Hungarian economic tea leaves

I mentioned in one of my comments that Lajos Bokros only once prior to 2007 published his views on the Hungarian economy when he co-authored a long economic analysis. It appeared on April 28, 2006, in the midst of the 2006 election campaign. His co-authors were three reform-minded economists with close ties to SZDSZ: Tamás Bauer, István Csillag, minister in charge of economic affairs in the Medgyessy government, and Péter Mihályi, who was the architect of the ill-fated healthcare reform. Let’s review their analyses and prognoses.


First they announced in the spring of 2006 that Hungary’s economy was not in crisis. The GDP had grown by 4%–good, but, with the exception of Poland, anemic in comparison to the other countries in the region. Making fun of János Kóka’s unfortunate remarks about the “Pannonian puma,” they called Hungary  the “Pannonian pussy cat.” They summarized the weaknesses of the Hungarian economy: too few entrerpreneurs, not enough skilled workers, high unemployment, excessive taxation, big government, soaring deficit.


After outlining these problems they moved on to the remedy, what later came to known as the convergence program. Yes, they said, the deficit must be cut and at the same time the government must shrink. I don’t think they had a clue how large the deficit was because the over 10% deficit surprised even János Veres and Ferenc Gyurcsány. (Let me add right here that the current government has excelled in this respect. The deficit is already under 4%, and the government spends 20% less on itself than before. However, this doesn’t seem to satisfy the economists.)


Interestingly enough, the same economists who today want to save money on pensioners and on various social services then emphasized that the austerity program didn’t have to hit the poorer strata of society. On the contrary, the country might be able to provide even more support to people of little or no income, and they added that “of course this would mean higher taxation of the upper strata.” (By now this is not at all what they demand: they want to lower taxes across the board.) They also thought that in spite of introducing a serious austerity program, wages didn’t need to lose their purchasing power. However, they added, the standard of living could not grow at the same rate as before. (Considering that in four years real wages increased by 30%, that was not surprising.)


Their first recommendation was to prepare a supplementary budget to be approved by parliament by July 1, 2006, because they were convinced that reducing the deficit couldn’t be achieved without such a move. (As it turned out, they were wrong.) In addition, they suggested a 20% VAT on all products and services. They wanted to stop all subsidies of natural gas with the exception of “the truly needy.” (We see an outcry today over higher gas prices even with subsidies.) Then came some suggestions that would have have hit the middle class and the retirees. The policy then in effect was that employees paid 4% and employers 10% into the health care system. To beef up the system they proposed that employees would pay twice as much (8%) and employers the same 10%. In addition, every individual, including pensioners, would pay an additional 5,000 Ft per month.


As for additional compensation for the retirees: the extra month of pension would not be paid separately but would be included in the normal twelve-month cycle. At this point these economists didn’t know who would form the new government and therefore warned that “the irresponsible promise of a fourteenth-month pension must be withdrawn.” This was a Fidesz promise before the elections.


The economists also suggested introducing a steep tuition increase, much higher than the government eventually proposed. Only poor students with excellent grades would be exempt. They wanted to stop the practice of financing universities based on their enrollment.


The authors demanded speedy action. During the summer the government was supposed to prepare all the bills whose passage would be necessary for the implementation of the austerity program. By the end of 2006 all would be set to go ahead. The budget for 2007 would already reflect the changes they recommended. They listed six areas that needed attention: health care, education, administration, local governmental structure, taxation, and social services.


I can’t summarize all of these proposed changes, but I will pick the one that is the most important: health care. This is the area where the government has experienced its greatest setback. What did our four economists want to achieve? What did they think was the best solution? I already mentioned doubling health insurance costs (8% from 4%) for employees and the extra 5,000 Ft to be paid monthly by everybody including the pensioners. In addition, immediately the government must begin to set up competing private insurers. Oh, what nice dreams. Each citizen would have a whole year to decide which insurer he would like to choose. The whole system would be set up by January 2008. The year 2007 would be a year of transition during which the hospitals and doctors would be able to sign contracts with the private insurers.


As for the status of the healthcare providers, it is obvious that the institutions will eventually end up in private hands because, according to our economists, “the ownership of the hospitals and the practices  will be immaterial given the competition.” Moreover, both state and private insurance companies will insure all patients, whether they are treated in public or private hospitals or medical practices. Doctors will not have civil service status. Thus, “tips” for doctors and nurses will disappear because there will be no need for them. (Hmmmm.)


These were the original plans, but it became clear that even a milder version of them failed miserably. It didn’t fail because the government didn’t communicate well but because the Hungarian people resisted changing the last stronghold of the socialist system. The medical establishment is as corrupt as it was in the Kádár regime. Almost nothing has happened to it in the last twenty years. Governments have traditionally steered clear of the problem. At last there is a government that has tried, but the economists are not appreciative. They refuse to see that, given a determinate and ruthless opposition in addition to the resistance of the upper echelon of the medical profession who has been benefiting from this corrupt system, the reform of the healthcare system was virtually predestined to fail.