Hungary c.bank chief slams gov't for negative economic policy turnaround

We haven't yet heard Prime Minister Viktor Orbán comment on Matolcsy's remarks, but if the governor indeed made public what the two of them had talked about in private, the PM would have every right not just to be merely miffed but outright livid. You simply don't do that, you just don't. Especially not when you, the head of the central bank, talk business with the prime minister in an admittedly private conversation.

Central Bank Governor György Matolcsy gave a speech in Parliament this morning on the occasion of an MNB report, in which he was particularly critical of the government.

Matolcsy spoke about fiscal processes, saying that this year's 3.9% of GDP budget deficit target will fuel inflation, and asked the government to help the central bank combat inflation. He said interest expenditure would rise to 4.6% of GDP next year, which the governor called a trap situation.

The success of a country is ultimately determined by its productivity, stressed Matolcsy.

"[...] you cannot distribute any more. You can borrow for a while as long as they will give it, but that is already a trap. You can bring in external capital, you should, with the right high technology, but you cannot build convergence on that," he said.

Productivity is a sore point and the price caps have not solved it, in fact. Food price caps have made matters worse, artificially and unnecessarily driving inflation higher by three to four percent. Food productivity is not the third worst in the European Union, it is the second worst.

He added that the failure to reform healthcare is also painful.

The failure to reform education, higher education, the health industry and services is very painful, as these could have been part of a qualitative turnaround.

The MNB has been regularly publishing analyses for the past 6-7 years to try to pressure the government to start reforms, but to no avail, said Matolcsy.

THE MISTAKES OF THE 2010S HAVE CAUGHT UP WITH US. 2021 is a year in which the strategic mistakes of the 2010s have caught up with us.

Despite the astonishing achievements of the 2010s, we made a number of mistakes that caught up with us. The government has made a negative economic policy turn, letting go of the balance, but there was a negative economic policy turn before the war, before the sanctions, before the skirmishes with Brussels, said Matolcsy. He highlighted the budget deficit, which he said should not have been let run away. Pointing to the differences in economic policy, he said that the Polish government was doing a better job than the Hungarian one.

The Poles are way ahead of us, they work better, they have better government, the central bank is doing its job.

"We must act now so that our descendants in 2030 do not ask where we went wrong, where we lost our way," he said.

We have to say that we lost our way in 2021,

Matolcsy noted that this lost track remained in 2022 and that there is no sign of any change for the time being.

According to him, in order for the successors not to ask questions, we need to draw 10 conclusions from the successes and unrealised reforms of the previous decade. (He did not list these 10 points in the end due to lack of time, but we have asked the MNB for them, and will release a follow-up report as soon as we get the requested information.)

Among the major mistakes, Matolcsy mentioned letting the budget deficit run away and the introduction of price caps. He said we should ask why we are in the bottom five in the EU. Portugal has left us behind, Poland, Romania is very close to us and Croatia is going to take off.

One important lesson is that the mistakes of the past can set us back up to ten years. We need a clear target: there used to be a clear, measurable target for economic policy, but now there is not.

Matolcsy said that the prime minister told him in a conversation that "if I measure, I lose", but Matolcsy said that was not true. "If you don't measure, you have already lost," said Matolcsy, who said the election was also a kind of measurement, and the prime minister won.

Matolcsy said that the mistakes of the past could be repeated, and that crises should be exploited, but these opportunities have been missed.

There are always crises, and the winners are those who exploit the crises for reform and transformation. That is what we did in 2010, but that is not what we have done now. We blew it, we blew a good crisis in 2020-2021-2022. we don't have the big transformations that the crisis should have triggered.

Finally, he also spoke about why he criticises the government:

Is the central bank governor offended? [Is he] frustrated? Did he have a row with the Prime Minister? No, God forbid! There is a conflict of principle between the central bank and the government. The National Bank of Hungary has a duty to fight inflation and we expect the government's help in this,

said Matolcsy, adding that he continues to believe in cooperation with the government.

Cover photo: MTI/Zoltán Máthé