Tamás Bauer, an economist and political commentator, has been walking around with a newly published book, Lajos Molnár's memoirs entitled Miért lettem antipatikus? Egy egészségügyi miniszter feljegyzései (Why did I become disliked? Notes of a minister of health). At every opportunity Bauer promotes the book. He says that people should read Molnár's book because it elucidates what was going on in the first year of the Gyurcsány government, especially with respect to the abortive healthcare reform. I who have a library that is devouring house space like the blob of the 1950s sci-fi flick of course bought a copy.
Molnár was one of the few doctors and hospital managers who strongly supported reform and thus soon enough became the favorite of SZDSZ for the post of minister of health. That is, if the socialists were willing to give the ministry to the liberals. Earlier SZDSZ had tried to get the post but the socialists insisted on keeping it in socialist hands. In four years, between 2002 and 2006 there were three ministers; one was more ineffectual than the next. By that time I think the socialists realized that health care was a hot potato that they were ready to pass on to the coalition partners. And stupidly the liberals agreed. The rest is history. Lajos Molnár resigned in less than a year; his successor, the liberal Ágnes Horváth, was fired; the coalition broke up. And the reforms came to an abrupt stop.
But here I don't want to tell the story of Lajos Molnár's time in the ministry. Instead I will concentrate on what Molnár relates about Hungary's financial situation in the spring of 2006. I will translate the more important passages.
Molnár recalls that it was clear from the beginning that there would be no extra money for health care. It became obvious by this time that the problem was really not financial. From 2002 on they had poured money into health care without the slightest improvement. "It was not only in the field of health care that useless expenditures took place. By the election campaign one could see that the whole budget was in trouble. But no one knew how big a trouble. Sometime at the beginning of 2006 we started a series of discussions with well-known economists…. One could only guess at the real situation. We figured that if we win the elections there will be deficit of perhaps as much as 300-400 billion forints. László Antal, the greatest macroeconomic expert, blurted out: 'Guys, if things go on this way the deficit might even be 500 billion.' Thus one can gather that the picture of where the country stood was not at all clear even for former national bank chairmen, financial experts, economists, or former ministers of finance." The consensus among these experts was that one couldn't cut that much money out of the budget all at once. Moreover, there was no necessity to do so. Perhaps 100-150 billion here and there would suffice. The important thing was for the foreign analysts to realize the resolve of the Hungarian government.
"Everybody was confronted with reality on the Monday morning after the April 23 elections. It turned out that the deficit was more than 1,000 billion (one trillon) forints. At this point it became clear that such a deficit couldn't be managed without introducing hard and painful measures. The stake was no longer the credibility of the government but the economic survival of the country. Many people became literally sick when they heard the real figures. Apparently the first person to hear the news was Ildikó Lendvai [the head of the socialist parliamentary delegation], who heard it from the prime minister at 8 a.m. Monday morning. At 9 o'clock she was followed by Gábor Kuncze [the chairman of SZDSZ]. Both got ill."
In brief, the two coalition partners knew that the country's indebtedness was large, but they didn't know how large. The ministry of finance had been overly optimistic in its calculations. Now let's see what Tamás Bauer has to say in hindsight.
Reforms were necessary already in the fall of 2004 when Ferenc Gyurcsány became prime minister, but he "couldn't expect any support for such a move from either party." And Bauer should know first-hand. At that time he was still a member of the SZDSZ parliamentary delegation. So it is easy to criticize Gyurcsány for not tackling reform, but the fact is that he had no parliamentary support. Then came a move that was certainly a mistake. In spite of the ever increasing pressure from Brussels, the cabinet decided to lower the highest rate of VAT and to raise expenditures, even if only moderately. By that decision they gave up the idea of introducing the euro any time soon. "It was the combination of the above mentioned moves that created the unexpectedly high deficit."
To summarize. Yes, they knew that the deficit was going to be high but their projections underestimated the extent of the trouble. Wishful thinking? Most likely. And what does Gyurcsány say about the problem in his answer to Bauer's piece in Népszabadság? He admits that simultaneously cutting taxes and raising living standards almost broke the budget and that it became clear that they "cannot grow their way out" of the ever increasing budget deficit but that instead they must introduce heartbreaking, painful adjustments. "It would be useless to deny that neither the people nor the government was properly prepared for these adjustments." His only reference to his infamous speech in this piece is rather telling. He says that the speech "at last sobered up the socialist caucus." The reason Gyurcsány made such a speech was that, without a little drama, the socialist members simply didn't want to face reality.
All in all, as is usuallly the case in economic meltdowns, there was plenty of blame to go around. The parliamentary delegations, both SZDSZ and socialist, were afraid to introduce much needed reforms toward the end of 2004 because they thought it was too late in the election cycle. Gyurcsány made the mistake, along with the financial team, of thinking that the country "can grow its way out" of the budget deficit. They most likely didn't share all the details with the socialist parliamentary members who didn't quite realize the seriousness of the situation. And finally, Gyurcsány made a huge mistake when he didn't give a sanitized version (expletives deleted) of the speech at Őszöd to the people of Hungary.
These were very costly mistakes. But no one cheated, no one even lied.