Remembering When Hungary Was Like Greece

As the world watches Greece, waiting with baited breath and hoping for the least painful outcome, it’s no surprise that some of the debate turns to which economic recovery examples work.

An anonymous “open letter,” allegedly from a concerned Latvian observer, went viral last week on social media. While the letter is mocking in its tone toward Greece, it highlights an important point of difference among today’s EU member states. Latvians, like some EU countries, have made incredible economic progress over the last twenty years. Others, not so much.

Naturally, all member states are slightly biased toward their own stories. But Hungary’s turnaround story is one that has caught the attention of many. Back in 2008, the country was headed for the cliff, speeding toward a crisis situation like the one Greece confronts now. Hungary faced expanding external debt, a high unemployment rate, and a shrinking economy. Breaking out of the 2008 financial crisis, Hungary turned to the IMF for an emergency bailout. The market was no longer an option for our financing. In 2010, fed up with the rule of those that had led the country into such dire financial straits, the people of Hungary elected a new majority to stop the country’s downward spiral. Since 2010, the results have clearly shown declining external debt, a sustainable budget balance (maintaining deficits under the Maastricht threshold of 3 percent), improving job numbers, growing investment and an expanding trade surplus.

The Hungarian government did not follow the IMF-playbook, questioning austerity. And instead, we paid the creditors back ahead of schedule in the summer of 2013 and politely showed them the door. The result? Hungary has been on the path of debt-reduction since 2011 and on an economic growth trajectory since 2013. The reforms, the so-called “unorthodox” policies, have shown results.

Parliament recently passed the Budget Act for 2016, far ahead of schedule, another sign of sound economic planning and stability. The early adoption of the budget will allow economic actors to prepare for the upcoming year and bolster the economic predictability of Hungary in the eyes of its international investors.

The new budget marks one of the first steps in the phasing out of Hungary’s crisis taxes on certain sectors. The upcoming year’s budget will lower bank levies by 60 billion HUF in exchange for a boost in lending activities, stimulating domestic enterprise. The fiscal plan calls for a further lowering of taxes on the telecom sector, utilities, and financial transactions. As the macroeconomic indicators signal a recovery, the government is standing by its promise to do away with the extraordinary sectoral taxes.

The improving economic indicators should help Hungary — sooner rather than later, as we have argued several times — to recover its investment-grade credit rating. Following the recent upgrades from stable to positive from all three of the major credit rating agencies, the markets agree that Hungary is promising. The 2016 budget reinforces fiscal responsibility and will help the state stay on its current trajectory.

The Budget Act for 2016 foresees a deficit of 2 percent of GDP and continued low inflation (it currently rides as low as 0.5 percent) and forecasts 2.5 percent economic growth. Considering the latest data and the fact that international organizations such as IMF, the EU Commission and the OECD have revised their Hungarian projections, we have every reason to be optimistic. When it comes to GDP growth, Hungary remains among the EU leaders.

Next year’s budget, according to Minister for National Economy Mihály Varga, “equals lower taxes and safe jobs for families,” adding that it will leave 230 billion HUF for workers, families and enterprises.

Savings for families will reach 120 billion HUF due to the reduction of personal income tax to 15 percent. Further measures such as increasing family tax allowances, cutting the VAT rate on certain staples like pork, lowering state administration fees, extending the right to free textbooks, and expanding the free school meal program will further benefit Hungarian families.

Another important part of the budget will be the continuing support for career models for the armed forces, law enforcement employees, and teachers. In addition, more funds have been allocated for healthcare. Some 15.3 billion HUF will be spent on raising the wages of young doctors and a further 10 billion HUF will be earmarked for the support of general practitioners.

The new budget anticipates a healthy, balanced, growing economy, an economy that has recovered from the crisis. As the situation in Greece intensifies and as other turbulences come and go, Hungary may rest much more easily than in 2008 because we pursued a different path and because 2014’s growth and other macroeconomic indicators afford us some stability.