Adam Bartha is Director of EPICENTER, a Brussels-based network of independent free-market think tanks, and a former Director of International Outreach at the IEA.
Almost half a year ago, Hungarians voted overwhelmingly to oust Prime Minister Viktor Orbán after 16 years of uninterrupted rule. Many, myself included, thought this an unlikely outcome, given how steeply Fidesz had tilted the playing field over the years.
Yet Orbán himself had correctly predicted it at CPAC in 2022. A government that cannot deliver a constantly improving quality of life, he said, is doomed to fail. After many years of double-digit inflation and two years without real GDP growth, his forecast came true.
Amid the post-mortems on Hungary’s illiberal democracy, the policy and institutional story has received far less attention. Few people outside Hungary follow what is changing, or likely to change, under the new Prime Minister, Péter Magyar.
On the institutional side, there has clearly been a major shift since April. Political pluralism is back. The Constitutional Court now consists more of respected lawyers rather than of party cadres. The public broadcaster, which pumped out North Korean levels of party propaganda, has been shut down and is being rebuilt from the ground up. The funnelling of public money into private foundations (many of which also funded MAGA-aligned think tanks in the Anglosphere) has been reversed. Parliament has elected a new president who does not shy away from criticising the ruling party and is even willing to clash with the Government over senior appointments, such as the new Prosecutor General. That would have been unimaginable under Orbán.
Economic policy is changing more slowly. Orbán’s Hungary showed what Mariana Mazzucato’s ‘entrepreneurial state’ looks like in practice. The previous government ran an assertive, mission-oriented industrial policy, picking winners (manufacturing, heavy industry) and losers (finance, retail) among market actors.
On top of this, government officials heavily influenced who bought and sold private assets, concentrating ownership in the hands of people aligned with the ruling party’s priorities. Orbán was keen to build a Hungarian ‘ownership class’, often financed by taxpayers and created through regulation that favoured government allies. This system will be slow to dismantle, but there are early positive signs, such as the removal of price caps and talk of market-based competition in place of cronyism.
In conservative circles, Orbán liked to claim that his was the only Thatcherite government in Europe. It was always a slogan rather than a reality. But if a broken clock is right twice a day, a broken government can manage it too. Here are three areas where the previous government got things more or less right, and which the new government should keep.
Income tax
Hungary has a moderately high effective tax rate on labour, but one of the lowest income tax rates in the EU. It is also set at a flat 15% on wages, dividends, capital gains and interest. The system is simple and avoids the cliff edges familiar from the UK, which discourage people from working more hours or asking for a pay rise. Flat income taxes are a rare sight in Europe. Hungary’s is worth keeping.
Corporate tax
Corporate tax matters for growth too. Whilst less ambitious than Estonia’s model of deferred taxation, under which companies pay 0% on profits they keep and reinvest, the Hungarian 9% rate is still one of the lowest in Europe. Tax competition is essential for attracting foreign direct investment, and Hungary’s 9% compares well with the 25% charged in the UK and France.
SME taxation
In 2013 small businesses were given a monthly flat-fee regime (KATA) in place of complicated and ever-changing tax and accounting rules. It was a real simplification for almost half a million small business owners, but a 2022 reform, rushed through parliament, reversed the progress and made most of them ineligible. Small and medium-sized enterprises (SMEs) are the backbone of most European economies, and making their lives easier should be a key priority for the new government. The quickest win is to return to the pre-2022 regime.
Plenty of Orbán-era economic policies deserve to be reversed: the nationalisation of private pensions; special ‘windfall’ taxes on banks, retailers, energy and telecoms firms; price controls on fuel and food; and budget deficits above 6% of GDP. The full list of bad ideas would fill a much longer article.
The new government is right to spend most of its time reversing the harmful policies of the last 16 years and pushing through liberalising reforms. It should not waste its energy changing the few things that actually work.
Agree on what Hungary got right. Much like Estonia. The support for manufacturing and sceptic view on finance is the same playbook that Xi has for China.
Brief and informative - thank you. I have often wondered why we are so willing to import so much, but struggle with importing good governance and other simple ideas from around the world which have been shown to work.