Lajos Bokros on the budget deficit in 2006

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.

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Hank
Guest
I guess it is a fair representation of what went on, except for the responsibility of the finance minister(s) and the prime minister. They can’t just get off the hook by claiming “they didn’t know” the extent of the budget problems. They should have known, that is their job, and I bet you they did know. Because all along they were warned, right from the start of the Medgyessi government in 2002, that their spending policies were irresponsible and would wreck the budget. I grant you, neither the coalition parties, nor the public, not even Fidesz wanted to hear this (Fidesz too voted in favour of the 100-days programs), but the finance ministers and the PM must have known all along. And then – what a coincidence – they happened to find out the reality the day after the elections??? Come on, one can’t take that seriously! The minister of health and Lendvai, maybe, but Gyurcsány and Draskovics, or even Kuncze (the SzDSz was supposedly there to safeguard responsible government for Gods sake), no way. Gyurcsány knew months before the 2006 election that there were very, very serious problems which could only be remedied with very serious savings and reforms,… Read more »
Eva S. Balogh
Guest

Hank: “They can’t just get off the hook by claiming “they didn’t know” the extent of the budget problems. They should have known, that is their job, and I bet you they did know.”
In my reading of the events, sure, they knew that there was trouble but, to quote Gyurcsány, they thought that they could grow their way out of the deficit. I still think that they overestimated the revenues and therefore, the final figures came as a surprise. But you and Mark are right: the economic policies after 2000 (not just after 2002) were very badly managed.

Mark
Guest
“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.” I just don’t believe them. I don’t believe them for the simple reason that I knew enough about how large the deficit was before the first round. I don’t have any inside information – I just read the Hungarian press, the international financial press. As I have a PhD in Economic History I have some economics training, but I’m not a specialist in buidgetary forecasting. I also had a good idea of the fiscal correction needed, and therefore was not remotely surprised by the Gyurcsány package when it was announced. In fact, what surprised me was that everyone in Hungary was shocked – in so far as I was concerned, anyone who was vaguely sentient should have had a good idea of what was going on, and treated by “dutch auction” between the parties with due scepticism! As for the Ministry of Finance ….. well, we know from Debreczeni’s biography of Gyurcsány how weak the mechanisms for monitoring the actual expenditure performance of ministries against their budgets was in 2005-6,… Read more »
Eva S. Balogh
Guest

Mark: “Medgyessy began to take steps to control the deficit, which led to his ejection from office, and replacement.”
Are you sure that this was the reason? My memories concerning his resignation are different. He offered his resignation over his choice of a cabinet post and they simply accepted it because the party’s popularity was dropping steadily. But I certainly will go back to my sources on this question.
I must admit that Medgyessy is not one of my favorites. He has behaved rather badly since his accepted resignation. A couple of interviews with him revealed that he was a vain and vengeful fellow.

Mark
Guest

Éva: “Are you sure that this was the reason? My memories concerning his resignation are different.”
You are right about the immediate trigger of the resignation. However, the background was the loss in popularity of the MSZP that culminated in the 2004 European election result. What lay behind this was the impact of budget cuts in a number of areas – especially subsidies to domestic energy prices, which caused household bills to rise in winter 2003-4, and made energy prices a major political issue in spring 2004.

whoever
Guest

Once again, I am with Mark on the subject of Medgyessy (I am not Mini-Mark, I promise).
As we know, the MSZP as a party made a lot of promises before 2002, which Medgyessy was forced to honour. Then the first elements of austerity were imposed in 2003 – wage freezes in the public sector, etc.
Despite his potentially shady background – which may well have been totally overplayed in the context of 19870s/1980s Hungary – Medgyessy has always struck me as a well-meaning social-liberal sort of person – maybe even likeable. I remember he appeared once on a show being quizzed by a group of kids – “ciki vagy cuki” I think it was called – and he came across as a human being, which was part of his appeal during the debates with the Orbán “juggernaut”…
Which isn’t to say he never made mistakes, and perhaps he is a herbivore in a political world of carnivores. And no, he doesn’t like Feri Gy. – but this puts him in the company of most Hungarians, to be brutal.

Eva S. Balogh
Guest

whoever: “the MSZP as a party made a lot of promises before 2002, which Medgyessy was forced to honour.”
The innocent victim! I guess the party forced him to announce another 100 days after the first. Digging the country into even a bigger hole.
I really don’t like the guy. According the people who worked with him he was a lazy bum, who in the middle of the biggest troubles left his office at 5 pm. and complained that the others don’t work enough.
He was an old-fashioned Kadarist bureaucrat who got along splendidly in the midst of a bunch of mediocraties.

NWO
Guest

Well whoever is ultimately the MOST at fault, today we get to harvest the fruit from MSZP’s and SZDSZ’s scandalous and incompetent behavior over the past years (and yes-Gyurcsany is as much at fault as anyone). If you are the PM you cannot blame others and then pretend it was just because you were working with some faulty macro assumptions. By being completely dishonest in the yrs before the 2006 election (like Mark-I agree that anyone who wanted to know the real situation in Hu at that time knew it) and by having a completely undisciplined and out of control fiscal policy to coincide with EU accession and the money and benefits and FDI that it brought with it, the MSZP was able to get reelected on false pretenses. Today, this great legacy has bequeathed all the rest of us a country where a radical right wing, neo-fascist party can garner 15% of the vote (much of it former MSZP votes-as Mark has discussed in the past) and where real liberalism and free market capitalism has been now fully relegated to the dust bin of political history.
Thanks a lot MSZP (and SZDSZ).

Mark
Guest
whoever: “Once again, I am with Mark on the subject of Medgyessy (I am not Mini-Mark, I promise).” Absolutely not …. and I’m not defending Medgyessy. I’d also remind people though that many of the people who now talk about the “catastrophe” of the 2002 wage and pension increases at the time liked to point out that the MSZP had actually promised very little! I’ve never heard any credible explanation from the SZDSZ of why, for example, the SZDSZ made a mistake in voting those increases through, though that is the logic of the position many of them take. And the situation is more complex than those who denounce these measures today suggest. We know that the salaries of teachers fell well behind those of other graduates up to 2002. Even Lajos Bokros believes in the importance of quality education. How can one even speak of improving the quality of education without ensuring the salaries of teachers are competitive? Which isn’t to say that there shouldn’t have been reforms of working practices, quality control mechanisms and so forth. The real problem was the MSZP entered government with no strategy – they never had a strategy for governing, not in 1994,… Read more »
whoever
Guest

I tell you what the disgrace is.
The Gyurcsány government collapsed in 2008.
If an election had been held in 2008, there would be no Jobbik.
The MSZP clung by their fingernails to power.
And why?
To wait for a night like tonight.
And yes, it is MSZP obituary time. Second place, but they’ve got no hope.

Eva S. Balogh
Guest

whoever: “If an election had been held in 2008, there would be no Jobbik. The MSZP clung by their fingernails to power. And why?”
It would have been a disaster to hold elections in the middle of an economic collapse. It would have been terrible for the country although it might have been better for MSZP to hold elections then. A long election campaign would have aggrevated the situation but then Fidesz would have ended up with the clean-up job and then they would have been responsible for austerity and all.
As for Jobbik. Jobbik would have come anyway but then these people would have turned against Fidesz and not MSZP and the liberals.

Mark
Guest
whoever: “The Gyurcsány government collapsed in 2008.” I was told the day before Gyurcsány resigned that their private polling told them they would win 25% in a parliamentary election. The Bajnai year has cost them 6%, and goodness knows what the two and a half years before that has cost. I looked through the constituency results, and the desertion of what we might call the working class vote to Jobbik is, if anything, even more marked than last year (I’m not surprised, as you will know from what I’ve been writing here for the last eighteen months). I suppose the saving grace of this is that one of the fronts they need to fight on is to start talking about jobs, and housing, and opportunity in all those places in ex-industrial Hungary that they’ve ignored for the last twenty years. I hope the lesson of the disappearance of MDF and SZDSZ and the rise of LMP is learned – there is support in Hungary for a social liberalism that stresses individual rights, solidarity with the poor, and environmental responsibility, but none left for free market, neo-liberalism. And as for FIDESZ let’s see how they cope with the mess they have… Read more »
whoever
Guest

He was an old-fashioned Kadarist bureaucrat who got along splendidly in the midst of a bunch of mediocraties.
Yes! You’re right. But this is the MSZP we’re talking about. Remove those qualified as above, and I’m afraid that there would be very few people left. A few young career types. So in the wider scale of things, he was amiable enough.

whoever
Guest

” It would have been terrible for the country ”
Well, hmmm… why? In the interim, contingency plans would have to be agreed.. but what massive difference would an 8-week interim period really have made?

Steve
Guest

It was a mess of an election, worthy ending of the 8 years preceding it, but finally its done. You may hate the result as much as you want, but i have opened a bottle of champaign. Cheers.

whoever
Guest

But Mark, I’d argue that the MSZP are genetically incapable of changing or raising their game. Their speciality is offering vaguely paternalistic social liberalism, whilst at the same time identifying and prospecting business opportunities for themselves. There really isn’t a solid base for them to draw upon – and under-40s really, really, do not want to know. This isn’t to say I violently hate them, as some of them are quite civilised, but this kleptomania runs through like a stick of Brighton rock.

Mark
Guest

whoever: ” I’d argue that the MSZP are genetically incapable of changing or raising their game.”
We are in a completely new era now. At the moment it doesn’t look like the MSZP is capable of renewing itself; we have a brand new, but untried party on the centre-left. Jobbik – we know for sure (though really we knew it anyway) – has to be fought politically through old-fashioned grass-roots activism if it is to be beaten back. And FIDESZ is in a difficult position – it has won a great victory, but only because of the stupidity of its opponents, and its supporters are expecting a social democracy in national colours, while it is going find itself squeezed between the demands of its clients and the brutal economic realities. The era of “transition” is over, but we don’t yet quite know what comes next.

Eva S. Balogh
Guest

whoever: “He was an old-fashioned Kadarist bureaucrat who got along splendidly in the midst of a bunch of mediocraties. Yes! You’re right. But this is the MSZP we’re talking about.”
Some are, some aren’t. We will see what happens after the elections.

Eva S. Balogh
Guest

Mark: “And FIDESZ is in a difficult position – it has won a great victory, but only because of the stupidity of its opponents”
And let’s add: and because the lack of any political savvy of the Hungarian electorate.

Mark
Guest

Éva: “And let’s add: and because the lack of any political savvy of the Hungarian electorate.”
I think that is difficult to argue. The rise in the FIDESZ vote over 2006 was just slightly over 10%; for comparison the rise in the MSZP vote between 1998 and 2002 was just a bit less than 10%. This isn’t a ringing endorsement of FIDESZ, merely a function of being the default alternative.
What is spectacular are two things. First, the disappearance of the moderate liberal and conservative forces that led the system change – the MDF and SZDSZ. But more spectacular is the collapse of the MSZP which has lost more than half its 2006 vote. This is much more of a vote against the last twenty years than a positive vote for FIDESZ, and everyone – especially FIDESZ as the only one of the “old” parties left standing – need to take note.

Eva S. Balogh
Guest

Mark: “This isn’t a ringing endorsement of FIDESZ, merely a function of being the default alternative.”
Maybe you’re right but how do you explain that people don’t remember at all what was going on between 1998 and 2002. It was a corruption laden period. And people were fed up with their methods of intimidation. Maybe that’s what the Hungarian people want. Rather sad, don’t you think?

Mark
Guest

That’s the way it goes. Did people think about why they kicked out Bush I when they elected Bush II? Did they think of the chaos of Edward Heath’s Conservative government in 1970-4 when they voted for Mrs Thatcher in 1979? And if you are mad at who is in office, who do you transfer your support to?

Sandor
Guest

“Miért lettem antipatikus? ”
“Why do I dislike the pharmacist?”

whoever
Guest

“we have a brand new, but untried party on the centre-left.”
But do we? We may just think that we do. This may be just wishful thinking. The LMP in practice can emerge as a right-wing Green Party (check Ireland and the Czech Republic). Especially if Schiffer’s comments about supporting Fidesz “two-thirds of the time” are as indicator. It gives the impression that the LMP know what Fidesz’ programme will be (not many others do). We may find that LMP become the respectable face of the “polgari” bloc, assisting in austerity measures. And then, if this is the case, I expect they will be gone, as quickly as they emerged.

Eva S. Balogh
Guest

whoever: “we have a brand new, but untried party on the centre-left.” But do we? We may just think that we do. This may be just wishful thinking. The LMP in practice can emerge as a right-wing Green Party (check Ireland and the Czech Republic). Especially if Schiffer’s comments about supporting Fidesz “two-thirds of the time” are as indicator.”
Do you remember the exchange between Mark and myself concerning LMP? I heard two Schiffer interviews and I came to the conclusion that the voters of LMP had been mislead. This is not a left or liberal party and it will not act a true opposition party in parliament.

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