As I predicted yesterday, we now know a little more about the details of the latest adjustments to the 2012 and 2013 Hungarian budgets. Economists who are critical of the government and especially of György Matolcsy just stare in amazement. How is it possible that this administration is incapable of putting together a decent budget? Everybody told them from the start that the numbers don’t add up. Everything is wrong with the predictions. Economic growth will be lower and tax revenues will also be lower. But no one listened.
By this summer the Hungarian economy was in recession, but Viktor Orbán and his right-hand man György Matolcsy refused to move. I’m not terribly surprised by the delay. These people do everything in the very last minute possible. When they finally looked at the figures and realized that without another austerity program Hungary could not escape the excessive deficit procedure that would entail the loss of billions of euros they reluctantly acted.
Why the reluctance? Because the admission that the government is introducing any austerity measures is a no-no. They promised time and again that “there will be no austerity as long as Viktor Orbán is the prime minister of Hungary.” Only the evil Ferenc Gyurcsány and Gordon Bajnai introduced austerity packages because they just wanted to make Hungarians poor and miserable. Not so the Fidesz-KDNP government, which has been handling the crisis in a first-rate manner. Much better than the rest of Europe whose leaders should learn from Viktor Orbán and György Matolcsy. Viktor Orbán repeated this story dozens of times.
Another mantra is that the current situation is not the fault of two years of misguided economic policies but is primarily due to the crisis in the European Union. This position is fairly difficult to maintain when other countries in the region, Slovakia and Poland for example, are doing much better than Hungary although they also belong to the European Union. The other culprit is “the previous eight years,” mostly because the governments during that period indebted the country heavily. Yes, the debt load is high, but the truth is that until the 2008 economic crisis it was a very manageable 67% of the GDP. Problems started with a weakening forint and a whopping 7% recession. However, by 2010 there was a fairly decent recovery thanks to the adjustments made by the Gyurcsány and Bajnai governments. It was from that positive territory that Matolcsy and Orbán managed to lead the country straight back into recession.
They want to avoid the the word “austerity” by all possible means. This particular austerity package is named “egyenlegjavító program” (balance improving program). But if it walks like a duck, quacks like a duck, and looks like a duck, it must be a duck. Just as Viktor Orbán can say that there is no such thing as tuition even though one must borrow money in order to pay the nonexistent tuition. Don’t tell me that students and their parents don’t realize that the prime minister isn’t telling the truth.
So, let’s see what is in this non-austerity program. First, one must keep in mind that the adjustments affect both the 2012 and the 2013 budgets. The savings from 2012 are estimated to be 134 billion forints. And that despite the fact that there are less than three months to the end of the year. Saving that much in such a short time will not be easy. The government will take away four billion from the funds for culture, technology and innovation; they will raise the excise tax on cigarettes a month earlier; they will raise something called “innovation contributions”; certain PPP-projects will be dropped; and finally they will try to save about 75 billion in various ministries.
The changes in the 2013 budget will amount to almost 400 billion forints. The government hopes to save 55 billion as a result of a change in the rules of the game regarding European Union projects. Until now 85% of an approved project was financed by Brussels and the Hungarian government kicked in the remaining 15%. However, for certain countries in financial trouble, Hungary among them, beginning in December the European Union will relax the domestic share required to finance EU projects. This temporary reduction will mean a higher commitment in the future. But that might not be the Orbán government’s problem. So, basically, they are using 55 billion forints of EU money to help to solve their own budgetary problems.
They are hoping to save 30 billion by stopping the practice of giving government and public employees their pension in addition to their salaries if they decide to work over the official retirement age. If that rule is applicable to physicians, the profession will be in trouble. There is a shortage of doctors, and people work even into their late 70s. These people are also entitled to their pensions. The trade union leader of the civil servants already announced that he considers this move unconstitutional.
Then comes a 73 billion savings by not raising the salaries of teachers in September 2013. As I mentioned yesterday, the teachers claim that their salaries today are worth 15% less than in 2008, the last year of a modest salary hike. Earlier parliament passed a new public education bill that increased their teaching load, which admittedly was very low by any standards. Moreover, the bill stipulated that the teachers must spend eight hours a day in school whether they have teaching duties or not. The teachers were not happy, but they accepted the new rules in exchange for the promised higher salaries. According to Népszava, on average high school teachers would have received 186,000 forints ($856) instead of the current 129,00 ($580) and elementary school teachers 167,000 ($768) instead of the current 122,000 ($561). You have keep in mind that take-home pay is only about the half of these amounts. Now that their salaries are frozen the teachers are stranded with a great deal more work for the same amount of money.
Social assistance for families will be capped at 47,000 forints ($216), an amount that is insufficient for survival. That move will bring in a modest 8 billion forints according to the usually too optimistic György Matolcsy.
The government is hoping to receive about 90 billion forints from raising the transaction taxes from 0.01% to 0.03% At the same time they plan to introduce a transaction tax on the Treasury’s financial obligations. This is a very odd tax. The cost of this transaction tax will be passed on to the population and the Treasury will behave as a second Internal Revenue Service.
The lion’s share of the budget deficit is to be closed by means of more stringent tax collection rules and regulations, substantially increasing tax revenues. The newly projected tax revenues are probably just a fudge factor necessary to close the budgetary hole, and I wouldn’t be terribly surprised if the European Union questions items connected to improved tax collection.
Kester Eddy of the Financial Times wrote that “analysts generally welcomed the moves, albeit with a wary eye” although they are pleased that these new government measures are “surprisingly conventional” compared to earlier “unorthodox” policies. He quoted Peter Montalto of Nomura in London who is quite skeptical. According to him, the markets reacted well but at Nomura they think that there is still at least a 60 billion forint hole in the 2013 budget. They also think that “the quality of adjustment is poor and not what the IMF or the Commission at least would be looking for.”
Lajos Bokros, the financial wizard of the first Hungarian austerity program of 1995, is also pessimistic. He is not at all sure that the Hungarian economy will be able to grow 1% in 2013, the figure on which Matolcsy’s new austerity program is based. And if that is the case, 400 billion forints will not be enough to achieve the 2.7% deficit Matolcsy envisages for next year.
So, I wouldn’t be at all surprised if there was a fourth “balance improving program” announced sometime in the middle of next year if not earlier.