Orbán’s right hand

Hungary’s national economy minister has an ambitious agenda to implement.

Hungary’s current government has repeatedly said it will be judged by the success of its ambitious social and economic agenda – and driving this agenda is György Matolcsy, the national economy minister and long-time confidant of Viktor Orbán, the prime minister. 

The 55-year-old son of an animator has the task of delivering on campaign promises to cut taxes, create one million jobs within a decade and lay the foundations for a reversal of Hungary’s dismal demographic trends.

But the revenue-raising measures Matolcsy has adopted since the populist-conservative Fidesz party took power last April have been no less controversial than the media law that has overshadowed the first two weeks of Hungary’s presidency of the EU’s Council of Ministers.

Since taking power, he has levied ‘crisis taxes’ on banks and on companies in the energy, telecommunications and retail sectors. The government is coercing members of private pension funds to hand over 2.7 trillion forints (€9.7 billion) of savings by threatening that they will otherwise receive no state pension. In return, the government has halved corporation tax and introduced a flat tax with a discount for families with children.

Decisive Matolcsy may be, but there are questions about how fully in charge he is of his sprawling ministry, which Orbán created to run public finances as well as large parts of economic and industrial policy.

When delegations from the International Monetary Fund (IMF) and the European Commission visited Budapest last July to review how Hungary was meeting the terms of the €20bn stand-by loan that the previous government took in the autumn of 2008, they were shocked at the lack of details that the new government could offer about its plans, their costs and their outcomes.

But Matolcsy, who works closely with a small circle of advisers and Orbán, did not come into government with austerity in mind. One financier who has worked with him suggests “he is not interested in the numbers; if they don’t fit, he assumes they are wrong”.

Two years ago, most of the economic-policy specialists competing for Orbán’s ear argued that only austerity and tax hikes could restore fiscal stability. But Matolcsy told Orbán that tax cuts and an industrial policy targeted at sectors such as health, tourism, agriculture and renewable energy could bring growth and restore Hungary’s fiscal balance.

Fact File

Curriculum Vitae

1955: Born, Budapest
1977: Degree in industrial economics, Budapest University of Economics
1981: Doctorate in economics
1981-85: Civil servant, finance ministry
1985-90: Researcher, Institute for Financial Research
1990-91: Prime ministerial adviser and state secretary dealing with privatisation
1991-94: Deputy director, then director, European Bank for Reconstruction and Development, London
1995-99: Director of various economics think-tanks, Budapest
2000-02: Economics minister
2003-10: Think-tank director and adviser to Viktor Orbán
2010-: National economy minister

His approach was more appealing politically, and Orbán told businessmen in 2009 that the IMF would fund tax cuts once his government was in power, since it would otherwise be faced with a bankrupt debtor unable to repay its loan.

This optimism was dashed days after Fidesz’s landslide victory, when Orbán learned from José Manuel Barroso, the European Commission’s president, that the multilateral lenders would not sanction his plan to run a deficit much higher than in the bail-out agreement. Since then, critics say, improvisation has been the order of the day. The ‘crisis taxes’, the raid on pensions and the decision to terminate the stand-by agreement with the IMF are all a result of this one miscalculation, they argue.

Matolcsy’s policy preferences have deep roots. After gaining a doctorate in economics in 1981, Matolcsy joined the communist government’s industrial planning department in the finance ministry (and the Hungarian Socialist Workers’ Party, the communist party). Colleagues say that, since then, he has always been more interested in the nuts and bolts of industry and production than in headline macroeconomics.

That focus made him the odd one out when he joined the Institute for Financial Research in Budapest in the mid-1980s. There, economic liberals such as his boss, Lajos Bokros, worried about the country’s indebtedness and pushed for further market reforms.

Matolcsy’s research there – on property ownership reform – nonetheless made him a natural choice as an adviser on privatisation to József Antall, leader of the first centre-right government in 1990. But Matolcsy lost a battle with liberal reformers and, by way of compensation, Antall sent him to the European Bank for Reconstruction and Development, where he served as a deputy director, and then director, until 1994.

Matolcsy has remained intellectually distinctive from his former colleagues. In 1995, Bokros, then finance minister, forced through a package of savage cuts and a currency devaluation, creating – so his supporters say – the growth that began in the late 1990s. Matolcsy believes that foreign investment, not budgetary discipline, was behind the growth.

Such differences have left their mark, some suggest. “He was correct in the mid-1990s when he rejected austerity in favour of demand creation,” says the financier. “And he feels he never got the credit he deserved…which makes him reluctant to listen.”

Though associated with the right, Matolcsy was not a political figure at this point. However, his interest in industrial policy and employment made him a natural ally of Orbán, who was transforming Fidesz from a liberal dissident movement into a conservative, paternalistic force capable of filling the vacuum on the right created by the collapse of Antall’s Hungarian Democratic Forum.

Eventually, in 2000, two years after Fidesz’s first electoral victory, Orbán made Matolcsy his economics minister. Matolcsy immediately poured some of the pot of cash generated in the late 1990s into a development plan that small businessmen remember as a grants bonanza.

This was Matolcsy’s contribution to the uncontrolled spending that remained a feature of Hungarian politics until 2008. A former colleague describes him as good, even canny, at spending money, but “he should never be in charge of a budget”.

That is just one of the criticisms directed at him. “He’s a visionary who should never be put in a position to implement things,” says one banker. “Out of ten ideas, three are brilliant, three OK and four catastrophic.” As for Bokros, he says Matolcsy will be remembered as the “man who destroyed Hungary’s pension system,…undermining trust in the state”.

Calls for Matolcsy to be replaced have appeared even in pro-government media. But Orbán has dismissed such calls. “Why would I get rid of my right hand?” he asked last year.

That defence is, no doubt, partly because Orbán is never keen to appear weak. But, philosophically, the two men have much in common: Matolcsy remains a believer in the power of government to improve citizens’ lives, while Orbán has described the role of the state as to help, not serve, its citizens and, by extension, its companies.

On one point, Matolcsy and his critics appear united: the stakes are colossal. As Matolcsy argued in a 2008 book, “good government decisions reinforce society’s human efforts, while wrong decisions hammer them to pieces”.

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