Here is the long-awaited Hungarian budget

The 2011 budget is being described by György Matolcsy as "ambitious but realistic" and by Christoph Rosenberg, head of the visiting IMF delegation, as "bold and risky." This "bold and risky" resonated all over the Hungarian media without people really knowing what is actually meant by it. The first meaning of "bold" is "courageous, confident, and fearless; ready to take risks." Here, I have the feeling, Rosenberg probably intended both "fearless" and "ready to take risks," while adding to to this adjective a reference to the risks that are real. The Hungarian translation of "bold" as "bátor" is somewhat misleading because it simply means "courageous" and thus sounds almost positive. Oh, yes, the intricacies of translating from one language to another.

The budget satisfies the European Union's requirements. If all goes well, the deficit will be 2.94% of the gross domestic product, down from 3.8% this year. The budget envisages a 3% economic growth and and an inflation rate of 3.5%. At this point it is worth pausing because analysts of late, both in Hungary and abroad, keep lowering their estimates for economic growth for next year. First from 3% to 2.5% and lately even to 2%. The same kind of pessimism surrounds the estimated growth for the rest of 2010. Of course, economic forecasts are notoriously inaccurate, so it's impossible to choose sides.

Matolcsy claims that this budget will ensure economic growth, create new jobs, and assist families' willingness to have more children. It actively supports the Hungarian business community. There is no sign of any structural changes that might upset some segments of Hungarian society, but it freezes the state's nominal expense for wages and will cut 25,000 to 30,000 jobs in the close to 700,000 public-sector jobs.

It seems to me that in the 2011 budget the "nationalization" of private pension funds plays a crucial role. Not only that the state will not pass on 14 months' worth of social security payments of about 3 million wage earners to their private plans; it is also hoping that by cajoling most of the people into quitting the private funds and moving over with their hitherto accumulated savings the government will have a gift from heaven of about 2.7 trillion forints. That is, assuming that 90% of the people decide in favor of the state-run social security system. There are serious drawbacks to transferring one's accumulated savings to the government plan. First, individual savings will be thrown into a common pot and in the future these savings will not grow as in the private pension funds. Second, the accumulated savings in the private funds are inheritable upon the death of the investor. Not so once funds are transferred to the government system. All in all, it doesn't strike me as a good deal, and in fact MSZP is urging people not to give up their private funds. However, my feeling is that such intense pressure will be put on the funds and such stories will circulate about the speculators who handle these people's money (shades of Lehman have already been invoked) that it is possible that the private funds will simply die a quiet or not so quiet death.

What is the government planning to do with this incredible amount of money? Apparently 540 billion will go to the state retirement fund which is in the red at the moment. The rest of the portfolios will be used to lower Hungary's debt level which as we know is the highest in the region. The IMF is not crazy about this rather unorthodox way of raising money. After all, it is stealing. There is no other word for it. On October 25, the IMF released a statement on the subject: "This measure would constitute a significant step back in the pension reform process initiated in the late 1990s, which has contributed to making Hungary's pension system one of the most sustainable in Europe."

The IMF has other criticisms of the Orbán government's economic plans for the future. According to the IMF Hungary is overestimating the effect of income tax cuts on growth because their impact is "highly uncertain." Rosenberg also made it clear that while the budget does address a long-standing issue, that is the deficit, the problem is that while it may work for 2011 no one knows what will happen in the years following. Because these extra taxes on the financial sector and the multinationals and the windfall in the form of the savings of little guys will take care of things this year, but what will happen once these sources of income dry up? This is what Ferenc Gyurcsány was talking about in his blog a few days ago.

Magdalena Polan of Goldman Sachs in London is in line with the IMF's assesssment: "fiscal adjustment based on one-off taxes is ultimately unsustainable and potentially negative for growth." In any case we will see in the next few weeks what the markets, not the analysts, will say after familiarizing themselves with Mr. Matolcsy's budget.

The budget is very lopsided. It is heavy on the income side and shows almost no reduction on the expense side. The structure of the budget is almost identical to that of last year. Sixty-one percent of the budget goes to social services. More money will be given to education and to health care but without any structural changes. The same bad structure remains, although there are some signs that the government may tackle the reform of education, including a serious reorganization of higher education, next year, but that will have no effect on next year's budget. Although there has been a lot of talk in the past about the amount of money which is spent on running the state, it seems that even with the firing of 25,000-30,000 people, running the bureaucracy will be even more expensive this year than last: slightly more than 2 trillion forints (14.7% of the budget) as opposed to 1.88 trillion last year.

And finally, let's return briefly to the constitutional court. I noted two days ago that it is unlikely that Viktor Orbán would risk such a confrontation with the constitutional court for the sake of getting a few billion forints from people who received outsized severance packages. I mentioned that I heard a fellow thinking aloud that perhaps the cost of firing thousands and thousands of civil servants is the real cause for this frontal attack on the court. By now there seems to be a consensus among constitutional lawyers and political analysts that the stake is actually much higher than that. If the constitutional court unanimously considered this piece of legislation unconstitutional, then most likely it would rule the same way about depriving people of fourteen months of their savings as well. Moreover, it is also possible that they would rule the same way about the extra taxes, which are also retroactive and unexpected. In this case, the whole financial edifice of the Orbán government would be down the drain. That's why there came the message from Orbán, who happened to be in Brussels yesterday, that the bill proposed by János Lázár depriving the constitutional court of its jurisdiction over matters on which no referendum can be held will not be withdrawn. Since then Mihály Varga suggested a further reduction of the powers of the court: they shouldn't be able to rule on pieces of legislation that require a two-thirds majority.

Yesterday Ferenc Gyurcsány wrote an open letter to László Sólyom saying that if he was such a zealous guardian of the constitution when he [Gyurcsány] was prime minister, why doesn't he raise his voice now? Sólyom did. He asked for a meeting with his successor. They talked. And a few hours later Pál Schmitt gave a brief speech on MTV: the "defender of the constitution" stood by his party.

Comments

[Paul]

The Orbánistás will be wetting themselves over this. Hungary does the 'impossible', The Mighty One leads Hungary to a new dawn on the uplands of Utopia...

But, whatever we 'Hungary haters' will say, this will probably be enough to get them through to the next election without too many Fidesz supporters feeling any pain. So, job done.

On a side issue, I am puzzled by the 2/3rds constitution amendment bit of the constitution. This seems to be almost a guarantee of dictatorship to me - the system effectively awards anyone who can get 2/3rds of the voters on their side with the oportunity to take complete power for ever (especially in a system like Hungary's with no other real safeguards).

This set me wondering why this option was put into the constitution. Obviously you have to have some way of altering the constitution, and equally obviously, it shouldn't be too easy to do. But surely 'winner takes all' is hardly a sensible way of doing it?

How is this done in other countries with written constitutions, for instance the USA or Canada?

[Kevin Moore]

I think 'bold' translates well into 'vakmerő' which means overly brave even with disregarding the consequences sometimes.

[Kevin Moore]

It is worth noting that your calculation of the pension money is probably misleading because the current system, as-is, indeed works as you described but this is very likely to change at the same time as private pension money gets channeled back into the state system.
You can't predict the fate of these savings in a radically changing system by taking into account its base construction at the state level as if it were unchangeable. The government will most probably amend the law so that pension savings will be accounted on a person basis, and will probably be inheritable as well.

[Kevin Moore]

One more thing. You miss structural reforms but they are on the way. Healthcare is under serious reconsideration, the web of hospitals is getting completely rearranged, their funding will be probably de-regionalized while health services will be reorganized to fit region-specific demands, and all this structured under state supervision ('népegészségügyi program').

[Mark]

"Because these extra taxes on the financial sector and the multinationals and the windfall in the form of the savings of little guys will take care of things this year, but what will happen once these sources of income dry up?"

This isn't even the most interesting question about the viability of the budget. To meet its targets the government must collect sufficient revenue - this depends upon growth. Growth too will depend to an extent on the supply of credit, which cannot be supplied from internal sources because of the low savings ratio. Therefore the question is will the banks be prepared to advance affordable credit to businesses and households to enable growth. I think the only way a bank tax would help is if its revenues were used to restructure bad debt; I suspect the bank tax is already prolonging and deepening a credit freeze which is going to undermine the budget.

"At this point it is worth pausing because analysts of late, both in Hungary and abroad, keep lowering their estimates for economic growth for next year. First from 3% to 2.5% and lately even to 2%. The same kind of pessimism surrounds the estimated growth for the rest of 2010"

Have these analysts actually looked at any recent Hungarian data? I'm afraid - though come back in a year and tell me I was wrong - that I would be astonished if economic growth next year was as high as 2%.

[Paul]

I suspect "bold and risky" is IMFspeak, so it doesn't even mean "bold and risky" in English!

I am reminded of the Yes Minister TV programme, where the very worst a civil servant could do to a Minister's idea or proposal was to describe it as 'interesting'.

"Bold and risky" probably translates as "mad and destined to fail".

[Kevin Moore]

'"Bold and risky" probably translates as "mad and destined to fail".'

Knowing the IMF's success rate, we have nothing to worry about then.

[Paul]

"Knowing the IMF's success rate, we have nothing to worry about then."

Some facts/sources to support this?

[Paul]

"The government will most probably amend the law so that pension savings will be accounted on a person basis, and will probably be inheritable as well."

"...structural reforms... are on the way. Healthcare is under serious reconsideration, the web of hospitals is getting completely rearranged, their funding will be probably de-regionalized while health services will be reorganized to fit region-specific demands, and all this structured under state supervision ('népegészségügyi program')."

For someone who is not a party member, or even completely pro-Fidesz, 'Kevin' is remarkably well informed.

I fear we 'probably' have yet another Fidesz troll on our hands.

When will they give up and go away? All they do is make even the neutrals anti-Fidesz.

[Sackhoes Contributor]

Paul asked abut how changes to the Constitution are handled in the US.

A change to the federal constiturion is first approved by 2/3d of both houses of Congress and then by 4/5th of the 50 States, within a specified number of years (usually 7). All the states put the amendment up for some form of direct vote by the people.

http://www.usconstitution.net/constam.html

Hungary, however is not a federal republic, so the process should be compared to those used by individual states. Each state, of course, has its own process, but there are similarities. All states except one (Delaware) end up putting the proposed change on the ballot and have the people vote directly. Only Delaware follows the Hungarian method of legislative approval only.

http://www.ballotpedia.org/wiki/index.php/Amending_state_constitutions

[Gábor]

Kevin, are you Szilárd again? Actually there are only very patchy informations on the nature and specific measures of "sructural reforms" and you seem to "know" a bit more. Not that you have mentioned anything specific, these are general lines and far from giving basis for a fair and well founded assessment of the coming changes.

On the other hand, you completely miss what was announced yesterday, the fate of private pension savings. Matolcsy said the government will set up a budget fund for the balance of the state household (államháztartás egyensúlyát biztosító alap) in order to cover holes in the budget during the 2012-2014 period. (Beyonfd the 540 billion they will spend in next year.) From the private pension savings, yes. It doesn't sound as if they would try to save it to you verbatim, isn't it? They want to pay for actual expenses and eliminate the sovereign debt you are holding.

Of course the government could create an account for you with this money, but it's better to understand: it will be virtual, only an entry in a book of account, nothing else than a vague promise that the state will pay for you smething at some moment, Nothing more specific, certainly not identical with the accounts in a private pension fund. The value of your pension will depend entirely on the actual income of the state pension fund and it will rise or decline with the contributions paid. If there will be a provision allowing these pension to be inherited it will only be like today's pensions for widowers etc.

But I have a bit funnier way to describe the situation too. The Hungarian people hold in the private pensions funds 1300 billion HUF sovereign debt. The government is waging a desperate war of economic liberation against foreign capitalists, like IMF. Taking decisive action in 2011 they would like to deafult on the sovereign debt held by Hungarian citizens through private pension funds and exchange it for future pension entitlements of unknown value. Contrarily, the government, stubbornly defying those foreign capitalists and resisting the austerity they would like to impose on the Hungarians, will pay back every penny to them. I hope you will see how worthy it is of our Hungarian ancestors, frequently invoked in festive speeches as brave fighters against Habsburgs, Turks, Russians, Soviets etc. And of course defaulting on the debt held by Hungarians while servicing it to the foreigners is not austerity, it is a patriotic sacrifice.

[Gábor]

Paul: "But, whatever we 'Hungary haters' will say, this will probably be enough to get them through to the next election without too many Fidesz supporters feeling any pain. So, job done."

I don't think so, it's better to characterize the situation with the metaphor of a cornered lion trying to break out. The basic idea is to default on a part of the sovereign debt (it is really ironic that it won't be the part held by those bloody foreigners) and finance from the accumulated household savings the budget deficit as long as the new tax system delivers the mircale: 6-7% lasting, sustainable growth. (In a country where savings level is chronically low to be able to contribute to capital accumulation!)

I see many faults in this idea, a series of chances to go wrong. Firstly, they need to convince quite a lot of people to return to the state. They need to get at least 20% of the accumulated wealth in the pension funds to have a chance to meet next year's target. (Consider the distribution of savings is unequal, people whit higher income in the past hold more than people with minimal wage. On the other hand you can presume safely the former category consist people who are more conscious of financial issues, the nature of the pension system, the risk of a state-run pay-as-you-go one etc.) They need 540 billion for 2011, but the projected loss of revenues of the budget for 2012 are higher and it is true for 2013. So they basically need to get 50% in order to survive 2012 with this strategy, and almost the whole wealth in order to keep afloat until 2014. Not so easy task as they imagine, I fear, at the end they will have to implement arbitrary and punitive taxes to convince me...:(

It is just risky, but as Mark used to said, Hungarians are living on austerity since 2006, it's almost five years now, and patience is running off. They not only have to avoid closing budget holes with austerity (a propos, cutting the number of public employees and freezing their wage qualifies everywhere as austerity ;) ), but make people not losing their hope in a bettering of their situation soon. And the point is, that even with this "ingenious" plan (anyway, even the worst of bandits can come up with the idea of robbing someone to get money) they can't promise a significant progress in people's financial conditions. Not to speak of repeating Medgyessy's mistake. As soon as Medgyessy had to realize the problems arising from the hundred days his austerity measures laid the burden on the middle income range, just as the new tax system does. The largest tax hike will fall on people earning between 180 000 and 280 000 HUF, while no one in the lower income categories will be better off. If you add the Meggyes-effect (how despotic conduct of politics can alienate even Fidesz voters, and the "reform" of the state administration relies on the idea of putting a despot in every county), it is far from being an easy march towards victory in 2014.

[Hank]

It will be interesting to see what will happen with this pension robbery in a European court. And if not, what that will mean for the Hungarian budget.

[Mark]

Gábor: "And of course defaulting on the debt held by Hungarians while servicing it to the foreigners is not austerity, it is a patriotic sacrifice."

Of course the other side to this is that the private pension funds have been a "safe" source of investors in Hungarian bonds. Without them the bond market becomes illiquid and thus, if the government's budgetary projections don't work out, they will be more dependent on foreign investor sentiment to finance their deficits than they are now and will have to pay more to do so.

[Eva S. Balogh]

Paul ""Bold and risky" probably translates as "mad and destined to fail"."

My thoughts were somewhat similar when read it. The "Yes, Minister" was a fantastic program.

[Kevin Moore]

Paul, what's your problem? I'm more and more sure that your problem is entirely with yourself, not me. It doesn't matter what tone I use in my answer, all you can come up with is the silly idea of me making neutral people anti-Fidesz.
Neutral people, reading my latest post, could never come to a pathologic conclusion of yours.
And you're still incapable of answering anything with factual content to my post, you only talk about me being what. Would you quit it? It shows only your standard, nothing else.

[Paul]

When it became 'Yes Prime Minister', Hacker was briefed about the UK's nuclear 'deterent' and expressed the oppinion that it was no longer necesary to threaten Russia, as the cold war was over.

His civil servants were puzzled about the reference to Russia and asked him why he had assumed that the missiles were aimed there. It turned out that they were in fact aimed at France!

One of my favourite TV moments - but unfortunately a joke that only native Brits seem to really understand (I've had to explain it to quite a few Hungarians!).

[Kevin Moore]

Gábor: all I mentioned about healthcare reforms come from perfectly open and public sources of information. In particular, from the latest interviews of Miklós Szócska, the State Secretary for healthcare and István Mikola, president of the Health Committee of the parliament.

It's not my fault that most posters on this blog are severely under-informed but this doesn't prevent them to articulate immature and be in a tantrum about what they know very little about.

Mark is the only voice with a moderate tone and an ability to distinguish between what is known and what is suspected.

[Paul]

It IS Szilárd! Welcome back - I wasn't keen on your replacement, he was exhausting, popping up all over the blog. But he went mad in the end, and at least that was amusing. Nice to have a more human Fidesz troll again.

As for your post, I realise of course that English isn't your first language, but I still don't understand what on earth you're on about.

[Gábor]

Kevin, the problem is that what we all know from these soruces is not a program, not a plan, just a wishlist. All we know for sure is the government has no money (they are "sweeping the attics" to find some) but they promise they will have in due time. I think if you pretend to be sure the coming changes will be significant (although in many sense they spell a return to the despised Molnár-plan), ensuring a cheaper/more effective etc. healthcare you should be either biased or knowing more than the public could know. You many times refused to be considered to be biased, I was left with the latter option.

Otherwise it is a not so clever attempt to evade considering the content of my comment.

[Kormos]

Of course it is debatable, but I think; it is utopia for Hungary to have a government which is acceptable, to Hungarians, to the rest of the Globe, (redundantly) to the populous of this blog, and at last to me.
But let’s say, as a remote possibility, there is such.
What template should this imaginary government follow to solve problems?
Let’s start with the one policy. That is where the bulk of money comes from: TAXATION.
I had similar question earlier, but I did not see any suggestions, only poisonous critiques.
I am/was a technical person, thus I am a tax payer, not an expert.

[Sandor]

Well, my dear Kormos, perhaps the ideal government should continue where the previous one has left it off: damn all ideologies and stick to the practical business of governance.
Need I say that the present government is anything but that?
They are guilty of not one, but two cardinal sins.
One is that they are improvising from week to week. The other is that they are acting in the name of an ideology that has failed already some 60-70 years ago, but this bunch of yahoos have never heard about that.
The only thing they can rely on is that despite the circumstances and their fumbling the economy, by dint of the people's efforts and some unforeseen miracle, will somehow correct itself.
I don't know what chances would you give to that happening, but I am deeply skeptical. Aren't you?

[Paul]

Leaving aside all the 'nice to have' stuff like democracy, freedom, justice, free press, etc, a government's fundamental job is to balance the books.

This is difficult in Hungary for two very basic and simple reasons: 1) Hungarians like a big state, they are used to being looked after by the state and expect it to continue, 2) Hungarians don't like paying tax.

In a country like Hungary, with no other significant sources of income, if the people demand an expensive state, but aren't prepared to pay for it, it simply isn't going to work. Hungarians either have to accept the IMF route of cutting the state back, or they have to start paying their taxes.

Fidesz have set themselves against the 'IMF' direction, but haven't yet faced up to the reality of raising enough tax to pay for the large state they have promised the voters.

They have dodged this problem this year by one-off taxes on the one sector of the ecomony who, ironically, DO pay their taxes, and by stealing people's pension contributions. And this might be enough to get them through to the next election. But they will almost certainly get reelected, and what are they going to do then?

Sooner, rather than later, they are going to have to face up to the hard facts of raising enough tax to meet their election promises. And the way to do this is not through gimicks such as flat taxes, but to effect a fundamental change in the way Hungarians see the state and their responsibility to pay their share of the cost of running it.

The new Republic is 20 now, it's high time it grew up.

[Kormos]

Thank you Paul for writing a positive answer.
Here comes my next set of questions. I admit the issue is a very hot political potato. One quite capable FIDESZ member lost his nomination over this.

Should Hungarians pay property tax?

Should this tax be a flat percentage of the yearly measured market value of the property?

or

Should this tax be a progressive percentage of the yearly measured market value of the property?

Should the property tax include a local education levy?

Which municipal Government Body should be allowed to set property tax?

Hamlet

Township

Management district

Village

Town

City

County (Shire)

District in the Capital city

Capital City Council

Central Government

What is the general feeling folks?

[Paul]

I don't have any answers, Kormos.

As a child of the post-war 'social democratic' political consensus, my basic political belief is that a civilised society should look after those in need and that the cost of this should be borne more by those with the most wealth.

This philosophy used to be pretty much universally accepted, but these days it is often challenged, and I have to accept that there is now at least a sizeable minority (if not more) of people who no longer accept this as obvious. So, to them, a taxation system based on my assumptions would be wrong. And they have as much right to their opinion as I do to mine.

I have lived roughly the same amount of time under both a high tax/large state system and the post-Thatcher 'hang on to as much of your wealth as you can' philosophy, so I should be able to draw some conclusions. But, I'm afraid I can't.

I certainly felt more at home under the old system, but I have to admit it was far from universally successful. People don't like high taxation on what they consider to be rightfully their money, either hard earned through overtime, or deserved through ability and/or enterprise. To them it doesn't seem fair.

And taxing all 'wealth' in the same way also feels unfair to most people. To the economist, wealth is wealth, but the average man or woman in the street regards money earned quite differently to money inherited, or to the increasing wealth tied up in their property. Regarding all these forms of wealth as deserving of tax in the same way strikes many (most?) people as wrong.

And, thinking back to the quality of service and product we got under the old 'large state' approach, I also have to admit that these have mostly vastly improved under the current system.

I still cling to the belief (rather ironically, like OV) that the old system could be made to work, as people can be motivated to run state organisations efficiently and effectively, without the need for 'market forces'. But, I'm very sad to say, that a vast amount of evidence, over many years and from many different countries, seems to be very much against me.

So where does that leave us? I think the answer, in as much as I have one, is that taxation has to be handled very carefully and has to be flexibly applied so that the state income is maximised but the people (both paying and receiving) see the system as fair.

So, higher rates of tax for high earners are OK, but not 'progressive' ones like we used to have (where people paid almost all the top part of their salary back as tax). Similarly, property and wealth have to be taxed, but not draconically, as people just don't see this as fair. But things such as so-called 'bonuses' (i.e those simply given, not earned) and perks (e.g. company cars when you don't need on to do your job) should be taxed very highly. Taxation of companies is another minefield, as a careful balance needs to be maintained between extracting the maximum 'fair' tax and scaring investors away, or killing new and struggling businesses. One aspect of company taxation that simply has to be sorted out though is tax avoidance (e.g. companies registered in 'offshore' tax havens). You can't expect ordinary people to willingly pay the tax due from them if they see companies and wealthily people blatantly getting away with dodging their obligations.

Personally, I also think non-progressive taxes such as VAT are very unfair and should be abolished or reduced. Unfortunately, history seems to be against me on this as well, as it's just too easy for governments to get themselves out of a tight corned by raising VAT. In the UK, VAT started at 8% and is now just about to go up to 20% - an increase of 250% over just 40 years. No other tax has been (or could be) increased by this amount, and yet this is the tax that hits the least deserving the hardest. It would be much fairer to raise the extra revenue by increasing income tax, but governments of all colours are too scared to do this - indeed the Thatcher government of the 80s in the UK frequently trumpeted its claim to be low tax government, but raised VAT from 8% to 17.5%!

But that's the easy bit! What I've written so far is probably pretty much word for word the taxation policies of almost every party manifesto (possibly excluding the bit about VAT). Where the difficulties really start are issues such as universality of benefits vs. means testing, what should be provided by the state and what shouldn't (universal health care, probably, but free university education?), how to encourage families to have children without upsetting the childless voters too much (and should the state even be doing this?). the provision of affordable housing (state or private?), how much needs to be spent on defence, the care of the elderly and infirm, the role of charities in service provision, the balance of public and private transport (and the state's role in this - if it should have one), spending on infrastructure (motorways, railways, broadband, etc - all very expensive), building hospitals and schools (state funded or private/public partnerships?), etc, etc. The list is almost endless.

That's how difficult and complex government is. And what Hungary needs is a government determined, and equipped, to tackle these issues. Not one that concentrates on historical 'wrongs' from a century ago, the 'pride' of the country, political and religious instruction, the undermining of democracy and the persecution of anyone who doesn't support them.

A government like that can only take Hungary in one direction - backwards.