focusing Political background Sectoral policy Public opinion poll Economy 2013/2 October More on Századvég The Hungarian model in Europe

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1 A l a p í t v á n y századvég foundation focusing on hungary 2013/2 October You are reading the monthly bulletin of Századvég Foundation, Focusing on Hungary. Through this monthly bulletin Századvég aims to contribute to a deeper understanding of Hungarian political and economic processes. We are dedicated to providing reliable and accurate information on various issues relating to Hungarian politics and economics: this information may be used in everyday or strategic decisions of current and future investors, foreign political or economic decision makers, analysts, academics, diplomats or media correspondents. Political background The Hungarian model in Europe Sectoral policy On the reduction of utility tariffs Public opinion poll Strengthened governing parties, less undecided Economy Inflation and the base rate of interest have sunk to a record low The Funding for Growth Scheme of the Hungarian National Bank (MNB) will finance significantly more projects than expected More on Századvég Századvég School of Politics Foundation 1037 Budapest, Hidegkuti Nándor utca Republic of Hungary editor: Gábor G. Fodor, political director for comments and suggestions please contact: Dr. Orsolya Pacsay Tomassich, director of foreign policy at bulletin@szazadveg.hu 1

2 Political background The Hungarian model in Europe For three years now, Europe has been telling Hungarians: It s not the right way of doing things. While the EU, undergoing a crisis, which was partly provoked by its own mismanagement, still insists on old tools of crisis management. The Hungarian solutions, however seems to have stood the test of time. While the EU would punish Hungarian crisis management with repeated infringement proceedings, double standard and a Tavares Report, the Hungarian solutions are being adopted by several European countries. The Czech Republic is now on its way to cut utility bills. In addition to coming out with the idea of freezing utility bills, even the disbursement of benefits is subject to public work in the UK. Windfall taxes have been imposed in France and Slovakia in order to ensure a fairer distribution of the payment of public dues. In September this year, Poland adopted a decision that payment into private pension funds would no longer be compulsory. All that proves that while there s still a lot to be done in Hungary, results of the chosen solutions are already showing. To bring just one example: the Orbán government said that there was a need for a change to a work-based society and that everyone must be led back to the world of labour as much as possible. Figures have shown that the direction is good and the results are visible. According to information by the Statistical Office, the number of active workers has not been this high since 1992 in Hungary. The number of taxpayers in Hungary has risen to almost four million. Indeed, while the rate of unemployment has been around 11 percent in the whole of the EU, it is now below 10 percent in Hungary. The number of the unemployed has decreased by about 70,000 in six months. Following the Action Plan for the Protection of Jobs, the government has also launched a number of programmes aiming at the creation of new jobs. 2

3 Sectoral policy On the reduction of utility tariffs The drastic increase of utility tariffs is closely linked to the privatisation practices of the socialist governments in the energy and utilities sectors. While utility providers generated a substantial profit even during the years of crisis, Hungarian families were paying one of the highest utility charges in Europe compared to their salaries. This was the situation the second Orbán government intended to change in the spirit of fair distribution of public dues. This goal is served by the government s plan to turn utility services into a nonprofit industry. In Hungary, on 1 January 2013, the retail tariffs of district heating, natural gas and electric energy decreased by 10 percent from the prices at the end of 2012, whereas a new 11.1 percent reduction is intended by the government from 1 November. (see figure below on domestic electricity prices on purchasing power parity indicating Hungary before and after the first retail tariff cut, and after the second tariff cut ) 35 Domestic electricity prices in PPS, all taxes included (first half of 2013) (PPS)/100kWh CZ CY DE PT HU SK MT ES RO PL IE HU DK SI HU LT AT BE BG IT LV EE UK SE EL FI LU FR NL 2012 jan 1 nov 1 3

4 The reduction of utility tariffs, affecting about 4 million households, is provided for in the NFM (Ministry of National Development) December No 78/2012 (XII. 22.) on the amendment of certain ministerial decrees related to the regulation of energy prices. According to government communication, since their privatisation in 1995, public utility companies have generated an annual profit of 20 percent on average, which means that they have recovered 3.5 times their initial investment. Opponents of the tariff cuts have argued that these measures prejudice the security of supply as the government makes the position of public utility companies untenable. However, the arguments of the opposition, most sharply criticising the measure, is rather controversial: they claim that while the reduction of tariffs distorts competition, its rate of 10 percent is still insufficient. Based on the increase of the forint value of the arrears from 2012 to 2013 and the increase of the number of consumers in arrears with the payment of their utility bills during the same period and, most importantly, on the international comparison of energy carriers on a purchasing power standard (PPS) basis, it is declared that both the tariff cuts so far and further tariff cuts are justified, and that international and domestic circumstances require that the battle against utility costs should be continued. The National Assembly approved a political statement on defending reductions of utility bills on 21 October. It was initiated by the parliamentary group of the ruling Fidesz in response to the pressure by the EU bureaucracy to amend the related legislation. The European Commission had sent a letter to the government asking for information about utility fee cuts, and propounding the possibility of an infringement procedure. Fidesz is consulting the government on the possible ways of enshrining reduction of tariffs in the Fundamental Law of Hungary. Socialist MPs meanwhile submitted an amendment proposal to the constitution. According to their proposal, the Fundamental Law should state that a law can ensure discounts in using public services depending on the household s income situation. International environment: Hungary one of the most expensive countries among the EU 27 The high rate of housing maintenance costs is an issue affecting the whole of Europe. In Hungary, however, the high costs of housing maintenance services have represented an even graver social problem for the population than in most other European countries. According to Eurostat statistics, while the rate of overdue public utility fees is 6 percent in the more advanced countries of the European Union, in Hungary, the proportion of people in default with their fees was 23.9 percent in 2011 (affecting app. 759,000 households), i.e. nearly one in four persons had problems paying 4

5 their public utility bills. According to the NFM, for 50 percent of families, utility costs exceed 50 percent of the costs of subsistence, while for 20 percent, the rate is even higher than that. According to 2011 statistical data of the Hungarian electric power system, as well as on the basis of data published by Eurostat, based on the average retail price of electric energy, including taxes (EUR/ kwh), Hungary is in the middle rank among EU member states. The Eurostat has also examined the percentage of the cost of energy and water in the budget of households. According to the latter study, in Hungary, these costs accounted for 21 percent in 2011, which again puts us in the middle rank of EU member states. On a proportionate basis, the highest rate (30%) was paid by Danish, whereas the lowest rate (12%) was paid by Maltese households on public utility charges. It could, however, be far more important to study the burden the costs of utilities impose on households in comparison with salaries and the value of money. According to the latest Eurostat data, at the end of 2012, households in EU member states paid 6.6 percent and 10.3 percent more for a unit of electric energy and gas, respectively, than a year before. These figures alone, however, do not tell to what extent such increase has burdened households of a different income situation in different countries. Therefore, in order to enable the comparability of the data, the figures of each country are also published by Eurostat on a purchasing power standard (PPS) basis. The PPS is an artificial currency calculated on the basis of various elements of the GDP. According to data at the end of 2012, i.e. prior to the tariff cuts, in the EU 27 member states, 19.7 pps were paid for 100 kilowatt-hours of electric energy on average. On the list based on purchasing power standard, Hungary was the fifth most expensive country after Czech Republic, Cyprus, Germany and Portugal. Now, after the tariff cuts, Hungary is number 13 among the 27. As far as gas prices are concerned, the average price of the EU 27 for 100 kilowatt-hours of gas is 7.2 pps. The order of costliness can be set up on that basis, too: gas is cheapest in Luxembourg (4.9 pps/100 kwh) and the most expensive in Bulgaria (12.3 pps/100 kwh). On a purchasing power standard basis, Hungary is among the countries paying the most for gas, too (10.4 pps/100 kwh). 5

6 Public opinion poll Strengthened governing parties, less undecided Party preferences September 2% 2% 4% 1% 2% 3% 6% 1% Fidesz KDNP MSZP Jobbik LMP DK Together 2014 PM Other Undecided 8% 13% 42% 28% Entire population 14% 23% 51% Decided voters who have clear party preferences Party preferences among the entire population (%) Fidesz KDNP MSZP 15 Jobbik LMP 10 DK Together 2014 PM 5 Other Undecided 0 July Aug Sep Oct Nov Dec Jan Mar May June Oct Dec Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June Aug Sep Methodology of the research: Századvég conducted a survey of public opinion by telephone interviews between September 25 and , on a sample of 1000 adult responders (with CATI method). The results of the sample may differ ± 3,2 percentage points to what would have been found if the entire population was interviewed. 6

7 Economy The Funding for Growth Scheme of the Hungarian National Bank (MNB) will finance significantly more projects than expected The opportunity is due to the SME sector on the account that it has remained the biggest employer by far: the foreign-owned sector employs 640,000 as opposed to the 2.5 million employees of Hungarian businesses In order to understand the goals of the MNB s Funding for Growth Scheme, one must be familiar with the dual structure of the Hungarian economy. By 1996, economic transformation led to a structure where the sector in the majority ownership of foreigners has enjoyed substantial tax reliefs, while its profitability and the value of its assets have been, respectively, twice and three times as high as those of businesses owned by Hungarians. Such dual economic structure has gone hand in hand with a dual taxation structure: while the total tax burden of major foreign-owned companies has been in the range of 10 to 18 percent as the average of several years, Hungarian SMEs have faced tax liabilities of 50.6% according to calculations by the OECD. Their low asset value and high tax liabilities have been an obstacle of growth to SMEs. Obviously, banks will treat them as higher-risk customers and charge higher interests rates in return for financing their operation and investments. The MNB s Funding for Growth Scheme therefore aims to level off the field currently inclining in favour of large corporations. The opportunity is due to the SME sector on the account that it has remained the biggest employer by far: the foreign-owned sector employs 640,000 as opposed to the 2.5 million employees of Hungarian businesses. These were the reasons why the Funding for Growth Scheme (FGS) was launched by the new management of the MNB in June 2013 in order to increase the chances of the SME sector. Under the programme, the MNB provides zero-interest funding to banks which are allowed to pass it on to SMEs at a maximum charge of 2.5 percent. A credit line of HUF 750 billion was available during the first summer phase. 56% of that amount (HUF 425 billion) was available for the placement of new loans (pillar I), while HUF 325 billion could be used to replace earlier loans (pillar II). Of the loans disbursed as part of the first pillar, nearly 50 percent were used for investments while the other half was used for current asset financing. 7

8 While the terms of lending have remained the same in the second phase beginning in October, 90% of the available amount of HUF 2,000 billion must be used for new loans, leaving 10% for loan replacement. According to the estimates of Századvég s Economic Research Institute (Századvég Gazdaságkutató Zrt) in 2014, the second phase may increase investments by app. HUF 500 billion, net of VAT, which will in turn increase the level of investments by 7 8%. Because of the substantial import content of projects, however, this growth will not fully appear in the GDP. Our analysts expect that the impact of the scheme on the GDP will be % during the first phase of the FGS and % in the second phase, assuming that the full available amount is utilised. Inflation and the base rate of interest have sunk to a record low Századvég Gazdaságkutató Zrt. expects the rate of inflation to be 1.8% and 2.7% respectively in 2013 and 2014 In autumn, the central bank has continued to cut the interest rate. The base rate of interest thus dropped to 3.6 percent by the end of September. According to the position of the Monetary Council, reaching the 3% inflation target can be ensured at an easier monetary policy. The situation of the real economy also points into the direction of interest rate cuts. In August, the rate of inflation dropped to 1.3%, the lowest point in decades, while the inflation rate adjusted for tax implications also fell under 2%. Both indicators are thus substantially below the 3 percent inflation target of the central bank. The historic low level of inflation has been the collective result of various factors. Since the growth of the Hungarian economy is below its potential level, the negative output gap has a price depression effect. While it would be beneficial if the government had the option to pursue a countercyclical economic policy in order to reduce the output gap, there is no such latitude as a result of the procyclical economic policy prior to the 2008 crisis. The government has therefore given priority to leaving the excessive deficit procedure, (the details mentioned in our previous Bulletin) counterbalancing the budget and, as a mediumterm target, reducing the state debt over taxation policy. While in the short term this has caused uncertainty, on the medium term the aim is to relieve the burden of businesses. The disinflation effect of the cutting of the price of utilities has significantly contributed to the low rate of inflation. Downward forces have to some extent been counterbalanced by cost shocks, for example other government measures (including the introduction of the e-toll and the increase of the profit margin on tobacco products) and the repeated increase of fuel prices. 8

9 Századvég Foundation Századvég Political School Foundation was established in 1993, as an articulation of the spirit of the young generation that actively participated in the regime change in Hungary. It started as a forum for social and economic thinking, first publishing journals, later books aimed at presenting the values of the progression in Hungary and analysing the patterns of development in Europe. The founding generation of Szazadvég as an intellectual workshop has played an important role in the transformation of our country to a democratic state respecting the rule of law and market economy. Our mission is Our goal is Our means are to develop and promote new policy ideas which assist the creation of public service-shaping agendas, supporting programs for a stronger society and a more dynamic economy. The authority and credibility of our research is our greatest asset. to participate in the education and training process of future policy makers at the highest professional levels to contribute to the spreading of democratic political culture, stability and sustainable development to assist civil society in self-organization and efficient representation to support new directions of research in social and political sciences to help the education of minorities beyond the political frontiers and young scholars activity by offering scholarships to promote public understanding and awareness of the issues recently in the spotlight Producing independent and rigorous analysis of regional and countryspecific challenges and formulating strategy ideas to decision-makers and policy-shapers on how these could best be tackled. Conducting research and analysing the political, social and economic changes in the country. Main research fields include macroeconomics, election studies, political campaign research, political risk analysis and forecast Conducting expert level dialogue, organizing conferences Publications of books, papers, journals, surveys Media appearances in print, radio, television 9