What should the Hungarian government do?

Let’s assume for the sake of argument that you’re Ferenc Gyurcsány (you poor thing!) and your government’s popularity is dangerously low midway between two elections. The unpopularity of your government has two main sources: the austerity program and the introduction of structural reforms. Most of us know why the government had to resort to the austerity program: too high a budget deficit and indebtedness that slowed economic growth and, at the same time, pressure coming from Brussels concerning the "convergence program." The austerity program achieved miracles in less than a year and a half. The deficit is under 4% instead of over 10%, and banks and financial institutions have renewed their trust in the country’s economy at a relatively low cost to the population. Real wages are only about 4% lower than a year and a half ago, but considering that in the last six years real wages grew at a phenomenal rate of about 40% people shouldn’t complain too much. (Of course, they do complain: they have completely forgotten about the 40% growth and are now convinced that the end of the world is at hand because they have to pay more for natural gas, though still less than its international price!) If we compare the current program to the austerity program of 1995 (the Bokros package–so named because it was the brainchild of the energetic and ruthless minister of finance, Lajos Bokros) the earlier program was much more drastic: the purchasing power of households dropped 19%. In any case, economic austerity usually results in a loss in popularity of the government, and the current measures are no exception.

Critics of the Gyurcsány government often say: yes, yes, we understand that this austerity program had to be introduced, but for Pete’s sake why did they have to start a huge reform program at the same time? That’s too much. The patience of the citizen is really tried under this double burden: less money in his pocket and at the same time widespread uncertainty about government programs: health care, education, social welfare, and so on. Some complain about Gyurcsány’s reform mania. He wants to reform everything. He wants to change everything. Yes, he is very keen on reform and, in my opinion, for very good reason. In the past, even during the Kádár regime great expansions of social services were followed by austerity programs when it was discovered that the state’s burden was too high and foreign indebtedness was enormous. This yo-yo pattern didn’t change after the change of regime: as soon as public finances were okay spending resumed. Spending from the nonexistent surplus. About three years after the Horn government’s austerity program the budget was in great shape. Orbán took over a very healthy, fast growing economy and a balanced budget. For two years his government followed a responsible economic program. But then the popularity of the government sank dramatically, to 17-19%. About the same as the current government’s situation today. Orbán and his fellow politicians got scared: they started to spend. (Ferenc Gyurcsány writes about this in his latest blog here: http://tinyurl.com/ywykqb.) And they spent and spent. They even spent between the two rounds of the elections when it was fairly obvious that they were going to lose the elections. By the time the Medgyessy government’s ministers arrived in their offices in May 2002, their whole year’s budget was gone. At this point the Medgyessy government should have said: "My dear friends! Fellow citizens! We promised all sorts of things, 50% raise for doctors and teachers, but you see, this awful government spent our very last penny and therefore we cannot fulfill our campaign promises." However, Medgyessy didn’t do that: he promised pie in the sky and he delivered on everything he had promised. The result was a deficit that grew to dangerous levels.

Economists and some politicians, including Gyurcsány, are convinced that given the present structure of government and government services these boom and bust cycles will continue indefinitely. In order to smooth out the cycles government programs must be streamlined. Therefore, they argue, postponement of the reforms would be suicidal and would lead again within two years to overspending. While the people and the opposition attack Gyurcsány for too much austerity and too much reform, liberal economists, including Lajos Bokros, claim that he’s not doing enough. According to them, "as long as the expenditure side of the budget is taboo" there can be no success. In plain language, they’re calling for a smaller social safety net. But what would happen to a government that seriously curtailed expenses when most of the spending goes for pensions, disability benefits, education, the arts, and so on? Critics of the government like to compare Hungary unfavorably with some other former socialist countries in the region. They point out that the Slovak economy, for example, is growing much faster than the Hungarian. What they forget to mention is that the Slovak government spends a great deal less on social services than the Hungarian government does. Hungarians can complain about meager pensions, but these meager pensions are still about 85% of the pensioner’s former salary. Even in Western Europe the situation isn’t that rosy. And most of us know about the situation in North America.

Let’s assume that one followed Bokros’s edicts. What would happen then? The Hungarian people are already up in arms. Can you imagine what would happen if the government cut spending even more? An economist thinks only in economic terms. A politician cannot take such a narrow approach.

As far as my own thoughts are concerned, I am on Bokros’s side theoretically, but I understand that Gyurcsány cannot do more. As it is, he is called a liberal (which in Europe means economic conservative, one who believes in smaller government and more self-reliance, not a real socialist) who is selling out the socialist party to the much smaller liberal party, the SZDSZ. And the opposition tries to take advantage of this situation and divide the socialist party. There are the real socialists and then there is the capitalist liberal head of the party who is abandoning social democracy and the social achievements of the past. Within his own party there are enough who are unhappy with him, blaming his reform zeal for the unpopularity of the MSZP. I myself wish that a more drastic reform could be put in place, but I fear that, at best, gradualism will prevail.

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As I remember Viktor Orban proposed a “technocratic government” to replace Gyurcsány in the autumn 2006. Orban even proposed Bokross to lead it, which of course had been an interesting idea. Bokross denied the invitation.
I always saw this “technocratic government”-thing as a typical way out for Orban to implement austerity measures, but without taking the direct responsibility for them. In the next election he would have blame the technocrats, even if his party, like the MSZP, of course must had supported their programme and proposals in the Parliament. A truly communist-inspired way of doing Government-work.


Found this article about Sándor Demján, chairman of property group Trigránit Zrt and Hungary’s wealthiest person, told Figyelő in an interview.(http://www.realdeal.hu/sandor_demjan_hungary_to_becom.html)
He is a bit hard on the Hungarian politicians, but he is probably correct. Would be fun to stick this one down the troath of Viktor Orban.