Summary
Highlights
Hungary, once a model of post-crisis recovery, now faces the lowest growth rate in its region. Prime Minister Victor Orban, in power for 15 years, is facing a significant challenge. Despite past overwhelming electoral victories and economic boosts from policies like taxing foreign corporations and nationalizing pensions, his party's support has dropped. A new rival, Peter Maguar, has emerged, capturing 30% of the vote in recent elections, signaling potential trouble for Orban in upcoming legislative elections.
Orban's economic policies, dubbed 'Orbanomics,' aimed to repay debts and maximize short-term growth. Key measures included a flat 15% income tax, low corporate tax, and a high 27% VAT. The economy also benefited from European cohesion funds, making Hungary a top recipient. However, these funds were often directed to allies and family, fostering 'crony capitalism' and a private sector lacking competitiveness. While stimulus measures initially worked during a period of low interest rates, rising rates since 2021 made them unsustainable.
Ahead of the 2022 elections, Orban pursued an ultra-lax fiscal policy, leading to a staggering 26% inflation rate. This disproportionately affected his electoral base—low-income families whose purchasing power eroded due to soaring prices for basic goods and housing. The government's attempts to curb inflation through price controls on commodities resulted in market disruptions and empty shelves. These short-term solutions are seen as exacerbating long-term economic problems.
Orban's reindustrialization strategy focused on low-value-added parts of the production chain, attracting investment through subsidies and currency devaluation rather than fostering high-skill jobs or R&D. Education spending was cut to meet deficit targets, leading to a scarcity of skilled jobs for Hungarians. The reliance on foreign companies, particularly in the automotive sector, and European funds (often misspent) has created a vulnerable economic model. Dependency on the German automotive industry is now a liability as the sector faces cuts.
To counter the risks from the German automotive sector, Orban is turning to China, attracting Chinese electric vehicle and battery manufacturing plants. However, this alliance's reliability is questioned given Hungary's strained international relations. Orban's support for Donald Trump did not yield preferential treatment, and his closeness to Vladimir Putin has raised concerns in Brussels. The EU is withholding €18 billion in funds due to Hungary's refusal to implement demanded reforms, further isolating the country.
Peter Maguar, Orban's new political rival, promises reforms, including implementing Brussels's demands, unlocking EU funds, and overhauling the production model to focus on high-value-added industries and end crony capitalism. While some of his ideas, such as eliminating indiscriminate subsidies and promoting innovation, are seen as positive, others like raising the minimum wage and increasing taxes on the wealthy raise doubts. Despite the economic challenges, unseating Orban is difficult due to his entrenched patronage network, manipulated electoral system, and control over state machinery and media.