Gyurcsány’s speech a day after

Last night I listened again to Ferenc Gyurcsány's speech, available in the archives of MR5, the Magyar Rádió's channel that broadcasts the parliamentary debates:

Most commentators found the speech boring and not political enough. It was too technical, they  said. It was like a lecture of a university professor. I with my academic background find this kind of speech perfectly okay. Moreover, I don't think that under the circumstances a political speech would have been appropriate. Admittedly it was long, about an hour, and Ibolya Dávid in her comments complained about its length. Obviously the prime minister thought that he had to explain the complexities of the economic situation, not so much to those members of parliament who were present (MSZP, SZDSZ, MDF) but to the citizenry. That is to those few who actually watched the debate on TV and to the newspapermen who were supposed to write their reports about it. In addition, around 8 p.m. Gurcsány made a short speech (about five or six minutes) televised on the more important television stations in which he made an appeal to the Hungarian people for their understanding. Apparently, not too people many watched him, especially among the young.

One of the things I forgot to report yesterday was a change in the calculation of pensions from year to year. I think I mentioned earlier that the Hungarian government currently follows the so-called Swiss indexing that pegs the rise of pensions to a combination of prices and changes in the value of real wages. Many people argued against this system, including Viktor Orbán last summer in his "secret" talk with young political scientists. An outcry followed the leaked Orbán plans. Thus it seems to me that the government didn't dare abolish the Swiss indexing system completely. Rather, they modified it. The real value of pensions will remain the same as long as GDP growth is under 2%. Once GDP growth reaches 4% the Swiss system will kick in again. In between these two growth levels the price component will receive a heavier weighting than real wages in determining pension increases.

Another detail came to light today when Erika Szűcs, minister of social services, announced that 50% of child support for children under the age of 14 will be given in kind (foodstuff, clothing) in cases where there is good reason to believe that the assistance intended for the child is being spent elsewhere. For example, in the pub or on cigarettes. Families with children over 14 years old will receive child support only if the child is attending school. It is quite clear that these new, stricter regulations are intended to make sure that Roma families send their children to school. The Fidesz government actually introduced such a regulation but, if I recall correctly, the opposition parties (MSZP, SZDSZ) were dead set against it and abolished the practice in 2002. Well, now they have to reintroduce these policies again.

Re property taxes: for the time being those "poor" families who own three or four pieces of property don't have to worry. The introduction of property taxes is scheduled for 2014. Currently plans include some kind of discount on property owned by people over the age of 62. (I can already see how many apartments will change hands from younger people to folks over that age!) People will be able to subtract 50% of their property taxes from their personal income tax. Rumors have it that the tax rate would be 0.5% of the property's value. I talked to some people who find that far too high given the appraised value of an average apartment in most Hungarian towns.

Finally, raising the retirement age is postponed until 2016 after which every year they would add four months to the retirement age until 2025 when it would reach the age of 65.

As for the reactions to the "stimulus package." Most of the economists I trust seem to think that although it might not be totally satisfactory, given the government's extremely difficult position Gyurcsány and his team cannot do much more. However, there are certain issues that remain to be resolved. One is the tax free status of the miminum wage. The guess is that most of the people at the so-called minimum wage level are actually making a great deal more under the table and evading paying any income tax.  Second, according to many economists something should be done with people who retire at the earliest possible moment and at the same time remain employed, most often at the same place from which they allegedly retired. So their salaries increase quite handsomely while a goodly portion of their income is not taxed. Third, people complain about postponing raising the retirement age until 2016 and consider 65 far too low a retirement age.

However, I'm not at all sure that the "package" is complete. Worse and worse economic news arrives daily and I wouldn't be at all surprised if further steps will have to be taken. Today, for example, the forint fell to an all-time low against the euro. (And it's not that the euro was strong. Moody's warning that faltering economic conditions in Eastern Europe will affect the quality and liquidity positions of major Western banks' local subsidiaries which could then spill over to their corporate parents sent the euro to a three-month low against the dollar.) Who knows what's coming tomorrow. Every new disaster will need new remedies.

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“Who knows what’s coming tomorrow. Every new disaster will need new remedies.” As Moody’s have pointed out the most immediate disaster is likely to be the impact of Eastern European element of the banking crisis on Hungary. Part of this involves the dependence of domestic borrowers on FX loans – those denominated in CHF, EUR, or in Yen – and the impact of economic problems on solvency. The other arm of this is that OTP is one of those banks that has “quality and liquidity positions” like “major Western banks’ local subsidaries” – particularly relevant here is the economic collapse in Ukraine. This is what lies behind the OTP’s current share price. I note that both Raffeisen and Erste are after a new assistance package from the government in Vienna, and Ewald Nowotny, the Austrian Central Bank governor, interviewed on the FT site has called for EU assistance to minimize the losses to Eurozone banks from the collapse in Ukraine (though in the same interview he implied, rather ominously, that those countries which border Austria were just fine, and shouldn’t need any EU help!) The most urgent issue seems to me to be that of solvency, both for households and… Read more »

There may be less to this package than meets the eye.
Broadly speaking, I agree with it, but what is the point of delaying a property tax for another five years? Or of doing nothing about the retirement age for another eight years? If these changes are worth making – and they are – then why not make them as soon as possible?
Apart from that, there is the great probability that Fidesz will be in power before 2104 or 2016 and scupper these changes.

We have to be very precise about the nature of the problem we have. Credit crisis, lack of consumption (demand) and the consequent shrink of industrial production and need for business and private services, deflation, unemployment are all related to the underlying problem of debt. We have a debt crisis, which is causing the painful reactions in the economy. We are re-learning that invisible hand of the market as such does not ensure rational decisions and right policies, but the invisible hand of market enforces correction of wrong decisions made in the past. Correction is painful, blind, hurts not only wrongdoers but the weak and the good, destroy values and its destruction is likely larger and more painful than should be. As a consequence of reckless borrowing of the past Hungary is virtually bankrupt. Hungary not alone is virtually bankrupt. Central and Eastern Europe is virtually bankrupt. Mediterran Europe is virtually bankrupt. Anglo-Saxon Europe is virtually bankrupt. Switzerland is virtually bankrupt. US is virtually bankrupt. Debts above real earnings made these countries and their economies virtual bankrupt. Countries of the other side of the coin, the savers, like China or Germany would also go to bust due to the bankruptcy… Read more »
András: “Hungary needs cost cutting to avoid real bankruptcy”. Hungary needs to restructure its spending over the long-term, but to engage in cost-cutting on this scale, in these circumstances, will bring forward bankruptcy, not avoid it. This is the route of Herbert Hoover, and – given the rise of Jobbik – the parallel that is more relevant, the route of Heinrich Brüning. Leaving the economics aside for a moment, this road will lead to a social explosion very quickly. I’ve spent alot my time during the past three months in Hungary and I can feel the tension rising. Péter Tölgyessy in yesterday’s Népszabadság drew the parallel with 1956, and while it isn’t a good one in many ways, I think it does capture the seriousness of the current situation. And as I know from studying their history, social explosions in Hungary have tended to come as if from nowhere, as least as far as their politicians and established observers are concerned. And almost twenty years of studying them suggests to me one isn’t that far away. Much of the discussion of the budget seems to take place as if commentators assumed Hungary was still a planned economy. What I mean… Read more »
András: “Credit crisis, lack of consumption (demand) and the consequent shrink of industrial production and need for business and private services, deflation, unemployment are all related to the underlying problem of debt.” Debt is a symptom and not the underlying cause. The underlying cause is the existence of huge imbalances between countries within the global economy which have encouraged some to become overdependent on exports and saving. The flip side of this is that other countries have had to become hugely indebted. What we really have is a crisis of the “Washington consensus” model of globalization. While that model has brought unprecedented prosperity to areas of the world like East Asia, it rests on serious imbalances which rendered the system unstable, and for that reason it is not going to come back in its old form. Many of the debts that have been incurred simply cannot be paid back, and the financial sector faces serious downsizing. Given the role the financial sector has played in allowing many of these imbalances to develop, and its contribution to global instability I consider that as something to be welcomed, not mourned (though the consequences of writing off enormous ammount of bad debt, and… Read more »