New Hungarian Government Starts Long Awaited Spending Cuts

The newly formed Bajnai-government in Hungary has released its crisis-management plans (see below for details) to curb the budget deficit and counterweight the effects of the global financial crisis. The most serious austerity measure plan of the last 20 years will cut HUF 1,300 billion (EUR 4.3 billion) in 2009 and 2010 in the central budget. 

 

 

 

The fiscal and economic effects of the crisis management program:

 

• Budget deficit can remain under 3 percent in 2009 and 2010 according to plans but if recession deepens the targets cannot be met. In this case, the government will have to renegotiate the IMF-loan so that the lenders allow Hungary to have budget deficit higher than 3% of the GDP.
• The economic growth outlook has further deteriorated in the short run. According to Political Capital, the GDP-contraction can significantly excess the 6% prognosis, which is the latest calculation of the government, and can reach as high as 10% or close to it. But after 2010 (if the global economic climate turns better), Hungary can produce a fast and robust growth.
• Inflation can rise above 3 percent due to the side effects of VAT rise (25% from 20%), the cut of subsidies (e.g.: gas price). and the rising excise taxes.
• The rate of the Hungarian currency can be stabilized, if the government’s program passes the parliament, and the confidence is restored towards the Hungarian economy. Though if the measures induce intense protests in Hungary, it can magnify the perceived political instability.

 

The main political dangers for MSZP

 

• The most important problems that paralysed the governance in the last three years (lack of credibility, conflicts within and between MSZP and SZDSZ, difficulties of communicating austerity measures) have remained key risks for the new government.
• Because of the deepening economic crisis, MSZP has to abolish some of its former symbolic welfare measures that the party have referred to as the most important achievements of the socialist governments (e.g. 13th month pension, wage hikes in the public sector).
• The program takes away most of the traditional MSZP voter base (pensioners, inactive people, public servants), while benefits social groups that usually support Fidesz (the actives in the private sector). It is highly uncertain that MSZP will be able to “replace” its voter base in one years’ time.
• MSZP is facing a historic defeat in the coming EP election that will strengthen conflicts inside the party.
• Deepening conflicts within the Socialist party may end up in the party’s falling apart and follow the ‘Polish model’ in which the left became so fragmented that it could not form a strong and united political force. Though at the moment this scenario has little chance, it cannot be ruled out that different factions inside MSZP will break away and form a new party.

 

Prospects for the government

 

• The government and the MSZP want to avoid early elections. Some positive effects of the measures will be felt only in 2010 or later (for example, income tax cuts), thus, MSZP’s politicians may expect that in the 2010 campaign the negative effects of the austerity measures can be politically counterbalanced with a campaign based on these benefits and on the credibility regained, which may appear in the stabilised currency rates.
• Although the opinion polls conducted in the last few weeks showed that the public is aware of the inevitability of the austerity measures, this is rather a general sentiment, and does not reflect the approval of the decreasing living standard. Most people would prefer saving government expenses on different social groups than on the one they belong to. Thus, after unveiling these concrete measures, there is a risk that the PM’s and MSZP’s public support will decrease further.
• As the government is not expected to soften the reform program, demonstrations and strikes will intensify in the coming months. On the other hand, demonstrations against the new government’s plans so far have been quite unsuccessful, which is positive for the political stability.
• The majority in the Parliament (MSZP and SZDSZ) are expected to support the austerity measures if the government can bring them into the parliament with a rapid codification until the EP elections due on 7th June. But the political effects of the program, a tragic defeat in the EP elections or the budget debate in the autumn can crack the fragile majority behind the government, thus an early election still cannot be excluded before Spring 2010.
• In the middle run, the fact that in the 2010 campaign MSZP may introduce itself as the political force that put the Hungarian economy on a sustainable path with efficient crisis management and saved Hungary from collapse, could serve as a political advantage. But the success of this message will be threatened by the fervent attacks of the opposition party Fidesz that aim at undermining the new cabinet’s credibility by questioning the “expertise” of the government, damaging the reputation of every government member, and emphasizing the continuity in the government’s politics (“The new PM is more Gyurcsány than Gyurcsány himself”).

 

 

 

The most important measures of the Bajnai-government

 

Tax

• Raising the rate of regular VAT to 25% from the current 20% (an 18% VAT rate for district heating, bread and bakery goods, milk and dairy products).
• Upper limit of the lower personal income tax (PIT) bracket will be raised to HUF 1.9 million (from 1.7 m) with retroactive effect to 1st January 2009.
• The social security contribution (payable by employers up to the double of the minimum wage) would be slashed by five percentage points as of 2010.
• Abolishing health contribution fee as of 2010.
• PIT rates decreasing as of 2010 (18 to 15-17%, 36 to 33-35%).
• Lower PIT bracket raising to HUF 4-5 million as of 2010 → 90% of taxpayers under the lower PIT rate.
• Excise tax raise by approx. 5%.

Pension

• Postponing the 2009 pension adjustment to 1st January 2010.
• Cancelling the reduced pension correction in 2010.
• Withdrawing the second part of the 13th-month pension of 2009.
• Abolishing the 13th-month pension entirely as of 2010, to be replaced by an optional pension allowance conditional to expected GDP growth.
• Changing the pension indexation method.
• A speedy implementation of regulations on early retirement.
• Speeding up the introduction of the statutory retirement age at 65 to as of 2012, and a further increase by six months annual from then on.

Public sphere

• Abolishing the 13th-month wage.
• Freezing the wages for two years.
• Reducing the central support for the municipalities.

Social benefits

• Reducing sickness benefits to 60% from 70% in 2009, and to 50% in 2010.
• Fixing the family allowance for two years.
• Maximizing the duration of maternity benefit (parallel with speeding up the kindergarten and the day care program).
• Step by step abolition of gas and heat compensation.

 

The new cabinet (sworn in on 20th April)

 

	Former minister	Minister in office	Comment
Prime minister	Ferenc GYURCSÁNY	Gordon BAJNAI	41, government commissioner of National Development Agency (2006-2007), minister of Local Government and Regional Development (2007-2008), minister of National Development and Economy (2008-2009)
Minister of economy	Gordon BAJNAI		Provisionally in the competence of the minister of transport, telecommunication and energy (the former candidate, Tamás Vahl stepped back because of accusations of cartel practices as a leader of SAP)
Finance minister	János VERES	Péter OSZKÓ	36, former chairman and Office Managing Partner at Deloitte Hungary. has a degree in law and is a qualified broker and tax advisor, in 2008 was named “Young Manager of the Year” by the National Manager Association.
PM’s Office	Péter KISS	Csaba MOLNÁR	33, minister of transport, telecommunication and energy (2008-2009)
Ministry of foreign affairs	Kinga GÖNCZ	Péter BALÁZS	67, Former Hungarian European Commissioner holding the Regional Policy portfolio until the end of the Prodi Commission on 21st November 2004.
Minister of transport, telecommunication and energy	Csaba MOLNÁR	Péter HÓNIG	57, former deputy CEO at the Budapest Power Plant, former Chairman-CEO of steel works Dunaferr and chairman of national airline Malév. In the ORBÁN-cabinet deputy state secretary under economy minister Attila CHIKÁN (mainly responsible for energy)
Minister of social affairs and labour	Erika SZŰCS	László HERCZOG	59, previously secretary of state at the ministry and has been a deputy secretary of state or commissioner of the minister (labour or economy) in every government since 1990.
Minister of local government	István GYENESEI	Zoltán VARGA	56, previously chairman of a county assembly, founding member of the Socialist Party
Minister without portfolio (responsible for the coordination of social policy)	-	Péter KISS	50, the head of the Ministry of Social and Labour Affairs (2006-2007), minister leading the Prime Minister’s Office (2007-2009)
Minister without portfolio (responsible for secret services)	György SZILVÁSY	Ádám FICSOR	29, state secretary at Ministry of Agriculture (2004-2008), state secretary at PM’S Office (2008- 2009), was not supported by the parliamentary commission, but sworn in on 20th April
Minister of justice and law enforcement	Tibor DRASKOVICS		53, minister of finance (2004-2005), chairman of the Board of Directors of the Hungarian Electricity Board Plc. (2005-2007), head of the State Reform Committee (2006-2007), minister without portfolio in charge of public administration (2007-2008), minister of justice and law enforcement (Feb 2008-)
Minister of agriculture and rural development	József GRÁF		62, founding member of the Socialist Party, minister of agriculture and rural development (2005-)
Minister of education and culture	István HILLER		45, political secretary of state of the Ministry of Education (2002-2003), minister of culture (2003- 2005), president of the Socialist Party (2004- 2007), minister of education and culture (2006-)
Minister of environment and water	Imre SZABÓ		56, member of the Committee on Environmental protection of the Parliament (2006-2008), minister of environment and water (2008-)
Minister of health	Tamás SZÉKELY		53, general director of National Health Insurance Fund (2007-2008), minister of health (2008-)
Minister of defence	Imre SZEKERES		58, member of the national board of the Socialist Party since 1990 and the deputy president of the party since 2004, minister of defence (2006-)