Orbán's Speech Marks the Start of the Government's Most Difficult Phase

International investors may feel slightly shortchanged by Hungarian Prime Minister Viktor Orbán's state of the nation speech to Parliament February 14. The prime minister revealed no concrete details about his much-hyped plan to slash state spending and overhaul Hungary's entitlement system, promised for mid-February. Instead, he said specifics would not be available until mid-March. (This is the second time the financial community has come away empty-handed: Orbán delivered a similarly detail-free speech February 7 in Budapest's Millenáris Park.)

The news that a reform package was in the works had spurred optimism among market analysts and financiers, pushing the forint up against major currencies in the past few weeks. Now, repeated delays and an atmosphere of uncertainty poses the risk that Hungary will once again come under pressure from the markets.

Springtime may thus mark the beginning of Orbán's most difficult period yet. The government must simultaneously fulfill duties related to its six-month presidency of the European Union, write and ratify Hungary's new constitution, and impose spending cuts that will please investors but pain the public. The administration is refusing to retreat on any of these fronts despite an increasingly obvious lack of time and resources. Meanwhile, the governing Fidesz party's popularity is continuing to trend downwards and internal party conflicts are threatening to balloon into full-blown battles.

There are two reasons behind the decision to delay the spending cuts:

1. Authorities are still working on the overhaul package thanks to protracted arguments over the details. MPs from Fidesz and the Christian Democratic People's Party (KDNP, a faction of Fidesz that has formed its own caucus in Parliament) tried to iron out intra-party disagreements over the reforms at a February 9-11 meeting in Siófok, a resort on Lake Balaton. The plan backfired: Instead, the gathering enflamed existing conflicts and created new ones. Members of Fidesz and the KDNP bickered over issues such as education policy and the KDNP's desire to guarantee legal protection for fetuses in the new constitution. Conflicts also deepened between various interest groups: National- and municipal-level politicians sparred over the government's plans to "nationalize" education and healthcare. The robust pace of legislative activity over the past few months has given rise to conflicts that are now hindering Fidesz's effectiveness.
2. The prime minister does not want to unveil the austerity measures himself. Political battles over the spending cuts will be fought by Fidesz's parliamentary caucus and National Economy Minister György Matolcsy.

The administration will introduce numerous reforms in the coming months, mostly cost-cutting measures along with some new revenue-raising mechanisms. These will impact broad swathes of voters and put a dent in Fidesz's popularity ratings, which will likely ratchet up tensions within the governing party. Measures that have already been revealed include:

• Reducing the number of people on disability pensions (currently about 800,000 people).

  

• Cutting welfare rolls (the number of people currently receiving unemployment benefits and long-term welfare recipients is about 300,000 together). Projected savings: HUF 100-120 billion (€368-441 million)
• Slashing state medication subsidies. Projected savings: HUF 100 billion
• Lowering state support for public transport. Projected savings: HUF 50 billion 

Prime Minister Orbán's speeches on February 7 and 14 have made it clear that the government's top economic-policy goals are to reduce the national debt (currently at around 80% of GDP) and to create jobs. Hungary may borrow a page from Poland and impose a constitutional cap on state debt. Meanwhile, like the first Orbán government (1998-2002), the administration will implement social policies designed to benefit active workers and high-income earners. Thus Fidesz is making a conspicuous shift to the right on social policy compared to the rhetoric it espoused whilst in opposition especially with respect to Hungary's inactive working-age population.

The delay in Orbán's state-spending reforms does not mean he will ultimately try to avoid making the tough, but necessary decisions.  However, the atmosphere of uncertainty offers fertile ground for fear and conjecture, which may damage Fidesz's standing among voters. This is something Orbán clearly wants to avoid.

For details, please see Reform plans – How will Fidesz spend the next four years.