Here is the long-awaited Hungarian budget

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.

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Paul
Guest

The Orbánistás will be wetting themselves over this. Hungary does the ‘impossible’, The Mighty One leads Hungary to a new dawn on the uplands of Utopia…
But, whatever we ‘Hungary haters’ will say, this will probably be enough to get them through to the next election without too many Fidesz supporters feeling any pain. So, job done.
On a side issue, I am puzzled by the 2/3rds constitution amendment bit of the constitution. This seems to be almost a guarantee of dictatorship to me – the system effectively awards anyone who can get 2/3rds of the voters on their side with the oportunity to take complete power for ever (especially in a system like Hungary’s with no other real safeguards).
This set me wondering why this option was put into the constitution. Obviously you have to have some way of altering the constitution, and equally obviously, it shouldn’t be too easy to do. But surely ‘winner takes all’ is hardly a sensible way of doing it?
How is this done in other countries with written constitutions, for instance the USA or Canada?

Kevin Moore
Guest

I think ‘bold’ translates well into ‘vakmerő’ which means overly brave even with disregarding the consequences sometimes.

Kevin Moore
Guest

It is worth noting that your calculation of the pension money is probably misleading because the current system, as-is, indeed works as you described but this is very likely to change at the same time as private pension money gets channeled back into the state system.
You can’t predict the fate of these savings in a radically changing system by taking into account its base construction at the state level as if it were unchangeable. The government will most probably amend the law so that pension savings will be accounted on a person basis, and will probably be inheritable as well.

Kevin Moore
Guest

One more thing. You miss structural reforms but they are on the way. Healthcare is under serious reconsideration, the web of hospitals is getting completely rearranged, their funding will be probably de-regionalized while health services will be reorganized to fit region-specific demands, and all this structured under state supervision (‘népegészségügyi program’).

Mark
Guest
“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 isn’t even the most interesting question about the viability of the budget. To meet its targets the government must collect sufficient revenue – this depends upon growth. Growth too will depend to an extent on the supply of credit, which cannot be supplied from internal sources because of the low savings ratio. Therefore the question is will the banks be prepared to advance affordable credit to businesses and households to enable growth. I think the only way a bank tax would help is if its revenues were used to restructure bad debt; I suspect the bank tax is already prolonging and deepening a credit freeze which is going to undermine the budget. “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… Read more »
Paul
Guest

I suspect “bold and risky” is IMFspeak, so it doesn’t even mean “bold and risky” in English!
I am reminded of the Yes Minister TV programme, where the very worst a civil servant could do to a Minister’s idea or proposal was to describe it as ‘interesting’.
“Bold and risky” probably translates as “mad and destined to fail”.

Kevin Moore
Guest

‘”Bold and risky” probably translates as “mad and destined to fail”.’
Knowing the IMF’s success rate, we have nothing to worry about then.

Paul
Guest

“Knowing the IMF’s success rate, we have nothing to worry about then.”
Some facts/sources to support this?

Paul
Guest

“The government will most probably amend the law so that pension savings will be accounted on a person basis, and will probably be inheritable as well.”
“…structural reforms… are on the way. Healthcare is under serious reconsideration, the web of hospitals is getting completely rearranged, their funding will be probably de-regionalized while health services will be reorganized to fit region-specific demands, and all this structured under state supervision (‘népegészségügyi program’).”
For someone who is not a party member, or even completely pro-Fidesz, ‘Kevin’ is remarkably well informed.
I fear we ‘probably’ have yet another Fidesz troll on our hands.
When will they give up and go away? All they do is make even the neutrals anti-Fidesz.

Sackhoes Contributor
Guest

Paul asked abut how changes to the Constitution are handled in the US.
A change to the federal constiturion is first approved by 2/3d of both houses of Congress and then by 4/5th of the 50 States, within a specified number of years (usually 7). All the states put the amendment up for some form of direct vote by the people.
http://www.usconstitution.net/constam.html
Hungary, however is not a federal republic, so the process should be compared to those used by individual states. Each state, of course, has its own process, but there are similarities. All states except one (Delaware) end up putting the proposed change on the ballot and have the people vote directly. Only Delaware follows the Hungarian method of legislative approval only.
http://www.ballotpedia.org/wiki/index.php/Amending_state_constitutions

Gábor
Guest
Kevin, are you Szilárd again? Actually there are only very patchy informations on the nature and specific measures of “sructural reforms” and you seem to “know” a bit more. Not that you have mentioned anything specific, these are general lines and far from giving basis for a fair and well founded assessment of the coming changes. On the other hand, you completely miss what was announced yesterday, the fate of private pension savings. Matolcsy said the government will set up a budget fund for the balance of the state household (államháztartás egyensúlyát biztosító alap) in order to cover holes in the budget during the 2012-2014 period. (Beyonfd the 540 billion they will spend in next year.) From the private pension savings, yes. It doesn’t sound as if they would try to save it to you verbatim, isn’t it? They want to pay for actual expenses and eliminate the sovereign debt you are holding. Of course the government could create an account for you with this money, but it’s better to understand: it will be virtual, only an entry in a book of account, nothing else than a vague promise that the state will pay for you smething at some moment,… Read more »
Gábor
Guest
Paul: “But, whatever we ‘Hungary haters’ will say, this will probably be enough to get them through to the next election without too many Fidesz supporters feeling any pain. So, job done.” I don’t think so, it’s better to characterize the situation with the metaphor of a cornered lion trying to break out. The basic idea is to default on a part of the sovereign debt (it is really ironic that it won’t be the part held by those bloody foreigners) and finance from the accumulated household savings the budget deficit as long as the new tax system delivers the mircale: 6-7% lasting, sustainable growth. (In a country where savings level is chronically low to be able to contribute to capital accumulation!) I see many faults in this idea, a series of chances to go wrong. Firstly, they need to convince quite a lot of people to return to the state. They need to get at least 20% of the accumulated wealth in the pension funds to have a chance to meet next year’s target. (Consider the distribution of savings is unequal, people whit higher income in the past hold more than people with minimal wage. On the other hand… Read more »
Hank
Guest

It will be interesting to see what will happen with this pension robbery in a European court. And if not, what that will mean for the Hungarian budget.

Mark
Guest

Gábor: “And of course defaulting on the debt held by Hungarians while servicing it to the foreigners is not austerity, it is a patriotic sacrifice.”
Of course the other side to this is that the private pension funds have been a “safe” source of investors in Hungarian bonds. Without them the bond market becomes illiquid and thus, if the government’s budgetary projections don’t work out, they will be more dependent on foreign investor sentiment to finance their deficits than they are now and will have to pay more to do so.

Eva S. Balogh
Guest

Paul “”Bold and risky” probably translates as “mad and destined to fail”.”
My thoughts were somewhat similar when read it. The “Yes, Minister” was a fantastic program.

Kevin Moore
Guest

Paul, what’s your problem? I’m more and more sure that your problem is entirely with yourself, not me. It doesn’t matter what tone I use in my answer, all you can come up with is the silly idea of me making neutral people anti-Fidesz.
Neutral people, reading my latest post, could never come to a pathologic conclusion of yours.
And you’re still incapable of answering anything with factual content to my post, you only talk about me being what. Would you quit it? It shows only your standard, nothing else.

Paul
Guest

When it became ‘Yes Prime Minister’, Hacker was briefed about the UK’s nuclear ‘deterent’ and expressed the oppinion that it was no longer necesary to threaten Russia, as the cold war was over.
His civil servants were puzzled about the reference to Russia and asked him why he had assumed that the missiles were aimed there. It turned out that they were in fact aimed at France!
One of my favourite TV moments – but unfortunately a joke that only native Brits seem to really understand (I’ve had to explain it to quite a few Hungarians!).

Kevin Moore
Guest

Gábor: all I mentioned about healthcare reforms come from perfectly open and public sources of information. In particular, from the latest interviews of Miklós Szócska, the State Secretary for healthcare and István Mikola, president of the Health Committee of the parliament.
It’s not my fault that most posters on this blog are severely under-informed but this doesn’t prevent them to articulate immature and be in a tantrum about what they know very little about.
Mark is the only voice with a moderate tone and an ability to distinguish between what is known and what is suspected.

Paul
Guest

It IS Szilárd! Welcome back – I wasn’t keen on your replacement, he was exhausting, popping up all over the blog. But he went mad in the end, and at least that was amusing. Nice to have a more human Fidesz troll again.
As for your post, I realise of course that English isn’t your first language, but I still don’t understand what on earth you’re on about.

Gábor
Guest

Kevin, the problem is that what we all know from these soruces is not a program, not a plan, just a wishlist. All we know for sure is the government has no money (they are “sweeping the attics” to find some) but they promise they will have in due time. I think if you pretend to be sure the coming changes will be significant (although in many sense they spell a return to the despised Molnár-plan), ensuring a cheaper/more effective etc. healthcare you should be either biased or knowing more than the public could know. You many times refused to be considered to be biased, I was left with the latter option.
Otherwise it is a not so clever attempt to evade considering the content of my comment.

Kormos
Guest

Of course it is debatable, but I think; it is utopia for Hungary to have a government which is acceptable, to Hungarians, to the rest of the Globe, (redundantly) to the populous of this blog, and at last to me.
But let’s say, as a remote possibility, there is such.
What template should this imaginary government follow to solve problems?
Let’s start with the one policy. That is where the bulk of money comes from: TAXATION.
I had similar question earlier, but I did not see any suggestions, only poisonous critiques.
I am/was a technical person, thus I am a tax payer, not an expert.

Sandor
Guest

Well, my dear Kormos, perhaps the ideal government should continue where the previous one has left it off: damn all ideologies and stick to the practical business of governance.
Need I say that the present government is anything but that?
They are guilty of not one, but two cardinal sins.
One is that they are improvising from week to week. The other is that they are acting in the name of an ideology that has failed already some 60-70 years ago, but this bunch of yahoos have never heard about that.
The only thing they can rely on is that despite the circumstances and their fumbling the economy, by dint of the people’s efforts and some unforeseen miracle, will somehow correct itself.
I don’t know what chances would you give to that happening, but I am deeply skeptical. Aren’t you?

Paul
Guest
Leaving aside all the ‘nice to have’ stuff like democracy, freedom, justice, free press, etc, a government’s fundamental job is to balance the books. This is difficult in Hungary for two very basic and simple reasons: 1) Hungarians like a big state, they are used to being looked after by the state and expect it to continue, 2) Hungarians don’t like paying tax. In a country like Hungary, with no other significant sources of income, if the people demand an expensive state, but aren’t prepared to pay for it, it simply isn’t going to work. Hungarians either have to accept the IMF route of cutting the state back, or they have to start paying their taxes. Fidesz have set themselves against the ‘IMF’ direction, but haven’t yet faced up to the reality of raising enough tax to pay for the large state they have promised the voters. They have dodged this problem this year by one-off taxes on the one sector of the ecomony who, ironically, DO pay their taxes, and by stealing people’s pension contributions. And this might be enough to get them through to the next election. But they will almost certainly get reelected, and what are they… Read more »
Kormos
Guest

Thank you Paul for writing a positive answer.
Here comes my next set of questions. I admit the issue is a very hot political potato. One quite capable FIDESZ member lost his nomination over this.
Should Hungarians pay property tax?
Should this tax be a flat percentage of the yearly measured market value of the property?
or
Should this tax be a progressive percentage of the yearly measured market value of the property?
Should the property tax include a local education levy?
Which municipal Government Body should be allowed to set property tax?
Hamlet
Township
Management district
Village
Town
City
County (Shire)
District in the Capital city
Capital City Council
Central Government
What is the general feeling folks?

Paul
Guest
I don’t have any answers, Kormos. As a child of the post-war ‘social democratic’ political consensus, my basic political belief is that a civilised society should look after those in need and that the cost of this should be borne more by those with the most wealth. This philosophy used to be pretty much universally accepted, but these days it is often challenged, and I have to accept that there is now at least a sizeable minority (if not more) of people who no longer accept this as obvious. So, to them, a taxation system based on my assumptions would be wrong. And they have as much right to their opinion as I do to mine. I have lived roughly the same amount of time under both a high tax/large state system and the post-Thatcher ‘hang on to as much of your wealth as you can’ philosophy, so I should be able to draw some conclusions. But, I’m afraid I can’t. I certainly felt more at home under the old system, but I have to admit it was far from universally successful. People don’t like high taxation on what they consider to be rightfully their money, either hard earned through… Read more »
Mark
Guest

Kormos: “Should Hungarians pay property tax?
Should this tax be a flat percentage of the yearly measured market value of the property?”
This is – as you say – a very difficult issue.
On the one hand property is taxed in most countries. There are good reasons for seeking to introduce such a tax in Hungary to broaden the revenue based of local governments especially.
However, Hungary has very high owner occupation, and often this is not correlated with income. In other words, in large parts of the country that someone has a house doesn’t mean that they can afford to pay a property tax on it. This is why I think FIDESZ was right to oppose the Bajnai property tax, and why any government seeking to introduce one should proceed cautiously and incrementally.

Eva S. Balogh
Guest

Mark: “There are good reasons for seeking to introduce such a tax in Hungary to broaden the revenue based of local governments especially.”
I’m for property tax with all the caveats you mention later. Incredible amount of wealth has accumulated in real estates in Hungary. Just in my family. A cousin of mine has a large, quite luxurious apartment they live in. They own an apartment their daughter lives in. They bought another apartment next to the daughter’s apartment. They also have a weekend place in a fashionable place next to a lake. In addition they own a piece of commercial real estate they inherited from the wife’s grandmother. Not a penny is paid on any of these. And this is a relatively modest middle-class family. But practically “castles” are being built in fashionable sections of Buda from questionable sources on which there is no tax.

Eva S. Balogh
Guest

Paul: “Personally, I also think non-progressive taxes such as VAT are very unfair and should be abolished or reduced.”
I’m actually amazed that Europeans put up with 20-21% of VAT or sales tax as we call it in this country. Sales tax is set by the states and in Connecticut where I live it is 6%. But food and and clothing under $50 is tax free. If you want to have a good summary of sales tax in the American states, take a look: http://en.wikipedia.org/wiki/Sales_taxes_in_the_United_States

Paul
Guest
Éva – I thought you lived in Canada. Now I understand all the references to the USA! I assumed you just used the USA as a reference in your blogs because no one would have been interested in how Canada did things! VAT in the UK is actually quite complex, as it’s applied at different rates on some things and not at all on a large range of products. This is why the ‘progressive/non-progressive’ argument is always a difficult one in the UK. For instance, children’s clothing is zero rated, as is food – and also books and newspapers. Electricity was zero rated but is now 5% – a compromise reached a few years ago by a government (I can’t remember which one) which wanted to impose full rate VAT, but which met with huge resistance. There are also some bizarre exclusions. For instance, if you get a coffee and drink it in the café, you pay VAT, but if you take it outside, you don’t. And, my favourite – no VAT on cakes, but VAT on biscuits. This led to a court case a while ago where Her Majesty’s Tax Inspectorate wanted to charge VAT on Jaffa Cakes, as… Read more »
Paul
Guest
As for property tax, this caused one of the great moments of 20th century politics in the UK – the downfall of Thatcher! (UK readers can skip the rest of this post, as they’ll know all this.) We had an arcane system of property tax in the UK (or possibly just England and Wales?) called the Rates. Each property was given a ‘rateable value’ based on its supposed actual value, were it to be sold, and then the local authority would set a ‘rate’ each year. This ‘rate’ (a few pence in the pound) would then be applied to the rateable value of each property (several thousand pounds) and the result (several hundred pounds) would be charged as your ‘rates’. (In local politics, the voters are often still referred to as the ‘ratepayers’ because of this.) The drawbacks of this system were manifold. Rateable values were only updated infrequently, so were often very out of line with true values, and when they were updated there was always a tremendous fuss as almost nobody agreed with their new rate. And, because the rates were charged per property, a pensioner living on her own paid as much as a family of six,… Read more »
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