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Public funds to private pockets


Limiting competition

Thirty years ago Hungary rejected the party-state and planned economy in the hope of democracy and material prosperity. The overwhelming majority of Hungarian society supported the move to a free-market economy, in which it is not the party in power that decides on business matters or company policies. In the early years of the change of regime the institutions of the European market economy were established anew; privatisation and the removal of obstacles to private enterprise ended state control over property. This great transformation shook society, but within the ranks of countries in similar circumstances Hungary was considered a leading success story in terms of progress in privatisation, foreign direct investment and the numbers of new enterprises established in the first decade after 1989.

Today, however, Hungary’s former economic advantage over its neighbours has been lost. In Central and Eastern Europe it is in Hungary that foreign-owned companies have the largest proportion of economic activity, but this is a sign not of the strength of our national economy but rather of the weak state of domestically-owned enterprises. Among the Visegrád group, Hungary is today ranked fourth, i.e. last place on the basis of per capita GDP. Similarly, the country has plummeted in the rankings for international competitiveness, and perceptions of corruption.

No state is free from financial abuse, crime and corruption, not even within the exemplary countries of Western Europe. But the use of public funds in Hungary has further worsened; the unique behaviour of state power has made conditions severe. A series of government measures since 2010 have restricted economic competition by means of extending official regulations and declaring certain otherwise everyday business affairs to be of “national strategic importance”. The government has signed special agreements, the contents of which have not been disclosed, with certain large companies. While most Hungarian enterprises, big and small, are weighed down with a huge administrative burden and a great many tax obligations, the government gives special ‘friendly’ treatment to favoured companies, often granting them generous state support. Meanwhile, citing the critical state of the economy, special taxes have been placed on certain sectors; and gradual reductions to these burdens are made, predicated on good relations being kept with the government. All of these measures act in opposition to the norms of stable, decent business activity.

Another characteristic of the regime is the practice of a narrow group of politicians making decisions involving large sums of money, without any kind of supervision, as, for example, in the case of granting residence permits (effectively a form of ‘golden passport’ valid for the entire European Union) in return for the large-scale purchase of state bonds. Opaque international agreements are made without any real professional or political discussion, leaving behind enormous future obligations. Perhaps the most infamous example is for the expansion of the Russian-built nuclear power station in Paks, central Hungary, utilising a huge Russian loan. Another is the Chinese-financed construction of an express railway line between Budapest and Belgrade. The government claims international precedents for all these interventions, meanwhile justifying its actions with reference to the difficult economic climate, the lack of competitiveness, or the excessive presence of foreign capital. While each of these interventions includes methods that may have been employed in other countries, nowhere are they all used simultaneously. The present-day practices of the Hungarian government are certainly unique for an EU-member state.


The siphoning off of public funds

What is particularly disturbing is the disappearance of public funds. The Hungarian authorities do not take any real action against the abuse of public procurements or against overpricing for services rendered. Prosecutors and the police do nothing in the face of the sudden enrichment of those close to cliques in power and the obvious violation of the norms of proper competition. The government camp regularly refers back to previous corruption scandals, yet no prosecutions have been initiated. State media keeps current corruption issues at arm’s length from the public.

 Government-friendly opinion makers claim that malpractices do not amount to corruption; this is simply “consolidation of wealth” and it serves to strengthen the Hungarian entrepreneurial class. This ideology is both mistaken and dangerous. We were witness to the fast rise of certain entrepreneurs close to the corridors of power under previous administrations, but these companies with purses swollen by Hungarian taxpayers’ money shrivel according to political whim, as happened to the empire of legendary Fidesz oligarch Lajos Simicska after he fell out of favour. Those citing this ‘patriotic economic policy’ should be aware that entrepreneurs who become rich from political connections do not tend to be successful when faced with the conditions of real competition; indeed, companies bolstered with public funds often require further injections of public money to survive.

The situation in Hungary has by now come to the attention of the outside world. Meanwhile Hungarian businesses have experienced at first-hand how Orbán’s childhood friend Lőrinc Mészáros, his son-in-law István Tiborcz and a handful of other individuals enjoying political favour have acquired fantastic riches. Those suddenly achieving such wealth from both Hungarian taxpayers’ money and EU funds intended to assist Hungary’s convergence, did not earn their stripes through innovation or by creating value. On the contrary, behind their rise one can identify losses suffered by other, more efficient entrepreneurs – both Hungarians and foreigners – who have been squeezed out of business. We could see this during the scandal of 2013, when the government created a new, state monopoly of tobacconist shops: licences to sell tobacco were taken away from all retail outlets, from supermarkets and small Hungarian business owners, and handed over to those enjoying political favour. Similarly, the sale and transfer of ownership of Hungary’s agricultural lands was also dependent on political connections, with no heed paid to competitiveness or the interests pertaining to the development of ordinary local farmers.

Practices such as these are grossly unfair. They also ruin the long term efficiency of the Hungarian economy and destroy its potential for innovation. When public opinion in those EU countries which are net contributors to the EU budget is becoming less and less inclined to support the recipient member states, news of such flagrant abuses could greatly weaken Hungary’s future negotiating positions in shaping the next Multiannual Financial Framework of the EU for 2021-2027. The negative effects of such blatant, widespread corruption on the career choices of the next generation is another concern for genuinely patriotic Hungarians.


Economic power in government hands

The Orbán government has concentrated economic power to a degree that is unprecedented in a market economy. The size of the country’s public finances is already extensive: of the newer EU member-states, Hungary has the highest percentage of public income collected in the form of taxes, levies, contributions and duties. Hungary also has the highest proportion of public expenditure relative to GDP. This excessive state presence would be an issue even if the taxation system were efficient and transparent, and the enormous level of expenditure were satisfactorily overseen by the Hungarian Parliament and public opinion. Tragically, neither is the case.

Hungarians’ everyday experience is borne out by international evaluations of the country’s system of public finance: there are many problems with the collection and spending of public funds as these processes are not transparent. The latest laws on the use of public funds give the government, which essentially means the person of the prime minister, a broad canvas for the making of decisions. The various items of public income and expenditure pass through the parliament with no genuine political deliberation or independent expert opinion being sought. The parliamentary majority displays a striking lack of interest in both the way public funds are spent and how public property is withdrawn from the oversight of parliament, whether through foundations or other means, e.g. via the activities financed with the profits of the Hungarian National Bank.

In similar vein, the Hungarian Parliament has repeatedly made decisions affecting entire industrial sectors – and the broader public – shorn of any meaningful debate, and without any consultation, as prescribed by law and needed for informed decision making. Preliminary consultations with EU institutions, such as the European Commission and European Central Bank, have also often been lacking. But it is not only with outside organisations that the government behaves in this way: time after time regarding important issues, the government rides roughshod over those directly involved, ignoring the likes of social partners (trade unions, alliances of employers), civic groups and academics as it forces through its will. Inevitably, this has a detrimental effect on the quality of economic legislation. Numerous corrective amendments to hastily passed legislative acts become necessary, but such practices weaken the nature of the rule of law and undermine the environment for business planning. This erratic government practice is one of the reasons why Hungary’s international credit rating is below what its economy would otherwise justify; while its sovereign rating has been upgraded in recent years, it is still below those of the other Visegrád countries.


An unsustainable path of development

Hungary’s good macroeconomic figures are often mentioned as a counter-argument to the problems listed above, as if such criticisms could only be motivated by political bias or a lack of knowledge. There is no doubt that the Hungarian economy has left the 2008-2009 crisis behind, and that – as part of the East-Central European region – it has profited a great deal from the favourable European economic situation, from FDI inflow, and in particular from EU funds. Thanks to these tens of billions of euros and trade surplus, Hungary’s external financial vulnerability has indeed been reduced. The budget deficit has for years been within EU limits, and the national debt relative to GDP, the highest in our region, is also acceptable. Hungary’s GDP has been growing quickly for the last couple of years, but it is no secret that the sources of this growth include favourable external factors that cannot be counted on in the long term.

Hungary’s economic performance is nothing like as rosy if we compare it to that of the three other Visegrád countries. This is the most reasonable comparison; it is of less use to compare Hungary’s current growth to that of advanced western countries. But even the most favourable macroeconomic indicators cannot sweep aside the serious concerns about the economic regime that has developed in Hungary, concerns that relate not only to the current growth figures. Due to the poor performance of the state and the declining standard of public services, the Hungarian economy is steadily drifting towards the periphery of Europe. In many respects, the demand for products, the quality of investments and employment bear the hallmarks of the periphery. The wage level is light years away from that of neighbouring Austria. High value-added investments are less eager to enter Hungary than before. Hungary’s main manufacturing sector is automotive assembly, involving multiple risk factors. This sector may become one of the first victims of a turnaround in economic growth: production lines can be closed or relocated. Assembly wages are suppressed, research, development and marketing takes place at centres in other countries; meanwhile the product itself is undergoing transformation, with the arrival of electric cars and self-driving vehicles. But the greatest problem is that Hungary has found itself on a path that diverges sharply from the direction set by social consensus at the time of the regime change, a path that distances the country from its fellow nations in Europe, and a path that is economically unsustainable.

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