Key findings

  • As the vote on the strict 2010 budget approaches, conflicts between the governing Socialist Party and Hungarian PM Gordon Bajnai became stronger and more visible than before. As more and more budget numbers and details become public, escalation of conflicts with political and social players are expected.
  • The biggest debate is around cutting the support of municipalities and public transport, two factors that are written in the government’s letter of intent towards IMF. 
  • The debates are not likely to result in resignation of the Prime Minister or withdrawing the support of the government from the Socialist Party, but the rejection of further austerity measures and reforms by the Socialists can limit the government’s political scope for action and in some cases the government can be forced to retreat.
  • There are more political factors posing threat to deficit targets in 2010 than in 2009, but the determination to continue the route of fiscal discipline still seems strong.

 

Background

 

As Gordon Bajnai is planning to accelerate the process of finalising the budget deficit (the vote on budget is scheduled for November instead of December), the debates over the numbers of the 2010 deficit began earlier than usual. The government made it clear that “the 2010 budget must be formulated to address the economic crisis, not to increase the MSZP's re-election chances”, and in line with this, the first published numbers of the budget projects expenditure cuts in numerous fields. The most debated plans of the government are to decrease the budget payments of the municipalities by HUF 120 billion (EUR 0.45 billion) and to cut the budget of public transport by HUF 70 billion ( EUR 0.26 billion) thus pulling the latter expenditure below 1 percentage of the GDP. The government declared that 3.8% budget deficit in 2010 is “blasted in stone”. Strong politicians of MSZP declared that cutting the municipalities’ expenses by HUF 120 billion is impossible, and local MSZP politicians and mayors are on the same platform. None of the significant socialist politicians denies the need of holding the deficit target in 2010. The negotiations between the party, the PM and the finance ministry are still going on. Both the party and the PM scheduled finalizing the numbers by the beginning of the parliamentary session in September.

 

The reasons for sharpening conflicts between the MSZP and the government

  • Lack of election year spending. The budget discipline makes it extremely difficult for the Socialists to introduce popular measures; moreover, they can be forced into defensive because of further austerity measures in election year.
  • The „end of the crisis” sentiment in the Socialist Party. As the direct threat of economic collapse is passing, and some economic and financial indicators show improving economic circumstances and success of crisis-management, some Socialist MPs regard further austerity measures unnecessary, which can undermine the support for unpopular steps in the future. 
  • Heavy infightings in MSZP before the party congress and the election. MSZP will have significantly less seats in 2010 than they have now[1] and this factor intensifies the infightings for the positions on the national and county party lists. Demonstrating strength against the government is part of this competition between different party groups.
  • The threat of further strikes and demonstrations. Because of cutting expenditures and transport expenses, certain trade unions declared their willingness to hold demonstrations and strikes. Harsh conflicts with interest groups in the campaign are a threatening perspective for the Socialists. Confrontation with social players can strengthen the will to loosen the budget.

Possible conflicts between the government and the interest groups

 

 

The possible consequences of the conflict

  • The failure of the governance and austerity measures are not expected, as it would be against the interest of both Bajnai (who wants to finish this term as a successful crisis-manager) and the Socialist Party (whose only success – the support for crisis management – would be abolished in case of the failure of the government). The harsh statements in the press are part of the negotiating tactics of both the government and MSZP. So far, Bajnai has been successful in easing the conflicts with the Socialists and could forge support even for the most unpopular measures, so making a bilateral compromise seems to be the most likely scenario at this point.
  • The government can be forced to reconsider its plans, especially in connection with cutting the budget of the municipalities and reforming the public transport system. The overall reform of pubic transport can be delayed (despite the fact that the market liberalisation measures come into practice in 2010). Reforming the wasteful and inefficient public transport system would need a complex system of re-regulation, cost-rationalization, (including closing some sidelines) and privatisation. The government is lacking both the necessary time and the political support for implementing an extensive reform plan, but some useful measures are not excluded[2]. Modification of the governments’ plans can have an inconvenient political side effect: the opposition can weaken the government by attacking Bajnai with political cowardice and too much compromise toward the Socialist Party (as they did in the case of property tax).
  • Even if fulfilling some obligations toward IMF is in danger, the organisation is not expected to withdraw its support or criticize the government if it can persuade the organisation that Hungary can meet the 2010 deficit target in different ways. Its ability to meet the 2009 deficit target will be the most important indicator for the 2010 budget deficit. While some factors seem to endanger the 3.9% targets in 2009 (lower inflation, higher-than-expected deficit of social insurance funds, lower tax incomes), the government will do everything to demonstrate fiscal prudency (e.g. freezing sources of ministries, delaying some expenditure to 2010). In case of a further deepening recession – which seems unlikely at the moment – IMF is expected to ease the deficit targets instead of deepening the recession spiral (see the example of Romania).

 

 

 

 

 

 


[1]  Projecting the results of the EP-elections on a hypothetic parliamentary election, MSZP would gain third of the places (58-60) of what they did in 2010 (190).

 

[2] The plans of the next government are unknown: the possible transport minister of the party (János Fónagy) has rejected the possibility of any privatization in the sector, but some steps to rationalize the public transport (especially the railway company MÁV) seem inevitable in the middle run.