2010 Budget Passed in Hungary

Prognosis

 

Government stability and the budget

• The smooth passage of the 2010 budget marks the beginning of the end for the Bajnai cabinet. The budget was the government’s last major hurdle; now that it has passed, the government has met all its short-term objectives related to crisis management.  
• With a deficit target of 3.8% of GDP, the 2010 budget cannot be considered a typical election-year spending plan. There is a serious risk that government will overshoot its deficit target because it overestimated state revenues and did not account for the expected additional expense of consolidating public transport companies . Still, it was crucial for both the government and the MSZP to preserve a favourable opinion among foreign observers and market players. The party will undoubtably exploit this asset during the campaign. Consequently, the risk of pre-election government handouts further upsetting the budget (as happened in 2006) is minimal. However, since the Socialists will all but certainly be absent from the government after 2010, some Socialist politicians with no ties to the government may engage in a dangerous bidding war over irresponsible promises.
• The government has no intention of resigning following the passage of the budget. Based on past experience, the president will call a general election at the earliest possible date, expected to fall on April 11, 2010. 
• While in the past few weeks the government’s popularity increased slightly, the gap between MSZP and Fidesz continues to be huge. Based on recent public opinion surveys, Fidesz leads the socialists by at least a factor of three (surveys of committed voters find over 60% support for Fidesz and around 20% for MSZP). Jobbik's success is considered a foregone conclusion. The party is projected to receive well over 10% of the vote; it cannot be ruled out that Jobbik will send more delegates to Parliament than the MSZP. While in theory the Socialist party has reserves among undecided voters, it is far from certain it will be able to mobilize these voters. Although current surveys measure support for LMP and MDF under the 5% threshold, they may gain seats in parliament. The chances for the SZDSZ and its splinter organizations are all but zero.  

 

The government and MSZP's plans for the period through the end of the term

• Prime Minister Gordon Bajnai has indicated several times that Hungary may start talks on joining the ERM II exchange-rate mechanism early next year. He asid he would initiate talks on this topic with all Parliamentary parties. Keeping the issue on the front burner is essential for the government for a number of reasons:  
  • If Hungary enters the ante-room for the euro, it could complete the stabilization process – an issue that’s difficult to communicate to the general public – with a tangible achievement. Such an outcome would represent a grand finale for the Bajnai government and greatly facilitate Mr. Bajnai's future return to political life with the reputation of a successful crisis manager.  
  • The success of such talks would present serious difficulties for Fidesz. It would leave the next administration's economic policy with few fiscal options and deny the new government the opportunity to apply fiscal stimulation in the early phase of its term in office. Therefore, in the short term, Fidesz has a vested interest in seeing the failure of the government’s talks aimed at accession to the ERM II.  
• The chances of success are undermined by the fact that the EU and international organizations usually fear that a new government is liable to increase the budget deficit, providing arguments against early ERM II accession.  
• A number of economists with no affiliations to the right, including Central Bank chairman András Simor and Lajos Bokros, said that the country should spend as little time as possible in ERM II (i.e., no more than two years). Since the country is not expected to join the euro zone before 2013 or 2014, Fidesz may use this logic to argue that joining ERM II in 2010 would be premature. 
• While Fidesz would indeed like to loosen the budget deficit, it has been making every effort to put the blame for such an eventuality on the present government well in advance. In the run-up to the election it will regularly criticize the budget and accuse the Ministry of Finance of providing unreliable data on the development of the deficit.  
• In addition to economic and fiscal policy, public security may be another focal issue for the government and MSZP. This is practically the only area that will receive more funds in real terms in 2010, and the issue is of primary concern for the general public. By implementing effective and visible security measures, in theory MSZP could prevent the further advance of the authoritarian Jobbik.  
• The departure of the Minister of Justice and Law Enforcement, Tibor Draskovics is presumably related to this issue. MSZP may need a person with close ties to the party who can communicate the issue effectively and with more credibility. The government may also find it useful if the ministry is no longer led by a discredited politician exhausted by political debates, with little support and plagued by professional mistakes. Draskovics is expected to take a position at the PriceWaterhouseCoopers accounting firm. According to the information in the press, the next Minister may be Dezső Avarkeszi, currently state secretary, or Gábor Juhász, the current minister without portfolio in charge of state security. (Both are socialist politicians). 

 

MSZP's prime ministerial candidate

• According to some observers, by nominating MSZP caucus leader Attila Mesterházy as its prime ministerial candidate, the party has elected a leader for the post-election period. However, at this point it is far from certain that Mr. Mesterházy will remain in the top ranks of the Socialists once the elections wrap up:   
  • By appointing the caucus head, the Socialists have simply postponed the resolution of their internal debates rather than closing them. Mr. Mesterházy appears to be a compromise candidate who was chosen to preserve a fragile peace, not to reunite his party. (Importantly, during the nomination period Ferenc Gyurcsány, who has been at odds with Mesterházy for quite some time, launched an internal campaign to promote the candidacy of EU Commissioner László Kovács).  
  • It remains to be seen whether in the coming months the prime ministerial candidate will be able to increase his influence within his party and national politics. Should he fail to mobilize the socialist camp, he may become the first victim of renewed conflicts following the elections. It would be a clear success for the party if he managed to prevent Fidesz and Jobbik from jointly gaining a two-thirds majority (securing a “democratic one-third”) although such a successful outcome is doubtful. 
  • Attila Mesterházy's attempt to mobilize his party’s constituency during the campaign will be undermined by his low public recognition, his less-than-charismatic political style and his relative lack of political experience. Moreover, Attila Mesterházy has been called to testify in court at the corruption trial of János Zuschlag, a former Socialist party functionary. A number of witnesses have already brought up Mesterházy’s name in connection with the case. This could easily be used to destroy his credibility.

 

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Economic events and data releases

 

 

 

Political events

 

 

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Leading Trends

 

Parliament passed the budget

 

As expected, on November 30 Parliament passed the budget with the support of the majority of MSZP and SZDSZ representatives, and Fidesz and the MDF opposing it. With the exception of the mayor of Székesfehérvár, Tihamér Warvasovszky, all Socialist representatives supported the bill. At the last minute, a Socialist lobby from Békés and Baranya Counties managed to earmark a couple billion forints for highway construction, although this will have no substantive impact on key numbers  (i.e., the budget has not been “diluted”).

 

Some details from the budget:

• Compared to the current year, the government slashed HUF 450 billion from the 2010 budget. Consequently, the redistribution rate has stabilized at around 50% of the GDP, while the redistribution rate among Hungary’s regional competitors continues to be 35-40%.
• In 2010 pension benefits continue to be the largest item in the budget (close to 20% of total expenses). However, in a break with previous practice, no increases are planned for retirement spending.
• Due to unfavourable economic trends, more funds have been earmarked for unemployment benefits next year, while the budget for family support and basic training has been reduced.
• In addition to unemployment benefits, funds have been increased for public security and expenditures related to loan servicing. 

 

Budget cuts compared to 2009

 

 

Attila Mesterházy - MSZP's prime ministerial candidate

 

MSZP's presidium and electoral board unanimously nominated caucus leader Attila Mesterházy as the party’s candidate for prime minister. The decision is not final (it has to be confirmed by the party congress to be held on December 12). The congress is widely expected to confirm the decision.

 

Mesterházy's political Career

 

Attila Mesterházy, MSZP's current caucus-head, is an economist by training. Prior to his political career he worked as a university lecturer and a communications expert. He was first elected to Parliament in 2002 and was also a member of Prime Minister Péter Medgyessy's advisory staff. He later worked as state secretary at the Ministry of Youth and Sports under Ferenc Gyurcsány, and at the Ministry of Youth, Family, Social Affairs and Equal Opportunities.

 

From a political angle, the above-mentioned position is important for the following two reasons: 1) Mesterházy has been one of the key witnesses in the “Zuschlag Case,” which is expected to generate relentless political attacks in the coming months (socialist representative János Zuschlag and his colleagues are alleged to have “siphoned off” funds from the Sports Ministry); 2) During that period he was on clearly bad terms with his boss at the ministry, Ferenc Gyurcsány. Presumably, this explains why his career gained new momentum only after the fall of the former Prime Minister. Fidesz’s accusation that both Bajnai and Mesterházy are under the control of Ferenc Gyurcsány is merely as part of a communication strategy that refers obsessively to the Gyurcsány era. It has relatively little to do with actual conditions within MSZP.

 

Ferenc Gyurcsány's failed attempt to “smooth the way” for László Kovács in the race for the prime ministerial nomination indicates that he is losing support within the party. Nonetheless, since Mr. Kovács has many supporters among the Socialists, he is expected to play a prominent role in the campaign. On the whole,  Mr. Mesterházy's nomination proves his weakness within the party, not his strength: No major power centre within MSZP wished to share the blame for an expected defeat at the polls; Mesterházy appears to be the ideal compromise candidate, whose defeat may minimize everyone else’s losses.

 

Political storm over the gas supply company, EMFESZ

 

The National Bureau of Investigation (NNI) arrested István Góczi, the chief executive officer of EMFESZ, a gas supply company. The events leading up to the affair go back to April when Góczi sold the company controlling nearly one quarter of the Hungarian natural gas market for one US dollar to an unidentified Swiss offshore company. Subsequently, Mafobi Holding, owned by EMFESZ’s previous owner, Dmitrij Firtas, filed charges against Góczi. Police arrested the CEO and searched his house. Following his arrest, Góczi said former Finance Minister János Veres lobbied NNI leaders to secure his removal.

 

Presumably, the confusion around EMFESZ is connected to personal meetings held separately by Viktor Orbán and Ferenc Gyurcsány with Vladimir Putin in Russia. This suggests that the future of the gas company is to a large degree subject to political bargaining.

 

 

 

 

Meetings: Gyurcsány-Putin and Orbán-Putin 

 

As prime minister, Ferenc Gyurcsány was already an important partner of the Russian prime minister and is believed to have remained one of Putin's important lobbyists even after his resignation. At the same time, Viktor Orbán  maintained a distant relationship with the Russian, especially while he was in opposition. However, following a recent meeting with Putin, Orbán said bilateral relations with Russia must be re-examined and Russia could be an important partner in helping Hungary reach energy independence. Orbán specifically mentioned the expansion of the Paks Atomic Plant, a project that could be achieved with Russian assistance, in his view. In reality, MVM (Hungarian Power Companies Ltd.) hopes to carry out the project through private investment, although so far no official decision has been made on potential investor groups. With the above gesture, Viktor Orbán openly invited the Russians to participate in the extension project.

 

While the ownership structure of EMFESZ is shrouded in mystery, it is taken for granted that the current, clearly temporary situation will only change with the consent of Russia, which supplies gas to the company with the assistance of E-On. Last week, energy Minister Péter Hónig hinted that state-owned Hungarian Power Companies Ltd. may acquire a stake in the company. The hitherto passive Fidesz immediately issued strong criticism in an attempt to prevent a potential transaction. Potential buyers of EMFESZ include E-on, Gazprom and Mol.