Monday, 9 April 2012

Abby Innes on Hungary: Viktor Orbán goes for broke (2)

Dr Abby Innes of the LSE, continuing & the cross post from the LSE's own blog. With grateful thanks.

How did it come to this? Coming out of the gradually reforming system of ‘goulash communism’ Hungarian governments tried the longest of the EU10’s frontrunners to hedge the region’s emerging market pressures after 1989, and so administrations of all stripes (including Fidesz) ran competitive (i.e. low) personal income and corporate tax rates to attract FDI while trying to maintain spending on welfare and skills formation. The result was relatively low inequality for this region but an increasingly crippling tax burden on employers, inducing what Esping Andersen has elsewhere dubbed the ‘death spiral’ scenario of low employment and lowered tax contributions requiring high payroll contributions to support the remaining welfare system, which further lowers employment, stunting growth, increasing pressures on welfare... Even after entitlements were reduced the spiralling costs of cash transfers in Hungary increasingly crowded out resources the economy needed to retain its competitive edge, as their low wage advantage ebbed away and the relatively portable FDI which Hungary primarily attracted moved eastward. This developmental bind duly put the country’s main free marketers, the born-again Blairite (reform communist) Hungarian Socialist Party into a near impossible electoral position: hence the fiscal make-believe of 2006. (In fact the leaked 2006 speech of the Socialist Prime Minister, Ferenc Gyurcsany is most striking for its honesty regarding the brutal character of Hungary’s realistic economic choices – along with prodigious levels of swearing.) Orban’s solution was to insist that the emerging market dilemmas that are structural to a population with European expectations of social cohesion are solely the product of ‘communist’ corruption and networking. This accusation duly proved more electorally successful than promises of further belt-tightening in a country that had already endured the complete opening of the economy to foreign investors, steeply rising welfare and employment insecurity for twenty years and steadily rising unemployment for the most recent ten. But the belt-tightening has come anyway – as, short of a simultaneous reconfiguration of global capitalism - it had to.

In government Fidesz adopted an incoherent ‘growth’ strategy that liberalised on the one hand, slashing employment and unemployment protections, for example, even as it politicised the Central Bank, the State Audit Office and the Fiscal Council, and by now their programme is reduced to chaotic acts of fire-fighting. Orban favoured those on a higher income with a flat-rate personal income tax of 16% in 2011 even as welfare cuts flattened demand among those on lower incomes (with a higher propensity to consume) but his government reacted to the subsequent decline in tax revenues with an increase in the employer social security contributions they had pledged to cut, a raise in VAT to a massive 27% and a hike in the minimum wage by 19%, none of which will improve demand or increase employment. These measures come in the context of an increasing inability to raise finance either from financial markets or from the IMF or the EU, with which the government is at loggerheads, even as Hungary teeters on the brink of a sovereign debt default.

[concluded in next post]

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