War in Ukraine will damage Hungary’s economy, but it remains a model to emulate
With many countries across Europe likely to take a sizeable economic hit as the fallout from the Russia-Ukraine war continues, Gursimran Hans writes that Hungary's economy should be seen as a blueprint for those wanting to ensure strong recovery.
Events in Ukraine put everything into perspective. No-one can know the full implications at this early stage, but the economic impacts on the countries closest to Ukraine are already being keenly felt. In Hungary, the Forint and the stock market have fallen sharply. Constricted energy supplies and sizable refugee flows will pose further challenges.
From an economic perspective, the timing of Russia's invasion is cruel. It is ironic that one of the country's bouncing back the strongest from the pandemic – Hungary – has a sizable land border with Ukraine and a large population of citizens living inside the country. As the war escalates, tens of thousands will flee to Hungary, and be welcomed there.
Hungary's response is confounding critics who accused Prime Minister Viktor Orbán of siding with Vladimir Putin over his EU partners. This has been shown to be nonsense. The Hungarian people know a thing or two about Russian authoritarian expansionism. Their economic interests will be hit harder than western economies, but it is a price they are willing to pay.
In happier times, Orbán's prescription for national renewal could have been a model for a post-oligarchic Ukraine, given the geography and the neighbours they share. But it is also a model that some EU countries, and even the UK, would do well to emulate. Hungary's economic performance has been stellar.
When Orbán began his second spell as Prime Minister in 2011, the country was reeling from the global financial crisis. The economy had shrunk by 6.8 per cent in 2009 alone. In the EU, only Finland, Ireland and Slovenia experienced steeper slumps. In response, Budapest implemented what was euphemistically called an 'unorthodox' economic and fiscal policy, subsequently 'Orbánomics'.
The political context was important. Orbán had taken over from a governing socialist party that had borrowed wildly to prop up the economy. As a result, the country was in hock to the International Monetary Fund. For Orbán, this was both economically unpalatable and politically unacceptable.
He administered a form of economic shock therapy. Private pension schemes were nationalised, VAT was initially increased before being reduced from the mid 2010s onwards. Flat corporation and personal taxes were introduced (of nine per cent and 16 per cent respectively). Conversely, aggressive 'mega-taxes' were slapped on banks, telecoms and utility companies, most of them foreign.
Orbán also required banks to pay 3 billion euros (£2.5 billion) in compensation to borrowers who had taken out fixed rate foreign currency mortgages under the previous administration. He combined tax policies that were 'Thatcherite' on the one hand and 'big state interventionist' on the other. Foreign ownership in the banking, media and energy sectors is now below 50 per cent.
Orbán took particular aim at the IMF. He ignored its dictats and chose to raise revenues his own way. By 2013, Hungary had paid off the Fund's 20 billion euro bailout programme and shut down its Budapest office. One might see this as a provocative, but it has paid off.
Reducing the national debt was totemic for Orbán. He even wrote debt reduction into the country's constitution. The results speak for themselves. In the three years to 2020, Hungary's deficit was consistently below the EU's three per cent threshold. In comparison, according to Eurostat, in 2019 Euro area governments ran average deficits of 6.6 per cent.
Hungary is now the kind of low deficit, low tax haven that Thatcherites dream of. The country has the lowest corporation tax rate inside the EU. Only Bulgaria and Romania have lower personal taxes. Unemployment is 3.8 per cent compared with an EU average of 6.5 per cent. Astonishingly, there are one million more people in work in Hungary than there were in 2011.
Other aspects of Orbán's national reform programme have been harshly criticised inside and outside Hungary. But current polling suggests his Fidesz and Christian Democrat coalition is on track for a fourth consecutive victory in parliamentary elections on 4 April. Such a result would be an indicator of how Hungarians feel about the impact of Orbánomics on their lives.
Hungary's critics point to fears of inflation and the balance of trade. But Orbánomics has consistently proved its critics wrong, so perhaps there is something to learn from it. The similarly eponymous 'Reaganomics' succeeded in shaping political discourse in the US for three decades, with those who benefited still tending to vote Republican to this day.
The appalling situation in Ukraine will inevitably put a large spanner in the economic works for all European countries, but Orbánomics has equipped Hungary with the power to bounce back quickly when the time comes. It is a model many would do well to emulate. The UK and its European neighbours should take note.
