A populist govt in Hungary faces making unpopular cuts

By bne IntelliNews March 8, 2011

Kester Eddy in Budapest -

At 1:00 pm sharp, the neatly attired lady station master at Mor waves her green disc, and the single-unit railbus hums louder, accelerating its seven passengers and two crew towards Szekesfehervar, 29 kilometres, six rather lonely stops and 35 minutes distant.

Mor, a small town 70 km south-west of Budapest, is one of the principal stations on the Szekesfehervar to Komarom line, an 82-km route through sparsely populated rural Hungary. It is lucky to have a passenger service; two years ago, the Socialist government, in an attempt to curb the huge losses of state railway company Mav, withdrew trains on this and a score of other lightly-used lines across the country.

Although the authorities substituted buses for the trains, the then Fidesz opposition denounced the closures and, once in power, quickly set about reinstating the withdrawn rail services. "It was a mistake to close this line; we have real traffic demand here," says the conductor-guard, showing his carefully collated lists that reveal 15 passengers in total have boarded so far. "Sometimes I've had 80 on a train when a special event is on," he says, before admitting that at times he's run empty all the way.

While the conductor-guard's dedicated enthusiasm is laudable, his economic judgement is, at best, highly dubious; the single fare between Mor and Szeksfehervar, at €2, can barely cover running costs, even in theory. In practice, the story is far worse; of the six remaining passengers to alight at the final destination, three were railwaymen and two were women of pensionable age, who travel free: only your correspondent bought a ticket. Indeed, the list of those eligible for discounted or free tickets in Hungary is so all-encompassing that only one in eight of Mav passengers pays the full fare. Little wonder, then, that the state railway's lost an estimated HUF43bn (€156m) last year - and that is still after receiving huge state support for passenger operations.

It's little wonder, then, that reducing budget support for Mav (and public transport in general) features in the long-awaited government fiscal restructuring proposals, finally released at the beginning of March.

Szell Kalman

Dubbed the "Szell Kalman" plan after a successful 19th century finance minister, the proposals were intended to reassure investors that Hungary will avoid excessive state spending once the bank tax and other "temporary" crisis measures imposed last year have been withdrawn - originally expected in 2012. (On March 7, the Economy Ministry published the plan in English on the government's website.)

The focal point of the plan, to reduce the budget deficit to 1.9% of GDP by 2014 while cutting state debt to 66% of GDP, was welcomed, but the plan met with a lukewarm applause, the forint losing 1% in the wake of the announcement on March 1.

Analysts praised the fact that it concentrated on expenditures rather than revenues, and targeted HUF900bn in savings and additional revenues by 2013 - higher than had been expected. But - as so often with economic policy under the Fidesz regime - they bemoaned the lack of detail.

Nigel Rendell, emerging market strategist with RBC Capital Markets, said that while the principal areas of adjustment, such as health care, pensions, public transport and drug subsidies, offer considerable scope for savings, any reforms will need to overcome "extremely deep-rooted problems that will require the political stomach to persevere in the face of [expected] public opposition."

And while the Fidesz government still enjoys widespread public support, that may be put to the test sooner rather than later if the plan is fully implemented, says Laszlo Akar, vice president of GKI Research, a Budapest-based economic think-tank.

He points to the challenge to cut drug subsidies - an issue made all the more thorny by Prime Minister Viktor Orban's insistence that his government has avoided "austerity" measures. "The plan targets a reduction in pharmaceutical subsidies by one-third [by HUF120bn (€440m) in 2013-14], but who is going to pay the difference, the population or the producers? There is no indication of how this can be worked out," he says.

Akar, who was former state secretary in the finance ministry under the Socialist-led government in 1994-98, is also sceptical about the government's ability to cut social transfers such as disability pensions, with stricter checks on medical examinations and the creation of work places suitable for the genuinely disabled. "It's a nice idea to create jobs for these people, but the majority of these people are over 50; are they suitable to work in the construction industry? I think many of these targets are over ambitious and have not been worked through professionally," he says.

Others, such as Zoltan Torok, head of research at Raiffeisen Bank in Hungary, are more sanguine, though still cautious. "While in our view the reform package is fairly comprehensive, with a decent structure (in terms of expenditure cut versus revenue items), its communication has been relatively poor," he says.

Already the government is facing criticism from many workers who have discovered, to their cost, that the much-vaunted 16% flat tax actually translates into a 20.5% levy on their headline income, and leaves many earning below the HUF300,000 (€1,100) a month threshold with less in their pocket than in 2010.

The new programme envisages raising the retirement age to 65, which will hit police and firefighters, who have until now enjoyed the luxury of taking full pension after just 20 years service - a most sensitive group of workers to alienate, particularly given the prime minister's high profile drive to increase the number of police. And the package also targets savings of HUF60bn in public transport in 2013-14.

Given the number of social groupings that the government could alienate with these cuts, the Fidesz politicians with a genuine understanding of the economics of everyday business may be rueing that decision to restore services on little-used branch lines like Komarom to Szekesfehervar.

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