There is great uncertainty concerning the job protection action plan “urged” by the Fidesz parliamentary party group. It is unknown whether the revenue side of next year’s budget, which is in any case plagued by serious risks, will be able to finance the costly programme, and it is questionable what economic effects it will have in its current form.
At present all that can be said for certain about the elements of the job protection action plan and the theory behind it is that they clearly indicate the government is now also aware that Hungarian crisis management is in crisis.
Naturally many will say this is nothing new because the government’s unorthodox economic policy has been misguided all along. In other words, the crisis in crisis management began when the government came to power. However, until the announcement of the new action plan, there was not even the slightest sign that the governing parties were also aware of this fact.
Mainstream economists have been surprised again and again by the government’s unbending insistence on its own ideas. But what is the origin and essence of the theory for which Fidesz-KDNP has been prepared to pay a high price in taking non-conventional economic policy steps?
In thrall to an English experiment
The economic policy principles and strategic aims of the second Viktor Orbán government primarily have their roots in the work of British economist John Maynard Keynes. In the first half of the 20th century Keynes undertook nothing less than to reform the whole way of thinking about economics to that point.
His economic philosophy was based on reconsideration of economic links and principles that previously had been treated as axiomatic. (Keynesian economics is rather complex, and as such this article only mentions those elements that are relevant to the Hungarian crisis management.)
The highly influential economist argued that, particularly in times of crisis, we cannot trust in the “invisible hand” of the market, and we cannot wait for the economy to regain equilibrium through its self-regulating mechanisms. Moreover, we do not have to pay, or can at least reduce, the costs of crises, if the state intervenes to create balance and kick-start growth by means of its fiscal policy.
According to Keynes, the state needs to intervene to increase the aggregated demand (demand of all the economy’s players). There are three possible ways: increase government spending, lower taxes or do both at once. However, whichever way the state chooses will be very costly and can only be covered by the state taking out loans.
Keynesian theory, however, states this is not a problem because the state with its counter-cyclical economic policy of extra spending will outgrow the crisis and later, when the crisis is easing, will be able to repay the loans from its savings. The theory goes that such an approach is still cheaper than waiting for equilibrium to be established and for growth to pick up of their own accord, or if the government would take austerity measures or reduce wage costs (internal devaluation) to stimulate production.
It is no coincidence that this way of thinking and these arguments seem familiar. We have heard similar remarks from National Economy Minister György Matolcsy more than once, and we have witnessed the measures that have their roots in the theory. The introduction of the flat-rate personal income tax, increasing employment by means of public works and strengthening of the state’s market positions (nationalisations, creation of a new mobile service provider, share purchases, cutting back privatisation) can all be traced back to Keynes’ theory.
Nevertheless, it cannot be said Matolcsy is pursuing a pure Keynesian economic policy, chiefly because the European Union with its deficit ceilings has rendered impossible the kind of fiscal policy required. Since it is not possible to kick-start growth by taking out loans Keynes-style, the state has had to look for other sources.
Primarily it has used the crisis taxes as an alternative. In other words, the economic theory is orthodox but the means used to implement it have been necessarily unorthodox. Precisely this mixed model is now in crisis, as the government has also recognised implicitly with its job protection action plan.
The simplification of taxation for businesses and the targeted reduction of contribution burdens on employers set out in the plan are steps that are associated not with Keynesian economics but with a rivalling economic philosophy, namely the supply-side school of thought.
New economic policy direction?
Supply-side economic policy is primarily based on reducing administrative burdens and rules determined by the state (deregulation), privatisation, lowering subsides and marginal personal income tax rates (they show the additional tax burden on one forint of extra income), increasing the flexibility of the labour market and reducing business taxes and contributions to stimulate investment.
The Reagan government in the first two years and the cabinet led by Margaret Thatcher in the 1980s acted in accordance with this economic policy. Naturally not every element of the theoretical model was used; both politicians tailored the supply-side economic policy to their own countries.
Some might argue that Matolcsy’s approach has been consistent with supply-side economic policy even before now. The new labour code increased the flexibility of the labour market, and marginal tax burdens also decreased significantly with the introduction of the flat-rate personal income tax.
We are convinced notwithstanding that Matolcsy’s approach lies closer to Keynesian economics, because the very high level of state subsidies has not decreased significantly and we have witnessed a series of nationalisations, rather than privatisations. Nor is the levying of the crisis taxes and special taxes indicative of an investment-stimulating policy.
It is true that there are overlaps between the supply-side economic policy and the Keynesian recipe – it is no coincidence, for example, that many regard the large-scale tax-reduction programme carried out by US president John Kennedy – which was clearly urged by Keynesian advisors – as a manifestation of the supply-side school of thought. Nevertheless, there is a striking difference between these economic policy approaches: the role they assign to the state.
Keynesian economists regard the state as an entity that is capable of correcting market shortcomings, and it is a luxury for it not to make use of that ability. By contrast, supply-siders seek to reduce the role of the state. The words spoken by Ronald Reagan in his inauguration speech in 1981 encapsulate the latter: “The government is not the solution, the government is the problem.”
The government, one of whose greatest virtues, according to Orbán, is that it is no longer liberal, is gearing up to adopt certain elements of the Reaganist and Thatcherite economic policy of the neo-liberal period. This significant turnaround in the government’s crisis management – which until now has been relatively consistent in terms of economic theory – clearly indicates that after two years of unsuccessful attempts it has dawned on those at the highest levels too that things cannot go on like this.
But how can also the government make such a turnaround politically acceptable and avoid losing face? It is no coincidence that the new action plan was called for by the parliamentary groups of the governing parties, rather than the government itself.
Knowing the relations between the parliamentary party groups and the cabinet, we can safely assume that the former were simply the mouthpiece of the latter, giving rise to the paradoxical situation of the government essentially urging itself to supplement its existing economic policy.
We cannot speak about a radical change to the government’s economic policy foundations. The government has merely recognised the deficiencies of the Keynesian recipe and is looking to “supplement” it.
This is also supported by the fact that the 2013 budget plan does not indicate a change of approach, since the government is seeking to make the crisis taxes, intended to be temporary, permanent – think of the introduction of the financial transaction tax or the telecommunications tax – and clearly has no thoughts of reducing the role of the state.
The job protection action plan can essentially be regarded as a confession: the considerable tax reductions have not stimulated consumption and have not increased the supply of jobs significantly. In other words, the Hungarian crisis management in its form hitherto was not sufficiently effective. Indeed, the conclusion can even be drawn that the crisis management is in crisis.