The 2011 budget is being described by György Matolcsy as "ambitious but realistic" and by Christoph Rosenberg, head of the visiting IMF delegation, as "bold and risky." This "bold and risky" resonated all over the Hungarian media without people really knowing what is actually meant by it. The first meaning of "bold" is "courageous, confident, and fearless; ready to take risks." Here, I have the feeling, Rosenberg probably intended both "fearless" and "ready to take risks," while adding to to this adjective a reference to the risks that are real. The Hungarian translation of "bold" as "bátor" is somewhat misleading because it simply means "courageous" and thus sounds almost positive. Oh, yes, the intricacies of translating from one language to another.
The budget satisfies the European Union's requirements. If all goes well, the deficit will be 2.94% of the gross domestic product, down from 3.8% this year. The budget envisages a 3% economic growth and and an inflation rate of 3.5%. At this point it is worth pausing because analysts of late, both in Hungary and abroad, keep lowering their estimates for economic growth for next year. First from 3% to 2.5% and lately even to 2%. The same kind of pessimism surrounds the estimated growth for the rest of 2010. Of course, economic forecasts are notoriously inaccurate, so it's impossible to choose sides.
Matolcsy claims that this budget will ensure economic growth, create new jobs, and assist families' willingness to have more children. It actively supports the Hungarian business community. There is no sign of any structural changes that might upset some segments of Hungarian society, but it freezes the state's nominal expense for wages and will cut 25,000 to 30,000 jobs in the close to 700,000 public-sector jobs.
It seems to me that in the 2011 budget the "nationalization" of private pension funds plays a crucial role. Not only that the state will not pass on 14 months' worth of social security payments of about 3 million wage earners to their private plans; it is also hoping that by cajoling most of the people into quitting the private funds and moving over with their hitherto accumulated savings the government will have a gift from heaven of about 2.7 trillion forints. That is, assuming that 90% of the people decide in favor of the state-run social security system. There are serious drawbacks to transferring one's accumulated savings to the government plan. First, individual savings will be thrown into a common pot and in the future these savings will not grow as in the private pension funds. Second, the accumulated savings in the private funds are inheritable upon the death of the investor. Not so once funds are transferred to the government system. All in all, it doesn't strike me as a good deal, and in fact MSZP is urging people not to give up their private funds. However, my feeling is that such intense pressure will be put on the funds and such stories will circulate about the speculators who handle these people's money (shades of Lehman have already been invoked) that it is possible that the private funds will simply die a quiet or not so quiet death.
What is the government planning to do with this incredible amount of money? Apparently 540 billion will go to the state retirement fund which is in the red at the moment. The rest of the portfolios will be used to lower Hungary's debt level which as we know is the highest in the region. The IMF is not crazy about this rather unorthodox way of raising money. After all, it is stealing. There is no other word for it. On October 25, the IMF released a statement on the subject: "This measure would constitute a significant step back in the pension reform process initiated in the late 1990s, which has contributed to making Hungary's pension system one of the most sustainable in Europe."
The IMF has other criticisms of the Orbán government's economic plans for the future. According to the IMF Hungary is overestimating the effect of income tax cuts on growth because their impact is "highly uncertain." Rosenberg also made it clear that while the budget does address a long-standing issue, that is the deficit, the problem is that while it may work for 2011 no one knows what will happen in the years following. Because these extra taxes on the financial sector and the multinationals and the windfall in the form of the savings of little guys will take care of things this year, but what will happen once these sources of income dry up? This is what Ferenc Gyurcsány was talking about in his blog a few days ago.
Magdalena Polan of Goldman Sachs in London is in line with the IMF's assesssment: "fiscal adjustment based on one-off taxes is ultimately unsustainable and potentially negative for growth." In any case we will see in the next few weeks what the markets, not the analysts, will say after familiarizing themselves with Mr. Matolcsy's budget.
The budget is very lopsided. It is heavy on the income side and shows almost no reduction on the expense side. The structure of the budget is almost identical to that of last year. Sixty-one percent of the budget goes to social services. More money will be given to education and to health care but without any structural changes. The same bad structure remains, although there are some signs that the government may tackle the reform of education, including a serious reorganization of higher education, next year, but that will have no effect on next year's budget. Although there has been a lot of talk in the past about the amount of money which is spent on running the state, it seems that even with the firing of 25,000-30,000 people, running the bureaucracy will be even more expensive this year than last: slightly more than 2 trillion forints (14.7% of the budget) as opposed to 1.88 trillion last year.
And finally, let's return briefly to the constitutional court. I noted two days ago that it is unlikely that Viktor Orbán would risk such a confrontation with the constitutional court for the sake of getting a few billion forints from people who received outsized severance packages. I mentioned that I heard a fellow thinking aloud that perhaps the cost of firing thousands and thousands of civil servants is the real cause for this frontal attack on the court. By now there seems to be a consensus among constitutional lawyers and political analysts that the stake is actually much higher than that. If the constitutional court unanimously considered this piece of legislation unconstitutional, then most likely it would rule the same way about depriving people of fourteen months of their savings as well. Moreover, it is also possible that they would rule the same way about the extra taxes, which are also retroactive and unexpected. In this case, the whole financial edifice of the Orbán government would be down the drain. That's why there came the message from Orbán, who happened to be in Brussels yesterday, that the bill proposed by János Lázár depriving the constitutional court of its jurisdiction over matters on which no referendum can be held will not be withdrawn. Since then Mihály Varga suggested a further reduction of the powers of the court: they shouldn't be able to rule on pieces of legislation that require a two-thirds majority.
Yesterday Ferenc Gyurcsány wrote an open letter to László Sólyom saying that if he was such a zealous guardian of the constitution when he [Gyurcsány] was prime minister, why doesn't he raise his voice now? Sólyom did. He asked for a meeting with his successor. They talked. And a few hours later Pál Schmitt gave a brief speech on MTV: the "defender of the constitution" stood by his party.