A new economic plan?

In the last few days the news that has piqued Hungarian interest is a study called "Kilábalás" (loosely translated, "Recovery," closer to the original, "Getting out of trouble"). The authors are four fairly young economists--Krisztián Orbán, Péter Holtzer, Tamás Vojnits and Gyula Barabás. They own Oriens, an M&A financial consulting company operating in Central and Eastern Europe, and also manage a private equity fund with investments in Hungary, Romania, and Bulgaria. It seems that George H. Walker, III,  former U.S. Ambassador to Hungary and first cousin of former president George Herbert Walker Bush, and George Pataki, former Republican governor of New York, are on the fund's board.

The young economists claim that, although Oriens is a business venture, the economic program they prepared was not commissioned by anyone. However, the leaked Orbán speech in a primitive way echoes some of their suggestions. For example, their emphasis on the actively employed segment of society at the expense of the pensioners and those who are on governmental aid seems as if some of Orbán's economic advisors are in contact with the economists of Oriens. One puzzling thing: nobody had ever heard of Oriens until now. I couldn't even find a home page for Oriens. (Or rather, I did find an oriens.hu but these people are interested in Japan and everything Japanese.) However, in the spring of 2006 there was another economic and financial think tank called Central European Management Intelligence (CEMI) whose owners are the same as those of Oriens. Perhaps it was just a name change, though CEMI still has a home page. 

The authors of the program promise economic recovery within two years. The caveat is that the government cannot pick and choose among the different components: they either accept the whole package or throw it away. Here is a summary of the key ideas: (1) ensuring a 20% real wage increase for three million people; (2) halving the burden on labor; (3) redistributing income worth several hundreds of millions of forints in favor of the active population; and (4) a comprehensive and in-depth program to revamp the incentive system of the economy. The program concentrates on issues such as outsized budgetary spending requiring high taxes and producing ever-smaller economic growth. According to the study the key to success is a simultaneous reduction of the public sector deficit on the one hand and taxes and contributions on the other. In 2009 they envisage lowering the tax burden on Hungarian workers and employers by 1,000 billion forints. How could such a huge loss of income be offset? First and foremost, by reducing government spending by 700 billion forints; in addition, 250 billion would come from a 3% increase in VAT (ÁFA) and 50 billion from an increase in excise taxes.

On the other side of the ledger there would be a change in personal income tax rates and brackets, the scrapping of modes of taxation that are favorable to certain segments of society, and the reduction of both employers' and employees contributions to benefit programs (health care and retirement). As a result of these measures, Oriens promises that there would be 100,000 new jobs in two years and that three million employees would see their income jump by 20%. (It is worth keeping in mind that Viktor Orbán talked about creating 1 million new jobs in ten years. It seems he got a bit mixed up and doubled Oriens's figures.) Like Orbán, Oriens also claims that the so-called Swiss indexing formula is unsustainable. According to this formula pensions are adjusted to reflect not only the rate of inflation but also half of any growth in real wages. If real wages, for example, grow by 6% in any given year, the pensions will go up, in addition to the inflationary adjustment, by 3%. As far as taxation is concerned, Oriens doesn't support the popular flat tax remedy promoted by MDF and SZDSZ but suggests a three-tiered system: under 170,000 Ft. monthly income the employee would pay 9%, between 170,000 and 270,000 18%, and over 270,000 36%. All income would be taxable, no matter how small it is.

The reaction? Economists like it. The ministry of finance was less enthusiastic. Changing the current system of Swiss indexing pensions seems to be nonnegotiable because pensioners are supporters of MSZP. However, Ferenc Gyurcsány invited the four economists to join him and the government this weekend to discuss Oriens' alternative economic plan. Perhaps Gyurcsány is interested in this program because in this way he can this way neutralize the noise Orbán is making about the economic crisis and his future government where experts without political ambitions would be members of the cabinet. That sounds to me, by the way, as if Orbán doesn't want to take the heat for any proposed economic restructuring and wants to shift the blame to dispensable experts.

Perhaps next week we will hear more about the talks between the government and Oriens. But if Oriens says that it's all or nothing, it is hard to imagine that there will be a meeting of the minds.

Comments

[New World Order]

A couple of facts.

1. The founders of CEMI split up. Some remained at CEMI, and the others formed Oriens (at the begining of this year).
2. Orban Krisztian, in particular, is known to be close to FIDESZ. Holtzer, on the other hand, was at OTP for a long time, and has focused a lot of his career on the Pension system.

Despite the partners at Oriens being close to FIDESZ politically, I actually think the ideas they are promoting are quite in line with the PM's "real" views on what needs to be done with the economy. They also I believe are similar to NBH President Simor's views as he articulated them some time ago (i.e., taking 250 bn HUF out of the budget).

It would be great if one could form some sort of cross party support among a "liberal" elements in FIDESZ, MSZP, SZDSZ and MDF to support radical changes like those proposed. I think, intellectually, there is support for this type thing across elements of these parties. This is of course what basically happened in Ireland a generation ago, and led to the massive changes in that society. It is, to say the least, not likely to happen in Hungary because of the dynamics of the political system, the organization of the parties and because the electorate is so biased towards older voters not interested in real reform. This is why Hungary is and will fail.

[Adrian]

NWO,

always good to read your informed comments; but

"because the electorate is so biased towards older voters not interested in real reform"

How is the electorate biased: through the demographic preponderance of old people, or through some sort or systemic over-representation in the complex electoral system?

In either case I don't think there is any appetite for reform in any group in society, accept for the far right and I don't think that's the type of reform you're interested in.

[Odin's lost eye]

N.O.W and Adrian
Every one hates change that is why there are specialist companies who make their money from ‘managing change’. The problems the current government had were that:-
Firstly it did not manage the change properly and
Secondly it did not sell it to the people.
Thirdly the opposition, who are hungry for power, spotted a way of embarrassing the government by using the constitutional trick of a referendum to stop the change. Having done that the opposition then ‘steal the government’s clothes’.
@ Prof Ballogh reports in her article says
*** “Here is a summary of the key ideas:
(1) Ensuring a 20% real wage increase for three million people;
(2) Halving the burden on labour;
(3) Redistributing income worth several hundreds of millions of forints in favour of the active population
(4) A comprehensive and in-depth program to revamp the incentive system of the economy.” ***
I dislike items 1 and 3 above for they suggest that this re-distribution would be un-earned and add to costs. Giving something for nothing gets you a population who just want ‘freebies’.
In any population there are four groups of people
1. Those who are in work
2. Those who are not in work but want to be.
3. Those who are not in work but have no intention of getting into work (the spongers)
4. Those who through age or infirmity cannot work (whether they want to or not).
For people to get work they often have to be ‘re-trained’. This seems to be a neglected area and would have to be addressed. If it is not addressed then you will just draw in 'guest workers'. What you do about the spongers and those who do ‘black work’ I do not know.

[NWO]

Adrian

The system is biased towards older voters because of the demographics of the country (one of the oldest in Europe), and this is then reinforced by voting behaviour. Moreover, the MSZP core constituency are "older" voters. Is there another rationale reason why a country would spend 10% of GDP on pensions, more than it does on its own defense, education or health care!

[Adrian]

NWO,

Since you suggest there is nothing more sinister going on than there being a lot of old people in Hungary who vote in their own interests, I think "biased" is a strange choice of word, maybe the MSZP is biased towards old people - and with good reason - but the system isn't.

But if you want to argue this, you going to have to explain why the government went ahead with its reform program for the health service, which disproportionately effected old people adversely.

10% is not a particularly high figure for pensions expenditure, and given the dubious nature of the GDP calculation is probably overstated anyway. 12% is the norm in the EU27. In Poland it's 12.7%.

Maybe the rationale for the alledged 'generosity' of Hungarian pensions is the very high contributions legal Hungarian workers have to pay - 8.5% is pulled off my paycheck.

[John Hunyadi]

Adrian,

I disagree - I think that 10% of GDP is a high figure for pensions expenditure. It is true that it is below the EU average, but you need to look behind this headline figure. If you take the data for difference between life expectancy and average exit age from the labour force then you find that Hungary is well below both Poland and the EU average (12 years in HU compared with 17 in PL and 18 for the EU average). Of course, for a full picture you also need to look at the demographic profile in HU compared with the EU average. Still, pensions expenditure in Hungary should be significantly below the EU average. In crude terms, Hungarians die young so there are relatively few old age pensioners. The problem seems to be that there are large numbers of middle-age pensioners here.

[John Hunyadi]

A further note. Hungarian pensions are, indeed, relatively generous. When a comparison is made of pensions as a proportion of income, then the Hungarian pension rates 6th highest in the EU.

The high contributions paid by salaried employees are not the rationale for the pensions - it is the other way around; high contributions are a result of high levels of spending on pensions (and also, of course, the low proportion of salaried employees in the population, under-reporting of income etc.)

[NWO]

Adrian-

John is correct. Given Hungary's wealth (or lack thereof), the country can ill afford such large transfer payments. In particular, the country needs to encourage people to work longer. Two ways to do this which should be undertaken immediately are (1) begin to raise the retirement age (how about 4-6 months per year for the next 10-15 years) and (2) decrease the costs of working-i.e., shift the tax burden away from labor. BTW, additional money should be spent (taking advantage of both the private sector and through co-pay) in both the health care sector (to help raise life expectancy) and in education.

[Adrian]

John, NWO,

Surely the key thing here is not how generous the pension system is, but how well funded it is. If Hungarians only benefit from pensions for 12 years (how are middle age pensioners accounted for in this statistic?) the contributions period being equal it would be fair to have higher pension rates than in more longevitous countries. Is there a funding crisis for the Hungarian Pension system? Is it sucking in general taxation?

Similarly extending life expectancy is surely just going to exacerbate the pensions problem. Working until you drop would be the cheapest solution.

In my experience of both the corporate and educational world in Hungary, the working old age pensioner is already a more common phenomena in Hungary than it was in the UK.

I agree that that the tax burden on work is ridiculously high and that it is a direct incentive to working black. But I don't see that that in itself makes a sound argument for reining in pensions. For example I only pay 20% on my unearned income, but a marginal rate of 53% on my salary. A better balance between income and employment taxes could improve incentives to work.

I think if everything were counted, it would be shown that Hungary is not nearly as poor a country as statistics suggest but a country with a poor government.

[NWO]

Yet more good news.

FROM MTI--Hungary's government has practically swept the alternative economic programme conceived by a group of economist off the table. The cabinet said tax reductions could be achieved only via restructuring within the tax regime, and that they would not consider implementing proposals by consultancy firm Oriens to cut social spending, revamp the pension system and introduce changes in maternity support.

At a two-day consultancy meeting started on Tuesday, the Socialist Party's (MSZP) leadership agreed that funds for possible tax cuts should be sought within the tax system rather than in the reduction of budget spending, e.g. social supports or pensions, government spokesman Dávid Daróczi said on Tuesday after speeches delivered by Finance Minister, János Veres, National Development and Economy Minister, Gordon Bajnai and Minister of Social Affairs, Erika Szűcs.

Daróczi said the participants of the meeting were looking for ways to boost economic growth without jeopardising the balance of the budget and social security. A means to that, he said, could be a marked reduction of the burdens on labour and a simplification of the tax regime.

He said the officials present agreed that burdens on labour may be cut only if other tax revenues make up for the losses stemming from this action, and that the resources for any tax reduction need to be found within the tax regime.

In practice this means that the government has rejected the proposals outlined in an alternative economic programme by four well-known young economists, Gyula Barabás, Péter Holtzer, Krisztián Orbán and Tamás Vojnits, under the aegis of Orien, an M&A financial consultancy company operating in Central and Eastern Europe.

The programme has been widely acknowledged by local economists and its suggestions chime together on several points with those made by the International Monetary Fund (IMF) and the World Bank.

The government spokesman said the meeting also addressed one of Hungary's gravest problems, i.e. the low level of employment, which is especially drastic among less educated people.

[Eva S. Balogh]

NWO: "Yet more good news. FROM MTI--Hungary's government has practically swept the alternative economic programme conceived by a group of economist off the table."

This was expected.

[Odin's lost eye]

@NWO
*** "The government spokesman said the meeting also addressed one of Hungary's gravest problems, i.e. the low level of employment, which is especially drastic among less educated people." ***.
People are the primary resource of this and any other nation. Life long training and re-training is essential. As an example of this is the Russian pipeline plan. This will mean that this country will need welders. Not just any old welder but 'Coded Welders' I tried to interest the local authority is setting up a school teach the necessary skills and diciplins, the buildings were available as were the instructors, but they were more interested in using the out of work for 'snow clearance'. Enough said!

[John Hunyadi]

Adrian,

Yes it is important how well-funded Hungary's pension system is. In a way that is the point that NWO and I are making. Because of demographic changes (increasing life expectancy, fall birth rates) it will become increasingly costly to maintain (ie fund) Hungary's pension system in its current form. I could also argue that it is "sucking in" general taxation. 10% of GDP is a large amount. Cutting that back to 8 or 9% would spare a lot of money for education and health care.

Actually I am not arguing for a reduction in the payment level of old-age pensions. I think it is more important to reduce the number of people receiving pensions. The current system in Hungary (generous but inflexible) encourages people to stop working well before 65. At age 60 only about 20% are still employed (officially) - 40% are already receiving old-age pension and over 20% a disability pension. Even at age 55 about a third are receiving a pension (disability or old age) - these are the "middle-aged" pensioners I was referring to. They are not included in the 12 year statistic as this referred only to old-age pensions.

I don't doubt that many pensioners are working illegally (without declaring income) - I see plenty of 50 something men, many no doubt already drawing a pension of some sort, working as security guards or night watchmen.

[Adrian]

John,

thanks for going the distance with me on this one. I think the outstanding bone of contention here is middle aged pensioners.

Firstly, are there seperately prepared actuarial accounts for the Hungarian state pension fund? If there are, whether it is receiving funds from general taxation to maintain its obligations now is either true or false, rather than something that could be argued. I accept that demographic change will adversely impact Hungarian pensions in much the same way as it is effecting all ageing populations. I think it is much easier to argue the case for pension reform if pension-holders can see their pension as part of a finite fund with concrete contributions and concrete benefits rather than a general right to income underwritten by the state.

Back to middle aged pensioners, these people have cashed in their pensions early, and do not receive their full pension which is only acheived at 62 after 40 years of work. My wife, who worked in personnel administration for a large American corporation, agrees with your claim that the current system "encourages people to stop working well before 65." But she believes that the government encourages early retirement because it actually reduces the aggregate amount paid out to people over their lifetimes. So more payments, but significantly smaller ones. Only actuarial calculations could support or refute this claim.

I agree that if "at age 55 about a third are receiving a pension (disability or old age) - these are the "middle-aged" pensioners I was referring to. They are not included in the 12 year statistic as this referred only to old-age pensions" then this makes a nonsense of the headline statistics we have been discussing up to now.

However, the middle aged pensioners in my experience have not been security guards, but people who have specific and valuable skills. The French and Biology teachers at my school, for example; or the paralegal who prepared employment contracts for my wife. None of these people are working black, they are paying tax on their additional earnings, while drawing down on pension contributions made over 30+ years of employment. I don't see why they should suffer in your proposed pension reform.

Finally, as a teacher and a tax-payer I am not too happy about yout blanket proposal for further spending on 'education'. Spending on education per se doesn't result in a more appropriately skilled workforce. I actually think that a significant proportion of secondary and tertiary education serves the purpose of a way of reducing statistical unemployment by shortening people's working lives: i.e a late start is not much different to an early retirement.

[Adrian]

For those still interested in this debate:

http://www.bbj.hu/main/news_40652_hungary%253A%2Bno%2Bplans%2Bto%2Braise%2Bpension%2Bage.html

"Hungary’s pension age is currently 62, but, because of the number of people who take early retirement, the average age when Hungarians stop working is 58.6, Korozs said. Early retirement is part of the reason for Hungary’s low workforce participation rate: 58%, well under the 63% EU average. And Hungary’s workforce participation rate for women is an especially low 49.7%, he added. Employee pension contributions currently cover just 80.5% of pension payments. The rest comes from tax revenue. (MTI-Econews)"

Does anybody know how much employers contribute to pensions?

[CrisisMaven]

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