Hungary’s incoming government faces some of the biggest economic challenges of the last decade as rampant energy prices may force it to abandon state-imposed price caps, while global disruptions are denting prospects for growth. The new Orbán government may again deploy unorthodox economic measures to guard fiscal stability and prop up the economic outlook.
Prime Minister Viktor Orbán’s recent victory at the polls has made him the EU’s longest-serving leader. At the same time, his government faces some of the most severe economic challenges since taking the helm, which may force him to resort to unorthodox policies yet again. Orbán has not ruled out more taxes on sectors like finance, energy, telecommunications and retail. “Whether special taxes on multinationals or others become necessary is up to the EU,” he said. “If Europe is unable to stem the rise in energy prices, we will be forced to take steps in Hungary.”
The most important challenges for the new government are the Russian-Ukrainian conflict and the inflation crisis and both are influenced by events over which the Hungarian cabinet has little control.
Hungary should increase domestic ownership in key sectors of the economy in addition to banking, media and energy, Márton Nagy, a minister-designate said. The government has previously exerted pressure on foreign companies to scale back their presence in Hungary as it sought to bring domestic ownership in the banking, media and the energy sectors above 50%. "A sustainable (economic) convergence is a key priority, and that requires an autonomous and self-sustaining economy," Nagy, economic development minister designate, said. He added that the government needed to take steps to ensure that Hungarian ownership in the building sector as well as in food retail and insurance will increase.
Speaking about state-mandated price caps, Márton Nagy stressed that the freeze may remain in place and food retailers can cover the loss in their revenue from the extra profit they make as people buy more food. The government will decide on the future of the price caps by taking inflation and other market developments into consideration, Nagy said, adding that the most important factor was the evolution of inflation.
The government has ordered a limit on the price of basic food items, fuel and it has also temporarily capped interest rates on mortgages.
“The issue of fuel, the issue of food, the issue of energy – or gas and electricity – and the issue of interest rates are all very, very important. They should be reviewed again and again and, if processes warrant it, they should be maintained. …This includes retail chains for food, MOL for fuel, and banks for interest rates,” the minister designate noted.
There is no reason to phase out the price caps as long as inflation runs this high and does not start to fall as it is in the government’s interest to reduce inflation, in conjunction with the central bank, Nagy reasoned.
The government may also look to freeze the price of additional items as new factors may emerge that may cause price shocks.
Hungary is experiencing the highest inflation in 15 years and the halt in EU funds is a major setback for Orbán as he could use these funds to maintain the price caps and to introduce other measures to fight inflation. Some analysts believe that the government would much sooner allow the budget deficit to exceed the EU limit of 3% of GDP or would delay key investments than scrap the price caps. Levying special taxes on certain industries like banking or telecommunication may help boost budget revenue, however past experience shows that companies will pass on the higher costs to consumers, which in turn will boost inflation.
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