In the next half an hour we shall focus on economic issues. We have Prime Minister ViktorOrbán in the studio. Good morning.
Good morning. This is indeed that time of year [for economic issues].
Let me just add, for the sake of our listeners, that we’re recording this interview a few minutes before half past one on Sunday, and we’re focusing on economic issues.
Fitch has confirmed Hungary’s current credit rating with a stable outlook, meaning that the three most important credit rating agencies now consider Hungarian bonds to be investment grade. If we combine this with the fact that you announced the standardisation and reduction of the corporation tax rate, in this respect we shall also break away from the pack in global terms. Was this, in fact, a message to international investors?
The new single-digit tax on profits, the nine per cent corporation tax, benefits every Hungarian business. There’s no doubt that this is a high point in the history of Hungarian economic policy in recent years, but this has foundations. Economic policymakers didn’t decide overnight to table the reduction of corporation tax, an unprecedented increase in the minimum wage, extension of allowances on the small business taxes KATA and KIVA, or the extension of family allowances. We’re talking about these things because there is a solid bedrock on which we can rely, and there is fertile soil for these economic measures. In the modern world everything happens so fast, so we might have forgotten that in 2010 our country was in worse shape economically than Greece. And the problem wasn’t simply that the economic policy was wrong, but that the Hungarian economy didn’t have clearly defined foundations. In economic policy one must lay down rules of iron, or rules of thumb, which cannot be violated, and on which one can then build a viable economic system. Economic policy is not entirely independent of a people’s disposition, and the first aspect of the Hungarian character is how the people look at life and the economy. This is always decisive, and we decided that it was not worthy of the Hungarian people for them to be supported by others: they should stand on their own feet. And the Hungarian people also know that he who pays the piper calls the tune. This means that in a country with the enormous debt that we had, it would be the IMF and not ourselves who would decide what we should do. Therefore this question had to be addressed. We had to lay down this principle, we had to send the IMF home, and we had to stand on our own feet again. The other important thing which we needed to state was that we didn’t want to live on handouts: something else unworthy of the Hungarian people would be millions of people waiting at home for the postman to deliver meagre monthly benefits. So we needed an economic policy to create a work-oriented economy instead of a welfare benefit-based one: an economic policy which reinforced the message that if there is work, everything else follows from this. So first let there be jobs, and then make it worth working. We laid down this principle and set out in this direction. A record high number of people are in employment, and while in 2010 only 1.8 million people were paying taxes, today there are 4.3 million taxpayers. Unemployment is below five per cent, and in practice there’s a shortage of labour, rather than an oversupply. So we’re close to full employment. Results began to emerge once we had laid down these principles, built them into our economic regulations, in the taxation system and so on, and then operated this machinery – this economic system – for three or four years. As a result, because the foundations are sound, we’re now talking about the lowest corporation tax rate in Europe, we’re talking about a minimum wage increase with fantastic inherent opportunities, and the possibility of promoting small businesses. The budget is in order, government debt has fallen, and our financial situation is stable. This is also reflected in the opinions of the credit rating agencies.
In the next twenty minutes let’s look in some more detail at all those things you’ve just listed. From what you’ve just said, the answer to my next question may seem obvious, but why is this happening now? The timing has taken everyone by surprise.
Hungarians tend to be pessimistic. I, for one, wasn’t surprised at all, to give you just one exception.
It’s reassuring that the Prime Minister knew about the plan.
And there were quite a few others in the country who had expected this for some time. The Hungarians are one of those peoples which lost the 20th century. We are thoroughly schooled in failure. We lost territories, population, our country was devastated, and we were on the losing side in two world wars. Then the communists came and took from us all that our families had worked for – never to be returned. So the 20th century gave the Hungarians a thorough lesson in failure and pessimism. Now then, it’s not so easy to emerge from this and to say “From tomorrow I’ll believe that everything will be better”. People don’t believe that. After all, the Hungarian people barely want to believe their own eyes. It’s very important to have people at the helm who have an optimistic and hopeful outlook on life, and who dare to set high targets, who are able to convince the rest of the country’s citizens – despite the defeats of the 20th century – that they should believe that this is a worthwhile endeavour. And if we do this together, if we make progress together, everyone will benefit. But the Hungarian people find it very hard to believe this; even now, as they listen to me, many of your listeners are shaking their heads. So we need many more years, many more successful years. We need Hungarian champions in the economy, and not only in the Olympic Games. In the economy, too, we need successful measures, we need rising wages, higher minimum wages, more successful businesses, and a more competitive economy to show people achievements on a daily basis. Today when a politician speaks about success, people see it as propaganda, rather than a comment on reality. This is despite the fact that we have started out on that path. We have yet to arrive and money doesn’t grow on trees, but we have set out in a direction in which we have every reason to believe we will be successful. We are able to implement these measures now because we’ve done the hard work: the Hungarian economic model, the work-based economy is successful. We have always believed in it, and now it is also recognised by the outside world. The next phase is about to begin, and the Minister for National Economy is currently engaged in negotiations with employers’ and workers’ representatives on a six-year economic plan. We’re not far from an agreement, and perhaps we’ll have time to talk about this here as well. Cooperation with the trade unions is indeed amicable, and I wouldn’t have thought we’d be able to come to an understanding so soon. We have some problems with businesses, and we must fight some more so that the business world accepts a tangible rise in the minimum wage. They’re divided on this issue: some support it, others don’t. We would like to bring this struggle to a successful conclusion, and come to an agreement with business representatives in the next few days.
We’ll definitely talk about the wage negotiations and the minimum wage increase in more detail. Is the announcement just made, the announcement on the corporation tax, linked in any way with the European economy, which is being transformed as a result of Brexit?
What changes will there be in the investment-friendly allowances which have so far been introduced for this reason?
They’ll remain in place. We haven’t simply turned one dial on the machine: we’ve also adjusted to this the other elements of taxation – including allowances. And so one can say that businesses will be able to operate within the framework they’ve known for some time by paying less in taxes, and their work will also become easier. I’m convinced of this – after all, we’re not communists. We don’t believe in the silly notions that communist economic plans were built on – such as nationalisation and wage regulation, and all those sad and silly things which destroyed the economic system of the entire Central European region after World War II. We don’t believe in those things. As we’re not communists, and don’t believe that the state itself will drive the economy directly, we must also have faith in the businesses which drive the economy. We need them, and the economy will not work without them. We cannot operate the economy – we can only regulate it. We’re able to create good conditions, but we can’t strike good deals, because they form part of business, they fall within the remit of businesses. So we also need competitive businesses. The Government is able to boost the competitiveness of businesses if we reduce the bureaucratic hurdles which they have to deal with – we have a great deal to do in this department – and if we reduce taxes. Businesses will be able to pay higher wages if they pay less in taxes – and we’re in the process of reducing taxes on wages. I can fight for higher wages and reach our goal by reducing taxes on businesses, and by using the minimum wage to set a certain limit. This the form our campaign on wages takes.
Will this announcement change the fate of corporation tax revenue? If tax revenue falls, then there will be less money for sport and the arts.
We’ll see. With all modesty we can perhaps say that after 2010 Hungary successfully changed its system of taxation, because if we also introduce the tax cuts, economic performance will increase, and even with lower tax rates, this increased economic activity will provide the state with its revenues. So I’m not giving up on the goal that, even with lower taxes, we can provide this country with higher standards in sport and culture – because it is possible to raise more funds, even with lower tax rates. As far as I can see, the causes of culture and sport are on an upward path, and will stay there.
This is with very low tax on profits, which are in practice the second lowest among OECD Member countries after Switzerland, so we are the best…
This will be the lowest in the European Union.
That’s right – this also means that Hungary will be attractive, Hungary will be even more attractive for foreign capital. This is one side of the coin. The other is this: do you expect any possibility of this leading to the new foreign businesses in Hungary attracting back Hungarians living abroad, because of the skills they’ve acquired?
Such effects may well emerge, and investment coming to Hungary will increase. A change in the fiscal system will not immediately lead to the desired effect; to achieve this we need two or three years of consistent work. After that we can expect results, similar to the 2010 and 2011 fiscal reforms, which by 2013 had resulted in the desired effects. Wages have been increasing continuously since 2013 – for more than thirty months, for three and a half years – and this is so because we changed our taxation system in 2010. But it took two to two and a half years for the effect of the reforms to be felt, and this will also be the case now. In this instance, however, the tax cuts will increase the investment coming to Hungary. As regards Hungarians working abroad, my view is somewhat different from the conventional one.
Yes, we spoke about this last time.
Everyone moans about this issue, but I see potential in it – an opportunity. This is what we fought for. I remember when I was Prime Minister for the first time – between 1998 and 2002 – we negotiated the conditions of our European Union membership. We fought to reach an agreement – and while there was general consensus on this in Hungary, it was difficult to achieve – which stated that if a Hungarian decides to try and find work abroad, the European Union’s Member States should not prevent this. We hailed this as an achievement. But now that Hungarians are taking advantage of this opportunity, politicians have come to see it as something negative. I’m convinced, however, that the people don’t see it like that. I think that we should instead prepare to live in a world in the years ahead in which Hungary is a Member State of the common European economic area. And our people will also come and go whenever and wherever they see an opportunity, whenever and however they see fit, according to their sense of enterprise. I wouldn’t suggest that the state restrict them in any way.
We’ll talk some more about the labour market, but for now a last thought on the tax on profits. Gábor Beer, head of KPMG’s Tax and Legal Services, has told Portfolio that Hungary is beginning to turn into a tax haven: social security contributions and corporation tax have been cut. He added, however, that the local business tax is not very advantageous. Do you have any plans to introduce reforms in that department as well?
We are unable to amend it. On several occasions the European Union wanted to see it abolished in Hungary, and we defended it. I don’t like any kind of tax, but we must accept that taxes of some kind must be paid, because the civilised running of a country requires police, an army, teachers and health care. Taxes are never our friends. There is a certain level, however, which must be paid, and the people realise – as do I – that they must pay a certain level of taxes. And they’re prepared to do this. But if they feel that their money is spent on all sorts of absurd things and on unnecessary bureaucracy, that they’re not respected, that they’re paying their taxes but getting nothing in return, then people will simply not pay their taxes. In Hungary now this is changing, and this is also why we’re able to generate more tax revenue, despite decreasing rates. At this point in time, however, we’re unable to amend the local business tax: if we did, our local governments wouldn’t have any financial revenues, and our cities and smaller settlements would then be in great trouble. Even if we want to make changes to it – and this is something which can never be ruled out – we must only do so with due caution, and with a great deal of preparation.
For the sake of our listeners we should note here that the planned corporation tax rate we’re talking about is 9 per cent, while in Slovakia it’s 22 per cent, in Romania 16 per cent and in Serbia 15 per cent. When a Central European, an East-Central European investor wants to invest here, from a regional point of view it is also important what tax rates our competitors are levying.
Well, yes, because we want to be the best.
In this we are the best.
Yes – in this too. We’d like to be the best at what we have talent for. We’ve spoken about sport, and we’d like to be the best in culture, too, but the Hungarians also have a talent for business – they’ve always had that talent. We’re talented as a nation of entrepreneurs – even if for some time we were weaned off this talent. If the tax system is well regulated, if the banks work and funds are available, Hungarians and Hungarian businesses can compete with the best. And so we want to be the best, and in Hungary we want to create the region’s most business-friendly environment.
Practically all the players in the economy agree with the direction which you’ve just outlined. The main claim of critics is that this reduction in corporation tax is most favourable for big business. For the rest, who now pay corporation tax at ten per cent, this one per cent reduction is modest.
But not insignificant.
That’s no doubt true. Do you envisage the reduction in social contributions, or the extension of allowances on social contributions as a means of helping the Hungarian SME sector? This is where we’ve come to.
Naturally, I see the minimum wage as the most important. At present the minimum wage is central to my thoughts. What we’ve talked about up to now – corporation tax, businesses, and so on – is important. But I believe that in Hungary now there are members of the lower middle-class who are able to find jobs, and who agree with us that if there is work, there is everything. It’s not irrelevant, however, what such work is able offer. They now feel that, in return for their effort, they could receive greater appreciation and greater respect – in other words, higher wages. This is not impossible, based on the Hungarian economy’s performance. Here we need government intervention: a government position, a government decision, a courageous decision which even goes beyond the trade unions’ conception. This decision should confirm that the minimum wage can be increased significantly. I have the courage to embark on this because I’ve already done this once before. It was the same then. Perhaps no one now remembers this, but in 1998 the minimum wage in Hungary was less than twenty thousand forints per month, and over the course of four years – partly through personal decisions, because at the time I also personally dealt with this issue – we managed to raise it to fifty thousand. Some say that this played a part in our election defeat, because at the time this was too much for businesses to bear. We don’t know whether this was in fact the case. But my experience is that if we raise the minimum wage up a category, it will have beneficial economic effects. And we also know how to do this, because we’ve already done it once before. What I’m trying to say here is that an increase in the minimum wage is feasible now, and businesses are also right to say that payroll taxes are too high. They request, or rather demand – if you heard them, perhaps you’d choose that verb…
They demanded it here, too.
They demand that we should, in return, reduce the taxes on wages. And I agree with that, they’re right on that. We have yet to determine the percentages, the extent of reductions, over how many years they will take effect, and in how many stages. The Finance Minister is a brave man, who has tabled a proposal to businesses for a reduction in payroll taxes over a period of six years. I see this as a well-thought-out proposal worthy of serious consideration: the sort of proposal which Hungarian businesses have not seen over the past thirty years. So they would do well to consider it, and I think that it would be worth their while to come to an agreement with the Government.
Fine, but you’ve briefly mentioned that in the past businesses found the rise to be too much. Businesses are now saying the same thing and adding that, even if they raise the money for this sharp increase in the minimum wage, there is a question about more qualified members of their workforces. They can’t give them a pay rise because…
No, because the Hungarian minimum wage system comprises two distinct elements. There is the basic minimum wage – let’s say the minimum wage which is paid regardless of qualifications; and there’s another minimum wage – let’s call it the minimum wage for skilled workers. I think that increasing this second element is even more justified. This is why we haven’t yet been able to come to an agreement with businesses – but we will. Returning to the reduction in corporation tax: you should take account of the fact that the number of Hungarian businesses which have so far kept their revenues below the tax threshold of five hundred million forints will now suddenly increase their revenues as, above the level of five hundred million forints also, the rate is only nine per cent. We’re Hungarians, we know what we’re talking about – we know ourselves. Now that we’ve removed the limit, just notice that…
I wouldn’t call it cleansing.
Whitening of the economy.
People think rationally: if there’s a threshold, and exceeding it means that you’re required to pay the state much more, you won’t exceed that threshold. One of the problems with progressive taxation has always been that it suppresses performance. We’ve now removed this element of progressivity from corporation tax, and this is now a flat-rate tax. So everyone can feel relaxed about declaring what they have, how much they’ve earned, how much profit they’ve made; and they can pay tax on it at a uniform rate.
In the wage negotiations, what authority has been given to the Minister for National Economy? I know you said earlier that he should do what it takes. But employers feel the same way.
All negotiations also have tactical elements and, if you don’t mind, I won’t show you all my cards. But the Finance Minister has been given room for manoeuvre.
On Monday, however, there was a meeting of the Seniors Council. When we talk about wages, we should obviously also say a few words about pensions. You’ve also been criticised about the extremely minimal pension increase so far…
Those who criticise us are right. This is despite the fact that they are criticising the wrong person – because the Government is not against paying higher pensions, but we must consider how much we can sustain. Up until 2010 pensions were typically taken away from the people: the news was always about how much less pensions would be. They took away an entire month’s worth, for instance. In 2010 we concluded an agreement with pensioners. I personally guaranteed this agreement, saying that we’d preserve the purchasing power of pensions. We’ve fully honoured that pledge. Once again this is something which Hungarians don’t believe, because we are, after all, calibrated for pessimism. But the truth is that pensions have not only maintained their value, but over the past six years their value has increased continuously. We’ve now reached a period of low inflation. Our plans suggest that next year also it will remain at below one per cent. Since we raise pensions in line with inflation, the figure is a low one, about which every pensioner feels understandably aggrieved. Now, however, if we manage to bring this struggle to a conclusion and are successful, and come to an agreement with businesses, there will be a higher wage increase. Wages in Hungary will therefore increase, and as a result inflation will also rise. This will then give scope for a higher pension increase as well. As far as I can see today, if the Finance Minister successfully negotiates the tax package, the 0.9 per cent pension increase planned for next year can be increased to 1.6 per cent. This is the same as the increase in 2016 – an increase which this year pensioners were able to accept.
We’ll continue this as soon as there is a decision, or as soon as an agreement has been reached…
For me it’s important that we don’t forget about pensioners. It’s not just that I’d like pensioners to understand and to appreciate that the Government is looking out for them and taking care of them. This is one aspect – but only one, as we’re not talking about gestures, but about fairness. It is true that over the past thirty years a great many people have worked hard to revive the economy after the fall of communism. But people had to carry this country through the extremely difficult 20th century, all the way to the fall of communism. And those people were our parents and grandparents: today’s pensioners. Now that we’re doing better we mustn’t forget this. This is why it’s important that pensioners should always feel that they, too, are part of this country, that their earlier efforts also contributed to our achievements, and that they, too, are given a share of the opportunities arising from those achievements – at least to an acceptable degree. So I’m also preparing to take some individual decisions.
Let’s talk a little more about the wage increase, the real wage increase. One of the issues of the past few weeks has been a forty per cent real wage increase. László György, an economist with the Századvég think tank, who was here in this studio, has concluded from accurate calculations that a forty per cent net pay rise can be realistically implemented over a period of five years. We won’t go through the data in detail – you obviously know the figures involved, and we’ve already talked about this on our programme. Do you agree with this percentage, and do you have a similar plan on your desk?
We always aim higher, so I can accept these as initial figures – and if we can implement them, it will be quite an achievement. I’m glad if we can set out on the path. But once we’ve started on this path, I’ll use every possible encouragement – with both rewards and penalties – to push everyone in the Government ever higher, and higher still. Because, I repeat, the most important thing is that people should not only have access to jobs, but should also feel that work is worth the effort. Furthermore, if people don’t work – if they don’t feel that work is worth the effort – state finances can also easily run aground. When talking about the budget and finances politics becomes an art, because we must provide while not exhausting our resources. It’s easy to give by distributing what we have, and then later find that there’s nothing left to give. In the economy, while paying for pensions, wages, social welfare benefits, culture and sport, we must ensure that funds are continuously replenished and not exhausted. This machinery must be kept running. For my part, I will always respect the rules which determine the operation of this machinery. One cannot afford to give amounts this year which mean that there’ll be nothing left to give next year. The socialists have already tried that: in 2002 and 2003 there was a major programme of pay rises which was not based on the essential economic foundations. It wasn’t combined with measures which would serve to boost the economy, and it wasn’t combined with tax cuts. What was the consequence? Within a few years we all went bankrupt – the whole country. So we must give and must introduce increases while ensuring that we never run out. We must do this by generating greater and greater energy.
It’s now a quarter to two on Sunday afternoon. From the studio here you’re going straight to Serbia, where today there’ll be a bilateral intergovernmental summit. What’s on the agenda?
We’re going to southern Serbia. We usually visit Hungarian-inhabited territories and we go to the capital: so we go to Belgrade, and, say, Szabadka [Subotica] and Vojvodina. And this is also true when we visit other neighbouring countries. I wanted to break with this habit now, and for this I found a good partner in Prime Minister Vučić of Serbia. We established that current relations between the two countries are good. In the area of policy on minorities, Serbia’s practice is more than fair, and economic cooperation is close. We support Serbia’s European Union membership – even though the European Union doesn’t want to enlarge, and doesn’t even have the slightest intention of taking these issues seriously. But we are a country which wants to wake Europe up, and wants to make Europe understand that enlargement generates energy, rather than dissipates it. The European Union doesn’t have a bright future if it refuses to admit countries which are eligible, suitable, and have ties to Europe. Serbia is such a country, and Serbia’s place is in the European Union. This is our standpoint. And now we would like to broaden the area for Hungarian businesses’ activities – which are extremely intense in Vojvodina, in northern Serbia – to southern Serbia as well. We’re taking businesspeople with us, and we’ll also launch projects. We see the whole territory of Serbia as a potential area for Serbian-Hungarian economic cooperation. At the same time we invite Serbs to come here and invest in Hungary, and to find financial advancement here. I’d like to see the Serbian and Hungarian economies connected with as many economic links as possible – not only in the traditional Hungarian territories, but also in southern Serbia. This is why we’re going to hold this intergovernmental meeting in the city of Niš, in southern Serbia.
You’ve been listening to Prime Minister Viktor Orbán.