The Hungarian “umbrella package”

In 1995 we had the "Bokros package," named after the newly appointed minister of finance, Lajos Bokros. The prime minister at the time, Gyula Horn, was most reluctant to introduce the absolutely unavoidable austerity program that meant a drop in real wages of about 17%. The "Bokros package," although painful in the short run, resulted in healthy economic growth from 1997 until about 2000 when the Orbán government started the usual irresponsible spending because of the approaching elections. Although the government spent a lot of money trying to buy votes, Viktor Orbán and his party lost the election. Fidesz was not the only party to offer all sorts of goodies to the electorate. The other side, the socialists, did the same, and Péter Medgyessy, the new prime minister, made the mistake of actually fulfilling his extravagant promises. Not like Orbán in 1998 who promised all sorts of things before the elections but prudently didn't pony up.

As a result of misguided fiscal policy between 2000 and 2006 both the national debt and the budget deficit became unbearably high. In 2004 Hungary became a member of the European Union and therefore was no longer free to pursue irresponsible fiscal behavior. Hungary had to come up with a timetable for its deficit reduction program in order to receive financial assistance from the EU. It was obvious that a new "package" was needed. Unfortunately, this package was named the "Gyurcsány package." Not the best advertisement for an already beleaguered prime minister. Gyurcsány and his economic advisers figured that an austerity program at the beginning of the government's tenure would bring positive results by the time of the elections in 2010. The improved economic situation should benefit the government in power. Well, it didn't work out that way, and now we have the "umbrella package." At least this is the name the newly proposed austerity program got today.

The proposed "umbrella package" was devised in part to meet IMF requirements for Hungary to access its lending facility. The Hungarian government has promises of standby credit from the European Central Bank and the International Monetary Fund. The IMF credit (possibly 12.5 billion dollars) has strings attached. According to newspaper reports, Hungary must reduce its expenses by at least 300 billion forints. If that is the case, the Hungarian "sacrifice" is not overwhelming, especially if we recall that some Hungarian economists, among them the venerated Lajos Bokros, were talking about cutting 1,000 billion forints from the budget.

The announcement of the IMF rescue package bolstered investor sentiment. Today the Budapest stock exchange soared 9 percent. The forint has also become considerably stronger, presumably at least in part as a result of the recent interest rate increase by the central bank.

Fidesz and the Christian Democrats have very serious reservations about the IMF loan. After all, what a terrible fate. Hungary in the same company with Ukraine and Pakistan? A country that belongs to the European Union? It was a huge mistake, according to them, to even contemplate IMF help. Instead, Lajos Kósa of Fidesz suggested that the prime minister resign. Unless this happens, Fidesz will not cooperate with the government. Crisis or no crisis. It is very unlikely that Gyurcsány will listen to Kósa especially since it seems that SZDSZ and MDF will cooperate with MSZP, and therefore there will be plenty of votes to pass the "umbrella package."

So what's contained in this "umbrella package"?

(1) They will freeze the salaries of all ministers and undersecretaries. The salaries of board members in state-owned companies will be reduced by 10%. Managers of state companies will not get year-end bonuses. There will be new furniture purchases for government offices.

(2) Salaries of civil servants and state employees (doctors and teachers, for example) will be frozen at their nominal value in 2009 and they will not receive the customary extra month salary.

(3) With great reluctance the government will also make some adjustments in pensions. Although MDF wanted to suspend the extra month payment across the board, the government made only a modest cut. People who receive pensions but who have not yet reached the official retirement age (62) will not receive the extra month payment. People with higher than average pensions will receive the extra month's pension but it will be capped at the value of the average pension, which is 80,000 Ft.

Otherwise, the ministry of finance based its calculations on what it considers the worst possible scenario: a negative print on the GDP of 2% and a 2.6% budget deficit.

Of course, these are only the government's suggestions. What will come of the package depends on further negotiations. As things stand now, I don't think that one can count on the assistance of Fidesz and the Christian Democrats; it is not in their interest to lend a helping hand to the MSZP government. They simply say that this whole mess is the government's fault and that the government will have to solve the problem it created. But they are against any of the cuts suggested by the government. They stick with their idea that the best way of handling the situation is to introduce massive tax cuts. I don't think that I have to emphasize the absurdity of this suggestion.