The results

The overwhelming percentage of "yes" votes should not have been surprising, even though the Pollyannas (including me) hoped for less of a thumping. What nobody foresaw was the large turnout: slightly over 50% of all eligible voters went out, and over 80% of those who voted said "yes" (in effect "no") to three cleverly worded questions about co-payment, daily hospital fee, and tuition. They don't want to pay. Understandable. Unfortunately, the overwhelming rejection of the introduced changes means a bit more than simple answers to three simple questions. It means, in my opinion, that the overwhelming majority of the Hungarian people doesn't want any part of the New Hungary Ferenc Gyurcsány talks so much about. They don't want to change. They don't want to accept the new rules of a new game. They want to be taken care of by the state. They believe that the state will find the way to support them, provide them with free university education and with absolutely free medical services (not counting the envelopes, of course, but they are accustomed to that). Where will the money come from? They don't rightly care.

So, what now? Gyurcsány announced that the government had already prepared legislation to be discussed and voted on in parliament tomorrow that would abolish the copayment and hospital fee as of April 1. I have the sneaking suspicion that already today patients will refuse to pay anything. After all, why should they have to pay today when within two weeks the whole thing will be scrapped including the automats doctors and hospitals purchased for receiving the fees? Members of the government steadfastly kept repeating yesterday that there was no way the missing income of doctors and hospitals can be supplemented. After all, augmenting of income of doctors and hospitals from the budget is impossible because the budget is very tight and there is no room for any maneuvering. Also, because the referendum was sanctioned by the Constitutional Court on the grounds that these fees are not budgetary items.

The Fidesz has a plan though: income from the state lottery should be used for improvements in medical services. Surely, a clever political move: it sounds so virtuous to use this ill-gotten money for the public good. Yeah, indeed, why didn't the government think of that earlier? Very simply, the state's share of the lottery's income is also part of the general budget. To properly appreciate the cleverness of this particular Fidesz move remember that the state lottery is one of those successful state companies that Gyurcsány hopes to make public and offer shares in it to small investors. Well, if the income from the state lottery must be used for financing health care, it must remain in the hands of the state in its entirety. How devilishly clever.

I have no idea what the government will do under the circumstances, but my hunch is that the Fidesz legislative proposal on the state lottery will not get far in parliament. After all, the government parties are still in the majority and the MDF surely will not support the Fidesz position. I hope that the coalition parties will stick by their guns and simply return the clock to December 31, 2006: no co-payment and no hospital fee. I have no idea how much weaker Gyurcsány's position is within his own party after the disastrous results of the referendum. But I would not advise them to change either prime minister or course because Orbán's appetite would not be lessened by such moves. On the contrary, the opposition would simply interpret such changes as signs of weakness. But, at the same time, it is obvious that the "re-education" of the Hungarian people has failed miserably. What to do in this department? The often mentioned criticism about the lack of good communication is, in my opinion, not the real culprit. They explained, and explained, and explained. The problem is not with the understanding. The problem is that the majority has equivocally rejected this new concept of the relation between state and citizen.

Comments

[Edward Hugh]

Hi,

I just found your blog. Great stuff. Very interesting analysis. I have just taken the liberty of putting a link and including a short exert at the end of my post on A Fistful of Euros and Hungary Economy Watch.

Best wishes,

Edward

[Csabus]

The extent to which the results undermine the position of Gyurcsany within his party will be seen in the coming weeks and months as the government seeks to ride the storm and prepare the ground for EP and parliamentary elections in 2009/2010. Gyurcsany will seek early endorsement from the Party grassroots (with whom he is more popular than he is with the leadership) at the 29 March party conference. There is no credible challenger yet, moreover the party is wary of potential market turmoil that might follow his replacement.

[Vándorló]

Well I think a presentiment of the tension to come was foreshadowed by Horn Gábor (the SZDSZ campaign manager) when he was quoted as saying that Gyurcsány had wrongly interpreted the referendum as saying that 'the people do not want pay 300 forints, so they won't pay 300 forints'. Horn rather reinterpreted the result for Gyurcsány as a clear statement that the people were saying : "That's not what the people are telling you Feri, rather 'go stick it up your a***'" ("Nem azt mondták Feri, hanem azt hogy menj a ..csába!"). Video available here: http://belfold.ma.hu/tart/cikk/a/0/7877/1/belfold/Horn_Feri_azt_mondtak_hogy_menj_a_...csaba_video

[Bill]

I know this won't happen, but I rather wish Gyurcsany would resign and call new elections - not because I think that he should be ousted as PM or that the Socialists should lose control of Parliament, but rather because I think that if Orban and Fidesz are intent on creating a fiscal disaster in Hungary, they should be the ones at the wheel when it all comes crashing down.

It would be absolutely hilarious if Gyurcsany resigned and said something like, "Well, you wanted to run the country, so here are the reigns - I'm curious to see how you manage to give buckets of money away to everyone without increasing taxes or causing the forint to collapse. My fellow Hungarians, you're getting what you deserve - I hope for your sake that Orban is the magician that he claims to be."

Ah, such sweet daydreams ....

[Viking]

To the question if the loss of income from the abolished fees can be replaced:

The Hungarian Constitutional Court said that these fees did NOT belong to the State budget (otherwise they would not have allowed to have a referendum about them).
So the conclusion is = You can NOT take money from the State Budget to replace these fees! At least not for the current budget, that would open up a possibility to take the Government to the Constitutional Court.

Next years budget is another story. That was why the fee was to be abolished from 1/1-09.

At least one Local Government has stated that they will give money to their local doctor/hospital, if the Central Government does not do that. This opens up an interesting case from Constitutional Law point of view;
Can a Local Government pay for what the Central Government should pay for? Can also any such act from any Local Government be seen as violating the original decision of the Constitutional Court that the fees did not belong to the State Budget? Sounds like fun for Lawyers...

[NWO]

Viking-

You are joking of course. You know well that the Constitutional Court is a political instrument and, in Hungary, the Constitution can be interpreted to mean whatever the judges want. And they seem generally to want whatever FIDESZ happens to want.
My bet is that their next ruling on the subject will be that Hungarians have a constitutional right to some minimum level of health care, which REQUIRES the Government to make up for the lost incomes to doctors and hospitals.

[Viking]

No, not joking, but I will not dispute your evaluation of the Hungarian CC. Nowadays we do have the European Court of Justice to appeal to, but it takes like 7 years to get there...

Checking the constitution, in an approved English translation (http://www.mkab.hu/en/enpage5.htm), articles 16, 17, 70/D, 70/E & 70/F touch the referendum areas.

I do not know if the German CC has taken a decision yet regarding the Harz IV-measurements, similar to what you are expecting the Hungarian CC to do. In lower courts the German Government has lost earlier, but the German measurements are much more radical than 300 Ft.

I do really have a hard time to believe that the Hungarian CC can take such a decision based on 300 Ft. Then they will open up for a court-case every year, where they need to decide if the different sectors get enough money from the budget.

The best thing that can happen Fidesz is that the money is not replaced and they can attack the Government all the time for that.

[Rolrox]

To the point about a new "relationship between the citizen and state," I think you've nailed the crux of the problem. However, the change is only a continuation of the lopsided relationship: tax (and take a lot) return nothing.

Hungary is locked in a vicious circle of rising taxes that drives its base either more underground or away which in turn forces the state to raise taxes again. As with all vicious circle systems there will come a point where there's simply no more elastic, and it will snap (though I cannot see where that is).

The situation was exacerbated through issuing bonds; this gave the country some buffer; but it was squandered as it wasn't used to build real infrastructure, rid itself of non-value added state activities. Now the country has added debt-service to its list of costs; without any new industry, rising skills and income that would generate more revenue to show.

[Eva S. Balogh]

Rolrox: "To the point about a new "relationship between the citizen and state," I think you've nailed the crux of the problem. However, the change is only a continuation of the lopsided relationship: tax (and take a lot) return nothing."

I agree that the taxation is too high, but I can't quite agree with you that the return is nothing. The problem is that too few people pay taxes and too many people must share part of those revenues. Over a million people allegedly earn "minimum" wage and pays no taxes, and most of the self-employed pays either nothing or very little due to the still flourishing cash economy. Practically no one collects sale tax on services rendered. A cousin of mine told me that in the last twenty years not once she received receipt from workmen doing any job around the house. It is very difficult to give a lot from very little.

[Varangy]

@Eva

I think you have not truly 'lived' in Hungary for a long, long, long time.

****I agree that the taxation is too high, but I can't quite agree with you that the return is nothing.****

The return is abysmal, counting transactional costs, i.e. the government undertaking efforts that could be privatized, the return might even be negative.

Look at the state of the roads as my foreign friends always comment. Unbelievably bad. Never mind the lame excuses offered such as the 'extreme weather' that warps and cracks them --- right...Sweden has more 'extreme weather' and its roads are great.

****The problem is that too few people pay taxes and too many people must share part of those revenues.****

Very Malthusian argument but No. You are wrong and implicitly, only considering sales taxes, which are BTW too high.

****Over a million people allegedly earn "minimum" wage and pays no taxes,****

There are not insignificant social security taxes paid by their employer on the minimum wagers - these taxes deter hiring and compensation. Monies that would be split between the employee and employer, if they were non-existent or lessened.

****and most of the self-employed pays either nothing or very little due to the still flourishing cash economy. Practically no one collects sale tax on services rendered.****

You are unbelievably mistaken and misinformed on this. Yes, tax-dodging and tax-cheating is rife in Hungary. But the facts remain:

1) the self-employed pay tremendous taxes and bear non-monetary tremendous costs for their entrepreneurship such as paperwork etc etc

2) ONE CANNOT RUN A SUCCESSFUL BUSINESS WITHOUT CHEATING ON TAXES -- IT IS IMPOSSIBLE

I have quite a few self-employed relatives and allow me to assure you, including their tax dodging, they pay plenty of taxes. So much so, one of them will be shuttering his business soon b/c the business he is in is of low profit margins and high volume -- taxes, aside from other factors, are absolutely killing him.

****A cousin of mine told me that in the last twenty years not once she received receipt from workmen doing any job around the house. It is very difficult to give a lot from very little.****

Yes, many service businesses like that do operate on a cash basis. And I encourage it! Cui bono? The consumer and the producer. Who doesn't? The government bureaucrats that funnel cash into their pockets via kick-backs and such...

Regarding the grey market, its existence is predicated on the usurious tax burden imposed on both consumers and producers.

Lastly, how much time and energy is wasted on the stupid ÁFA game, we all play? The true costs of this must be in the billions....

Hungary has a big government tax-and-spend problem. Tax too much, spend even more. End of story.

Neither the politicians nor the populace want to admit this.

[Varangy]

my second point should be amended to include IN HUNGARY

[NWO]

There is a "chicken and the egg" problem with tax rates in this country, no doubt. The absurdly high level of tax and the stupidly complex tax system encourages mass tax evasion. A higher level of of tax payers in the country might theoretically allow for far lower rates, though I am not positive that lower rates without the closing of the many "Kft. loopholes" and far stricter enforcement would result in the necessary increase in tax participation.
Fundamentally, however, the source of the problem is on the other side of the ledger and is the fault of Government AND the people. Hungarians WANT a large State that provides everything from cradle to grave but at the same time do not want to pay for it. Sadly, FIDESZ is most guilty these days of encouraging the population to believe this is possible.

Shockingly this morning I heard on the radio the head of the Hungarian Doctors' Chamber say that given the elimination of the visit fee, from 2009 family doctors will need a substantial pay raise from the State. The beauty of this is that, of course, the Chamber was front and center in in oppossing the visit fee and in supporting the "yes" position on the vote last week! And last night I hear again on the radio something that I did not know and that appalled me. Hu. pays over 10% of GDP in retirement benefits. This is far higher than any of the other surrounding states. Again, the best choice would be to encourage massive immigration to balance out the demographic imbalances. This will not happen. So instead an ever increasing portion of the country's GDP will go into a largely non-productive area (retirement benefits) will those few younger people left in this country will increasingly face worse prospects and greater burdens.

It is time for the country to go "cold turkey". The addiction to the State is frankly killing the country and destroying its future prospects. There is no denying it now. Hungarians must choose socialism (a big state with high taxes) or something else (lower taxes, a smaller role for the state more REAL freedom and more individual responsibility). The rest of the CEE countries are on the path of renouncing socialism. Hungary seems to have decided otherwise!

[John Hunyadi]

Varangy - I largely agree with your observations, but I'd be interested to see some facts backing your position. I believe that the fundamental problem here is the overall tax burden (37% of GDP in 2006, compared with 37% in Czech Republic, 36% in Germany, 35% in Portugal, 30% in Slovakia, 27% in Greece) and level of government expenditure (above 45% of GDP, broadly similar to Czech and Poland, but substantially higher than Slovakia, Baltic States) is too high for a mid-income country. I've read economic analysis that suggests for successful fiscal reform expenditure should be cut first and then tax rates. But you are right to point out the the complexity of the tax system and burden of red tape are also major inhibitors to small-scale private enterprise.

"Regarding the grey market, its existence is predicated on the usurious tax burden imposed on both consumers and producers."

Not only. High tax rates make it difficult to reduce the size of the grey market, but so does ineffective tax collection (caused by many factors - complex tax system, incompetent/corrupt civil servants, culture of tax evasion). The relatively low rates of usage of credit (and, particularly credit cards) are also a factor.

****The problem is that too few people pay taxes and too many people must share part of those revenues.****

I agree with Eva here, assuming her comments related to specific aspects of the overall tax-and-spend problem in Hungary. Too few people pay income tax and the various employment-related taxes. If the base for these taxes were increased then rates could be lowered. Overall the proportion of total tax take from both income tax and employment-related taxes is similar to that in Czech Republic, Poland and Slovakia but rates are higher implying the tax base is narrower. On the other side, too many people receive benefits and subsidies. For example, over 10% of the Hungarian working-age population receives disability pensions compared with 4% for the OECD as a whole.

[Viking]

NWO - "Hu. pays over 10% of GDP in retirement benefits. This is far higher than any of the other surrounding states. Again, the best choice would be to encourage massive immigration to balance out the demographic imbalances. This will not happen."

Especially not if Viktor Orban has it his way. In one of the big interviews a couple of weeks ago, he stated that immigration is not the way forward, but to encourage Hungarians to make more children.

Children who need to grow up for 20 years before they start to be productive and will cost a lot of investment doing that in education, which in Fidesz-land will always be free.

Time to go back to the old COMECON-days and grow tomatoes?