Austerity measures in Hungary: The shape of the crisis to come


For the last 12 years, the consecutive Governments headed by Viktor Orbán successfully avoided imposing direct austerity measures on the Hungarian population. This is no longer the case, however: skyrocketing inflation, especially of energy prices, threatens to spark ongoing protests and discontent this winter. As a consequence, the governing Fidesz party could lose a significant amount of support and its political stability could be a concern in the long run. Because of the opposition’s weakness, however, the Government is almost certain to remain in office until the next election.

Image of many notes of 20 thousand forints piled on each other

Hungarian Prime Minister Viktor Orbán has clearly learned many crucial lessons from defeating his political opponents back in 2010. One such lesson is that the country’s leaders, no matter how dire the economic situation, should avoid direct austerity measures aimed at their core, middle-income voters.

To this end, Orbán and Fidesz developed the “dream formula” that worked successfully for the past 12 years: Whenever the Government needed extra income, it newly imposed or raised taxes on companies serving the people. These companies invariably passed those tax increases on to consumers, and hence the Government mostly taxed consumption rather than income, with many voters clearly convinced by this populist approach, particularly after having lived through the “lecturing” neoliberalism of the 2006-2010 Socialist-Liberal Government.

Following the April election this year, Orbán’s new Government quickly announced spending cuts and EUR 6 billion in windfall taxes, mostly on large companies. However, it seems this was insufficient to balance the budget. In recent weeks, the fifth Government to be led by Orbán has been forced to abandon its highly successful policy of avoiding direct austerity measures: In the space of less than 10 days, the Government significantly increased taxes on hundreds of thousands of small businesses and on the self-employed, announced a major reduction in the number of public sector employees and, most importantly, unveiled an unprecedented increase in residential gas and electricity prices. 

Any “above-average consumption” of electricity by households will mean its cost will double per month, with consumption to be paid at “residential market prices”, while household gas consumption prices will see a more than sevenfold increase if gas is consumed above the average level per household set by the Government.

This is a major development in a country with an average monthly wage of around EUR 950, a median wage of EUR 650, and a shortage of modern, insulated housing: Hundreds of thousands of people will be unable to pay their  gas bills this winter, which could run anywhere between EUR 300 and 600. Even if the Government imposes a  moratorium on turning off the gas for the winter months as expected, with these austerity measures and an inflation rate of more than 10%, a significant percentage of Hungary’s population will face an acute cost-of-living crisis.

The reduction to the small business tax benefits has already triggered some demonstrations all over the country, but the protesters were mostly among the urban, liberal middle-class, i.e., not Fidesz’s traditional voters. However, those set to suffer the most from the energy price hikes are rural populations living in single-family houses, i.e., Fidesz’s core voter base. Cutting household utility costs (“rezsicsökkentés”) was once a flagship policy of Government, a measure that decided the 2016 election. Moreover, keeping utility prices down was Fidesz’s single most important election promise in the most recent campaign: Reneging on this policy is a very visible political climbdown for Orbán. For this reason, Fidesz is looking to protect certain core voter groups from the full extent of the price hikes.

An important political question is who the Hungarian people will blame for this situation. In reality, the Fidesz-led Government can hardly be blamed for the inflation caused by Russia’s war in Ukraine or the disruption of global supply chains. However, the Government did spend billions of euros during Fidesz’s 2022 election campaign on welfare measures, fully aware that this money would need to be repaid after the election. 

The Government now blames the war in Ukraine for these economic difficulties (using the term “war inflation”) and criticizes the “international left” as well as the United States and the European Union (EU) for imposing sanctions on Russia. The opposition, on the other hand, highlights the fact that the inflation started well before the war and has been exacerbated by Fidesz’s overspending.

If we look at the political events of the past few years, we can be sure that the narrative of the Government is going to win, but at the same time it is difficult to assume millions of people would blame the opposition and the international left for bills they cannot afford to pay.

The best-case scenario for the Government would be to reach a fast agreement with the relevant EU bodies on the Recovery Fund and use that money to cover the expenses of the country’s households until the war in Ukraine is over. To achieve this, the Government is prepared to make concessions to the EU on the rule of law. While Hungary expects about EUR 5.9 billion from the EU Recovery Fund, it is still unclear how those funds could be used to help households – and for how long they would be enough to compensate for rising energy prices.

During the last decade, Hungarian opposition parties have failed to offer a credible alternative to Orbán, who has cleverly exploited the economic state of affairs to shape the domestic political system. In the absence of this best-case scenario, we expect Fidesz to lose a significant amount of support by year-end, even among its core voter group. Because of the opposition’s weakness and Fidesz’s two-thirds constitutional majority, however, the Government is unlikely to fall. In the near future, though, we will see something previously unprecedented: Orbán governing the country during a real economic crisis. There is the distinct possibility that new opposition movements could emerge, which is essential to making Hungary’s political system more competitive again.