(The author is a leading analyst at Raiffeisen. The Zero Divider is the analyst corner in G7.)
When the government’s budget plans for next year were announced, discussions flared up immediately. Interestingly, in addition to the usual ‘hohogues’, Magyar Nemzity Bank and the Financial Council have expressed a critical opinion, mainly because the general government deficit is set to decrease only slightly. This article seeks to respond to the arguments for and against the government’s plans. The study seeks to remain within the boundaries of the economy so that the political and social aspects do not appear for discussion.
We run from a distance to the question, but I promise you we’ll get there. During economic crises, major changes are concentrated in both economics and economic policy – so studying the relationship between the two is a real fix for economists. These periods are particularly intense in support of building and testing economic theory and contributing to the development of scientific ideas about the performance of economics and ideal economic policies.
However, we must accept that, as in the social sciences in general, there are no absolute truths in economics. In contrast to different economic methods of visualizing the same phenomenon, conflicting conclusions and practical recommendations for economic policy may emerge.
However, it cannot be denied that there is “mainstream” economic thinking – this is called prevalent in Hungarian. However, this changes over time and as the economy develops, constantly reflecting new ideas. All of this is important not only in theory but also in practice, as the economic policy applied is influenced by the prescription provided by economics, especially when these recommendations are taken and incorporated into their own repertoire through major research, among other things, consulting institutes and international institutions.
But what does this have to do with the Hungarian budget? The fact that the above is reflected in the recommendations of international organizations regarding the optimal economic policy and the economic policy solutions that must be applied in relation to crisis management, and finally in the economic policy applied in each country.
For a long time, countercyclical economic policy recommendations were trusted in the mainstream of the economy. In a nutshell, this assumes that economic growth can be divided into two components: trend (or the natural rate of growth, what “goes out” of the factors of production) and the cycle (which merely adds or loses business cycles to the trend). From this point of view, the ideal would be for the economy to be as close as possible to its natural growth path, i.e. the task of good economic policy is to reduce the volatility caused by business cycles. If the business cycle is positive, growth above trend – the economy heats up – will constrain demand (the central bank raises interest rates, the government lowers the budget ratio), and if the business cycle is negative and lags behind, demand stimulates (interest rates decrease and the budget deficit increases). So you go against the cycle. This approach has been the predominant one, and until recently has determined the thinking of the European Commission and thus its economic policy recommendations.
No matter how great the growth theory mentioned above, economists have faced many practical problems in applying it. On the other hand, the accurate calculation of trend growth is a similar challenge to trying to domesticate a black cat in a black box – nearly impossible. Another such problem is that the cycle has been observed to affect the trend. In other words, the past has a great influence on the present, as certain characteristics of a given economy show surprising permanence even after a major change in the economic environment. For example, if the unemployment rate in the economy is very high during the crisis (negative cycle), it will remain relatively high during the post-crisis recovery – but it could be the opposite. This phenomenon is called hysteresis. On the other hand, if this is true, then ideal economic policy should strive to keep economic growth high, unemployment rates low, etc. for as long as possible. This is “high pressure”, that is, the theoretical background to high pressure economics.
Although it has been discussed since the 1970s (Okun, Tobin), the idea of a slowdown and a high-pressure economy began to gain more attention after the 2008 financial crisis, while analyzing the crisis and then searching for an appropriate recipe for crisis management. For the first time in the United States, elements that can be derived from the theoretical model of a hyperbaric economy have entered into economic policy thinking and tools. This endeavor has been characterized by domestic economic policy since the second half of 2010. The general prescription for tackling the Coronavirus crisis also appears to derive from this line of thought.
And we’ve already got to the local budget plans for next year. After a general government deficit of 7.5 percent of planned GDP this year, the government wants 5.9 percent next year. We are far from pre-crisis levels of less than 3 per cent. With such a fiscal policy, the period 2021-2022 will again be marked by a very stressful economy. At the same time, the economic environment that prevailed in the period before the Coronavirus crisis will return:
High economic growth, high investment rates, rapid growth of bank credit, low unemployment rates and relatively high inflation.
The problem with MNB is, understandably, with the latter. It is unlikely in this environment, with such a massive stimulus of government demand, that inflation will remain at 3 percent in 2022, in line with the target. The problem of the Financial Council is different, the literal justification is as follows: “The Council notes that a general government deficit of more than 3% is expected to be allowed by the rules of the European Union (…) Margin of maneuver similar to the general exemption clause applied by the European Union in domestic legislation does not provide for it Law of stability only in the event of a decline in gross domestic product. ” This is a legal argument, not an economic one.
In general, the main objective of the Hungarian macroeconomic policy is to achieve rapid economic growth and thus a fast catch-up path. The theoretical framework that suited him became more accepted and became part of the mainstream of economics. The biggest risk is the relatively high inflation that comes with it. In this way, the government’s budget plans for the next year pose an additional challenge for MNB: How do you deal with a situation you want to maintain (or even improve) its credibility and support the high-pressure economic model at the same time? Figuratively speaking, the government has thrown the “hot potato” of the hyperbaric economy into the hands of MNB. And these potatoes will be very hot due to the planned large deficiency.
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