Robert Smyth in Budapest -

Hungarian Prime Minister Ferenc Gyurcsany not only lost face when the public rejected via a referendum his plan to levy fees on visits to the doctor, staying in hospital and studying, he also appears to have lost the trust of the public at a crucial time for Hungary.

"Hungary loses," Gyurcsany told parliament in the wake of the March 10 referendum defeat, in which over 80% of the 4m Hungarians who turned out to vote wanted the charges scrapped. Gyurcsany also told parliament that the fees would be withdrawn forthwith. Needless to say the opposition, who called the referendum, disagreed. "The country won!" hailed Victor Orban, leader of the main opposition party Fidesz.

While lost revenue is always a drag, a much more serious problem for Gyurcsany and his increasingly unpopular Socialist-led government is that it will now be even harder for it to carry on with the painful, but necessary reforms. "For Fidesz, this is a good move politically, but it won't solve anything in the long run, it just makes matters worse," says Balint Torok, an analyst at BudaCash brokerage.

The government might now be forced to lay off meaningful reforms in the pursuit off much-needed popularity. "Even before the government's reforms, the convergence programme demanded tight criteria and the government's approach has been generally inconsistent - this could make the situation worse," says Torok.

The government's reforms had seen both an increase in revenue from higher taxes and a reduction in government expenses from the notoriously over-populated and cash-guzzling public sector. Analysts agree these measures helped the Hungarian economy to turn a corner and reduce an unacceptably high budget deficit, drawing international plaudits. Now the picture is decidedly less rosy.

Paying a high price

Torok criticizes the government's communication over the three fees as being far from optimal, which led to it paying a price much higher than HUF300 per doctor's visit or HUF1,000 per night in hospital. "The government couldn't let people know what it wanted. It's going to be harder for the government to continue its work and it's running out of time to make the necessary reforms," says Torok. He estimates the government has just nine months to implement further reforms before campaigning starts in earnest for the 2010 general election.

Gyorgy Jaksity, managing director of ConCorde Securities in Budapest, agrees that the forgone revenue doesn't add up to a lot of money, but "if you add it all up, we're talking hundreds of millions of dollars, which is real money when you have a budget that is bleeding in all directions."

Jaksity notes the referendum was less about the payments themselves and more about an anti-government protest vote. It is the philosophical side of the referendum that is the most disturbing for Hungary's long-term prospects. "The sad consequence of Sunday's referendum is that the attitude is still the same: most people think there is a free lunch and you don't have to work, that a politician is like your father and will take care of you," he says.

He describes the situation as a trap that the country's politicians find themselves caught up in. "Politicians can't start to behave rationally and take the country's long-term interest into consideration, and will continue to be populist and primitive," opines Jaksity. "Society will continue to behave like a child and wait for someone else to solve its problems."

The result will be larger deficits and more unsolved problems. "As long as people think like this, we'll have weak economic policies; and as long as this happens, Hungary will drop down all the rankings. Neither society or politics has the momentum to get out of it, which means we face a couple of very difficult decades ahead," he says.

Few are optimistic about the economy and Hungary's ability to meet the all-important convergence requirements laid down by the EU. "If the inflation target is missed this year, then that is not necessarily the government's fault due to global influences, but budget deficits are," BudaCash's Torok says. "We might reach 2110 meeting the convergence requirements, but what happens after that is a big problem."

Analysts worry that the health and pension systems could collapse in five to 10 years as things stand. Poor global market sentiment and adverse economic conditions, including the credit crisis, serve only to make Hungary's plight worse.

The optimal solution would be for the government and opposition to start cooperating on health, education and pension reform, but events show that such an outcome is unlikely in such a polarized country. The government is in a very difficult position not only because it has had to adopt unpopular steps to attempt to get Hungary out of the mire, but also because the opposition can play on the fact that the reform measures have been applied ad hoc. "Fidesz tries to use as its main message that it's not the measures themselves that are problematic, but the fact the government did not mention these measures in its election manifesto," says Jaksity. "This is true, but most political parties have differing election and governing programmes."

While Gyurcsany and Co. are dismissing calls to quit, arguing that negative feedback is a direct consequence of its success in making inroads into cutting Hungary's budget deficit, they will have to act more cautiously in future. This might help the government survive, but will hinder the Hungarian economy from getting back on track.

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