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With economic turnaround, Hungary aims to create ‘best business atmosphere’ in the region

| November 29, 2016

It’s been a long time coming, but over the past six years Hungary has recovered from an economic disaster potentially worse than the one Greece has faced. Former critics, even some of the harshest detractors of the Orbán Government’s economic policies, have acknowledged the success, and with the turnaround gaining momentum, the government is setting out a more ambitious agenda. With the foundations of economic stability firmly in place, the government aims to create the most attractive business climate in the region, increasing competitiveness and the living standards of the people.

In recent days, Eurostat updated its Macroeconomic Imbalance Procedure (MIP)-indicators. The MIP indicators attempt to show the vulnerability risks of each Member State. Since the indicators are published with a significant delay (2015 data was published just now), trends are more important than actual status, and the trend for Hungary is overwhelmingly positive. In almost every aspect, the indicators show that the country has been improving since the economic crisis.

Regarding the economic vulnerability of the country, the market was much more upbeat in the beginning of 2015. As of February, according to Morgan Stanley’s own Vulnerability Indicator, Hungary’s economic vulnerability decreased between the 2008 financial crisis and 2015 by more than any other country in the region.

Corroborating these positive evaluations, in 2016, all three of the major credit rating agencies have upgraded Hungary’s national sovereign debt to the recommended-for-investment category, far sooner than the average waiting period, as defined by Fitch Ratings, would have indicated.

Despite the fact that the European Commission is well known to be more cautious and slower in recognizing economic recovery and progress, even many of those harsh critics now admit that Hungary’s “unorthodox” recovery has worked. The country is closer to the desired Maastricht convergence criteria than at any point since its accession into the EU, and in this regard, beats most of the older Member States as well. More importantly, the country has managed to apply strict budget control and economic growth at the same time and had a rocket boost in employment as well.

After six years of Orbán Government, Hungary’s unemployment rate fell below 5 percent, a historic low, from over 11 percent. Our debt-to-GDP ratio is coming down to 75 percent from 81 percent, the country’s GDP growth consistently outperforms most of the other Member States and the GDP has climbed back to its pre-crisis level in 2014. The trade balance shows a steady surplus. The list goes on.

The question is: what’s next? On Monday, Prime Minister Orbán laid out a quite clear vision. It is time to reform the tax system to increase wages and competitiveness.

Hungary, starting next year, will have the lowest corporate tax in Europe, a single-digit, 9 percent. That, plus extending tax benefits for small businesses, families and cutting payroll taxes will define Hungary’s path to taking the economy to the next level.

Additionally, the government agreed with its “social partners” to substantially increase both the minimum wage and the so-called guaranteed minimum wage in 2017 and then again in 2018.

Employers will be partially compensated by a modest decrease in payroll taxes. The parties agreed that the minimum hourly wage should increase by 15 percent in 2017 and then 8 percent in 2018.  A guaranteed minimum wage, which applies to employees of a certain level of education, is to increase 25 percent in 2017 and 12 percent in 2018.

Employers will be compensated in part by a 5 percent decease in employer payroll contributions in 2017 and another decrease of 2 percent in 2018, or 2.5 percent if gross wages increase more than 11 percent in the first nine months of 2017.

In many ways, the approach is not new: to tax money when it is being spent rather than when it is being earned. Replacing the so-called progressive taxation for flat taxes was the driving force when Hungary reduced and simplified personal income tax. Now it is time to do the same with companies as there is only so much a government can do for economy. After a point, it is up to the businesses.

Compared to six years ago, Hungary’s job over the next six years is not easier but much sweeter. To continue to fuel growth and improve standards of living, Hungary has to create an attractive business environment. The fire that was the financial crisis has been extinguished; the building has been restored. Now is the time to make the much-needed upgrades and improvements.

Six years ago, few were betting on the Orbán Government to fix the economy. But those who did, won the bet. This time, we hope that many more will be a part of our next success story, the next big, ambitious step ahead.