Hungary's Economic Game Plan

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David Ferenczy

The debt crisis that roiled Greece this year caused collateral damage in other countries, including Hungary, whose currency, the forint, was pummeled. Although exports are strong, Hungary's domestic demand has been weak. President Pal Schmitt recently sat down with TIME's editors and talked about the government's plans for growth and reducing its deficit, now at 3.8% of GDP.

How was Hungary hit by the global recession?
The global economic crisis rolled in when the Hungarian economy was very weak, so we're living through it as a double crisis. That's why getting out of the crisis is more difficult. We had to ask the IMF for help. They offered $25 billion, which we didn't ask for, and we didn't use the whole of it — only three-quarters. And it was not used to pay back debt. So therefore our reserve is higher than that of many other European countries; it went up 40%. So it was, at the time, very important. It gave us a certain safety and security — let us not forget, we are not in the euro zone. We were abandoned a bit with our forint, and our forint was shaken by the crisis.

Hungary made news this year by essentially getting rid of the IMF. Why?
I don't want to use this expression, to "get rid of" the IMF. They helped us when we needed them the most. Our relationship is O.K., but we're trying to stand on our own feet now. The contract we made with each other will expire this year, and the government has well-determined ideas about how to handle the great state indebtedness, to stabilize the Hungarian currency, to decrease the budget deficit to 3%. With effective measures, the government will be able to complete these tasks. [But] this is not the most important problem.

What is, then?
The 10% unemployment rate is unbearable in Hungary. We have to create jobs. Especially for the young generation, which is more affected by unemployment. Every economic measure, everything we do in regard to economic development, we have to concentrate on job creation. That's the most important thing for our future. The government wishes to create 1 million within 10 years.

That's 10% of your population. Where are those jobs going to come from?
This is a question perhaps difficult to answer and easy. Small and medium-size enterprises [SMEs] provide 70% of the jobs. There are a half-million in Hungary: if each of them took one single additional employee, then half of the problem is solved. If growth goes forward again, then house construction, road construction, rail, all kinds of construction starts: construction work [generates] 80 different jobs.

What do you need from your European partners?
The E.U. helps us with a considerable sum allocated from different funds for Hungary, which is one place where we think we can stabilize our finances. The second is, we asked the banks in Hungary to participate in the joint responsibility, the obligations. They made quite a nice profit during the crisis. O.K., it happens in other countries. We think, Now we have problems. We want to go forward, we want to re establish the growth in our country, so they have to pay a certain part of this. They have to take their share. We agreed, all the banks agreed, whether it be Hungarians or foreigners. This year is the second wave, where we can re-establish the Hungarian economy with the help of European money, with the help of banks and, of course, by cutting expenses enormously.

How have you cut expenses?
For instance, we reduced the size of the parliament from 386 to 200. We reduced the size of local councils: it has had an effect already. The highest salary in Hungary was fixed. Even the President of the national bank cannot enjoy more salary. His salary was cut by 80%. The highest salary now is 2 million forint [about $10,000]. This is the highest salary — including the head of state.

You are proposing tax cuts, yet you need to raise revenues. The U.S. is debating the same issue. How can that work?
We will support the [SMEs] with tax reductions ... The personal-income tax will go down next year, reasonably. I'm not an economist by practice. I learned in a university about 50 years ago, but I think this works: if you cut taxes, people can spend more; if you cut taxes for companies, they can employ more people, and growth starts with more employment. We, the government, believe in this.