Hungarian Government’s Rescue Package

While governments around the world have been swift to announce measures to keep the economic crisis at bay, the Hungarian government has been rather slow to respond. Criticised by the opposition, Prime Minister Ferenc Gyurcsány recently defended his minority Socialist government when he said that the country’s economy had more problems than most because of its lack of budget reserves. Other European countries have been propping up their economies at the expense of their budget deficit, but that is not an option for Hungary.

Among the country’s economic problems is a dramatic drop in industrial production – it fell by a massive 23.3% year-on-year in December 2008 – while foreign and domestic consumption have also seen a significant reduction. Economic experts are predicting that the Hungarian economy could see a decline of 5% in GDP growth. The government has decided that drastic measures are called for and have come up with a plan which is both an immediate response to the crisis and the first stage of some long-term reforms.

Tens of thousands of Hungarians have lost their jobs in recent months and one of the government’s main aims is to protect current jobs and create new ones. It plans to reduce the tax burden on both employers and employees and restructure the tax, welfare and pension systems. However, to compensate for this, the VAT rate will be raised from 20% to a massive 23% and the business tax from 16% to 19%.

The measures received a mixed reaction from the business community and workers. Industrialists demanded even more comprehensive measures and government was criticized by the opposition for not doing enough and said that the measures were ‘too little, too late’. The prime minister has warned the Hungarian people that there is a difficult road ahead and that they may not see the benefits of current measures for several years. This was confirmed by The Economist’s predictions that Hungary’s economic growth will not begin to recover until 2010 although annual inflation will decline gradually, and it is expected that the country will adopt the euro in 2013.

Hungarians have responded to the economic situation by choosing to rent more property – there has been a considerable jump in city rental markets. Instead they are saving their money - a good option as banks are offering 12% to 13% yields for fixed-term deposits. James Gonzalez, Market Analyst at Obelisk Investment Property, says that the Hungarian market is currently a good buy-to-let investment. “Recent research from GKI Economic Research in Budapest shows that although the market is temporarily frozen, there has not been a drop in house prices. Traditionally Hungarians prefer to be homeowners and so experts believe that they will continue to invest in the housing market once the financial crisis passes.”

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