Economy 4 January 2024, 10:17am

Hungary Economic Minister would set a radical course for the economy of Hungary and the EU

Portfolio

Márton Nagy said it would be a bad decision if budgetary discipline were to come to the fore in the European Union. In an interview with the weekly Demokrata, the Economy Minister spoke strongly about fiscal policy, arguing that if other countries are competing with budget deficits of 7-8% to support their own economies, "we can be more lenient with ourselves". He directly suggests that Europe, including its largest economy Germany, should temporarily loosen its budget deficit in a controlled way. It looks very much as if the government's economic policy has reached a dividing line, and it is about to abandon its commitment to low budget deficits in favour of supporting economic growth. Portfolio provides a quick assessment of the situation in the light of economic data, government announcements and key speeches in recent weeks.

Budget in trouble, but the government seems to be up to big things

The budget is in crisis. One could sugar-coat the figures, but the picture is pretty clear:

The government has failed to meet its own increased deficit target, with the Finance Ministry admitting in its medium-term macroeconomic forecast published at the end of last year that it expects a deficit of 5.9% of GDP by 2023.
The general government sector deficit as a proportion of GDP was 3.7% in the third quarter of last year, bringing the rolling average of the last four quarters of the general government deficit to 7.7%. For this figure to fall below 6% by 2023 as a whole, the budget would have had to accumulate a deficit of at most 7% in the last quarter last year, the lowest fourth-quarter deficit since 2019. However, the government's plans are helped by the fact that it was able to raise large revenues in the last part of the year (see MVM's HUF 309 billion dividend advance payment) without the usual spending in the last days, while previously it was typical for transfers of hundreds of billions of forints to appear in the Official Gazette at this time of the year.
Meanwhile, the 2024 budget, approved by the Parliament early in the summer as usual, has got very far from reality, and the main question is whether this year's deficit will be 5% or 6% in the absence of a government adjustment (the 2024 budget plans have since been worsened by worse-than-expected base processes in 2023).

All these weaknesses in the fiscal position and the lack of disciplined fiscal policy have been pointed out in a recent piece by investment expert Viktor Zsiday. According to him, we are back to 2006 levels, based on an indicator that reflects the real state of the budget.

Meanwhile, it is also worth adding to the overall picture that Márton Nagy received a rarely seen governmental mandate a few days ago: the re-established Ministry of National Economy (NGM) now has virtually all substantive economic development and economic policy decisions (except fiscal policy), and the ministry has an independent forecasting team after former macroeconomic analyst Gergely Suppan joined the NGM team. In practice, this means that Márton Nagy has become an indispensable and decisive player in economic matters. In light of this, it is worth assessing the most important statements made by the Minister of National Economy in his interview with the weekly Demokrata, especially on the budget, and it is also important to underline that this is the first interview he has given in this recently consolidated position.

On the budget, the minister said:

The budget deficit needs to be reduced, while at the same time taking into account economic development objectives, as the priority this year is to restore growth.
This also requires a fiscal boost to the economy.
In this respect, the important question is what fiscal conditions the EU will impose, whether we will return to a deficit below 3%.
Márton Nagy said it will be worth watching other countries. He argues that there are two paths: some states prioritise fiscal discipline even when growth is collapsing, and others compete, giving state aid to the new economy.
This latter group is not considered to care about the size of the budget deficit, only productivity matters. He believes that the United States and China are following the same path. The question now is whether the EU will join the competition between the two superpowers: whether it will improve its own competitiveness through subsidies or whether it will focus on fiscal discipline.

I think that the latter (prioritising fiscal discipline - ed.) would be a bad decision,

because if others are competing and running a budget deficit of 7-8% and a public debt of around 100%, then we can be more lenient with ourselves", the minister said, adding that the EU and Germany should join in this competition.

He proposed that

"Europe should temporarily loosen the budget deficit in a controlled manner."

He was quick to add, however, that "this does not mean, of course, that we should go into so-called fiscal alcoholism". "We are talking about long-term growth and this can be helped by fiscal policy through a targeted system of public support," he adds.

Márton Nagy's statement on fiscal policy is noteworthy in several respects. When assessing the statements, it is worth nuancing the picture from the outset by noting that in many cases, it is not clear whether what the minister is saying can be understood to apply to Hungarian fiscal policy (there are, however, sentences that unambiguously refer to the Hungarian situation: e.g. "the economy needs a boost on the fiscal side as well"). However, it is telling which way he thinks the EU fiscal process should go: less discipline, more easing, i.e. he is clearly arguing for an increase in the budget deficit (one of the components of the "high pressure economy" he advocates). This is strange if only because, although its remit and powers have been visibly strengthened, the Ministry of Finance, led by Mihály Varga, is responsible for fiscal policy. These already identify a strong dividing line within the government on the future of economic policy and government plans.

One of the minister's arguments is that some countries (here he mentions the US and China) do not care about budget deficits and that the EU should follow the same path. It is not difficult to see that if the EU moves towards easing in the ongoing fiscal rule review, it would also be a boost for Hungary, which is struggling with fiscal problems. In other words, this reasoning can be seen as an argument in favour of an indirect relaxation of Hungarian fiscal discipline. However, our analysis has shown that Hungary is paying a huge price for this (last year it had the highest interest expenditure as a share of GDP in the EU) and that losing fiscal discipline is a very risky strategy for a number of reasons. It is as if Hungarian economic policy has reached a crossroads and is about to abandon its commitment to a low budget deficit, with the zero budget, once proclaimed as an important goal, now a mirage. However, Hungary is paying a huge price for this (last year it had the highest interest expenditure as a share of GDP in the EU) and that losing fiscal discipline is a very risky strategy for several reasons.

And the practical question is how Márton Nagy's words that the public budget should be more supportive of economic growth this year, i.e. it should be looser, fit into the 2024 budget process. Indeed, Portfolio calculated a month ago that this year's deficit target of 2.9% is already under threat (due to worse base processes and a less favourable macro environment) and that a 5% deficit this year seems more realistic. In other words, not only does the government have no room for extra spending this year, but it would also have to take corrective measures to reach the original deficit target (reiterated by Finance Minister Mihály Varga just a month ago). It will be interesting to see how the government resolves this contradiction in the coming weeks. The very first and most important question for 2024 may be what will happen to this year's budget deficit target (which Mihály Varga has promised to examine in February). The government's response to this may also show the balance of power within the government on economic issues.

The government will soon have to come up with a new deficit target to give credibility to its shattered fiscal policy. From the words of the Minister of National Economy, it seems that he will not start this year with a real deficit target of less than 5%. Indeed, this follows from the underlying processes of the budget and the need to stimulate public growth. Of course, it may well be that this will be announced only gradually over the course of the year, as we saw last year.

Central bank

Márton Nagy said that in this situation, the National Bank of Hungary's (MNB's) interest rate cuts could be faster. He said the central bank is being held back from cutting interest rates more by the fact that many foreigners are sitting on so-called hot money, the discount bonds of the MNB. If investors were to move away from here, he said, it would be reflected in the volatility of the forint.

The government also says that companies do not need real interest rates, because it is not good for companies to save and not invest.

Positive real interest rates for companies should be abolished, the minister said.

Economic development

The short-term strategy is to boost consumption and investment. This requires real wages to rise, but the surplus may not be consumed, so, according to him, the cautionary motive should be removed and the household savings rate should be gradually reduced to around 10% of household income. "This will happen when people feel secure," he explained.

As part of the long-term strategy, he mentioned building an independent energy system and increasing the number of people employed. To do this, he said, the reserves must be tapped, and the government will launch targeted programmes to achieve this. The third option is to increase infrastructure development. He said that there are a lot of heavy goods vehicles on Hungarian motorways, and we need to make room for them, because if transport time is extended, it will become more expensive.

The minister also expressed his views on the German economy and Chinese industry. "Chinese and German capital want to work together, and Hungary has become a platform for this," he said. He noted that it is actually German capital that brings Chinese capital to Hungary, Chinese capital attracts more German capital, and more German capital attracts more Chinese capital. He cited the construction of the BMW factory in Debrecen and the CATL factory as examples.

"These are mutually reinforcing processes. Business cannot stop," he predicted. According to Márton Nagy, EU funds are critically limited, as at 90% of EU development, Hungary will become a net contributor. But there is and always will be foreign working capital. "The only thing we have to focus on is to maintain the multiplier effect", to make R&D work effectively.

He also said that, in the context of the creation of the Ministry of National Economy,

we have to work here. Tasks are entrusted to you and you have to deliver results. Period.

"At this level, you are proving to yourself by doing the tasks. With that said, I enjoy the challenge," he added.

He also said that PM Viktor Orbán had achieved a pragmatic intention by developing a new structure to relaunch growth.

This means that the Cabinet for Economic Affairs must be headed by the Minister for the Economy.

And if the Prime Minister has confidence in me, I will serve that confidence," said Márton Nagy. "I will be a minister as long as I am useful, as long as I am needed," he added.

At the end of the interview, he said: "I wouldn't say I'm a genius, I'd say I'm more like a restless person. I'm looking for ideas, I'm looking for possible solutions to problems to get what we want faster. The recognition of the profession doesn't matter, only respect".

I'm friends with several ministers, I can talk to them about the important things in life. But there is an undeniable loneliness that surrounds one at this level,

he concluded.