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Hungary govt gains on unorthodox economic policy

Interest Rates NewsDec 06, 2010 12:00PM ET
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* Polls show strong public support

* People to benefit from tax cuts

By Marton Dunai

BUDAPEST, Dec 6 (Reuters) - Hungary's ruling centre-right Fidesz party is a favourite with voters despite its unorthodox economic policies.

Hungary's government has rejected austerity and aims to close its budget deficit with hefty new taxes on banks and other businesses as well as a diversion of private pension savings into state coffers. Opinion surveys showed Fidesz, led by Prime Minister Viktor Orban, held onto its strong public support even as it clashed with the European Union, investors, international lenders and the central bank. The latest poll shows Fidesz with 37 percentage points of support compared to its nearest rivals, the Socialists, with just 10 percentage points, a result which reflects a general trend in recent surveys.

The government, which took power in May, launched a flat 16 percent personal income tax and a 10 percent tax rate for small businesses -- measures it said would boost growth and create hundreds of thousands of jobs in the next four years.

Hungary is climbing out of its worst recession and highest unemployment in decades and it must work with strict budget limits enforced by the EU.

The government rejected austerity to create room for tax cuts and imposed hefty windfall taxes on businesses and moved to effectively renationalise the pension system, measures further removed from everyday life than income taxes.

"They had to do something, didn't they? If the choice was between taxing me and taxing a bunch of banks, I choose the banks," said Matyas Furtos, a 42-year-old waiter from Budapest.

"And as for pensions, who cares where I'll get that pitiful little money from?"

Voters stayed behind Fidesz even as investors have grown increasingly alarmed by the government's actions, Political Capital analyst Peter Kreko told Reuters.

"There have not been measures that would have hurt citizens in a short-term, material way," Kreko said. "The pension story is only meaningful far in the future, while many people will benefit directly from tax cuts (today)."

The government did far less to soothe investor nerves and put off substantial fiscal reform until next year, which has unnerved markets repeatedly and contributed to a two-notch downgrade by rating agency Moody's on Monday.

The government has also confronted domestic institutions that criticised its moves, including the Constitutional Court, the Fiscal Council budget watchdog, as well as the central bank.

Hungarians have not reacted to those conflicts and appear to embrace the rhetoric of Fidesz.

"What Fidesz is doing might be unacceptable in an old school thinking, among market norms and all," said Rita Zoldi, a 21-year-old student. "Those who criticise the government don't get it: Fidesz is not playing by those old-school rules."

To voters, the debates over pensions and taxes boil down to the pocket book.

"These tax changes are good for me," said Denes Lengyel, a 33-year-old web designer. "I have a small company, the taxes are good there, and they are also good in my personal income taxes. My pension savings are minimal, so I don't think about that."

(Reporting by Marton Dunai)

Hungary govt gains on unorthodox economic policy
 

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