At the Oct. 17 Portfolio Budapest Economic Forum 2024, policymakers and industry leaders debated how best to revive the Hungarian economy amid shaky inflation, geopolitical risks, and overregulation.
Minister of Economy Márton Nagy unveiled the government’s ambitious action plan aimed at tackling some of Hungary’s most pressing economic issues. The plan focuses on providing affordable housing, raising the purchasing power of wages, and doubling the size of local SMEs. These goals are central to the government’s strategy to foster long-term growth. Nagy expressed confidence about the success of the planned measures:
“We have every reason to believe that with strong foundations and targeted investments, Hungary can return to a path of sustainable growth,” he said.
Minister of Finance Mihály Varga echoed this optimism. He assured the audience that, after a tough period, growth would return to a healthy range of 3-4%, while the budget deficit would drop to 4.5%, a significant improvement from the previous 6.7%. Varga acknowledged the challenges but emphasized the need for cautious optimism: “We’ve had a bumpy ride, but looking ahead, we should expect better times,” he said.
However, the government must be careful in its approach to reviving the economy. Barnabás Virág, Vice President of the Hungarian National Bank (MNB), warned that inflation remains a persistent issue, with particular concerns around service inflation, which remains stubbornly high. This has to do with the fact that demand for services has been growing faster than that for products.
He also pointed to the geopolitical risks and the growing trend of people saving in euros as threats to stability. “The shadow of inflation remains long,” Virág said. He underscored that on developed markets uncertainty still prevails and hinted at the cautious path the National Bank would take, declaring:
“We won’t put rate cutting on hold just in October,” he noted. His comments had an immediate impact on the markets, with the Hungarian currency gaining strength shortly after his speech.
Ease That Burden
Following the discussions by political leaders, corporate executives offered their perspectives on the state of their sectors and the broader economy. One key theme that emerged was the underperformance of the EU compared to global competitors. Several speakers referenced the Draghi Report, which highlighted how growth in the U.S. and China was five and seven times faster, respectively, than in the EU in the past ten years. The report also called for boosting investment by 5.5% of GDP annually—levels not seen since Germany’s post-war Wirtschaftswunder.
Beyond cutting red tape, easing the tax burden was another demand from business leaders. Sándor Csányi, President of OTP Bank, criticized the government for not following through on promises to phase out punitive taxes:
“The worst part is that government promises made when these taxes were introduced are rarely kept,” he recalled.
The burden of the transaction tax is another issue that stands out: now that it has been raised it should amount to five to six times more than banking taxes. This imbalance has become a major concern for the financial sector, and its adverse effects are felt across the banking industry. Erste CEO Radován Jelasity added that while Erste’s Hungarian operations only account for 3% of the group’s performance, they are responsible for paying 16% of all taxes. This heavy tax load has placed significant strain on banks’ ability to remain competitive.
Stop Funding Foreign-Owned Operations
Leaders from Hungary’s largest corporations also weighed in on the impact of extra taxes and subsidies on business operations. Gábor Orbán, CEO of pharmaceutical giant Richter, stressed that these taxes are hindering the company’s acquisition activity, which is essential for growth in the competitive pharmaceutical sector. He also criticized the practice of subsidizing foreign-owned companies, pointing out that such policies fail to benefit the broader economy:
“There is no multiplier effect. These subsidies only help the firms that receive them,” Orbán said, calling for more support for locally owned companies.
János Vida, CEO of Opus Global, also voiced concerns about the disconnect between government policies and the realities of the business world. He suggested that policymakers often base their decisions on theoretical models that do not align with on-the-ground conditions. According to Vida, policy makers are sometimes working with “vials,” but the real world has little in common with what’s inside those vials.
More competition please
The forum’s closing panel discussion brought these issues to a head, with participants expressing concerns that the government’s over-reliance on interventionist policies is undermining competitiveness. György Surányi, former governor of the MNB, emphasized that current government policies are not encouraging businesses to innovate or improve productivity.
“The government’s interventions are not fostering competitiveness. Instead, they are creating an economy that is more reliant on soft money than on real growth drivers,” Surányi said.
This theme was echoed by investor Viktor Zsiday, who argued that too much state involvement is distorting market dynamics and reducing the incentive for businesses to compete and improve. Zsiday pointed out that sectors with close government ties receive most of the available funding, while successful firms face heavy taxation or stringent regulation. As a result, many companies are more focused on securing EU and government funds than on adapting to market conditions:
“Diverting market forces, little competition, and too much state intervention won’t result in higher productivity,” Zsiday concluded.
This article was first published in the Budapest Business Journal print issue of November 4, 2024.
