Hungary, as readers of this blog well know, is struggling with a large budget deficit and a terrible balance of payments problem, which has led to a certain amount of trouble. Specifically the fighting in the streets kind. Now, the Socialist government of Ferenc Gyurcsyany came up with a simple plan to cut the deficit from 10.1 per cent of GDP to something more reasonable.
Essentially, he decided to tax the rich until the pips squeaked. More accurately, he decided to tax industry until the pips squeaked, introducing a new 4 per cent “solidarity tax” on company profits. During the Chinese civil war, one of the more depraved warlords used to levy a “Happy Tax” on the unfortunates who lived in his territory – the taxpayer was meant to pay up and be happy. Presumably Hungarian businessmen are expected to do something similar.
The first results don’t look good. In fact they look disastrous. Volkswagen-Audi has reacted to this by cancelling â‚¬1 billion worth of investment at its plant in Gyor, which produces 20,000 Audi TT sports cars a year. The Gyor plant is Hungary’s biggest exporter, all on its own. VW had been planning to double its output. It is fair to say that essentially all the extra cars would be exported.
Doh! On one level, I suppose I should be sympathetic to the Hungarians because they are being pushed around by an arrogant German multinational. On another, though, you can’t deny that this is a really incredibly stupid policy. Hungary’s biggest economic success has been its fast-growing export manufacturing sector, concentrated around Gyor. And it’s only that sector that is making an impact on the current account deficit. After all, if you don’t increase exports, the only way you can reduce a current account deficit is to reduce imports, which means reducing the standard of living…