system is an attractive fund, and people will always want to dip into it. I’m opposed to that. I think that the Hungarian pension system has its weaknesses, no one can deny that – but it doesn’t have the sort of serious weaknesses that would require significant intervention. And here we should measure ten times – not twice, but ten times – before we cut once. So I read these social engineering proposals about how we should intervene here and there, but I don’t recommend that. This way may be slower, it may be more boring, but it’s safer. Let’s proceed calmly and steadily with pension increases. We have a pension system, we were able to introduce the thirteenth month’s pension, and if we want to and are able to give pensioners more money, we should do so through this system, rather than recklessly tinkering with it. It’s very easy to ruin the lives of hundreds of thousands of people in an instant with a poorly calculated pension percentage, a poorly adjusted ratio, or a changed age limit. So here, if anywhere, we need to be ten times more cautious. There’s one rule that must be observed, or that must be placed above all else, and on this we have an agreement with pensioners: the value of pensions must not be reduced. And pensions must be increased in a way that ensures that doesn’t happen. As for whether we need to tamper internally, I’d rather suggest that those who want to save the country should exercise their imaginations elsewhere. That shouldn’t be done through the pension system. The pension fund holds the money accumulated by millions of people throughout their lives, and we mustn’t play around with it. This is why I recommend caution. I could even say, “Just don’t reform it”.
Csongor Gáll: Prime Minister, President, thank you very much for spending the last hour with us and answering our questions. And thank you all for your kind attention. If you haven’t already done so, be sure to subscribe to the Money Talks and Economx channels, and in the comments section share your thoughts on what you’ve heard. Money Talks will be back soon with a new episode, so stay tuned. Until then, see you and hear from you soon!