"Orbán doubled the national debt in such a way that it wouldn't be a problem," writes the online newspaper Szabadeuropa.hu courtesy of Tamás Wiedermann, and immediately presents a diagram showing that the national debt has doubled since 2010...

...I used to deal a lot with and write about the national debt, I got bored with it, but unfortunately, it seems that it will remain an evergreen topic. Then let's get into it. First of all, most of the confusion stems from the loose use of the concept of public debt, because it does not matter to whom we owe and whether we are indebted in our own currency or in a foreign currency.

These statistics are distinguished in such a way that there is the debt of the public finances on the one hand, and on the other hand Hungary's gross debt to foreign countries, the latter of which was registered by the Magyar Nemzeti Bank as "debt embodied as the debt of residents". The debt of the public finances includes the debt of the budget, local governments and social security, which together, or possibly supplemented with smaller parts, make up the debt of the public finances. The debt of the public finances can be owed to both domestic and foreign citizens. On the other hand, Hungary's gross foreign debt stock is the debt owed by the public finances, private individuals and companies to foreign countries.

The two types of debt must be imagined as two intersecting circles, the common part of which is the debt of the public finances towards foreign countries. Of course, to make matters even more complicated, foreigners can also buy government bonds issued in HUF and domestic citizens can also buy government bonds issued in foreign currency, which is why the statistics show the foreign currency debt of the public finances. The debt of the public finances accumulates in such a way that the budget (more precisely, the public finances) spends more than it has tax revenue, and covers the difference in the form of issuing government bonds, on which it then pays interest. If inflation is low (two to three percent) and at the same time there is economic growth of two to three percent, then with a public budget deficit of three percent, the debt of the public budget will not increase compared to GDP at current prices...

The balance of the balance of payments of Hungary is largely determined by the foreign companies located here, so the Hungarian government mostly only has unorthodox tools at its disposal to balance the balance of payments. Such an unorthodox tool can be taxing the income of foreigners, limiting the export of income, or convincing the interested parties in some informal way that it is not in their interest if the country is in debt.

But now let's return to the introductory question, why is it okay that the debt of the public finances has doubled at current prices. This is because the GDP has also increased in the meantime, and the debt of the public finances is largely domestic, so there is little risk of a speculative attack on the forint from abroad , as indicated by the latest assessment of the Fitch debt rating.

Of course, it is true that due to the economic disturbances of recent years, which can be traced back mainly to the covid epidemic, the debt of the public finances in relation to GDP has increased from 65 percent to 78 percent, but it is still ten percentage points below the EU average (the debt of the public finances has increased everywhere). There is therefore no reason to be ashamed or afraid, and there is no reason to rush to reduce the debt of the public finances in relation to GDP.

The situation is different with the balance of payments, which by 2020 has decreased from the previous five or six billion plus to two billion minus, and the data published so far in 2021 also show the continuation of the deteriorating trend. This is where the alarm bell rings, we must place the improvement of the balance of payments with all available means at the center of economic policy...

...Returning to the initial question, it is not a problem that the debt of the public finances is 78 percent compared to GDP, but the problem is that the balance of payments is deteriorating. It will be good to pay attention.

Source: Magyar Hírlap/economist Károly Lóránt

The full article can be read here.

(Cover image: Magyar Hírlap)