I moved to Budapest, Hungary, in 1992, and I have lived mostly in Budapest and Warsaw for the last thirteen years. I am an entrepreneur – a newspaper owner and publisher – and I have helped to roll out newspapers in Hungary, Poland and the Czech Republic. In Hungary I found a country with a favourable business environment which rewarded success. If the question is ‘Does the West know best?’ then I believe that the example of Hungary and its neighbours answers it with a firm ‘no’.
Publishing independent business news in central Europe has proved to be an immense challenge. Given the recent history of eastern Europe it was impossible to employ the older generation of journalists, as they had been institutionalised by the communication style of the communist regimes. We had to take on young and inexperienced writers, and we had to train them to deliver impartial, carefully researched information.
When I moved to Hungary, 70% of the economy was in the hands of the state. That figure is now around 14%. Austria had the same percentage of state-controlled economy in 1992, and yet the figure has remained constant to this day. I leave it up to you to decide which country has had a more productive and successful decade.
Does the West know best? Certainly not. The pace and scope of eastern European reform has been breathtaking over the last ten years. More bills have gone through the Hungarian parliament in the last twelve years than in the last 60 years in the UK. Quantity is certainly not the sole barometer of success, and it is true that Britain has not had to deal with 50 years of communism. Nevertheless, Hungary has taken steps to deal with issues that continue to be ignored by British politicians.
The implementation of a flat tax has not yet been voted on in Budapest, but the groundwork is being laid for such a move. Western European nations are, by contrast, completely closed to the type of blue-sky thinking needed to countenance a flat tax.
Hungary attracted the most foreign investment of all the countries in eastern and central Europe (including Russia!) during the first seven or eight years of transition. The lion’s share of foreign investment went into a country with a population of 10 million and a graduated taxation system. While Hungary can be proud of her early success there is now a danger that she is resting on her laurels. The country’s reticence in moving towards a flat system of taxation is testament to this phenomenon.
Hungary has got it right in other areas of tax law, however. Corporate tax rates are 16%, among the lowest in Europe. Real action was taken with the Bokros austerity measures, policies that are similar to those proposed by Mr Balcerowicz in Warsaw. These two people realised early on what they had to do and they did it, but they have been painted as the Devil ever since.
Despite the relatively low corporate tax rate, VAT in Hungary is 25%, one of the highest rates in Europe. The costs of employing people, including all the taxes and social security costs, are preposterous. For example, to employ somebody on a basic 700 euro monthly salary costs around 2,000 euros. This is because there are five different business taxes. There is a curious 2% tax on total revenue, not profit, an 18% tax on employees, a healthcare contribution, an 11% pension contribution, a 3% employer tax and an additional 1.5% fee that goes into a state training fund. This has, unsurprisingly, led to a burgeoning shadow economy for labour. I believe it is time to accept that lower taxes make people more honest.
Yet other areas of the social economy provide many different challenges, and it is telling that there is a game on the Ministry of Finance website which allows players to manipulate the country’s spending priorities in order to demonstrate the difficulty in cutting expenditure. The game demonstrates deeply ingrained attitudes about the role of the state in Hungary. This is further illustrated by the fact that the game does not even entertain the notion that people would enjoy better lives if the state stopped taxing them into the ground and allowed private service providers to develop.
The healthcare system, for example, is the stuff of local legend. Though private investors now operate within Hungary, they are mostly choosing to set up private hospitals rather than take the risk of engaging within the public sector because of the current regulatory burden.
But hope does exist. In 2003, a 15% flat tax on the profits of entrepreneurs and small business was implemented, allowing them to escape the existing web of employment taxes. At present this remains a voluntary option for just this one sector of the economy. Its implementation reveals, however, that the Hungarian government has realised that small businesses are essential to the future vitality of the economy, and its popularity augurs well for the future.
Hungary has been a regional leader in terms of economic growth and scope of reform, but there is a danger that it will be left behind by its neighbours. Romania has become the latest state to implement a flat tax, and I believe it is vital that the powers that be in Budapest do likewise. Western Europe offers a timely example to Hungarians of the dangers of failing to reform ageing and inefficient tax and social systems. It is time for politicians in both East and West to act if they are to create a prosperous Europe for future generations.
© Copyright; Foundation for Economic Growth and various authors. Individual authors retain their own copyright.
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