Hungary's error
However, Hungary’s recently elected government made a significant error on 4 June 2010 through a causal comparison of the country’s economic woes to that of Greece and stating further that it was “no exaggeration” to highlight concerns of the possibility of a default on its debts. As a direct result of this blundering, Hungary’s cost of borrowing increased rapidly as the international markets balked at the looming prospect of yet another European crisis.
Rapid Regain
Fortunately, this precipitated a serious consideration of Hungary's positioning and this yielded the presentation by the Hungarian government of a 29-point economic programme, which includes a radical series of tax reforms, These reforms have been mooted to include a reduction in big business-tax cut and a 16% flat tax on incomes both of which are expected to be implemented into the legislation in 2011.
Deficit reduction
In these reforms, Hungary has also promised to endeavor to meet the deficit target agreed with the IMF, of 3.8% of the country's GDP, which will need to come down from its present level of in excess of 7%. This significant reduction will, in part, be met by an attempt to cut overall public spending by 0.6-0.8% of GDP in addition to the imposition of a substantial, but temporary, levy on banks. Moreover, the government intends to ban the use of foreign-currency mortgages, which is a practice currently undertaken by around 65% of Hungarian households.
Disaster aversion
The immediate action taken by the Hungarian government appears to have allayed the market's fears and financial disaster appears to have been at lest postponed, inf not averted for good. Upon receiving news of these plans, the forint rose, giving much needed and immediate relief to the country's foreign currency borrowers amidst significant support for the measures from the IMF.
Practicalities of the plan
However, despite the palpable relief, these plans have not been universally supported. Bankers have remained deeply skeptical about whether the plan is entirely practicable, particularly given the unsubstantiated claims by Victor Orban, the country's Prime Minister, about his ability to create a further 1m jobs in the near future.
To the future
Despite the initial early wins of this plan, Hungary still has a long way to go as the most debt-ridden country in eastern Europe with public-sector debts exceeding 80% of the national GDP. If these measures are going to have the desired effect, further, and deeper, cuts in public spending will need to enter into the much less superficial reductions talked about so far in terms of use of official mobile phones, cars and top civil service salaries.
Notwithstanding the fact that Mr Orban's government was elected in April 2010 with a resounding mandate from the people, his government still appears to lack the deftness and sensitivity to drive through changes in these difficult times. In particular, Mr Orban has picked fights that have been far from necessary and has done so too publicly such as the removal from post of of the highly-regarded and hawkish central-bank chief, Andras Simor. Moreover, he has seemingly deliberately re-ignited a ethnic dispute with one of its neighboring Slovakia, which, given the problems he is facing in the domestic area, may be seen as a little reckless and frivolous. It could be argued that this hawkish demeanor would be better placed in tacking the country's bloated civil service and the wastefulness within.
Paul Carcone - I am a Chartered Management Accountant with a military background who is also a freelance Management Consultant based in the United ...
