Orbanomics[1] is the name given to the economic policies of Hungarian prime minister Viktor Orbán and his government since it took power in 2010.
These policies are in reaction to the global economic crisis and the state of Hungary's economy in it. Instrumental in the invention and implementation of these policies was György Matolcsy, former Minister of National Economy and current Governor of the Hungarian National Bank.
History
After the 2010 parliamentary elections in Hungary, the newly elected Orbán government tried to negotiate an exemption from the strict European Union regulation setting a 3% limit on budget deficit. Since the request was declined, Hungary turned to taxation policies regarded as unorthodox by the international community to cover the deficit.
Policies and regulations
Approved reforms
Nationalisation of private pension funds
All private pension funds were abolished and nationalised which are estimated around $12,000,000,000 in total.
Taxation
Increased main VAT from 25% to 27% in 2012, while it decreased for certain products (meat, fish, chicken, eggs, internet, etc.) to 5% gradually from 2016-18;
Decreased all corporate profit taxes from 10-19% to 9% regardless of revenue (previously, there was a non-flat corporate profit tax);
Decreased payroll taxes paid on employee salaries by few percentages;
Introduced new taxes on banks (transactions, withdrawals, etc).
Base interest rate
Decreased base interest rate gradually from 5.25% to 0.9% until May 2016.[2]
Foreign currency denominated mortgages
“(The FX mortgage conversion) was one of many negative and controversial decisions from Budapest and many people still find their decision-making controversial. But you have to acknowledge that so far it has worked,” said Marcus Svedberg, chief economist at asset manager East Capital.[3]
Utility price cuts
A distinctive features of Orbanomics is the policy of utility price cuts, which aims to reduce the cost of living for Hungarian households by capping the prices of gas, electricity, and district heating. The policy was introduced in 2013, when the government ordered a 10% reduction in household energy prices, and was followed by further cuts in 2014 and 2015, resulting in a total decrease of 25%. The policy was popular among voters, as it helped to lower inflation and increase disposable income. The government also claimed that the policy was necessary to protect consumers from the excessive profits of foreign-owned energy companies.
However, the policy also faced criticism from various sources, such as the European Commission, the International Monetary Fund, and the Hungarian Energy and Public Utility Regulatory Authority. Some of the main critiques are:
The policy distorts the energy market and discourages investment and innovation in the sector. By imposing artificially low prices, the policy reduces the revenues and profits of energy companies, which may lead to lower quality of service, reduced maintenance, and delayed modernization. The policy also undermines the incentives for energy efficiency and renewable energy sources, which are more expensive than fossil fuels.
The policy is costly for the budget and unsustainable in the long term. The government has to compensate the energy companies for the difference between the market price and the regulated price, which amounts to hundreds of billions of forints per year. The policy also exposes the budget to external shocks, such as fluctuations in global energy prices or geopolitical tensions. For example, the 2022 Russian invasion of Ukraine caused a surge in gas prices, which forced the government to allocate an additional fund of HUF 670 billion (EUR 1.7 billion) to preserve the utility price caps in 2023.
The policy is not equitable or efficient in terms of social welfare. The policy benefits all households regardless of their income level or consumption pattern, which means that richer households and higher consumers receive a larger subsidy than poorer households and lower consumers. The policy also creates a cross-subsidy from businesses to households, as businesses have to pay higher prices than households for the same energy service. This may reduce the competitiveness and profitability of businesses, especially small and medium-sized enterprises.
Unemployment decrease
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Family policies
The Orbán government has implemented several policies intended to raise the birth rate and reduce the number of abortions and divorces.
In 2010, Hungary's birth rate was 1.25 children per woman in 2010 when Orbán first retook office, but by 2019 one year into his third term since his reelection it increased to 1.49 children per woman according to the World Bank.[4]
Orbán has claimed in the 2019 Hungarian State of the Nation speech that his family policies are a replacement for replacing a declining nation's population without immigration. [5]
Unapproved reforms
Internet tax reform
As part of its economical reforms, Fidesz started to draft the new version of the Tax Law for 2015. Minister of National Economy Mihály Varga announced the proposal on October 21.[6] According to the draft, Internet traffic would be taxed with a 150 Ft/GB rate irrespective of the type of data transmitted.[7] This resulted in 2014 Hungarian Internet tax protests and government dropped the idea of introducing this new tax.
Criticism
György Molnár, a workfare specialist at the Institute for Economics at the Hungarian Academy of Science, has argued the actual unemployment rate in Hungary was 7.3% instead of 4.2% in 2018, as close to 4% of the workforce participated in Hungary's workfare program where they actually barely work often for 1 or 2 hours a day and are paid $175 a month which is less than half of the minimum wage in Hungary. The New York Times also pointed to other issues such as increased corruption in Hungary, declining health care quality, and declining student achievement in reading, math and science as issues facing Hungary under Orbanomics. Factors outside of Hungary's control have also been used to explain part of the country's economic revival, such as EU funding constituting 4% of the country's GDP and global economic improvement.[8]
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