Image may be NSFW.
Clik here to view.
József Papp is professor emeritus at Corvinus University. An earlier piece of his, “The Dutch with No Hatred toward Hungarians,” was published in Hungarian Spectrum last year. The present article is an English translation of his opinion piece titled “A vissza nem térítendő tamogatások megmérgezik a magyar gazdaságot.” It appeared in the opinion column of G7 Ekonomi.
Redistribution in conjunction with EU grants totals at least HUF 2,000 billion (EUR 5.6 billion), distorting the structure of the Hungarian economy, while this money could be allocated in a much smarter way.
Sometime back in 2008, while listening to the radio in my car — during a commercial on Info Radio — I grabbed for my head hearing a lady express her gratitude that she was able to turn her two-star hotel into a three-star one thanks to an EU grant. Holy cow, this is what the EU gives money for?
It was not envy that made me upset. Rather, in my view, in a market economy it is a sin to give grants to profit-oriented companies as national gifts, when funds just started to flow from the EU tap. The possibility of free money confuses — or, more bluntly, poisons the thinking of both potential beneficiaries and those distributing funds. All those who can, not wanting to miss the money falling from the sky, will apply for it, regardless of whether they are in need of a certain investment or asset (service) or not.
The giveaway of support will lead to wastefulness, as the projects thus implemented would have never come to fruition by market allocation mechanisms. The thinking of fund distributors will also be confused by this allocation of funds without compensation, because man is feeble. Especially so once reaching a position where there is no efficiency ramification involved in who gets the gift. Sooner or later “whoever gives more kickback” takes effect. I.e. these free funds will be channeled to the person distributing it.
And this is exactly what happened. In 2009, opposition newspapers reported that an undersecretary of the Ministry of Finance received a grant in the amount of close to half a billion Hungarian forints (EUR 1.4 million) for the upgrade of his hotel in Székesfehérvár. Then it was learned that a hotel owned by a family member of a mayor of Gyula, who also happened to be a socialist member of the parliament, had been financed under very similar conditions.
So, I had no illusions whatsoever that economic development based on the giveaway of non-refundable funds would serve the public interest more than the interests of protegees and political loyalists. Nonetheless, I was stunned that Fidesz, having obtained a two-thirds majority, would go so far as to pay themselves, as is demonstrated in the shocking article of András Bódis, published in valaszonline.hu.
In three years, the Orbán government distributed 300 billion Hungarian forints (EUR 840 million) to their buddies for hotel development. Admittedly, this staggering amount came not from EU grants but from Hungarian taxpayer money. However, it was the influx of EU funds that allowed the Hungarian government to finance such extravagant gentlemen’s fun from the domestic budget.
The vast majority of grants landed in the accounts of the knights of NER (“system of national cooperation”). Two-thirds were awarded to half a percent of the applicants. The largest amount, i.e. 18 billion Hungarian forints (EUR 50 million), was awarded to hotels owned by companies associated with Lőrinc Mészáros. Sándor Csányi is also listed in this group. His hotel, owned with Zsolt Hernádi and István Garancsi in Tihany, received the tidy sum of 8 billion Hungarian forints (EUR 22 million). His being on this list proves eloquently why these grants are mere nonsense.
Csányi became one of the richest men in the country prior to joining NER. He had always been keen on appearing to be independent. However, by accepting these grants (he received quite nice sums for his agricultural holding company for investments, as well as for research and development, the companies under his control received a total of 26 billion Hungarian forints (EUR 72 million) as land-based subsidy in the course of nine years between 2011 and 2019 calculated on today’s exchange rate), he became politically obligated.
The Hungarian economy (and, as a matter of fact, politics as well) would desperately need a few independent entities who would restrain this uncontrolled government mechanism and who, by providing moral support, could make new political actors competitive. When decisive actors of the economy become corrupt by accepting grants, it destroys the good policy-making role of the national bourgeoisie. They thus become accomplices in “poisoning the well.”
Bence Laposa is also on this list with an awarded sum of 631 million Hungarian forints (EUR 1.8 million) as national gifts for his hotel projects. Early this year, Laposa became the focus of the independent media when it was reported that he also received a grant of 143 million Hungarian forints (EUR 0.4 million) in a “spending spree” from the Hungarian Tourism Agency, when funds in the amount of one and a half billion Hungarian forints were distributed among forty members of the Balaton Circle and Stylish Countryside Intellectuals (SVÉT) .
Laposa is the chairman of this advocacy group and also a consultant to this very same agency. Two of his projects were awarded the highest amount of funding. Responding to the scandal, he issued a communique, which was naked evidence of the demoralizing effect of this reckless handout of grants. Bence Laposa is a very gifted entrepreneur who can succeed without grants. However, by participating in this handout of grants, he compromised himself.
It would be hard to identify any public good coming from this money from the sky landing on hotels owned by oligarchs. However, it is the nonplusultra, as reported by valaszonline.hu, that a small portion of these funds could have saved the whole agonizing hospitality and tourism industry, but it never did. This, in light of how much money is shoveled into the economy beyond the 300 billion Hungarian forints (EUR 840 million) provided for hotel developments in the form of grants, not including EU sources, is quite astonishing.
The state, “instead of 15% support, will provide 80% cofunding in addition to the EU grants provided for rural development. This will mean that the budget to be spent for rural development will more or less quadruple in a few years; this translates into approximately 3800 billion Hungarian forints (EUR 10.5 billion) in extra funding.” In light of the above, the question of who and in what ratio will benefit from all this seems to be somewhat foreseeable.
And we have not even mentioned the money from the sky falling on multinational companies who have been investing in the country for more than a decade and a half by now. It would take a separate study to demonstrate the demoralizing effect it has on the Hungarian economy.
One thing is certain: redistribution combined with EU grants completely distorting the structure and making the Hungarian economy extremely dualistic contributes to the creation of an uncompetitive national bourgeoisie, and the costs of this process are rolled over to the SME sector struggling as a xenolith in between the former two. Redistribution, which has grown into an unhealthily grandiose phenomenon and is completely useless for the benefit of the public, is a hotbed of corruption growing more and more unbearable. At the same time it undermines the competitiveness of the Hungarian economy, with indisputable deteriorating trends.
Even György Matolcsy, the central bank chair, acknowledges the problem by mentioning Estonia as an example to be followed, which is successful by doing the exact opposite of what we are doing. They significantly reduced the level of redistribution.
The most efficient and corruption-free use of the annual EU funding of 1000 billion Hungarian forints (EUR 2.7 billion) (note that one third of this comes from the contribution made by the Hungarian budget) would be to repay public debt. I argued over and over to promote this apparently not too well received idea. Even with no real chance of acceptance, I still maintain my position.
Currently, actors in the central and local governments may apply for the bigger slice of the total allocation, which is principally supposed to implement projects of public interest from the funds received through enterprises selected in the process of public procurement. It is unfortunate that this process became synonymous with theft due to the practice of unscrupulous overpricing, because under fair circumstances this institution is well designed to ensure that public objectives are realized at reasonable costs.
Overpricing did not start recently. However, the Orban government developed it to perfection and made it the main channel of funneling funds to the national bourgeoisie. Taking advantage of public procurement is a huge temptation for every politician. Recently, it was claimed that Nancy Pelosi, the Speaker of the U.S. House of Representatives, also gave in to it when, after learning about the plans of the president-elect to procure electric cars for the government, she bought call options on the stock of the potential supplier.
By enforcing the rule of law (i.e. no politician should be above the law), however, the institution of public procurement can be restored. It would take only one first-line politician being charged and taken to court; the asphyxiating climate governing public procurement would soon be ended.
Another part of EU funding is received by the Hungarian government via the tendering of profit-oriented companies. This system should be totally ended.
Instead, a wide array of inexpensive funding instruments should be offered to the SME sector. I am referring primarily to venture capital available to a wide circle (instead of expensive and botched mechanisms managed through oligarchs, see Jeremie programme). Companies could further benefit from easily accessible loans with low interest or subsidized interest and, not least, inexpensive and affordable credit guaranties by the government using EU funds as collateral.
It is not handouts the SME sector needs but rather a stable, reliable environment, inexpensive resources for development, and reasonable taxation, where only expenditures supporting investments in real public interests, transparent to all, would be financed. Unlike what is going on right now, where, in large measure, the above detailed, overly expanded, detrimental and destructive redistribution system is financed from VAT with the highest rate in the European Union (contributed to mostly by the SME sector manufacturing for the domestic market).
It would be worthwhile to use part of the EU funds constituting the basis for this system of handouts to cover tax breaks. I am not thinking of the current, scandalous corporate and dividend tax breaks, but rather of personal income tax relief, something like the contradictory but still useful Sulinet Expressz program in the first half of the two-thousands.
Stimuli for private persons and the business sector to utilize renewable energies would be an excellent area in which to deploy this mechanism. When a private person or a business invests in their own property to utilize renewable energy, or to decentralize the power supply, the individual or business entity should be able to write off a part of the investment from the tax base over a few years; individuals should be allowed to reduce their personal income tax and businesses, their corporate tax.
A feature of renewable energy use is that it proportionately reduces utility costs. In the case of full decentralization, utility bills would tend to zero. The fee paid to utility providers will remain in the pockets of investor property owners to be used freely for consumption, as well as accruing funds to cover that part of the energy efficiency investment not financed from the tax break (like for loan repayment).
The annual electricity consumption of Hungary is 45 TeraWatt hours, and the natural gas consumption totals around 9 billion cubic meters. Regardless of what rate we are calculating with, this costs approximately 2,500 billion forints (EUR 7 billion) for consumers each and every year. I firmly believe that if the government were to designate the same amount to fund tax breaks for these investments as they currently hand out to their hotelier buddies, then in a short while the annual energy bill could be reduced by one fourth or one fifth, allowing an annual 500-600 billion Hungarian forints (EUR 1.4 -1.7 billion) to freely flow into the economy.
And this would just keep growing over time.
I see no other way to utilize EU funds more efficiently. It is a gross mistake to miss the benefits offered by the Münchhausen effect underlying the use of renewable energy. In addition, the program must be accessible on the basis of intrinsic eligibility, not only as a privilege for a selected few. The program should only be applied retroactively for projects already implemented with less opportunity for misuse to begin with. Through smart regulation and verification these risks could presumably also be minimized.