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Hungary’s soaring inflation puts squeeze on Viktor Orbán

With long queues at gas stations, teachers blocking the streets of Budapest as they strike over wage increases, and small business owners protesting tax increases, Hungary’s economic woes and resulting public anger are baffling right-wing Prime Minister Viktor Orban and threaten to escalate his dispute with Brussels over frozen funding.

“I’m taking a second job and giving private lessons,” said Bence Toth, a Budapest teacher who joined a year-long strike in his profession after facing rising inflation. “I work, I go to work, or I sleep. It’s unstable.”

Despite measures such as capping retail prices that were put in place before the war in Ukraine triggered an energy crisis, food and electricity prices in Hungary rose about 50% in December compared to the previous year, according to government data. Headline inflation rose 24.5% year on year in December, the highest in the EU. The block average is 10.4%.

Economists blame partly on the weak forint, the phasing out of price ceilings and the retail tax. The price ceilings themselves had a distorting effect, they said, causing shortages of fuel and staples such as sugar as importers and retailers refused to sell below cost, and pushed up the price of unrestricted products as they sought to compensate. cover for other goods. Last month, the government was forced to remove a fuel tank cap after supplies collapsed, sparking panic buying.

Lajos Torek, chief analyst at Equilor, a Budapest-based brokerage, warned that the situation would worsen. “Household spending is rising, so domestic consumption will fall, higher financing costs will delay corporate investment, public investment will be cut,” he said.

CPI inflation line chart (annual change in %) showing that inflation in Hungary is high and rising.

Economic problems will limit Orbán’s ability to pacify the public through costly populist measures, a tool he has used in the past as his Fidesz party prepares for municipal and European elections in 2024.

“Inflation in Hungary is bad news for everyone,” said Daniel Hegedus of the German Marshall Fund, a US think tank. The prime minister will be forced to lift price ceilings, he said, which in itself will increase pressure on his electoral base. “This will greatly affect a much wider and lower social class, which could harm Orban,” he added.

Public discontent is growing. Teachers, who are seeking pay increases of around 45 percent, as well as protesting high workloads and centralized control of the education system, launched another week-long strike on Monday. Wider demonstrations erupted last year due to sudden increases in taxes on small businesses and cuts in energy subsidies.

Although recent polls show Orbán, who won a fourth consecutive term last year, and Fidesz have no strong political rivals, local elections in central Hungary earlier this month hinted at potential problems for the government.

In the city of Yasberen, opposition candidates for mayor and city council won overwhelming votes, defeating their Fidesz rivals less than a year after the ruling party handily won the district in parliamentary elections.

Analysts say Orban is likely to try to absolve himself of economic woes by hardening his political stance ahead of next year’s elections and making him an even more difficult partner in the EU than before.

Viktor Orban
Hungarian Prime Minister Viktor Orban blames high inflation in his country on EU sanctions against Russia © Attila Kisbenedek/AFP/Getty Images

In recent months, the Hungarian prime minister has shelved EU sanctions against Russia over the war in Ukraine and suspended the bloc’s financial aid to Kyiv as it sought to unlock around 30 billion euros for pandemic recovery and EU structural funds.

Brussels blocked the money based on the perceived risk of fraud and democratic backsliding by Budapest as Orbán expands the government’s control over the judiciary, the media, the arts and education.

The government launched a publicity stunt this month saying most Hungarians oppose EU sanctions on Russia, which Orbán blamed for the country’s economic woes.

“This bloody sanctions regime is driving inflation to the sky,” Orban told state broadcaster MR1 earlier this month. “If sanctions were to end, energy prices would immediately fall along with overall prices, meaning that inflation would be halved.”

He also linked the teachers’ plight to EU intransigence, saying the government would offer a 10% pay rise but could increase it to 20.8% if Brussels provided Covid funds.

Orban’s lack of economic tools “leaves him with a dangerous choice,” Hegedus said. “Deceit or repression [at next year’s elections] maintain unquestioned authority; returning to the world with genuine opposition; or protests [that weaken the government significantly]”.

Since coming to power in 2010, Orban has experienced several crises. His handling of some of them, such as his tough approach during the 2015 refugee emergency, even boosted his popularity. But critics say he may have misjudged his strategy this time around.

“The government hasn’t found the keys,” György Matolcsy, chairman of the Hungarian central bank, told a parliamentary committee in December. “We cannot overcome this energy price explosion and inflationary crisis the old way.”

“Communism has already shown that price ceilings don’t work,” said Matolci, who Orbán once described as his “right hand” in economic planning. “This system has collapsed. We will not return to [it] with such practices.”

Orbán remains steadfast, telling MR1 earlier this month that Hungary’s foreign exchange reserves were close to their maximum after recent borrowings, meaning the country is solvent.

According to EU data, Hungary’s debt fell from 78.6% of gross domestic product at the end of 2021 to 75.3% at the end of last year, below the EU average of 85.1%. In 2022, its budget deficit reached 5.3% of GDP, about double the EU average of 2.7%.

“Hungary can do without [the EU]”, Orban said. “Of course, we are better off with them … but to think in Brussels that without them the sun will not rise … it is completely wrong.”

In the meantime, the Hungarian government has responded to teacher protests with crackdowns, tightening strike rules, firing some for “civil disobedience” and placing education under the control of the interior ministry.

In September, the Budapest mathematics teacher Tamas Paglia was fired. He has since found work at a private school, but said teachers in the state system have been subject to repression and intimidation.

“They are under constant surveillance – what they post on social media, what they like, whether they wear plaid shirts. [the uniform of the protesters],” he said. “That’s absurd. But that’s the reality.”

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