Hungary squandering EU funds, says former finance minister

September 25, 2016


In an interview given to Hungarian weekly Figyelő (September 22, 2016, pp. 18-20), KPMG partner Csaba László explained why he is not as optimistic about Hungary’s economic growth as Prime Minister Viktor Orbán.

Critical labor shortage could be addressed by deceasing payroll taxes

According to László, consultancies, such as KPMG, are eager to see how plans for changes to the tax code will affect payroll taxes in Hungary.

“[A decrease in payroll taxes] would significantly improve Hungary’s competitiveness,” he says.

While low personal income tax rates help improve employment, the burden of putting up additional tax revenues is left on the employer, László says.

He believes the government’s motivation behind announced high payroll taxes is driven by the fact that “the labor shortages are becoming critical in many places”.

Furthermore, László says, this problem ruins the investment climate. The only way the government can help is by reducing payroll taxes.

Viktor Orbán’s claims for 3-5 percent growth in GDP in the coming years are too optimistic

“It would be nice, but I do not think [GDP growth] will be this high in the next two-three years. It will not average out to those figures, especially if we take this year’s figures into consideration. Much depends on EU fiscal transfer, on EU plans for the next budgetary cycle. The international climate also gives reason for concern because the growth figures for Europe are not too promising. That said, I do not think it likely that the government would decrease payroll taxes by 8-10 percent,” László says.

Net foreign domestic investment is at 0 percent

When asked about how investors see Hungary, László responded:

“I do not have good news. If we do not take into consideration the recapitalization of the banking sector in recent years, we see the net capital investment, that is [foreign direct investment], is essentially zero.”

The Hungarian government has over-extended itself with all the centralization projects

“Centralization in Hungary is 50 percent of the GDP, while it is much lower in the countries of our Central Eastern European neighbors. The Hungarian state has overextended itself. This is different with our neighbors, and that is why they are able to operate with lower taxes. The state is too large and the quality of service has not adjusted to this.

“No one is satisfied with the Hungarian education and health-care systems. It is also important, though, to point out that Bulgarian and Romanian pensioners do not live as well as their Hungarian counterparts. Of course, the pension of Hungarians is not high either, and those pensions cannot be trimmed any further. But there are [public services] being provided [in other countries] that are far better than ours,” László says.

Hungary needs to prepare for the time it receives less EU fiscal transfers

“It would be worthwhile to prepare for the time when [Hungary] will receive less EU funding, but until then we should be spending these funds much more effectively. Instead of bike roads that lead to nowhere, 40 centimeter lookouts, and cobblestone public squares, we need to pursue projects that really drive economic growth.”

Hungary’s agriculture sector needs to modernize

“In agriculture we see that a significant portion of [state-provided] funding serves as supplemental income, instead of an opportunity for technological advancements. ”

One of the problems, László says, is the Hungarian agriculture sector has not learned from the positive lessons of their Western European counterparts, for example in Denmark and The Netherlands.

“People no longer sit on tractors there, they use machines with computer programs to plough and sow their fields. Here, farms with 20 hectares of land still use the old technology,” László says.

What the future holds for those who don’t keep up with the times

“I do not think that 50 percent of the Hungarian labor force will end up on the streets in ten years time, but we can be certain about one thing: people in [this generation] will switch jobs two or three times before retiring during their professional careers. The education system must prepare them for this. People [whose jobs are replaced] because of technological advancements will end up working in the service sector,” he says.