An attempt to restore macroeconomic equilibrium in Hungary

Abstract

The present study examines the developments concerning major disturbances in the Hungarian macroeconomic equilibrium between 1995 and 2008, and the attempt to restore that equilibrium between 2006 and 2008. The first part reviews to what extent domestic consumption exceeded the GDP and the GNI, presents the major constituents of that surplus consumption, and explains its financing. Based on recent years' data, it concludes that while a marked decrease in the domestic consumption surplus is a great achievement, it is primarily due to an enhanced export performance and the decrease of gross capital formation. However, favourable changes in the export performance are dependent on business cycles, so they are necessarily volatile. Indeed, the impact of the slump period within the business cycle can already be felt. At the same time, decreasing gross capital formation is simply intolerable. The second part of the article discusses changes in the government's financial situation, outlines the changes after1996, describes the deterioration of the government's financial situation between 2000 and 2006, and explains how that derived from the dominance of different aspects of internal politics. The assessment of the stabilisation attempt suggests that that attempt was based both on increasing revenues and decreasing expenditures. By and large, we can say that increasing revenues led to the restoration of the situation of 2000–2001, while the attempt to decrease expenditures was dominated by decreasing capital formation and collective consumption, as well as social transfers in kind, while social transfers other than in kind failed to be decreased, and were indeed increased. Even though the stabilisation attempt led to a steep decrease in the government's borrowing, which is a great achievement, that happened at the cost of decreasing social transfers in kind serving as an investment in human capital and of capital formation, which is intolerable, sustaining an increase in social transfers other than in kind, a process that can still be regarded as one governed by motives of internal politics. The era when stabilisation has been a top priority has ended, and an era dominated by crisis management is beginning. It is impossible to foresee how the different aspects of stabilisation and crisis management, calling for contrary measures, will be reconciled in a situation shaped by the rather condemnable economic policy of the pre-2006 era.