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.