Hungarian Spectrum

Hungarian austerity program: tougher EU demands

It was yesterday that Péter Oszkó, Hungarian minister of finance, and András Simor, chairman of the Hungarian National Bank, together representing the Hungarian government, met with Joaquin Almunia in the name of the Commission of the European Union to sign the latest agreement allowing Hungary to receive the third installment of the 6.5 billion euro loan from the EU. From the document it is clear that even tougher measures are expected from Hungary. Otherwise the next and final installment will not be forthcoming. The main demands are to: (1) stop all housing subsidies; (2) save forty billion forints by the time of the fourth installment on subsidies for the Hungarian State Railways (MÁV); (3) reduce expenses for running local governments by 120 billion forints; (4) introduce property taxes; and (5) reduce to two years instead of three government payments to new mothers.

As for housing subsidies, the government as of March planned only to reduce their size. That didn't satisfy the European Union. They want to put an end to all housing subsidies by July 1. Right now the government is thinking of a more modest plan that would allow subsidies for first-time purchases of apartments or houses by people under the age of thirty-five. The purchase price cannot be higher than 30 million forints. I can't see how that will satisfy Brussels.

The other sticking point is subsidies for young mothers. Parliament passed legislation that reduced the duration of the payments from 36 to 24 months, in keeping with the new EU demands. However, László Sólyom, president of the republic, refused to sign it. He wrote a letter to Katalin Szili, speaker of the house, in which he stated that in his opinion women should decide when they want to return to work. (Fair enough, but what does that have to do with the duration of government subsidies?) He considers women's employment important, but at the same time he thinks that the low birth rate and the problem of an aging population warrants the retention of the present practice. It is a well known fact that the ability of Hungarian women to stay at home with their children for an unusually long time didn't help the birth rate. Moreover, according to Klára Sándor, SZDSZ member of parliament, staying away from the workplace for three years reduces a woman's chances of returning to work. She claimed that the birth rate is higher in those countries where women's career opportunities are better.

Whatever László Sólyom thinks, it is unlikely that this piece of legislation will be scrapped, and not only because the European Union will not allow the current system to remain in place. Lajos Bokros just yesterday said in an interview that he didn't agree with László Sólyom, which may mean that most of the MDF parliamentary members will vote to keep the bill as is. SZDSZ made it very clear that they are sticking with their original decision. The mild-mannered Gordon Bajnai (one can only hope with some of the powers of mild-mannered Clark Kent, known to the world as Superman) said that he was sure that when the president fully understands the government's plans for establishing new day care facilities he will not object. My feeling is that Sólyom will have to swallow a big one and sign the bill.

As for the property tax. There is quite a discussion about what to call it. It was originally known as "ingatlanadó" (real estate tax) but is now referred to as "vagyonadó" (property tax) because it will be levied not only on real estate but also on other luxury items: planes, helicopters, expensive boats and particularly valuable cars. (I'd be curious to know how many Hungarians own any of these luxury items.)  But the original bill (still under discussion in parliament) is very muddled. As it stands, it will be levied only on real estate worth more than 30 million forints. Real estate tax based on market value is an entirely new concept in Hungary and it seems that there is no way of assessing the value of structures and deciding which ones are worth more than 30 million forints. Therefore, the idea is that the owners themselves should declare the value of their real estate. I don't think that I have to tell what I think of this brilliant idea. Somehow I don't think that millions of owners of apartments and houses will do a self-assessment and rush to declare that they should pay real estate tax. The authors of this stillborn tax scheme answer such objections by saying that the Hungarian equivalent of the Internal Revenue Service will check returns (How? By targeting certain addresses and then going on site for an appraisal?) and that personal income tax is also paid on the basis of a simple declaration (and we know how high the collection rate is in Hungary). One thing is sure: some members of SZDSZ will not vote for the bill in its current form. They rightly point out that many people own more than one piece of property. So even if none of the houses or apartments is worth more than 30 million, the owners should pay taxes based on the total value of their real estate assets. The party thinks--or at least this is what Gábor Horn says--that property tax should be levied locally as everywhere else in the world. SZDSZ also suggests that locally levied property tax should be deductible from national income tax. So far so good, at least based on the American model. But SZDSZ doesn't seem to be concerned that until now not one word has been uttered about taxes on commercial real estate holdings. This revenue stream is vital to local governments, at least in the U.S. Another strange aspect of the Hungarian tax code is that land is not taxed. Wow! Wouldn't it be nice to own thousands and thousands of acres of land ripe for residential or commercial development! SZDSZ's vote is essential but, once again, the party is unable to speak in one voice. While Gábor Horn talks about opposition to this bill János Kóka promises full cooperation.

The reason for the new tougher demands is the changed economic climate. When the original arrangements were made the prediction was for a 3% decrease in the GDP. By now the ministry of finance's calculations are based on a slump of 6.7%. As for Sólyom, only yesterday he announced that without the help of the European Union the Hungarian government would have had to declare bankruptcy. I hope he keeps that in mind when he has to sign the child-support bill he currently objects to.

The Hungarian stimulus program

I won't give a detailed description of the "Gyurcsány package" today because first of all there hasn't been enough time to sit down and analyze the program. It seems that most experts think that the government is moving in the right direction. Although economists and businessmen would like to see more radical reforms than the program outlined by Ferenc Gyurcsány this morning, they are not politicians. Most people, including the prime minister, admit that the government has very few options at its disposal. Hungary, unlike some other countries (the United States, for example), cannot expand its already large budget deficit. And it is faced with shrinking revenues as a result of the economic crisis. Therefore, the government decided to restructure its tax basis and to offset tax cuts with reduced spending.

Tomorrow I will give details of the stimulus program, but basically it raises the threshold to qualify for the lower income tax rate, which should be a significant savings for the middle class. Payroll taxes will also be reduced, helping out the business community. To pay for these earnings-based tax cuts the government proposes a combination of consumption tax increases and social welfare decreases. They plan to add 3% to the sales tax rate and and 3% to 7% to the sin tax rate (excise taxes on alcohol and tobacco). On the social welfare front, they plan to eliminate the so-called thirteenth-month pension payment. The bonus is grandfathered in for current retirees, though it will no longer be paid out in one lump sum. Rather, their normal monthly pension will be increased to include the thirteenth-month benefit. For future retirees there will be no such adjustment. Government subsidies for new mothers have also been rationalized. Until now a woman who worked for a minimum of six months before having a child was eligible to stay at home for three years at 70% of her salary. Under the new program the six-month minimum will be increased to one year (so you can't suspect or know that you're pregnant when you get a job in order to receive the government subsidy), and financial assistance will be available only for the length of time the woman was employed, up to a new maximum of two years instead of the current three. In addition, the tax-free government subsidies that families receive for every child under the age of eighteen will now be added to the family's taxable income. All in all, the govermment claims that an average family will save about 12,000 Ft (about 40 euros) a month after the introduction of these measures. There are plans, but only in the very long run, of gradually raising the retirement age and introducing property taxes.

The reaction in parliament was predictable. World crisis or not, the Fidesz delegation walked out when Gyurcsány rose to speak. The leaders of the right-wing caucuses always remain inside because, after all, they are supposed to say something after the prime minister's speech. Tibor Navracsics's retort was predictable: Gyurcsány is responsible for the crisis. This is a program that punishes the Hungarian people when it is not their fault that the country is in trouble. He offered no alternative program except to say that Gyurcsány is a discredited man and once he disappears all will be fine.

Zsolt Semjén, the leader of the Christian Democratic caucus, is known for his absolutely outlandish speeches. At least this time he offered a constructive suggestion--that the sales tax on "basic" foodstuffs be lowered from 20% to 5%! (In Connecticut we pay no sales tax whatsoever on most groceries.) But his description of basic foodstuffs was, shall we say kindly, retro: bread, milk, and lard. I don't know where this man lives, but even in Hungary the overwhelming majority of the people use oil for cooking. And when one mentions bread: well there are at least fifteen different kinds, some cheap, others very fancy and expensive. Where could one draw the line? Moreover, such a drastic reduction in the sales tax would mean the loss of about 600 billion forints in taxes. Where would the government find these 600 billion? Semjén forgot to talk about that.

When it came to the more moderate opposition parties, MDF and SZDSZ, they were no more helpful. The only thing Ibolya Dávid and Gábor Fodor said was that this is too little too late and they have been saying for years what should have been done but the government didn't listen. So on the liberal and moderate conservative side the measures are not enough while on the more radical right it is far too much. Outright exploitation of "the Hungarian people." So here we are at the moment. I don't think that anyone expected anything else.