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.

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I’m sorry but to describe this as a “stimulus program” is surely a joke. I don’t normally like being polemical but it looks to me like Gyurcsány and Bajnai are taking the Titanic full speed ahead into the iceberg, but they’ve sent Veres down to the top deck to re-arrange the deckchairs in the hope that no-one notices the inevitable impact! We can debate the various tax changes and the other changes to social programmes. A policy of re-distributing the tax burden by cutting personal income tax for those on middle incomes, while increases VAT is not only socially regressive, but it will restrict the purchasing power of those most likely to buy Hungarian produced goods and services, and in those regions most in need of regeneration. The pensions and GYES changes are neccesary, but they were neccessary in 2002, or 2004, or 2006, in good economic times – they will bring benefits as Hungary moves onto a growth path, but they are not going to do anything to get it on to one. “Hungary, unlike some other countries (the United States, for example), cannot expand its already large budget deficit.” The situation is really far from being this simple.… Read more »