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Central Europe Digest

Hungary's Reform Deficit

Posted Date: 2 June 2008

by Roman Kessler

Ahead of Prime Minister Ferenc Gyurcsány's policy meeting next week, CEPA
Associate Scholar Roman R. Kessler overviews how "the evolving political dynamic
in Hungary is sadly a handicap to much needed economic reforms." Kessler
asserts that a strong government will be required to keep Hungarian economic
policy on the right course, but offers few reasons to be optimistic.

Hungary is stuck in a rut. Once a pacesetter for political and economic reform
during the post-communist waltz of the 1990s, Hungary may soon be no more
than a “has been” stronghold of progress. The ruling Socialist Party (MSZP) now
governs from a minority position, and early parliamentary elections look
increasingly likely. The evolving political dynamic in Hungary is sadly a handicap to
much needed economic reforms.
MSZP’s coalition with the liberal-minded Alliance of Free Democrats (SZDSZ) fell
apart in the spring after Prime Minister Ferenc Gyurcsány dismissed one of the
SZDSZ’s ministers in the cabinet. However, the main reason for SZDSZ’s
discontent had to do with the Socialists’ reluctance to press ahead with reform of
the health sector.
Remaining in power will be a challenge for Gyurcsány’s minority government,
whose electoral mandate is scheduled to end in early 2010. Meanwhile, the right-
wing but populist Fidesz Party, currently leading in the polls by large margins,
smells blood and is holding out hope for early elections. MSZP stood its first stand-
alone test in parliament when SZDSZ lent its 18 votes to approve the minority
government’s structure last month.
The government’s next make-or-break moment already looms on the horizon; in
the second semester, MSZP will have to come up with a budget plan for 2009 and
clarify its proposals for tax policy. Gyurcsány recently invited his executive
ministers and other high-ranking politicians to discuss policymaking for the next
two years at a meeting on June 10-11.
In thinking about the road ahead, MSZP will have to consider the main
cornerstones of Hungary’s economic misery, a misery which the Socialists helped
create and now ought to reverse:
• Government debt is equal to about two-thirds of Hungary’s GDP (the highest
in Central Europe).
• Hungary’s twin deficits (in the current account and public budget) are still
nuisances.
• Recent inflation figures of close to 7 percent came in amid a marked
slowdown of the economy, putting a damper on the monetary authority’s
hopes to reach an annual 3 percent target. Reducing inflation will be
essential if Hungary wants into the Eurozone.
• The tax wedge on labor is high, putting upward pressure on unemployment,
and many Hungarians admit they prefer working informally.
• Hungary has become growth laggard. GDP crunched to 1.3 percent in 2007,
down from over 4 percent a year earlier.
Importantly, however, the growth crunch was mainly owing to a fiscal austerity
program introduced by the MSZP-SZDSZ government after the last elections.
Constraining spending (and not implementing tax cuts) has helped to shrink
Hungary’s budget deficit from 9.2 percent in 2006 to 5.5 percent last year.
Financial market participants will be close spectators of Gyurcsány’s policy meeting
next week. The ever-swelling Hungarian debt has attracted many foreign
government bond investors. They won’t tolerate political instability or hesitate
before selling these bonds along with the currency, relinquishing their Hungarian
assets and driving down the Forint. This would mean just another setback for
Hungarian competitiveness.
The economic imperative of the hour is to continue consolidating Hungary’s fiscal
position through spending cuts. This is painful and many would rather pause after
2007’s lacklustre GDP growth. What’s more, Hungary’s tax structure isn’t very
competitive when compared with some of its neighbours, many of whom have
introduced flat taxes. Tax cuts may seem popular, but they would likely create
rising debt as well.
A strong government will be required to keep Hungary on the right course. But
Gyurcsány’s Socialists are caught in a real dilemma. On the one hand, the
government doesn’t want to be blamed as the bad guy in power when it moves to
introduce more unpopular budget cuts, as rival Fidesz would take every
opportunity to discredit MSZP. On the other hand, SZDSZ insists it will oppose
another state-run spending spree or any significant backtracking on reforms.
Hungary’s political system has become a drag on the economy. Mismanagement is
the word folks in Western European capitals use privately when judging Hungary’s
economic convergence towards EU living standards. Political parties have
notoriously failed to cooperate with one another, and at this juncture a minority
government seems to be the worst of all possible arrangements. Many
uncertainties surround Gyurcsány’s endeavor to hold on to power until 2010. And
with Fidesz-style populism hoping to make a come-back, economic reforms may
be dead in Hungary for some time.

Roman R. Kessler is an economics correspondent for Dow Jones Newswires in

Frankfurt and a contributor to the Wall Street Journal. He can be reached
at kessler.roman@gmail.com.

The views expressed in this article are those of the author and do not necessarily
reflect the opinions of the Center for European Policy Analysis.

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The Irish Times - Tuesday, April 13, 2010

Centre-right election winner vows to reform Hungary

A member of the far-right Hungarian Guard

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DANIEL McLAUGHLIN in Budapest

THE LEADER of Hungary’s centre-right Fidesz party has pledged to cut taxes, red tape and corruption in a move to
kick-start the country’s economy and help neutralise far-right nationalism, after dominating the first round of a general
election.

Viktor Orban also urged voters to use the second round of voting in a fortnight to give Fidesz the two-thirds
parliamentary majority that it needs to ensure the passage of reforms and allow it to change a constitution that was
drawn up after the fall of communism in 1989.

Sunday’s election saw Fidesz claim 206 of 386 seats in parliament, trouncing the Socialists, who had been in power
since 2002 but who only secured 28 seats, just ahead of the far-right Jobbik party with 26 seats.

The liberal and environmentally-minded LMP party took five seats and the remaining 121 will be decided in voting on
April 25th.

The Spanish EU presidency welcomed the victory of a “pro-European party” but voiced concern over the success of
Jobbik, which entered parliament for the first time on promises to clean up politics and crack down on the “gypsy
crime” and benefit abuse that it claims are ruining the country.

“The most important economic policy task is to improve the competitiveness of the Hungarian economy,” Mr Orban
said of a country that was forced to take a €20 billion emergency loan from international lenders and impose tough
spending cuts in return.

“Within a short time, Hungary must be made into the most competitive economic system of the region,” he added,
identifying high taxes, stifling bureaucracy and rampant corruption as the main problems.

“In the focus of our economic policy is not austerity measures, but how to generate economic growth – this is the
question. I cannot carry out any kind of budget rationalisation if at the same time we cannot put the Hungarian
economy on a growth track.”

The European Union and the International Monetary Fund will keep a close eye on the sometimes populist and
profligate Fidesz to ensure it is not spending more money than the crisis-hit country can afford.

Mr Orban hopes an overwhelming mandate will help him achieve his ambition.

“The second round of elections will be about unity. Will there be unity in Hungary or discord? The bigger the unity, the
greater the success. The greater the success in the second round, the faster the recovery will be,” he said.

“The stronger mandate the next parliament receives, the more strongly the next government and parliamentary
majority will be able to drag Hungary out of its tough situation.”

As the Socialists try to recover from a humiliating defeat and overhaul their party, Jobbik looks likely to be Fidesz’s
most vocal challenger in the near future.

“We are not preparing to conduct peaceful and almost invisible politics,” said Jobbik leader Gabor Vona, who
promised “ very distinct and very spectacular politics”.