HUNGARY: The new right

15/05/2010 | Kester Eddy

Hungary’s incoming prime minister Viktor Orban’s strident right-wing tone may be more rhetoric than action – at least initially

From early morning till late at night, unending processions of yellow trams, blue buses and general traffic roar, whirr and squeal their passage around Moszkva ter – the busy terminal and junction that feeds the western half of Budapest. Meanwhile underground, Soviet-era metro trains suck in and disgorge as many as 400 passengers per minute.

It may not be Tokyo. But foreign visitors invariably praise BKV, Budapest Transport, for its efficiency.

Ask the opinion of a local, however, and the answer is often diametrically opposite. “BKV? It’s bad,” says Janos Kovacs, a retired theatre technician, asked at random in the middle of this hubbub. Kovacs’s immediate comment is not about the service but about the BKV managers under investigation for embezzling millions of forint. “Let’s face it, half the management are in prison, or under investigation,” Kovacs says.

Indeed, it is bad: one scam involves an alleged multi-million forint severance package for a senior manageress who continued in her position at the company. “Nobody, except the police, knows how much money is involved,” says Gabor Demszky, mayor of Budapest, and as such the person ultimately responsible for the BKV, admitted this spring.

But the BKV scandals are only the latest in a series of alleged high-value rip-offs at state-owned companies and institutions.

Public disgust led to a massive swing to the right in last month’s general elections and an overwhelming victory for Fidesz, the centre-right party led by one-time anti-Communist student activist Viktor Orban.

The Socialists came a poor second, with Jobbik, a far-right party entering parliament for the first time, a close third. “The public clearly associated the Socialists with these scandals; it damaged them a lot,” says Csaba Toth, the strategic director of Republikon Intezet, a liberal-leaning political think tank.

Armed with such political ammunition – plus the continual denunciation of Socialist claims to have put the Hungarian economy back on a sustainable basis – Orban achieved an unprecedented victory in the elections, amassing 263 of the 386 seats in parliament, a massive 68% majority.

The Socialists trailed with a mere 59 seats (or 15%), while Jobbik, the radical-right new entrant, closed third with 47 seats (12%). The success of the green LMP, with 16 seats (4%), was put down to the power of the protest vote. There is one independent, a Jobbik sympathizer.

Orban has promised to clean up public life, bolster law and order, and boost the economy by reducing taxes, streamlining bureaucracy and creating new jobs.

DIFFICULT TIMES

The need to create growth is clear: Hungary has been hit hard by the recession. Exports of cars and other manufactured goods – a pillar of the economy – slumped from September 2008. Because of worries over Hungary’s ability to manage both the budget deficit and its debt (at around 80% of GDP), the central bank felt compelled to raise the base rate to 11.5% while the government secured a standby loan with the IMF for E20 million.

Despite these moves the currency lost almost a third of its value within six months, bottoming out in March last year at around Ft317/E.

Since then, tough austerity measures, including tax hikes and cuts in pensions, have brought stability; the economic slide has been halted (growth is projected at 0% this year) while the budget deficit – a principal concern for the IMF – came in fractionally above target at 4.0% last year. Meanwhile, the forint has recovered to Ft265/E; the base rate has been successively trimmed to 5.25%, the lowest level since the change of regime in 1990.

All this came at a cost, however: the economy contracted by 6.3% in 2009, and despite government support to maintain jobs, unemployment has climbed to 11.4%, a level not seen since 1994.

Fidesz pounced on these types of statistics to press his political advantage in the campaign. “Unemployment is at a 16-year negative record. As for the 3.8% budget deficit target, that is a lie. The base rate is now at 5.5% [as was], but we said it should have been put there 18 months ago, to save Hungarian SMEs [small and medium enterprises] and jobs,” Peter Szijjarto, Fidesz chief-of-staff, said recently.

Professional observers sift through such rhetoric with care. Most accept that the budget deficit will exceed the target, though this is partly due to fierce Fidesz opposition thwarting a number of measures, which has eroded budget revenues – including a planned property tax, which was ultimately declared unconstitutional.

“The deficit target will definitely be missed, but as for dropping the base rate 18 months ago, it means they don’t understand how the markets work,” says Zoltan Torok, head of research at Raiffeisen Bank, Hungary.

Fidesz’s promise to cut taxes while boosting jobs naturally adds to concerns that the budget deficit will be further off target – although most analysts say that economic realities will restrict the new government to more symbolic moves, at least initially.

“As Hungary is still in the IMF programme, we expect the new government first to agree with the IMF on a new – upwardly revised – 2010 deficit target. As for tax cuts, initially they may reduce the VAT on some food items, with a very gradual cutting scheme from 2011,” says Torok.

Fidesz’s resounding victory has one additional ramification: by winning more than two-thirds of parliamentary seats, Orban can modify the constitution. Indeed, he has pledged to reform Hungary’s bloated political circles, cutting by half the number of MPs and local councillors – a move that should make significant budgetary savings.

More ominously, Fidesz’s criticism of the central bank has raised concerns that governor Andras Simor could be targeted for removal. “They would like to get rid of Governor Simor,” says Torok. “But actually it’s not possible. I can imagine that Fidesz will be loud in verbal attacks, and make some institutional changes. It will sour the taste for investors in Hungary, but nothing more,” he says.

So what of the promised cuts in tax and bureaucracy to support the real economy? Such moves are critical to support small and medium-sized businesses, particularly at a time when many companies are struggling with late payments from suppliers.

James Kinnell, managing director at King Sturge, a property consultancy in Budapest, says recent measures initiated by the outgoing government, including a reduction of payroll taxes by 5%, have helped, but that further reform is vital.

“The only way Hungary can improve international business activity is by having a more transparent and simple tax, legal and economic system,” he says.

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