At least superficially, yesterday’s keynote speech to Parliament by Prime Minister Ferenc Gyurcsány was music to the ears of Hungary’s increasingly disheartened entrepreneurs, investors, or anyone who believes the country’s future lies in a more business-friendly environment. In addition to reiterating his government’s plans to cut taxes by at least Ft 200 billion (€760 million) next year – and saying it was his “primary target” to boost job growth by easing the country’s suffocating taxes on labor – he unveiled a new “ownership proposal” that would see the distribution of billions of forints worth of shares in companies currently held by the state to individuals.
But like many such well-publicized speeches, there is more – and less – than meets the eye. And in the case of this speech, whatever survives the uncertain journey from words to action may do little to help the country out of its rut.
You Call These Tax Cuts?
First, on the matter of taxes, the Ft 200 billion figure is nothing new, and Finance Minister János Veres and others have for months been talking up the need for – and possibility of – cuts to the pension contributions and other levies on labor that often leave employers paying 200% of an employee’s wage to the government. It is also not likely enough to reverse the now deeply-ingrained habit in Hungary of focusing as much on how to skirt such taxes – or to benefit from them – as how to actually create value.
Overall, with taxes in some other countries in the region now a fraction of Hungary’s – Slovakia is only the most depressing example – it will take much more than Ft 200 billion to convince even Hungarians that the country is worth investing or even living in, or to raise the medium-term growth rate above the current 1%-2%.
The problem, however, is that the government currently has little leeway to cut taxes to the degree necessary to meaningfully encourage legal employment, or significant investment. Though the massive 10% fiscal gap of 2006 was pared to a more manageable 5.7% last year, and looks set to fall below 5% this year, in order for the country to meet its “euro convergence” plan, this figure will need to drop to roughly 3% in 2009 and 2010. Meanwhile, inflation – which stood at an annual 7.1 percent in January – remains the highest in the EU.
Because of this, and the fact that Hungary’s credibility in international markets is “thin,” any move to significantly cut taxes without corresponding cuts on the expenditure side could lead to a nightmare scenario in which a “run” on forint-denominated assets (and thus the forint) leaves both the state and Hungarian households saddled with suddenly dearer forex loans, and domestic consumption simply collapses. (What little growth exists today is mostly export-driven.)
Yet it is hard to envision the government making the kinds of spending cuts necessary to “finance” anything but cosmetic tax cuts, as pledges to Brussels to trim the fiscal gap to 3% correspond neatly with the run-up to the next scheduled general election. And in his speech, Gyurcsány more or less pledged that no such spending cuts would take place in this period, saying that no more “difficult decisions” are expected in the “upcoming period.” (See related story on Politics.hu about the political issues raised by the speech.)
Buy These Stocks Cheap!
The other main element of the speech was the introduction of what is being called the government’s “ownership proposal,” basically a plan to offer shares in certain companies with public ownership to individual investors.
As with taxes, Gyurcsány’s words about the proposal were fine, though more or less a rehash of what you hear from politicians throughout the west about the benefits of an “ownership society.” But if anything, the substance of the scheme is even more disappointing.
For one thing, he did not even mention by name any of the companies likely to be involved, only saying that such names would be forthcoming in the next few weeks. This would seem to suggest that the proposal was rather hastily put together, that the government is mostly interested in a “multi-day” story that can distract attention from the upcoming referendum on March 9, or (as is likely the case) both. Either way, the list of potential companies isn’t so long that it is difficult to imagine which ones would be involved; analysts quickly suggested national electricity grid operator MVM, postal carrier Magyar Posta, gambling quasi-monopolist Szerencsejáték Zrt, and perhaps the national motorway company and some commercial components of rail operator MAV.
While some finance professionals cheered the proposal, on the grounds that any injection of additional household savings into such shares would give local capital markets a nice boost, the concept was met with scorn by many analysts.
For one thing, Gyurcsány made it clear that it would be far from a “straight” sale of equity in firm, and would instead be focused on offering tax allowances, easy payment terms and some kind of discount for individual buyers. Thus, what at first blush might seem a move to cut the state’s role in the economy would likely turn into another complex scheme to channel benefits to the country’s already cosseted but red-tape-bound middle class. One critic said it was like “throwing wads of money to people from a plane,” and others warned that it would signal to (already jittery) markets that the government was now shifting its posture from fiscal discipline to populism.
Meanwhile, the history of privatization schemes in which small block of shares in state-run or influenced firms are distributed to individuals at a deep discount is patchy at best, having led most memorably to the Czech voucher scandal of the 1990s. (A calamity that Hungary avoided by selling most such companies directly to qualified investors, causing the export boom which continues to keep the company afloat.) But even if the process turns out not to be rigged or corrupt – or not to happen at all – one must ask: with things going the way they are, why should Hungarians want to invest any more than they already have in Hungary?