Hungarian austerity program: tougher EU demands

It was yesterday that Péter Oszkó, Hungarian minister of finance, and András Simor, chairman of the Hungarian National Bank, together representing the Hungarian government, met with Joaquin Almunia in the name of the Commission of the European Union to sign the latest agreement allowing Hungary to receive the third installment of the 6.5 billion euro loan from the EU. From the document it is clear that even tougher measures are expected from Hungary. Otherwise the next and final installment will not be forthcoming. The main demands are to: (1) stop all housing subsidies; (2) save forty billion forints by the time of the fourth installment on subsidies for the Hungarian State Railways (MÁV); (3) reduce expenses for running local governments by 120 billion forints; (4) introduce property taxes; and (5) reduce to two years instead of three government payments to new mothers.

As for housing subsidies, the government as of March planned only to reduce their size. That didn't satisfy the European Union. They want to put an end to all housing subsidies by July 1. Right now the government is thinking of a more modest plan that would allow subsidies for first-time purchases of apartments or houses by people under the age of thirty-five. The purchase price cannot be higher than 30 million forints. I can't see how that will satisfy Brussels.

The other sticking point is subsidies for young mothers. Parliament passed legislation that reduced the duration of the payments from 36 to 24 months, in keeping with the new EU demands. However, László Sólyom, president of the republic, refused to sign it. He wrote a letter to Katalin Szili, speaker of the house, in which he stated that in his opinion women should decide when they want to return to work. (Fair enough, but what does that have to do with the duration of government subsidies?) He considers women's employment important, but at the same time he thinks that the low birth rate and the problem of an aging population warrants the retention of the present practice. It is a well known fact that the ability of Hungarian women to stay at home with their children for an unusually long time didn't help the birth rate. Moreover, according to Klára Sándor, SZDSZ member of parliament, staying away from the workplace for three years reduces a woman's chances of returning to work. She claimed that the birth rate is higher in those countries where women's career opportunities are better.

Whatever László Sólyom thinks, it is unlikely that this piece of legislation will be scrapped, and not only because the European Union will not allow the current system to remain in place. Lajos Bokros just yesterday said in an interview that he didn't agree with László Sólyom, which may mean that most of the MDF parliamentary members will vote to keep the bill as is. SZDSZ made it very clear that they are sticking with their original decision. The mild-mannered Gordon Bajnai (one can only hope with some of the powers of mild-mannered Clark Kent, known to the world as Superman) said that he was sure that when the president fully understands the government's plans for establishing new day care facilities he will not object. My feeling is that Sólyom will have to swallow a big one and sign the bill.

As for the property tax. There is quite a discussion about what to call it. It was originally known as "ingatlanadó" (real estate tax) but is now referred to as "vagyonadó" (property tax) because it will be levied not only on real estate but also on other luxury items: planes, helicopters, expensive boats and particularly valuable cars. (I'd be curious to know how many Hungarians own any of these luxury items.)  But the original bill (still under discussion in parliament) is very muddled. As it stands, it will be levied only on real estate worth more than 30 million forints. Real estate tax based on market value is an entirely new concept in Hungary and it seems that there is no way of assessing the value of structures and deciding which ones are worth more than 30 million forints. Therefore, the idea is that the owners themselves should declare the value of their real estate. I don't think that I have to tell what I think of this brilliant idea. Somehow I don't think that millions of owners of apartments and houses will do a self-assessment and rush to declare that they should pay real estate tax. The authors of this stillborn tax scheme answer such objections by saying that the Hungarian equivalent of the Internal Revenue Service will check returns (How? By targeting certain addresses and then going on site for an appraisal?) and that personal income tax is also paid on the basis of a simple declaration (and we know how high the collection rate is in Hungary). One thing is sure: some members of SZDSZ will not vote for the bill in its current form. They rightly point out that many people own more than one piece of property. So even if none of the houses or apartments is worth more than 30 million, the owners should pay taxes based on the total value of their real estate assets. The party thinks–or at least this is what Gábor Horn says–that property tax should be levied locally as everywhere else in the world. SZDSZ also suggests that locally levied property tax should be deductible from national income tax. So far so good, at least based on the American model. But SZDSZ doesn't seem to be concerned that until now not one word has been uttered about taxes on commercial real estate holdings. This revenue stream is vital to local governments, at least in the U.S. Another strange aspect of the Hungarian tax code is that land is not taxed. Wow! Wouldn't it be nice to own thousands and thousands of acres of land ripe for residential or commercial development! SZDSZ's vote is essential but, once again, the party is unable to speak in one voice. While Gábor Horn talks about opposition to this bill János Kóka promises full cooperation.

The reason for the new tougher demands is the changed economic climate. When the original arrangements were made the prediction was for a 3% decrease in the GDP. By now the ministry of finance's calculations are based on a slump of 6.7%. As for Sólyom, only yesterday he announced that without the help of the European Union the Hungarian government would have had to declare bankruptcy. I hope he keeps that in mind when he has to sign the child-support bill he currently objects to.

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Mark
Guest

“Hungarian austerity program: tougher EU demands”
Are you sure they are just EU demands? It is relatively well known that if Almunia understands some of the basic principles of economic policy, that understanding is well concealed. In addition, who do we have representing Hungary? Simor, whose confidence in his own country’s economy is so great, that he was, until he was caught, investing his money in Cyprus. And, Oszkó, veteran of the Reform Alliance – an organization of such political principle and committment – that it dissolved itself immediately after the former Prime Minister, who, though flawed, was at least aware of some of the social and political consequences of what was being suggested, was removed.
Shouldn’t we instead say that the meeting was really about the president of the MNB and the Minister of Finance securing EU support for the demands they are making of their colleagues in government, and Hungary’s democratically elected parliament? Isn’t this just the latest phase in a quiet coup d’état in which the financial elite has used the economic crisis and exploited the confusion and panic among the ruling parties it has caused, to implement their own solution in the absence of any democratic mandate whatsoever?

Member

The property tax seems to have potential to be a revenue loser in the short term when we consider how much bureaucracy will be required to assess the value of every piece of real estate in the country.
The only way that I can see it working would be to value properties on some sort of nominal or estimated value based on the size and district taken from land registry records.

whoever
Guest

The government are going to leave such badly scorched earth in their wake, it’s going to leave any progressive, pro-European, socially liberal standpoints truly scuppered for the forseeable future. It’s so easy to categorise this kind of thing as symbolising the “enemies of the Hungarian people” – it’s going to be a rough autumn.
I think the big loss here is the szocpol housing support – which acted as the surrogate of social housing in Hungary. Without this, I don’t expect a new wave of social housing to be built, thereby leading to an eventual housing crisis compounded by the “Budapest and West” distortion of Hungary’s economic basis.
High levels of property ownership are likely to result in an “Irish famine” type situation – where the divided proceeds of selling a previous generations property, are not enough to be able to enter the housing market. The lack of available credit simply compounds the problem.
Szocpol was one of those things that Fidesz got half-right, in a culture that would probably reject the widespread provision of social housing.

Brum
Guest

Ad. Luxury car tax
Just by looking around in Budapest, I would argue that the really rich imported Florida-registered cars or register them in Lichtenstein. The merely rich register them in Komarno in Slovakia. The predicted return on this tax is most likely negative (after taking in costs of enforcement).
Ad. real estate tax
Expats whose rent is paid by a company find it nearly impossible to get a formal invoice in Budapest. Landlords do their utmost to prevent any official trace of the fact that they are renting their flats. That sets the stage…

Gábor
Guest

Mark “Isn’t this just the latest phase in a quiet coup d’état”
Exactly the same thoughts crossed my mind reading the story, especially the introduction of property tax in the IMF aggreement. Ironically while almost every other government is wrangling for some elbow room (if not because they are populists, trying please the electorate for some coming elections, than because they are a bit concerned by the severity of the imposed pro-cyclical measures or because some of them ask what if the implemeted measures won’t be succesful enough and they just simply bound their hands earlier) the Hungarian seems to propose eagerly specific measures to be incorporated into those aggreements.
Maybe it is not the case, but there is still nothing to make my suspicions fading away.

NWO
Guest
The difference between how the Hungarians are acting (and now how the Latvians are acting) and what is going on in other parts of Europe and especially CEE is that Hungary was saved from bankruptcy by the IMF and the EU in October. They are no big creditors of the Country. They get to call the shots so that their loans are more secure. This is completely different than Poland, Slovakia, etc. These countries were never close to bankruptcy and as such have not had to go to the IMF to be bailed out. Poland went for some credit and liquidity support, but as a better quality borrower they get better terms than do Hu, Latvia and the Ukraine. Maybe Hungary should have said no to the IMF and chosen a sovereign default? That would make an interesting argument. Maybe the IMF has it all wrong, and should be proposing different types of deals for near default borrwers? This is a long running debate. Regardless, the fact is these are the terms that one needs to accept to “play”. The fault of the government was to put the country into this position in the first place, not for trying to… Read more »
Mark
Guest
NWO: “Regardless, the fact is these are the terms that one needs to accept to “play”.” My suspicions stems from the apparent confusion regarding whether these are the “terms”, especially as the IMF’s role in relation to countries that hit problems (I’m reluctant to use the term “near default” for Hungary, because I think it was more a victim of exceptional market circumstances – after all it done a great deal to bring its budgetary problems under control)is changing. We are being asked to believe that there exists something called IMF 2.0, which is less keen on rigid conditions, and on pro-cyclical policies of restriction. The IMF also tells us that it wants to build “social conditionality” into is agreements to protect the poorest (it is noteworthy in this connection that some additional social spending to protect the poorest from the consequences of the downturn forms part of the package that underpins its agreement with Romania, and even in its original memorandum of understanding with Hungary it envisaged cushioning the cut in 13th monthly pension for poor pensioners). Furthermore, its managing director is not hostile to “fiscal stimulus” to “countries that have the room” – though as the crisis has… Read more »
NWO
Guest

Mark
Whether it is the Mandarins in the EU and not the iMF that are requiring the orthodox approach, I don’t know, but like you I would not be surprised. The shadow of Ms. Merkel looms large.
Anyway, as you know, the issue for Hungary was not and is not essentialy about this year’s or last year’s budget. The issue is the total indebtedness of the country. Hungary has the distinction of being one of the few countries in the region that has both a massive Government and public debt to GDP. The Government debt could not have been rolled over last fall (remember-there was no HUF bond market at all), and I dare say that I very much doubt there is much of a market for Hungarian euro denominated debt now and there would be no market for HUF debt without the IMF support.
Hungary has a “tougher” deal than other countries because Hungary messed up more. Plain and simple.

Mark
Guest
NWO: “Whether it is the Mandarins in the EU and not the iMF that are requiring the orthodox approach, I don’t know, but like you I would not be surprised.” If this is the case, then huge political damage will be done to the EU project. Fortunately, at least from our perspective, Hungary’s problems are at the moment a sideshow compared with the unfolding disaster in Latvia. Unfortunately, the point at which everyone recognizes that Latvia’s current course is untenable is likely to create contagion effects which will not only spread through CEE, but into the Eurozone itself (Spain and Greece etc.) I wonder then how far this leads to an unpicking of the generalised policy of “competitive deflation” which, although it is being pursued most starkly now in much of CEE, has tended to characterize economic policy in the Eurozone itself. NWO: “Hungary has a “tougher” deal than other countries because Hungary messed up more.” Is it really the case that Hungary messed up more, or is it truer to say that its problems became apparent earlier than those of its neighbours? I don’t think Hungary has “messed up” more than the Baltic states with their FDI-led and western… Read more »
Gábor
Guest
“Is it really the case that Hungary messed up more, or is it truer to say that its problems became apparent earlier than those of its neighbours?” I tend to agree, that there was a certain factor of the country’s image as having fiscally irresponsible governments behind the vulnerability. Especially, as the Baltics’ (considered as the very model to follow in Hungary in order to redress the state houshold and the economy) recession preceded the outburst of the crisis and not followed it, but nobody paid real attantion to this fact. And there is no real ground for making a distinction between the contries you mentioned. Moreover, the one of the basic factors was quite common: the need to raise the living stnadards. In Hungary it was practiced through redistribution in the Baltics or in Romania through credit bubble, but basically it wa sthe same process, a consequence of political necessities. But I would dare to say that if it would have been combined with a less insane budget deficit level, the Hungarian approach would have offered more room for manouever and control over external balances, than the much hailed Baltic one, with budget surpluses and low redistribution rates. (Not… Read more »
New World Order
Guest
Guys I understand your point(s), and I even agree with some. Given the depth of this crisis, forcing such a severe pro-cyclical fiscal policy is probably self defeating. However, let us be clear, that even if the IMF were to allow a substantially higher deficit (they have already moved 1% of GDP higher), I don’t actually see the capital markets “buying it”. Trying to force more borrowing into the market at a time when the market just will not buy Hungarian State debt would precipitate a collapse of the HUF in a way that would have terrible ramifications. And sorry to say, but the NBH cannot undertake Fed style quantitative easing. The same result of a collapse of the HUF and a subsequent banking sector collapse would occur. We need to remember that the Hungarians are ultimately counting on the EU and the key member states involved (Austria, Italy, etc.) to suport the banking system. Would this happen in the case of a massive and disorderly depreciation of the HUF? Finally, Mark, I grant you that Latvia messed up pretty much as badly as Hungary, but even the other “at risk” states like Romania and Bulgaria grew over the last… Read more »
Mark
Guest
NWO: “Given the depth of this crisis, forcing such a severe pro-cyclical fiscal policy is probably self defeating.” What has always worried me is that given the fragility of Hungary’s economy, and its labour market that the crisis and the response to it would damage Hungary’s ability to recover severely. Since 1989 we have seen a number of short-term financial stabilizations (in response to crises far lighter than this one) that have done real, long-term damage to the real economy. NWO: “The level of FDI in Romania and SLovakia overwhelms Hungary. They have problems (as you mention) but for each country I see a path out of the tunnel. For Hungary, I really don’t at this point.” This is a really interesting issue. I think that we can agree that what happened in the Baltic States was a classic, if spectacular, credit bubble. And I think we can also say that in Hungary the combination of deficit spending in a context in which the country’s competitiveness was declining combined with a tight monetary policy, a strong HUF, and a credit boom based on FX-denominated lending was disastrous. Aside of my concern for Hungary, one of the interesting aspects about the… Read more »
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