Gordon Bajnai’s austerity program

Gordon Bajnai is apparently a very quiet fellow. Someone with steady habits and a calm demeanor. Always polite but according to those who know him made out of steel. He doesn't say much but when he talks people listen. (And we can only hope not with the consequences of the E. F. Hutton ad from the 1970s and 80s: "When E. F. Hutton talks, people listen.")

Bajnai laid down some very tough conditions for accepting the nomination. First he announced that he would prepare a memorandum in which he would outline the main points of his plans and send this memorandum over to the MSZP and SZDSZ caucuses. He demanded that each parliamentary member sign that he/she is ready to support the program and will vote in parliament accordingly. He added that if he doesn't seem to have the necessary votes he will not even bother to show up at the MSZP congress on Sunday.

Yesterday morning the long-awaited "political manifesto" was released. When a few days ago Bajnai said "this will hurt," he wasn't joking. Most people I talked to looked at the terms and said: there's no way that the great majority of the MSZP caucus will sign this. At least there is no way that the old left-leaning members will ever support Bajnai's austerity program. This will be the end of MSZP. However, this afternoon I heard Tibor Szanyi, one of the most socialist of the socialists, say on József Orosz's program, Kontra, that he will sign it and will urge all his friends, including the most recalcitrant and unpredictable member, József Karsai, to do the same. I almost fell off my chair. How is this possible when only this morning, before he had a chance to read Bajnai's more detailed program, Szanyi had announced that "one doesn't need an austerity program but only a program of thrift," adding that Bajnai's program from what he knows about it is "not a left-wing program." Well, something must have happened at the meeting of the caucus this afternoon. Most likely the MSZP members realized that the stakes are too high and not accepting Bajnai's '"ultimatum" means early elections. And early elections would result in a humongous defeat for their party and such an overwhelming Fidesz victory that the present constitutional setup might be in jeopardy. How did Szanyi justify his sudden enthusiasm for Bajnai's program? He triumphantly announced that what changed his mind was that Bajnai didn't want to raise the value added tax (VAT) from 20 to 23%!

Well, indeed, Bajnai didn't do that, but he is planning to do plenty that might not be welcomed by a lot of people. I already heard a few pensioners swearing up and down that although they had been faithful supporters of MSZP until now they would never vote for the party again because this government is taking away the thirteenth month pension. Trade union leaders of public transport companies, civil servants, teachers are all up in arms. I haven't heard about the doctors and nurses, but I'm sure we won't have wait long.

So let's go through Bajnai's "Political Manifesto" outlining the conditions for handling the economic crisis. Bajnai first impresses on his readers the urgency of the situation that demands "immediate and determined action." There is no time to waste. They must move in order to have the supporting votes on these "unavoidable measures and painful sacrifices" in the spring session of parliament. He would  like to see some of the changes introduced on July 1. His main goal is to save as many jobs as possible in order to avoid social unrest and the further splitting of Hungarian society into haves and have nots. Keeping that in mind, he would like to achieve the relative stability of the Hungarian currency, he wants to reduce the deficit, and join the eurozone as soon as possible. In order to achieve these goals "the whole government structure must be revised in order to spend less on administration." Also the tax burden of employers and employees must be lowered. Bajnai would like to give "first aid to mid-sized and small Hungarian businesses that provide two-thirds of the country's jobs." Last but not least there must be a stimulus package. The money for that will come from European Union subsidies. The government will spend 1,800 billion forints to make sure that the building industry doesn't collapse. One mustn't forget about the IMF and convergence obligations either because this is the only way to make sure that the country doesn't lose the trust of investors. As soon as the stabilization of the forint is achieved, the interest rate can be lowered.

After these introductory remarks Bajnai outlines "the chief elements" of the program that aim at decreasing expenses immediately, not next year as originally planned. How is he intending to do that? First, he wants to freeze the salaries of public employees for two years. That would entail changing the terms of an understanding arrived at between the government and the public employees' representatives. From 2010 on there would be no thirteenth month pay for public employees. In the future they may receive extra bonuses depending on the fortunes of the economy. He would also give less money to local governments from the central budget.

The age limit for retirement would also change. The earlier plan to raise the retirement age was painfully slow. At the moment it is 62 years but there are so many ways to retire early that the actual average retirement age is around 58 years. The plan produced a few weeks ago would mean that the whole process would begin only in 2016 (starting with people born in 1954) and would go on until 2027 (people born in 1962). Every year 4 months would be added to the retirement age that would eventually (in 2027) reach the desirable 65 years. Bajnai seems to have different ideas. He is not specific but he would start the whole process sooner and yearly they would chip off not 4 months but half a year. The promised pension correction for 2009 will be moved to 2010 and there will be no extra month of pension.

Further restrictions on benefits would include "sick pay." Currently if a doctor certifies that is a person is so sick that he is unable to work he receives 70% of his pay for six months as compensation. Half of this is paid by the employer. A friend of mine, the owner of a small business, finds this whole thing rather unfair. As he says: "It is not my fault that one of my employees becomes sick." Well, from here on instead of paying 35% for work not performed he will have to pay only 30%. This is still quite generous. Child support, which has been going up and up for years, will be frozen at the current level for two years. If a "child" goes to college his parents will receive child support until the age of twenty-three. That is, at the moment; Bajnai wants to lower it to twenty. If Bajnai asked me I would lower it to eighteen. I just heard, for example, that Hungarian university students are not so eager to get part-time jobs as their colleagues in the west. Then comes the notorious gyes (gyermekgondozási segély) and gyed (gyermekgondozási díj). If a woman worked at least 180 days prior to giving birth to a child, she is eligible to receive 70% of her earlier gross income. That is called Gyed. It seems to me that the same person, or even a grandparent, is also eligible for Gyes (28,500 Ft/per month). For three years a woman can stay at home with a newborn. And, of course, if she has another child three years later she will receive another three years of Gyed and Gyes. That is indeed unique in Europe and if it is unique there one can imagine that it is unique in the whole world. Bajnai's plan is not to abolish it or to decrease it to a more acceptable three or six months; rather, he modestly calls for a reduction of the benefit to two instead of three years. I think it is a generous offer although I'm sure Hungarians will not share my view.

The government will temporarily stop assisting young couples with children to buy a first home. A family is currently eligible for a great deal of help from the government. After one child 900,000 Ft., after the second one 1.5 million, after the third 1.4 toward the down payment on a home. It keeps adding up. The government currently is also pitching in by paying part of the interest on the mortgage. This whole nonsense will be stopped. In 2009 the government will also decrease subsidies on gas consumption and on distance-heating. After 2010 they will stop all subsidies. In addition less money will be given to public transportation, especially to Hungarian Railroads (MÁV) which is 40-50 billion forints in the red every year. There will be less money for Hungarian public radio and television. MTV is a very expensive TV station without much to show for it. Hungarian farmers are currently getting generous subsidies from the European Union, and the Hungarian government also pitches in. Hungarian contributions to the farmers will shrink.

And this is just the beginning. I'm sure more is in the offing. It's time for Hungary to live within its means.

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NWO
Guest
You are correct about Bajnai’s character. I applaud his honesty, and his intentions. Particulalry, his effort to make some fundamental long term changes (i.e., increasing the retirement age) and not just short term budgetary changes. My sense is that he believes he will probably have 4-6 weeks maximum to get his programme through, and after that as the consequences are felt directly among the population, the support he is now garnering (reluctantly) among the MSZP members will fall away. I would then guess that by the early Fall, if not before, having already made-I hope- a lot of progress in cutting 2009 expenditures and hopefully baking in some changes for 2010, but also realizing that his support is gone, he will resign and there will be new elections scheduled for the year end. Before he goes, however, he might be able to renegotiate the IMF facility thereby increasing the amount and extending the maturity. What could change this timetable and speed it up or slow it down? I think speeding it up is a function of FIDESZ and whether they will bring “their people” out onto the streets for “French style” demonstrations. My guess: Likely. What could slow it down?… Read more »
Hettie
Guest

People will have to understand that their jobs and livelihoods are at stake and the danger of losing these is more significant if the cutbacks aren’t made. Public sector workers don’t seem to have much solidarity for their private sector counterparts, and seem to be even less aware of what would happen to them specifically if the country went bankrupt.
I welcome the cuts, but tend to agree with Edward Hugh who says that the cuts will only work if the EU (or the IMF or the two in tandem) provides the necessary guarantees so Hungary gets access to funds which they should use specifically to kickstart the economy. Without these funds Hungary would enter a deadly spiral of economic contraction and out of control government debt leading to more cuts, less consumption, more economic contraction etc.
In sum, I’d like to see a reassuring EU action before any painful measures are taken. If people are to make the sacrifices they need to know that it is worth it and that it is for a relatively short term (2-3 years at most)

Mark
Guest
“Last but not least there must be a stimulus package.” Poor Bajnai! He seems to be confused. Economic stimulus is an action by which the government (either European or national) spends money or foregoes revenue through tax cuts to inject extra money into an economy to restore it to growth. If the total ammount of money from these measures (including the European one) is not greater than it was before it is not a stimulus. Actually, this is the opposite of a stimulus – but is actively deflationary, and extends the logic of the current governments measures, and will intensify the current economic downturn. If Bajnai survives that long (and for everyone’s sake I hope he doesn’t) then there will be a need for further cuts in the autumn as state revenues fall even further as a consequence of his programme. “His main goal is to save as many jobs as possible in order to avoid social unrest and the further splitting of Hungarian society into haves and have nots” This is surely a joke isn’t it? If I wanted to both split Hungarian society down the middle and create a political revolution, I can’t really think of a better… Read more »
NWO
Guest
There is no question that this strategy being proposed by the PM candidate (1) courts even greater social disaster and (2) may well have the effect of making the recession that much deeper. On the other hand, not undertaking a plan like this, would mean almost certain state bankruptcy in the near term. But let us face it. The fact is that too many people live solely off of transfer payments from the State, including a significant proportion of the Roma population and hundreds of thousands who have taken advantage of the ridiculously lax rules for early retirement or medical disability. Among others, these are the people who will be cut off. And also, lets admit it: among this population, that are very few counter cyclical stimulative measures that can be employed. Many of these people are incapable and often unwilling to work. They consider transfer payments as a birth right. The rest of the Hungarians are really not interested nor capable of supporting this strata of the society any longer. Finally, Mark, I don’t fully agree with you. There are EU funds that could theoretically be used to invest in infrastrucutre etc. that (1) will not burden the budget… Read more »
Mark
Guest
NWO – there are three important points to be made by way of reply. “There are EU funds that could theoretically be used to invest in infrastrucutre etc. that (1) will not burden the budget like transfer payments and (2) will be more positive forint for forint in generating GDP then just providing cash.” There is no doubt that these funds can be used for investment in infrastructure (though I think you’ll find, even on the more generous post-crisis terms, they will require substantial co-funding from the Hungarian government for the money to be accessed, and therefore it is not strictly true that they will have no implications for the budget). But two points follow from this. The point I made above was about whether a package that is made up of the sum total of national and European infrastructure can be called a stimulus in any meaningful macro-economic sense. Unofortunately if the sum total of the package is to take more money out of the economy through national tax increases and spending cuts than is being put in through EU moneys then the net effect of the package is deflationary – the precise opposite of stimulus. The second problem… Read more »
Mark
Guest
Ėva: ” think you’re too pessimistic. Did you see the newest Szonda Ipsos poll? I will write about it tonight. People at last realized that something must be done.” I wouldn’t put too much weight on polling like this. There is a European trend to approve of tax increases and pain in the abstract – especially when the terms of the media debate suggests it is desirable. The people who support it tend to change their minds when they personally are asked to make sacrifices. Look at responses in the UK in advance of the 1992 election, when voters were asked about the desirability of tax increases, and compare it to how they actually voted. Look too at the views of Germans on painful spending cuts and tax reforms in 2005, and then compare it to how they actually voted. There is a basic psychological problem that undermines this polling. People are naturally reluctant to tell pollsters that they oppose things that are presented as being “in the interests of the country”, that they privately have no intention of accepting. When everyone else starts complaining – or when they can express a preference in the privacy of the polling booth… Read more »
Godot
Guest
We all know Bajnai, and there are many reasons why we don’t trust him. Another sad example of why this country is in so much trouble. It’s the same old school: when you get in power, surround yourself with friends, the dumber the better, just like Gyurcsany did. If you look at our government, you won’t find anyone who’s good at what they are doing, or supposed to be doing. The result is the usual wide-spread corruption, bureaucracy, government waste, theft and incompetence. Now we hit bottom, so it’s time for the rest of us to suffer a little more, and pay for the crimes and misdemeanors of the elite. Of course pensioners who try to live on 200 euros a month may suffer more than the pensioners who collect 5,000 euros a month plus the overpaid phony “consulting” jobs they have on the side. Working for the government pays, working for the good of the country doesn’t. If we want change, the first step is to lock up everyone responsible for the mess. Freeze the assets of the rich, and investigate where their wealth comes from. I bet most of them have something to hide. Anyone convicted of corruption… Read more »
Godot
Guest

“Perhaps it would be better to wait until we see what he does. It is safer than jumping into conclusions based on political likes or dislikes.”
You must have missed the “accomplishments” of Bajnai in business and also as the head “misappropriator” in Gyurcsany’s government. Obviously not all of us know him personally, but most of us are aware of his less than impressive record.
I don’t care much for any of the currently visible parties, and have no political prejudices, but it seems offensive for the country to even mention his name for yet another, even higher position. Not to mention his “plans”, a recipe for disaster.
So we the people know enough of Bajnai not to look forward to his reign of (t)error.

Godot
Guest

“reveal your political stand”
I’m pro-Hungary. I want what’s best for the country, no selfish personal interests, no dependencies, no special party agenda. You’re obviously on the other side. Any reason why you hate Hungary so much?