Page 61 - AEI Insights 2018 Vol 4 Issue 1

Szanto, 2018

EU views it as an attempt to hide the dire state of the labour market. While the programme
does offer some income to people in desperate need, it does not offer a sustainable, long-term
solution. The public works programme offers little opportunity to develop skills that would be
valuable on the labour market, and thus it does very little to facilitate peoples’ transition from
the programme back to the regular labour market. Essentially by eradicating the statistical
perception of unemployment the Government reduces pressures to adopt systemic reforms.
Combine this with the mismanagement and corruption associated with large government
projects and the programme becomes problematic. Once again contrasts can be drawn between
Malaysia and Hungary: Malaysia responded to its own employment issues with the expanding
of the civil service. Both the expansion of the public works programme and the civil service
create a ballooning government workforce of questionable economic value. From a narrow
moralistic viewpoint it makes sense that people prefer recipients of government assistance to
contribute back to society through painting fences and collecting rubbish. However, funds
could be more effectively used if the programme focused on skill training and facilitating re-
entry into a competitive labour market.

Expanding government spending for welfare programmes also puts a pressure on the
government to match it in increased revenues. The inability to do so was a strong contributor
to the Greek financial meltdown. Combining populist welfare spending with a trickle-down
economic model is contradictory. While the Government expands the public works programme
and offers various benefits to families, it also has reduced most taxes and offers tax breaks to
selected groups, such as young married couples or families with multiple children. To make up
for the revenue lost, the Government has introduced a host of special taxes, often targeting
specific industries. There is a tax targeting energy firms. There is a special banking tax that is
sometimes popularized as a punitive measure against banks profiting at the expense of the
voters, especially following the collapse of the foreign currency-based lending market. There
is also a tax targeting telecommunication businesses and insurance firms. (PWC) These special
taxes often target business sectors unpopular by the electorate or those viewed to profit unfairly
on basic necessities as part of the Government’s populist programme. Unsurprisingly the EU
has been critical of these special taxes, voicing concerns that they negatively impact investment
into the Hungarian economy. Furthermore, special taxes create an unfavourable precedent even
for companies that are not affected by them. Any corporation investing into Hungary can
reasonably wonder whether it is their industry that receives such taxes next if they fail to tow
the government line or run afoul of public opinion. Reduced investment carries the risk of
unbalancing the Hungarian economy in the long run. At the same time the trickle-down model
used by the government is not without risks on its own. The Government cut tax rates expecting
that the money saved will be reinvested into Hungary and that it will improve tax compliance.
However, there is no guarantee that it will achieve such a goal. It is reasonable to expect that
tax breaks to the lower and middle classes will contribute to higher consumption, which the
government can take advantage of through atypically high value added tax (VAT) rates in
Hungary. But large corporations and high income individuals have proven time and time again
that they do not conform to the expectations of the trickle-down model, taking advantage of
the tax breaks without reinvesting the gains. Furthermore, from a Europe-wide perspective
Hungary’s aggressive tax policy could intensify the race to the bottom that can be seen in
Eastern European countries desperately trying to attract large corporations. While in the short
run the move might benefit Hungary, in the long run it gives power to corporations, a direction
the EU has been pushing against recently, as seen for example in the case of invalidating tax
breaks offered by Ireland. While the Hungarian economy is not unravelling at the moment –
the Government successful reduced government debt – it is not surprising that the EU is critical
of its execution as a faltering Hungary would exert a negative influence throughout the EU’s

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