Hungary’s New Budget: Big Promises, But Little Else

With public debt at 80% of GDP and unemployment over 11%, Prime Minister Viktor Orban will have to act fast

News | Reka Ferencz Mosteller | March 2011

Today Hungarian Deputy Prime Minister and Minister of Justice and Public Administration  Tibor Navracsics and Economy Minister Gyorgy Matolcsy presented the "Orban budget" – officially known as the Széll Kálmán Terv, union against debt -- promising to save over 800 billion forints and reduce debt satisfactorily.  Since Moody’s Investors Service, Fitch Ratings and Standard & Poor’s rate Hungary’s credit one step above junk with a negative outlook to boot, the Hungarian government will have to produce measurable changes in its economy before they will be able to borrow money again.

All major Hungarian newspapers immediately pointed out that while the plan contains ambitious projections and numbers, it lacks the specific actions and corresponding financial figures of how such major steps can be achieved. This type of a criticism has been common toward Fidesz, the party of Hungarian President Viktor Orban. Indeed, the 40-page plan mostly has dates and draft action agendas but no itemized budget.

Hungary promises to lower its public debt to between 65% and 70% of gross domestic product by the end 2014 from the current 80% GDP.  According to the plan, the transfer of private pension-fund assets to the state and fiscal-restructuring measures will be the major sources of debt reduction. This includes savings of 213 billion forint annually by new employment policies, 129 billion forint by pension reforms, 60 billion forint by public transportation savings and 38 billion forint from savings in higher education. The cabinet also plans to cut drug subsidies by 120 billion forint annually from 2013 on, according to HVG, a leading economic journal.

And although the government acknowledges that the country needs a better-educated workforce to be competitive, Hungarian education faces serious restructuring as well as cost cuts as it is supposed to move forward. Notably, starting from September 1, 2012, the minimum age limit of mandatory education will be lowered from 18 years of age to 15 years of age. It is not clear what industries are expected to absorb the increasingly untrained workforce.

"No specifics or details were heard, however, it is unequivocally noticable that there is ‘governmental intention’ to reach the outlined goals," said MKB Bank’s leading economist, Zsolt Kondrat in an interview with Világgazdaság Online.

Others are more skeptical. Daniel Bebesy, an asset manager who helps oversee $1.5 billion at Budapest Investment Management thinks far more precision is necessary.

"We only know headline figures, but nothing concrete on how they are going to save the amounts," said Bebesy in Bloomberg Business News.  "The government keeps promising big announcements all the time and then fails to deliver."

In a press conference today Attila Mesterházy, leader of the Hungarian Socialist Party (MSZP) since July 2010, welcomed the idea of structural reforms and budget deficit cuts but emphasized the plan’s lack of details and criticized the presentation as a "tabloid economic lecture" without specific data.

Hungary’s newest party in the Parliament, LMP (Politics Can be Different) was much more critical. Gabor Scheiring, Member of the Parliament, leader of the Economic Policy Cabinet of LMP,  calls the "Orban Plan" "empty promises, restrictions and a catastrophe in the employment market." "Reduction of unemployment ought to be the goal" - he emphasized. The Hungarian government will not lower its tax rate for large corporations from 19% to 10%, as promised, nor will it change the extraordinary financial-sector tax, despite earlier plans to halve the amount in 2012. These and other measures affecting the economy create an environment that is not conducive to the creation of new jobs, the key to economic progress, argued by many economist.

Hungary’s unemployment rate now reached 11.2%, and more than half of the unemployed have not actively searched for jobs for over a year. Average unemployment lasts over a year and a half. No wonder 4/5 of voters object to the new budget plan and find it unfair in a new public poll Scheiring refers to in his response.

The far-right Jobbik party leader Vona Gábor was no less critical and called the plan an "empty-headed" experiment that is severely restrictive and particularly cruel to the disabled, the retired and the unemployed.

Hungary was the first European Union country that needed an EU-IMF bailout. Yet Orban’s new government broke with the International Monetary Fund soon after its sweeping election victory last year. When Orbán was responding to international critics of Hungary’s media law, he said Hungary would not take orders from anyone, including the EU.  Given the criticisms heard today in Hungary, the government needs to figure out how to deliver all the proposed results and satisfy domestic critics.

It is probably not such a bad idea that the government’s first proposed action is to reduce the annual vacation time of political Department Ministers form 40 days to 20.

C’est la vie.

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