Hungary on the path to economic recovery: How the new plan will change the country – INTERVIEW
By Asif Aydinli
News.Az presents an interview with Kohán Mátyás, Deputy Editor at Mandiner.hu and a prominent Hungarian expert. In this exclusive conversation, we delve into the Hungarian government’s latest economic action plan, exploring its goals, challenges, and implications for the country's future. Kohán Mátyás shares his insights on how the plan aims to tackle current economic hurdles, enhance competitiveness, and ensure sustainable growth while maintaining fiscal discipline.-What are the primary goals of the Hungarian government’s new economic action plan, and how does it aim to balance economic recovery with fiscal discipline?
-Hungary is currently experiencing weak growth as the fundamentals of its convergence model gradually erode. Throughout the 2010s, Hungary's growth was driven by an export-led model based on tight integration into European value chains, especially in the automotive sector, led by German firms. Hungary has developed into a major European automotive hub, hosting all three German premium car manufacturers—Audi in Győr, Mercedes in Kecskemét, and BMW in Debrecen—as well as a large Suzuki operation in Esztergom, a Stellantis engine manufacturing site in Szentgotthárd, and numerous suppliers, TNCs, and SMEs of both Hungarian and foreign ownership across the country. This model has relied on the growth of EU export markets, particularly Germany; stable German-Chinese economic relations that enabled mass exports of German cars to China; and a European regulatory environment favorable to automotive-sector growth. However, all these fundamentals are now under threat due to structural challenges in the German economy, strained EU-China economic relations, and anti-automotive regulations that are stifling Hungary’s growth potential.
This situation calls for a new economic policy addressing both the external and internal dimensions of Hungary's economy. The government’s economic action plan focuses on the internal challenges, namely the productivity and competitiveness crisis among Hungarian-owned SMEs and low household consumption. (The latter has been a persistent issue. Due to Hungarians’ strong preference for homeownership and high savings rates, Hungary currently has the lowest actual individual consumption in the EU, which burdens the economy.)
The plan aims to ensure wage convergence and boost consumption by increasing minimum wages. It seeks to further stimulate consumption and household investment through a new system of worker loans and an increased family tax credit, a key component of Hungary’s family support program. The plan includes a comprehensive housing package, consisting of measures such as a crackdown on Airbnb (which has contributed to high real estate prices in Budapest, where Airbnb penetration surpasses all other Central European capitals and rivals Berlin, a city twice its size); support for renovating energy-inefficient rural homes; assistance for youth housing; tax breaks on employer-provided housing assistance; a voluntary 5% mortgage interest rate cap; and more regulatory flexibility, allowing parts of employer-provided leisure benefits and private pension funds to be directed toward housing investments. SMEs will receive support via a new capital financing program, investment grants, a more efficient system for disbursing EU cohesion funds, higher audit thresholds to exempt smaller enterprises, interest rate cuts on state-sponsored investment loans, and assistance for exports and outward FDI.
This is not an economic recovery package but a stimulus package intended to help an already high-income economy upgrade. It remains to be seen how it will align with the stringent fiscal discipline requirements mandated by the EU's Stability and Growth Pact. The government plans to present Hungary’s 2025 budget after the November 7 US presidential election, believing that the resolution of the war in Ukraine, a key factor in Hungary’s economic planning, hinges on Donald Trump winning the election. Currently, there are no specific figures on how much the action plan will cost the Hungarian treasury. However, there is room for optimism, as many of the plan’s policies do not heavily burden the budget or do so only from a cash flow perspective. The government has announced that the budget deficit for 2025 is expected to be 3.7%, easing from this year’s 4.5% but still slightly above the SGP norm of 3%. The action plan's compatibility with fiscal discipline is also supported by expert consensus that Hungary’s 2025 GDP growth will exceed 3%, providing some leeway for the country's sales tax-heavy budget.
- How does the government plan to implement wage convergence, and what impact is expected on the labor market and overall economic growth by 2027?
- Hungary has a dual minimum wage system that is unique in the EU. There is a statutory minimum wage of about €670 gross per month for any full-time job, and a higher "guaranteed wage minimum" of about €810 gross per month for full-time jobs requiring at least intermediate education. The latter is more relevant in the Hungarian context: around 4% of all workers earn the minimum wage, while the guaranteed wage minimum applies to about 16% of the workforce. These minimum wages are determined annually through tripartite negotiations between labor unions, employer associations, and the government. They are crucial for overall wage convergence, as they set a baseline for raises in higher pay grades. The government now aims to secure a multi-year agreement within this tripartite framework to gradually converge the two tiers of minimum wages, driving wage convergence that will allow the gross average wage to reach €2,500 by 2027, up from €1,600 in August 2024. For the government, this requires further cuts in employer contributions and significant pay raises for government-sector employees in the most underfunded sectors, such as public administration, water management, and social care. Strong wage convergence is expected to boost domestic consumption, thereby driving economic growth.
- What are the potential risks of allowing tax-free pension withdrawals for home purchases, given the already high housing prices in Hungary?
- Pension fund withdrawals can be used for both home purchases and renovations, but it is likely they will primarily be used for renovations, as using pensions for home purchases could deplete funds and defeat their purpose. While it might be logical to assume that more available funding could further fuel the housing price boom seen throughout the 2010s, the dynamics of Hungary’s housing market do not necessarily support this thesis. For example, high inflation in 2022 and 2023 caused housing prices to decrease slightly in real terms despite nominal increases. Real estate price growth has been concentrated in Budapest and its suburbs, while growth in other parts of the country has been more moderate. Furthermore, the Hungarian construction industry is currently struggling with a lack of demand due to significant cuts in government-funded construction projects and a freeze on private construction resulting from high mortgage interest rates during the two high-inflation years. The industry currently relies on industrial construction projects and has sufficient capacity to meet the demand generated by the stimulus package. It is also expected that the action plan will include incentives to focus most programs on rural areas outside Budapest’s suburbs, where real estate price growth has been less pronounced.
- How does the government plan to address the challenges faced by SMEs, such as limited access to credit and high energy consumption, to enhance their competitiveness?
- Despite the Hungarian Central Bank’s high headline interest rate, which hampers significant growth in private loan deployment, the government has provided discounted loans to prevent a total investment freeze. These discounted rates will now be extended specifically to SMEs, alongside an investment grants system designed to enhance SME competitiveness. The energy price shocks of 2022 and 2023 led to a surge in energy-efficiency investments by Hungarian SMEs, so high energy consumption is no longer a primary concern for these businesses. Instead, this is more of an issue for domestic consumers in rural areas, where the action plan’s rural renovation grants are expected to provide relief.
- What does Prime Minister Orbán mean by "policy of economic neutrality," and how does this strategy align with Hungary’s position in a rapidly changing global economic landscape?
- The policy of economic neutrality addresses the external challenges facing Hungary's economy. As previously outlined, Hungary's convergence model has been built on strong integration into European value chains, but growth is now stagnant, particularly with its main trade partner, Germany. Hungary now needs a policy that enables it to tap into the economic growth centers currently located outside Europe. US-China tensions (and the resulting EU-China tensions) threaten to cut off trade access to these growth centers, prompting Hungary to take action.
Hungary aims to remain neutral in the looming economic Cold War and maintain a balanced approach in five key areas: financing, export markets, investment, technology, and energy. It plans to actively pursue financing and FDI from partners both inside and outside its alliances, seek markets for its products beyond the struggling European market (partly supported by the internally focused action plan through government incentives for exporters and outward FDI), and stay open to technology and energy sources without being bound by the ideological restrictions most of its allies attach to certain technologies or energy sources.
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