The Hungarian Reform Alliance: ideas of capitalists and economists

It was at the end of November, 2008, that a new organization came into being: the Reform Alliance. It consisted of nine representatives of business associations, the president of the Hungarian Chamber of Commerce and Industry, the present and past presidents of the Hungarian Academy of Sciences, the former presidents of the Hungarian National Bank, and ministers of finance and economic development prior to 2002.

Considering that the Reform Alliance's suggestions had to have solid economic grounding, a slew of economists were invited to work on the project. Publicly only four names are known: László Békesi, briefly minister of finance in Gyula Horn's government and now a professor of economics; Attila Chikán, minister of economics in the first half of Viktor Orbán's tenure as prime minister, now also a professor of economics; Péter Oszkó, CEO of Deloitte in Hungary; and Éva Palócz, CEO of the Kopint-Tárki Economic Research Institute. Three of these (Békesi, Chikán, and Oszkó) headed workshops, each dealing with different aspects of the economy.

The long awaited report became available today, and in the building of the Hungarian Academy of Sciences the leading members of the Reform Alliance along with the above-mentioned four economists gave a press conference. And the reactions? Perhaps Ferenc Gyurcsány said it most succinctly: "It is impressive but in its effects on society is at times chilling." However, he added, the government will analyze the document line by line. He somewhat optimistically added that the government's and the Alliance's numbers for 2009 are closer than might appear at first blush. It is true, he said, that the government officially talked about a savings of 220 billion forints for the year, but they believe that the final number will be closer to 260-270 billion forints. That is not so far from the goal of the Reform Alliance, 330 billion for 2009. János Veres, minister of finance, mentioned two problem areas. First, he can't see how they could introduce property taxes in Hungary this year as the Alliance suggests. Second, he doesn't see where the funds will come from to cover the reduction in payroll taxes after 2009–by 3% in 2010 and an additional 2% in 2011. Gordon Bajnai, minister in charge of economics and development, cheerfully added that some of the Alliance's suggestions have already been adopted while others will be introduced shortly.

Fidesz wasn't that charitable. Péter Szijjárto, who by now is not just an ordinary spokesman but the director of communications, held a press conference this afternoon where originally he didn't want to deal with the issue. The press conference was held to announce Viktor Orbán's "international negotiations" and their results. Szijjártó stated that Orbán is planning to launch a common regional front (the so-called Visegrád Four, i.e. Poland, the Czech Republic, Slovakia, and Hungary) in order to receive greater financial assistance from the European Union. There are a couple of problems here. First and foremost, Orbán is not yet the prime minister of Hungary. Second, Ferenc Gyurcsány already made the same suggestion, and next week he has scheduled meetings with European politicians to hammer out an agreement. And there is a third problem: Orbán most likely wouldn't be a welcome guest in Slovakia. He did visit Poland and the Czech Republic, but according to a sarcastic remark by the prime minister, he went there to lobby for their support in his quest to hold onto his post as one of the vice-chairmen of the Christian Democratic International, an umbrella organization of 74 European conservative parties. Szijjártó also announced a new Orbán junket. This time to Berlin where Orbán will negotiate with important politicians of the German Christian Democratic Union and will also have a conversation with Chancellor Angela Merkel. Well, we will see about that. The last meeting with Merkel didn't quite work out the way Orbán planned.

Most likely to Szijjártó's annoyance there was a question from a reporter about the suggestions of the Reform Alliance. Szijjártó was adamant that no austerity package is acceptable. Nothing can be taken away from the people who are not responsible for the crisis. After all, laws provide for these social assistance programs and in a democracy one must obey the law. Moreover, the current economic crisis has nothing to do with thirteenth-month bonuses. The cause of the crisis is the government's ill-conceived economic policies. The real problems started with the austerity package of 2006. Well, that sentence took my breath away because everybody knows that the austerity program was critical in reducing the bloated budget deficit. I would hate think what the situation would be today if Hungary's budget deficit were still over 10%. As usual, the reporter was satisfied with Szijjártó's answer.

Back to the Alliance plan, described by many newspapers as "brutal cutbacks." The Alliance outlined a five-year plan. During this period the economists of the Reform Allliance suggest cutbacks in spending amounting to 1,350 billion forints. They would abolish entitlements as they now exist. Instead people would receive assistance, including child support, only on the basis of need. They would abolish the extra month of pension completely, not just incorporating it into the normal year as the government planned. They would raise the retirement age at a much faster pace than the government announced. In the next three years they would reduce payroll taxes by 10%. The lower personal income tax bracket, qualifying for an 18% tax rate (as opposed to the 38% rate for the more affluent), would include all those with incomes under 5 million forints, 2 million more than the government's suggested limit.  Currently there is a flat rate of 1,900 Ft per month paid by an employee as his or her healthcare contribution. The Alliance would demand 5,000 Ft a month instead. The economists added that in addition to the 1,350 billion in savings another 1,000 billion could be saved by freezing government expenses at their current level. Attila Czikán claimed that the Hungarian educational system is "awful" and that another 20 billion could be saved while improving standards. Éva Palócz concentrated on such state enterprises as the Hungarian Railroads (MÁV) and the Budapest Transit System (BKV). According to her another 85 billion could be saved there. According to Péter Oszkó (Deloitte) the current disbursement of GDP is 50.5% as opposed to the Polish and Czech 42-43% and the Slovak 38%. Therefore it is clear that in comparison to the other three Visegrád countries Hungary is not competitive. The Alliance would like to lower Hungary's disbursement to 42.1%. According to Békesi such a move would ensure a 1.5% percent growth in GDP per year and it could even reach 3-4%. Their calculations are based on a forint-euro ratio of 260-280 and a 2.5% inflation rate. They think that Hungary would be able to fulfill all its obligations for entering the eurozone by January 1, 2012.

As Menedzsment Fórum, an online economic newspaper, summarized the current situation, neither the government nor the opposition will stand by the suggestions of the Reform Alliance because "they are afraid of social upheaval." My feeling is that the government will adopt some of the less draconian suggestions of the Reform Alliance in order to appease its framers. In the short term the work of the Alliance may benefit the government. The people may just think that they are lucky to have the government's proposal that is not so "brutal" after all in comparison to the "chilling" suggestions of businessmen and economists.

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Mark
Guest
When I commented in the SZDSZ thread yesterday it was these proposals that were uppermost in my mind. In the current climate they are a complete non-starter. I would go far as to say that their implementation is not compatible with the survival of democratic institutions. No elected government could introduce these reforms in current circumstances and expect to sustain them. I doubt that they would be sustainable even in the unlikely event of agreement between the MSZP and FIDESZ. The anger they would generate would focus attention on why the population were being asking to bear the costs of austerity, when the wealthy – among them those in power – were seen to have caused the problem. That is not mention that such cutbacks in the midst of the recession would be completely counterproductive. I do see benefits deriving from some of the proposals if they were re-cast as part of a long-term restructuring of the welfare state. The quality and efficiency of public transport will only be improved by making the ticket prices large sections of the population pay more realistic – and this means limiting the concessions to those of compulsory school age and pensioners, and making… Read more »
PatRiot
Guest

The so called “Reform Alliance” is either a bunch of guys pushing numbers around (where do they get real numbers would be a mystery) or its sole purpose is to make Gyurcsany look somewhat better.
No one can make him look good any more.
Both the Alliance’s and the government’s “programs” – for the lack of better word – miss key points.
What Hungary needs is a serious cut in the top, not the bottom.
Smaller Parliament, send all party-list “representatives” packing, put the rest on a budget.
Introduce “ill-gotten gains” tax. Put together an independent team of investigators and go after at least some of the billions that ended up in the wrong hands.
Let the APEH go after the good folks who drive expensive cars and wear heavy gold chains and don’t pay any taxes.
Don’t just cut basic social spending, make an effort to deal with bureaucracy, so some of the money will end up where it’s needed.
You can only push people so far before they start pushing back, and it’s going to be messy.
Hungary is already the bad example, see what the New York Times wrote:
http://www.nytimes.com/2009/02/19/business/19views.html

Op
Guest

Patriot,
I just read the NYT article you mentioned. They translated “böszme” as “boneheaded”, and posted a picture of Gyurcsany for illustration purposes.
Hungary is largely invisible from the US, it’s pretty depressing that they found it looking for scary examples of government insanity. It would be interesting to see the exact amount Gyurcsany has spent of the taxpayers’ money on buying supporters. All those billions wasted on fake “consultants” and self-promotion, all the EU money that ended up in the wrong hands and so on.
One thing Gyurcsany seems to be good at is getting away with ruining the country and still hanging on to power. Amazing…

Mark
Guest

Ėva: “You and I might think so, but SZDSZ and MDF consider them just ducky.”
Unfortunately. It is at moments like this that I’m forced to conclude that the worst enemies of Hungarian liberalism are in fact Hungarian liberals!

Tünde
Guest
Mark: „The quality and efficiency of public transport will only be improved by making the ticket prices large sections of the population pay more realistic – and this means limiting the concessions to those of compulsory school age and pensioners, and making everyone else pay 100% of the price.’ You must be joking. Public transport has not improved with raised ticket rates, it has gotten worse. Raising the ticket price in public transportation, particularly for the railroad will just kill it. It is already general more expensive to use the train than a car. Cutting all group rates did not mean those groups (such as nature groups) started paying fullfare, it meant them taking cars instead, resulting in a net loss to the railroad. The massive losses of the transportation systems aren’t due to low ticket prices, they are due to ongoing mismanagement, hiring people who effectively work against the transportation systems they are supposed to support, who sell off transport wagons as scrap metal, and the state refusing to pay its costs to MÁV and doing nothing to improve service (EU funding came only after Brussels objected to the Hungarian govt. not asking for any) while supporting automobile, lorry… Read more »
Mark
Guest
“Public transport has not improved with raised ticket rates, it has gotten worse.” I’m not at all unsympathetic to what you say about the environmental costs of motorization, and the need for a balanced transport policy that avoids the mistakes made in North America and the more motorized societies of western Europe (and indeed a national system of road charging so that motorists pay the full environmental costs of driving is one reform I’d suggest to bring the budget into balance over the long-term). I also agree that the obsessions of sucessive Hungarian governments with high-speed highway construction has been fairly senseless (I’ve criticized this policy in my comments on this blog before). There are clearly problems of corruption and criminally incompetent management within the public transport system that stem from a weakness of state control over them and a lack of general public accountability. However, you have to consider the problems sensibly. Urban public transport suffers – especially in Budapest – from considerable overcrowding that on some routes – the no.7 busline is a good example – compromises the safety of passengers. I think this could be said of certain rail routes. Given that capacity is always going to… Read more »
Andras
Guest

I have just read a piece of Berend T Ivan, in which he states that in pre IWW Hungary, although density of railway lines were almost as high as in Western Europe, passenger traffic was half of it. So it seems, that overbuilding and under-utilisation is rather a phenomena of developing economies. Beyond what Mark suggested, what is needed to do is honestly review public transport system. It is well known fact that bus transportation is much cheaper, more flexible than railways. There is a need for reviewing railway lines and bus transportation systems and create a new system with better interconnections. That alone could save a lot of money on the long term.

Tünde
Guest
Mark: Yes thank you, I have considered the problem sensibly. It is sensible with a looming energy crisis, a number of major environmental problems caused by the auto, a collapsing auto industry, an aging population, for which train, and not bus, travel is ideal, and increasing state services centralisation forcing more travel, to subsidise public transport. It is a public service and should be subsidised. And where are earth are student fares given based on economic background? And how do you propose on enforcing such a thing? The bureaucracy would cost more than any cost gained. Plus one could argue that the wealthier are paying more for public transportation in taxes, I am happy to see any of those who can afford cars take the train as it is. I am aware of how EU funds work, having worked with them. So what is your point? The Hungarian government spends money it doesn’t have on stupid things, so spending some on something worthwhile would be a welcome change. As I said, increasing fare revenue will kill it. And the less people who take the train, the less economic it is to run it. And once you terminate service, tracks and… Read more »
Tünde
Guest

András: Berend T. Iván’s figures were probably true for all of Europe, there was less mobility then and rail was used for transport of goods, which is a great source of income for the railway, and which Hungary discourages and something that some countries still do quite well, the USA for example, or Romania, which makes lorries cross the country by train, and pay for it.

Mark
Guest
Tünde: “You have totally ignored the part about auto and air travel being subsidised, in addition to not being taxed according to their ecological burden.” I hadn’t ignored the point – in fact I am a strong supporter of national road charging schemes for road transport and said so in my last response. Given that most forms of transportation – save the bicycle and walking – involve the consumption of energy that has to be produced somehow, if you price all forms of transport according to their true ecological cost, then all mobility except those dependent on the direct expenditure of human energy would become more expensive – train and bus – included. I am sure you would see a shift in the relative prices of the car to public transport, but people would have to spend more on travelling per kilometre by any means than they do now. I suspect that ecological sustainability will actually involve a re-organization of the economy to reduce overall ammounts of travel. That isn’t to say this isn’t a desirable step – in fact the economics of oil production and climate change suggest this is an adjustment that all societies will have to make.… Read more »
Mark
Guest

“So it seems, that overbuilding and under-utilisation is rather a phenomena of developing economies”
I suspect it is due to the fact of the rather unusual dynamic of private and state involvement in nineteenth century rail construction. Prior to the mid-1870s private railway investment was stimulated by the huge increases in the prices of European grain, in anticipation of future profits that were never realised as a result of the USA’s returning to the European grain market. From 1868 the Hungarian government started taking over these private investments as they went bust. With the puncturing of the grain bubble in 1873, these rescues became ever more frequent. Quite a lot of the Hungarian network was shaped by the process of progressively bailing out private companies whose operations were already uneconomic at the peak of the railway age. Peculiar relationships between state and private sectors later became institutionalized after the 1880s as private companies built lines, which MÁV then operated for them. It’s probably no accident that the Hungarian railway network was very extensive, but significantly less profitable than that in equivalent states on the eve of the First World War.

Andras
Guest

Ah, so it is not a development issue, but the underlying nature of PPP has not changed despite the fact that everything has changed.

Mark
Guest

Nothing indeed has changed despite the fact that everything has changed. Railway development was driven forward by a parasitic relationship between investors building branch lines and the state rail company. And it was justified politically through the arguments that a modern national rail system was being built. Sounds familiar?

Tünde
Guest

Mark: I wrote “I am saying raising prices will kill the train, and you are implying that raising rates will provide income for MÁV and lower its operating costs, which is ridiculous.”
and then you say, once again:
“keeping (prices) at their current level is not free – the price is paid through increased state indebtedness, low quality and collapsing services.”
And if you can’t bother with reading links on this by people I can’t help but think know more about this than you do, and who have already countered your theses, then there is no point to this debate.

Mark
Guest

Tünde, with all due respect I think you’re being a bit unfair. I’m very grateful for the information provided in the links, but there is very little I disagree with in most of them (though I have to say the calculations on the relative costs of rail and buses are bizarre)- and I don’t think there is much in them which is incompatible with or contradicts anything I’ve said. What I’ve said is that all travellers must pay a more realistic price for travel to improve quality. I also think that motorists and hauliers should pay a realistic cost for using the road too, and that should reflect ecological costs. Unfortunately, we have to recognize that means all travellers paying more than they do now for journeys, as that is the only realistic way of providing the funds to modernize the transport infrastructure.

Andras
Guest

Tünde, I am not only supporting public transport, I am really using it. I dont even have driving licence!
Still, we are in a midst of a worldwide upheavel. We had a false development based on artificial easy money, distorted prices and unsustainable private and state budgets. The world is it now in price discovery: adjusting prices and through readjusted prices will slash unsustainable consumer activities, state expenditures, and economic activities to were built up to serve these. This will be an extremely painful, and long process.
I guess there will be substantial drop in private car use. There will be a substantial drop for travel, in general. There will be a substantial pressure on state budget to cut expenditure.
There is a need for thorough review in public transport also, which part of it sustainable, how to finance it and how to manage it. Especially, we need in this state to be able to have thorough reviews and calculations on costs and functioning of these companies.

Supra Footwear UK
Guest

Don’t know what is wrong what is rite but i know that every one has there own point of view and same goes to this one