Key Findings


 

The Hungarian government has released details on its long-awaited plan to cut state spending – sort of. National Economy Minister György Matolcsy today outlined the framework and the objectives of the reforms, but the apparently needs more time to finalize the details. Concrete measures will be released piecemeal between now and the end of the year. Between now and then, the biggest risk is that anti-reform protests will pressure the government into watering down the content.

 

The government's new economic policy can be viewed as "protectionist neoliberalism."  One one hand, the administration is embracing budgetary discipline, lowering the national debt, introducing a flat income tax and cutting social spending, much as the Slovak Prime Minister Mikuláš Dzurinda did in the early 2000s; on the other hand, Hungary is slapping hefty surtaxes on foreign-dominated business sectors and adopting selective regulations that are clearly intended to give Hungarian-owned companies a leg up against their multinational rivals. 

 

Debt Reduction Above All


 

The administration laid out its cost-cutting objectives the Kálmán Széll Program, a 26-point plan named in honor of a 19th century Hungarian political leader who advocated fiscal discipline. The foremost goal is to reduce Hungary's national debt from its current level of around 80% of GDP to 65-70% of GDP by 2014; the government intends to use some 63% of the money it expropriated from private pension funds for this purpose. The program's provisions will help sustain the state budget for the medium term, which may boost Hungary's reputation among market players and improve its risk profile – even if the short-term market reaction, mainly due to the lack of details, was a slight HUF weakening. Thus the country may avoid additional downgrades to its sovereign credit rating.

While the government's general goals are clear, the specifics remain unknown: The cabinet is now promising to unveil concrete measures in early July, while the most important cost-cutting steps will not be implemented until the beginning of 2012.

 

The main reasons are:

  1. Investors have been piling up pressure on the government since the end of 2010, and the government is apparently feeling the heat. It has decided to discard most of the "unorthodox" economic policy goals it originally espoused and is now scrambling to work out the details of a new program that will lower state redistribution of wealth.
  2. The cabinet agrees on the general directions of the reforms, but wants to see how voters (and other politicians) will react before passing the concrete measures into law.  (This is one reason why details of the program were leaked out to reporters before the official announcement.) By announcing the Kálmán Széll Program, the government is simultaneously trying to soothe investors while maximizing its room for budgetary maneuver for the next 10 months.  

The program's political and social impact


 

The biggest risk is that the governing Fidesz party's popularity will decline at a quicker pace, fueling internal party conflicts. By announcing the reforms, Fidesz has entered the most difficult phase of its governance (see our previous analysis for details).

  • Fidesz hopes the spending cuts will inflict only marginal hardship on its core voter base. The main "losers" of the program will be the long-term unemployed and welfare recipients – groups that generally do not vote in elections. 
  • However, the package will have a negative impact on a much wider section of the population. High-income Hungarians have been known to abuse the disability pension system, not just the poor. Moreover, cuts in state support for public transportation and stricter rules for early retirement are likely to enflame tempers at labor unions, many of whose members are already unhappy with Fidesz's performance.
  • Altogether, the reforms may give rise to a popular perception that the governing party has broken its most important election-campaign promise: That a Fidesz government would not impose new austerity measures on the public.  (Officially, the party will continue to deny that the spending cuts qualify as "austerity" – a line that may not carry much weight among the disgruntled public). The measures will probably drag down support for Fidesz – the question is, by how much, and whether the popularity loss will spark panic among party members. If this happens, the government may be tempted to soften some of the program's harsher measures.
  • The possible popularity loss may heat up tensions within Hungary's governing coalition (Fidesz and the Christian Democratic People's Party (KDNP), a conservative faction of Fidesz that has formed its own caucus in Parliament). However, certain items in the reform package may also cause conflicts over policy: For example, the government's plan to centralize state control over education and healthcare institutions has created a split between national- and muncipal-level politicians within Fidesz. These disagreements may deepen in the coming months.

 

Kálmán Széll Program: Key Points


 

Revenue-raising measures

  • The surtax on financial institutions (bank tax) will not be reduced by half in 2012; however, all revenues from the tax will go toward reducing the national debt.
  • The corporate tax will not be uniformly reduced to 10% in 2013; only corporations whose revenues do not exceed HUF 500 million will be eligible for the lower tax rate.
  • An electronic highway toll system will be implemented in 2013.

Cost-cutting measures

  • Labor force: Unemployment benefits will be slashed.
  • Pension system: The government will cut the number of people on disability pensions and tighten rules on early retirement (women will still be allowed to take full pensions after 40 years in the labor force). Authorities will also review sick-pay allowances.
  • Public Transportation: Hungarian State Railways (MÁV), the Budapest Transport Company (BKV) and state bus operator Volán will be merged into a single National Transportation Company; fare discounts will be slashed.
  • Medicine subsidies: While details have yet to be worked out, the government wants to halt increases in prescription drug prices. This may involve an extra tax on drugmakers.

Other measures

  • Labor force: The government will create a new public labor program in which big corporations will participate.
  • Education: New law on public and higher education, lower minimum age for leaving high school.