Economy
Non-partisan macro strategy, turnaround opportunity for Hungarian economy - CEMI
Fiscal adjustment without major growth sacrifices
CEMI said the state should be more efficient, taxes need to be reduced, employment should be boosted and economic policy must become more credible in order to put the Hungarian economy back into the top section of the region.
Members of the Advisory Board are László Csaba (Chair), Professor at the Central European University; Attila Chikán, Professor at the Corvinus University of Budapest; György Jaksity, Managing Director of Concorde Securities Ltd.; Zsigmond Járai, Governor of the National Bank of Hungary (NBH); and András Simor, President and CEO of Deloitte.
The project's central message is that overcoming the current imbalances and improving the rate of economic growth are not conflicting but mutually reinforcing goals - the latter requires the former. The right strategy can handle both the imbalances and the structural factors that hinder the full exploitation of the Hungary's growth potential.
After analysing the cases of Spain, Ireland, Finland, Sweden, and the United Kingdom, the authors of the study have come to the conclusion that in case of the current economic situation in Hungary, the inevitable budget deficit reduction can be accomplished without a substantial fall in GDP growth.
If the measures concerning the budget are carried out in the appropriate areas and are coupled with a comprehensive transformation that aims at enhancing effectiveness, they could provide a strong foundation for outstanding economic growth in the medium term. In order to achieve this, it is imperative that the effectiveness of the public sector, health services, education and labor policy should improve, while a sustainable pension system and a competitive tax system should be introduced.
The alternative solution is a set of measures based either upon the dramatic devaluation of the Hungarian forint or upon an inflation strategy which both would result in significant sacrifices in GDP growth, whereas neither would progress towards solving the structural problems of the economy.
Since during the last few years the Hungarian economy has functioned with permanently high twin-deficits, its indebtedness has deteriorated considerably. The debt-financed budget deficit has primarily been generated by the increase in consumption, not by that of investments.
Moreover, in the last few years, Hungary's GDP growth rate was among the lowest ones in the region. Even more important than these short and medium-term issues are those structural obstacles that have continuously hindered the Hungarian economy's ability to exploit its growth potential. The study devotes a considerable amount of attention to systematically explore these factors.
Structural problems
Some examples for these structural problems are as follows: Hungary's employment rate in the 15-64 age cohort is among of the lowest ones in the EU (56.3%), third only to Malta and Poland. The relatively low output growth level implied by the low employment rate is reduced further by the fact that the rate of public sector to private sector employees is exceedingly high (26%), one of the highest in the EU.
Moreover, the oversized state bureaucracy not only is a financial burden, but also acts as an active hindrance to corporate sector growth. Maintaining a large state bureaucracy while the employment rate is low can be financed only through heavy taxation. The latter, however, necessarily increases tax evasion. The high deficit and taxation, combined with low employment rate and GDP growth creates a trap. The best way out is a programme that focuses on deficit reduction and employment growth.
CEMI said the state should be more efficient, taxes need to be reduced, employment should be boosted and economic policy must become more credible in order to put the Hungarian economy back into the top section of the region.
Members of the Advisory Board are László Csaba (Chair), Professor at the Central European University; Attila Chikán, Professor at the Corvinus University of Budapest; György Jaksity, Managing Director of Concorde Securities Ltd.; Zsigmond Járai, Governor of the National Bank of Hungary (NBH); and András Simor, President and CEO of Deloitte.
The project's central message is that overcoming the current imbalances and improving the rate of economic growth are not conflicting but mutually reinforcing goals - the latter requires the former. The right strategy can handle both the imbalances and the structural factors that hinder the full exploitation of the Hungary's growth potential.
After analysing the cases of Spain, Ireland, Finland, Sweden, and the United Kingdom, the authors of the study have come to the conclusion that in case of the current economic situation in Hungary, the inevitable budget deficit reduction can be accomplished without a substantial fall in GDP growth.
If the measures concerning the budget are carried out in the appropriate areas and are coupled with a comprehensive transformation that aims at enhancing effectiveness, they could provide a strong foundation for outstanding economic growth in the medium term. In order to achieve this, it is imperative that the effectiveness of the public sector, health services, education and labor policy should improve, while a sustainable pension system and a competitive tax system should be introduced.
The alternative solution is a set of measures based either upon the dramatic devaluation of the Hungarian forint or upon an inflation strategy which both would result in significant sacrifices in GDP growth, whereas neither would progress towards solving the structural problems of the economy.
Since during the last few years the Hungarian economy has functioned with permanently high twin-deficits, its indebtedness has deteriorated considerably. The debt-financed budget deficit has primarily been generated by the increase in consumption, not by that of investments.
Moreover, in the last few years, Hungary's GDP growth rate was among the lowest ones in the region. Even more important than these short and medium-term issues are those structural obstacles that have continuously hindered the Hungarian economy's ability to exploit its growth potential. The study devotes a considerable amount of attention to systematically explore these factors.
Structural problems
Some examples for these structural problems are as follows: Hungary's employment rate in the 15-64 age cohort is among of the lowest ones in the EU (56.3%), third only to Malta and Poland. The relatively low output growth level implied by the low employment rate is reduced further by the fact that the rate of public sector to private sector employees is exceedingly high (26%), one of the highest in the EU.
Moreover, the oversized state bureaucracy not only is a financial burden, but also acts as an active hindrance to corporate sector growth. Maintaining a large state bureaucracy while the employment rate is low can be financed only through heavy taxation. The latter, however, necessarily increases tax evasion. The high deficit and taxation, combined with low employment rate and GDP growth creates a trap. The best way out is a programme that focuses on deficit reduction and employment growth.
