Tag Archives: budget

ONE OF THE FIRST STEPS AFTER BREXIT MUST BE THE REFORM OF THE EU BUDGET

As always, Hungarian Spectrum welcomes democratic voices from and about Hungary. Today András Lukács, President of the Hungarian NGO Clean Air Action Group (Levegő Munkacsoport) and Board Member of Green Budget Europe, presents his opinion, in the wake of the Brexit referendum, of the role of EU funds in the rise of Eurosceptism. He also offers some possible solutions.

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 The results of the Brexit referendum strengthened the conviction of all those who think that profound changes in the European Union are necessary to stop and reverse the rise of populist parties with Eurosceptic and, in some cases, even Europhobic agendas. It is hardly an unfounded opinion that if the governance of the EU is not changed radically, then even the mere existence of the EU is put at risk.

One of the main drivers of Eurosceptism is the way EU money has been used. It is telling that, according to a recent representative opinion poll, 61 percent of those surveyed in the Czech Republic, a net recipient of European funds, believe that the EU member countries should get along financially by their own means, i.e. wealthy member countries should not support poorer ones. I know of no similar survey in Hungary, but I do know that there is a widespread opinion here that EU money has led to serious problems. Many are even convinced that EU funds cause more harm to the country than good. For example, speaking at a conference in May this year, Zsombor Essősy, CEO of MAPI Hungarian Development Agency Corp., “The Expert of EU and Domestic Funds” (as it is described on MAPI’s website), stated the following: “If our country spends EU money following the present trends and framework, this might cause the biggest tragedy of Hungary.”

According to a detailed study on the topic by Hétfa Alapítvány, the use of EU money in other countries does not seem to be more efficient than in Hungary. Having spoken to quite a few people dealing with the issue in other net recepient countries, I am not surprised by this conclusion.

Along with others, our organization, the Clean Air Action Group (Levegő Munkacsoport), analyzed the reasons for such a perverse use of EU money. Here I will summarize just a few of these reasons, described in detail in our report.

EU funds are distributed to companies in a way that seriously distorts the market. Many companies make an enormous effort to receive as much EU money as possible in order to gain a competitive advantage, instead of improving their products or services. This situation is also a serious threat to democracy because practically no business group would be willing to criticize the government for fear of not receiving public money.

A substantial amount of EU money has been spent to support the construction of new hotels. Even the Hungarian Hotel Association expressed strong criticism of state subsidies for hotel construction, emphasizing that existing hotels often struggle for survival. Such results of EU funding are characteristic not only of the hotel industry but practically all sectors of the Hungarian economy. Photo by András Lukács

A substantial amount of EU money has been spent to support the construction of new hotels. Even the Hungarian Hotel Association expressed strong criticism of state subsidies for hotel construction, emphasizing that existing hotels often struggle for survival. Such results of EU funding are characteristic not only of the hotel industry but practically all sectors of the Hungarian economy. Photo by András Lukács

The present system of distributing EU funds is also a hotbed of corruption. Free money irresistibly attracts all those looking to get rich (or much richer) within a short time by illegal or semi-legal means. These circles do everything they can to capture the national and local governments, and, as practice proves, they often succeed. (This has been described in detail, for example, in studies by Transparency International Hungary.)

Another driving force behind the ill use of EU money is the endeavor of the government to spend every last cent, rendering the efficiency of spending much less important. Coupled with corruption and other factors, this leads—among others—to investments that are not really necessary, or do not represent the most efficient way to spend public money in a given period of time. Furthermore, even if the investment can be justified and even if there is no corruption behind it, it is often implemented in a very wasteful manner because it is financed with “free money.”

A new brandy distillery built with EU money. A World Health Organisation report (as summarized by 247wallst.com) states: “No country had a higher rate of alcohol use disorders than Hungary, where 19.3% of the population abused alcohol in some form. As many as 32.2% of Hungarian men and 6.8% of women suffered from alcohol use disorders, the highest among countries reviewed.” Photo by András Lukács

A new brandy distillery built with EU money. A World Health Organisation report (as summarized by 247wallst.com) states: “No country had a higher rate of alcohol use disorders than Hungary, where 19.3% of the population abused alcohol in some form. As many as 32.2% of Hungarian men and 6.8% of women suffered from alcohol use disorders, the highest among countries reviewed.” Photo by András Lukács

In our report, besides describing the situation, we also made concrete proposals to the European Commission and governments of EU member states to remedy the situation. The main points are the following.

In the Treaty of Accession, all EU member states declared: “Our common wish is to make Europe a continent of democracy, freedom, peace and progress. The Union will remain determined to avoid new dividing lines in Europe and to promote stability and prosperity within and beyond the new borders of the Union. We are looking forward to working together in our joint endeavor to accomplish these goals.” In our understanding, this means that all member states will improve their legislative and institutional systems as much as possible in order to achieve these goals, but at least they will refrain from any backward measures. Therefore, it must be stipulated that member states repeal all legislative and institutional measures that have been adopted by the given member state since its accession to the EU that contradict the principle of non-retrogression as far as “working together in our joint endeavor to accomplish these goals” is concerned.

The European Commission must demand that the Hungarian government implement all possible best practice measures within a reasonable time to reduce corruption and other malfeasances. In our opinion, this is a measure that would fully comply with EU legislation. The European Parliament also called for measures “to be implemented right across the spectrum of EU policies, and for action not just in response to cases of fraud but also to prevent them.”

The Commission should require strict implementation of the European code of conduct on partnership in the framework of the European Structural and Investment Fund. According to the code, the governments of the member states must closely cooperate with “bodies representing civil society at national, regional and local levels throughout the whole program cycle consisting of preparation, implementation, monitoring and evaluation.” However, the Hungarian government has been doing just the opposite.

The fulfilment of the National Reform Program (NRP) and of the Country-Specific Recommendations (CSRs) should be the main criteria for the assessment of the efficiency of the use of EU funds, and not the success or failure of individual projects or groups of projects. The European Commission should strictly control the former, and not the latter. (The NRP is a document that presents the policies of the member country, which aim to achive the targets set forth in the EU’s Europe 2020 Strategy. The CSRs are the yearly assessments by the Commission on the progress of each member state towards achieving these targets, and they include recommendations for improving the country’s performance.) The NRPs and CSRs are approved by the governments of the member countries as well, thus they are binding commitments for these governments. In spite of this, the Hungarian government is generally doing just the opposite of what it committed itself to in these documents. This is well known to the European institutions concerned; for example, an assessment by the Economic Governance Support Unit of the European Parliament came to the conclusion that in 2014 only Bulgaria and Hungary made no meaningful progress in implementing any of the recommendations.

The EU should give all EU funds, destined for national purposes, directly to the national governments, without any requirements for the precise use of these funds, i.e. each national government should decide that for itself. On the other hand, in the event that a country does not comply with the above requirements, EU funding must be partly or completely suspended until it comes into full compliance. We believe that this is not only legally possible even today, but it is an explicit duty of the European Commission: according to EU legislation it is the Commission’s task to protect the EU’s financial interests.

I strongly believe that it is absolutely necessary to provide EU funds to the less developed member states with the goal of improving their economic well-being as well as their political stability in order to strengthen the EU as a whole and to make it more competitive globally. But EU taxpayers’ money must be used for this purpose, not against it.

June 27, 2016

Hungary actually spends an enormous amount of money on healthcare. It is just a question of definition

This morning I read a comment by a journalist who announced that it is no longer worth listening to the Friday morning radio interviews with the prime minister because by now the reporter can’t ask any questions, even friendly ones, about the political events of the previous week or fortnight. At the last interview not a word was exchanged about the teachers’ strike, and this time the Hungarian National Bank’s foundations proved to be too insignificant to mention. Nonetheless, I managed to find an exchange at the very end of the interview that I believe merits comment.

Orbán outlined all the positive changes his government has been introducing of late that are making the lives of a large number of Hungarians more economically secure. First, the government raised the salaries of the policemen and soldiers. Then, a year later, they increased the salaries of the teachers, although naturally he neglected to say that for the higher wages the teachers had to work longer hours. The next task will be an improvement in the lot of doctors and nurses. Moreover, the government will find money to raise the salaries of people working in the cultural and social spheres– like librarians and social workers. Everything he promised was or soon will be fulfilled, he added triumphantly.

At this point the reporter chimed in, quoting a statement from the State Audit Office that pointed out “great management shortcomings and public procurement anomalies.” Viktor Orbán interpreted these words to mean that there is not enough money being spent on healthcare. (I guess something must have been lost in translation.) He immediately began talking about the amount of money that is being allocated to healthcare which, as we all know, is much less in Hungary than in other countries in the region. But it seems that Orbán has an entirely different definition of healthcare and, therefore, of the amount of money a country allocates to it. Let me quote the most important part of what he had to say here.

My thinking is a bit broader on that topic than the ideas of health experts. Because the budget of healthcare is not really the budget of healthcare but the budget of healing. I don’t mix up healthcare with healing. These two things overlap somewhat, but one of them is bigger than the other. So, we spend more on our health than the sums allocated to healthcare in the budget because in reality these are sums for healing the sick. Sports, daily gym classes, our investments in infrastructure that are necessary for healthy living all serve our health needs. So, in a more comprehensive way of looking at things, we could easily add these items to the healthcare expenses. We don’t calculate that way in Hungary, but I always like to put the budget together this way.

Well, let’s see what all this means in black and white. It is very difficult to find out exactly how much money is allocated to healthcare—healthcare in the commonly accepted sense, not in Viktor Orbán’s definition—because even economists specializing in healthcare issues can’t quite figure out the final amount for 2017, for example. However, according to Bence Rétvári’s announcement, which must be viewed with extreme caution, the Hungarian government will spend 500 billion forints on healthcare in 2017.

Billions for healthful living

Paragon of healthful living

And figuring out the amount of money spent on sports and infrastructure for football stadiums, swimming pools, sport stadiums of all sorts is even more difficult. However, here are a few figures that might give you some idea of the lavish spending on sports-related items. In two years (2012-2013) the government spent 142.6 billion forints on sports of all sorts. In 2014, they spent 168.6 billion. But direct government spending is only a part of the whole sports package because companies can offer billions of forints for different sports, mostly football, which means that yearly at least 50 billion forints never reaches the central budget. This money goes straight to sports clubs, mostly to the Ferenc Puskás Foundation in Felcsút.

A more recent assessment predicts that tax-free gifts for sports will be about 90 billion forints in 2017. This means that since the introduction of the system, more than 400 billion forints has gone straight to sports clubs instead of to the central budget. In addition to the 90 billion forints in “charitable contributions,” it is projected that the government will spend 223 billion forints next year on sports.  Others estimate government expenditure on sports in 2017 to be as high as 400 billion forints. Thus, we are getting close to the amount of money the government ostensibly spends on “healing the sick,” to use Viktor Orbán’s expression.

These figures do not include the construction and renovation of soccer stadiums. Atlatszo.hu estimates that the seven stadiums that have already been completed cost 42.11 billion forints. And this is just the beginning, a very small beginning. Practically peanuts, because in the next three years 32 new stadiums will be built or renovated to the tune of 215 billion forints. Thus, I estimate that the Orbán government actually spends more on sports than on healthcare. I can say only one thing: “A crime against the Hungarian people!”

May 6, 2016

Is the Hungarian economy in trouble?

Being no expert on economic matters, I have been hesitant to comment on the state of the Hungarian economy, but for a long time I have had the sneaking suspicion that, despite the self-congratulatory reports of the government and the fairly good numbers, something is awry. Something doesn’t add up. Every day we hear about 45 billion for this project, 35 billion for that project, 50 billion for something else. Most of these projects are frivolous, the classic being a train taking non-existent fans to the Felcsút Football Academy’s fancy stadium. Almost all of the projects are being paid for, at least in part, by money Hungary receives from the much-hated European Union, money that János Lázár, who is in charge of the convergence funds, is trying to spend as fast as possible. These are the investments that were behind the surprisingly good economic growth in 2015. Lázár, who is often quite blunt in his public statements, admitted that Hungary’s economic growth depends on how much money he can “squeeze out” of the convergence funds. Since in the next few years less money will be coming from Brussels, unless the Hungarian economy picks up steam, future economic growth will slow. Under the present circumstances, if the flow of money from Brussels were to stop the economy would simply collapse.

At least this is the assessment of the Institute of Budgetary Responsibility (Költségvetési Felelősségi Intézet). This institute serves as a watchdog over the government’s economic policies. It is a non-governmental organization that was formed in 2011 when Viktor Orbán abolished an official government office, the Budgetary Council, that served the same purpose. The Budgetary Council came into being at the insistence of Fidesz, which, when it was in opposition, was very keen on holding the government accountable. After winning the election in 2010, Viktor Orbán found the Council burdensome, especially since its head, George Kopits, an American-Hungarian who formerly worked for the IMF, severely criticized the government’s budget proposal for 2011. I suggest you read my piece “Goodbye, Mr. Kopits” from November 2011. Here you will meet a rare specimen: a man of integrity. Kopits is a conservative, but by 2013 he was quoted in The Wall Street Journal calling Viktor Orbán’s regime “a constitutional mob rule.” Supporting the work of the Council was a research team of economists. Some of them went on to found KFI.

The Haza és Haladás Alapítvány (Homeland and Progress Foundation, established by Gordon Bajnai) commissioned KFI to prepare a study on the “technical outlook” for the years between 2015 and 2019, which is available online. Without going into the details, let me just say that Balázs Romhányi, the director of KFI, described the Hungarian economy “as a car without an engine that is being pushed and only its windshield wipers work.” Those who push it obviously reside in Brussels.

How heavily is Hungary dependent on the European Union subsidies? As Hungarians nowadays like to say, “brutally.” Here is just one example. The government is hoping for an economic growth of 2.7% in 2016 based on receiving 1,988 billion forints this year and 1,105 billion forints next year in subsidies from Brussels. According to Romhányi’s calculations, however, Hungary would need an extra 600 billion to achieve this goal.

Since Hungary’s GDP depends so heavily on these subsidies, it is of paramount importance for the Orbán government to spend the money as quickly as possible, even if not wisely. Index uses the phrase “throwing the money” when it describes Lázár’s efforts to get projects underway. Although, according to KFI’s calculations, the larger Hungary’s economic growth is in 2016 the smaller it will be in 2017, the study talks about 3-4 “good years.” So if Brussels continues to push the engine-less car, it will help Viktor Orbán’s far-right regime win the 2018 election. Perfect timing, I must say.

economic growth2

Even though the government is under budgetary constraints from Brussels, its spending continues unchecked. “Whatever money comes in [from domestic sources] is immediately being spent.” As an example, when the government received 450 billion forints more in tax revenue than anticipated, “they happily spent the windfall.” Nothing was put aside for a rainy day. In fact, it seems that they spent not only the unexpected revenue but even more.

The government is standing by its call for a 2.4% budgetary deficit. But it seems that without additional revenue it will be hard to meet this target. At the end of October the Magyar Nemzeti Vagyonkezelő Zrt. (Hungarian National Asset Management) sold 14 million OTP shares  for 75 billion forints. As a blog writer described it, the government was selling the family silver.

In assessing the economic health of Hungary, economists pay particular attention to employment figures. But there are serious questions about the accuracy of the data being released by the Central Statistical Office (KSH). The concerns are explained quite well in portfolio.hu, so here I will merely summarize the results. Hungary, like the United States, has two measures of employment: the institutional or establishment survey and the labor force or household survey. According to KSH’s own labor force survey, “the entire growth of employed people in the business sector (without employees in public works and those working abroad) totaled 294,000 between 2011 and 2014 [while] the institutional surveys came up with merely 3,000 people.” Surely, KSH is doing something very wrong.

All in all, we have no idea about what’s really going on in the Hungarian economy. I suspect nothing good. I am almost sure that if the Orbán government were to fall tomorrow, the new government would be in a terrible financial predicament. And the majority of Hungarians, in their total ignorance of what’s going on, dream of hosting the Olympic Games in 2024. In fact, 70% of them would be mighty proud.

That nasty, nasty budget is not Matolcsy’s strong point

 

To tell you the truth I don’t know whether Matolcsy has any strong points at all. I’m starting to have my doubts. It was about a week ago that people who know something about finance, the budget, the deficit, and such matters were stunned to hear that the Hungarian government is putting aside a so-called “stabilization fund” of 250 billion forints. The news broke on February 11th after the three-day meeting of everyone who matters in the party and the government. There were the two parliamentary delegations, 263 MPs if everybody showed up, and the government. When it comes to the size of the government that is pretty much of a mystery given the peculiar structure of the second Orbán administration.

The three-day affair was held in Siófok. Everybody was expecting Viktor Orbán to share his government’s economic plans. Instead there was quite a disagreement between Fidesz and the Christian Democrats about the ill-fated constitution, and an equally contentious argument surfaced between Zoltán Pokorni, former Fidesz minister of education, and the Christian Democrat Rózsa Hoffmann over education. There was no discussion of the “reorganization” plans (alias austerity program). The only “financial” matter that came up at the meeting was the establishment of a “stabilization fund” of 250 billion forints which Matolcsy must come up with somehow.

Everybody was baffled. Why is this new stabilization package necessary? After all, this year’s budget was passed only a couple of months ago and now the numbers are being changed. Because the “stabilization fund” basically means that a very sizable amount of money is being taken out of the 2011 budget. The explanation that this money was being put aside for “rainy days” is surely not the whole story.

Two possible explanations are circulating concerning this “stabilization fund.” One is that Matolcsy got the word from Brussels that the nationalization of the private pension funds and its partial use in this year’s budget wasn’t accepted by Olli Rehn, European Commissioner for Economic and Monetary Affairs. And if that is true the 2.9% deficit Hungary agreed to cannot be maintained. And if this number cannot be kept, the subsidies from the convergence program are down the drain.

The other possibility is–as Index reported today–that Matolcsy’s ministry doesn’t quite know how to put together a budget. They miscalculated. After, all it shortly before the final touches on the budget were due that Matolcsy fired the man who was Mr. Budget himself. For almost twenty years he played a key role in putting together the country’s budget.

If I had to pick the more likely explanation I would opt for the first one. The European Union didn’t like using nationalized private funds accumulated over more than a decade for current expenses. If it were only the question of not being able to count up to 250 billion the problem could easily be remedied by putting a little more money into the kitty from the huge amount of money that the government will receive soon enough from the nationalization of the private pension funds. People were in fact talking about a surplus of about 5 percent. The government could spend and spend merrily. But obviously that is not the case. Someone told them that the solution is not that simple.

I do hope that my guess is correct. The European Union shouldn’t put their stamp of approval on this ruse that Matolcsy and Orbán concocted. They are trying to ignore every EU rule while desperately trying to get all possible financial benefits from Brussels. After all, if there were no convergence program and billions of euros there would be no New Széchenyi Plan either. And then what?

Then here is another piece of news. Apparently, the Hungarian government couldn’t keep the 3.8% deficit and the figure will be more like 4% or even more. Do you remember the famous 3.8% that is written in stone? Do you remember Viktor Orbán’s trip to Brussels when he tried to sell a 7.5% deficit without any success? Do you remember the 29-point action plan that was supposed to solve all the problems? Repeated promises of keeping the magic 3.8% and now the deficit is 4%+. I wonder what Brussels will say to that. Perhaps not much. But I wonder how long its patience will last.