Orbánomics has been a disaster for Hungary

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Hungary is heading to the polls today to vote in a historic election, one that is relevant far beyond its borders.

In a clear sign of the shifting world order, both Russian President Vladimir Putin and US President Donald Trump have backed incumbent Prime Minister Viktor Orbán to the express detriment of the EU and Ukraine. 

Hungarians are living under Orbánomics, the self-styled “illiberal” model put in place by the country’s long-serving premier. Its main effect has been to centralise economic power and decision-making while undermining independent institutions.

The model has been a disaster for Hungary. It has made the country far poorer than it would be otherwise, with prices having risen higher than in peer nations as corruption proliferates and public services deteriorate. (Meanwhile, the government-aligned elite has done quite well, as my colleagues have diligently documented, while Orbán’s Hungary has become a byword for democratic backsliding, as chief economics commentator Martin Wolf laid bare.)

This is not surprising. As I noted in a previous edition of this newsletter, populist economics of both the left- and right-wing varieties tend to cause further damage, and Orbánomics is a textbook example of right-wing populism with Hungarian characteristics.

Under Orbánomics, international and “opposition” firms are disfavoured while markets and public tendering have been made far less free and fair. As with other populist governments, independent institutions — the media, central bank, judiciary and universities — have been undermined and co-opted.

The early period of Orbán’s second stint in office beginning in 2010 saw a period of stable economic growth akin to a sugar rush before an inevitable crash. Cheap Russian energy, inflows of foreign capital and EU disbursement funds soon dried up and “sharply exposed pre-existing structural weaknesses”, according to the Centre for Eastern Studies.

Hungary’s economy has remained orientated around low value-added activities — chiefly, assembling German cars — and the nation has made little effort to move up the value chain. Hungarian productivity growth is chronically low and rates of investment in education and research and development are far below the EU average.

The oligarchic restructuring of the economy has, of course, not helped, further weakening competitive forces and compounding under-investment. The result has been stagnant GDP growth.

Hungary has also experienced the highest cumulative inflation among countries in the EU since 2020. Overall, prices are up 57 per cent over the period, nearly double the rate for the bloc as a whole (28 per cent).

Voters truly hate inflation. For evidence, look no further than the US, which tilted back to the twice-impeached Trump largely due to rapid price rises. (He is the most consequential example in the 2024 “graveyard of incumbents”, as chief data reporter John Burn-Murdoch aptly put it.)

Hungary’s experience as an inflation outlier is down to domestic policy. Ahead of the April 2022 election, the government introduced additional stimulus, in a move some analysts saw as an attempt to “buy” votes. It repeated the same tactic ahead of this election, offering giveaways costing 2.2 per cent of GDP. Meanwhile, temporary government price caps proved largely ineffective.

In line with the populist playbook, the government has steadily reduced the independence of the country’s central bank, leading to persistently higher inflation in the run-up to the Covid-19 pandemic and Russia’s full-scale invasion of Ukraine. Annual inflation rates peaked above 25 per cent.

Moreover, policies aimed at boosting fertility — a centrepiece in Orban’s nationalist agenda, which includes tax breaks and interest-free loans and is estimated to cost around 5 per cent of GDP — have so far failed. While the fertility rate initially recovered from its 2011 nadir to about 1.6 average births per woman, it plunged back down to 1.3 in 2025. This is well below replacement rate and neighbouring countries that did not implement such expensive measures, for example Bulgaria and Slovakia.

Any modest impact of these policies — routinely commended by right-wing populists in the US and elsewhere — has been swamped by the negative consequences of the Hungarian economic model. Research suggests high inflation and recessions, of which Hungary has had a couple since 2022, diminish procreation. (Arguably, the post-2012 benign macroeconomic environment did more than any specific policy to boost the Hungarian fertility rate.)

Low fertility combined with a staunch anti-immigration stance equals a shrinking population. Hungary has 500,000 fewer people since 2011, which equates to a 4.5 per cent decline.

The country also grapples with labour shortages in key sectors such as health, as thousands of doctors emigrate in search of better pay. The education sector is facing staff shortages too.

With growth low and a relatively high budget deficit, prospects for remediating some of these issues are dire. Hungary’s budget deficit now roughly equals its family policy outlays at 5 per cent of GDP, which is high compared with peers. Its debt servicing requirements are the highest in Europe as lenders demand an “Orbán premium”.

While Hungary’s GDP is expected to recover next year owing to increased pre-election fiscal giveaways, Capital Economics warns that this will push up the risk premium on its public debt.

Orbánomics has clearly failed. The economic model has left Hungary poorer and less productive. Yet if Orbán’s bid for re-election also fails, the country’s prospects could improve. One near-term benefit might be the disbursement of withheld EU funds worth around €20bn, or roughly 10 per cent of nominal GDP. In the long term, if corruption is cut and rule of law restored, much-needed investment could rebound, supporting growth and renewed prosperity. 

Should Hungarians make a decisive pivot at the ballot box against the odds of a slanted electoral system, they would be better positioned to improve their lot. 

Food for thought

Interactions along the income distribution matter for future incomes, according to a study using the random allocation of Finnish conscripts to dormitory rooms. The richer your roommate, the better your long-term earnings, the research suggests.

Free Lunch on Sunday is edited by Harvey Nriapia