Matolcsy’s 397 billion Forint adjustment package

Columnists wonder whether or not the government’s announcement that it will restructure the 2013 budget in order to save 397 billion Forints means that it has abandoned its previous economic strategy . Left-wing and liberal analysts believe that the government has thereby admitted the failure of its previous earlier policies. A pro-government pundit suggests that it is too early to reach a verdict on the government’s efforts.

On Friday, Minister of National Economy György Matolcsy announced a fiscal adjustment package for 2013 in order to keep the deficit below the 3 per cent threshold required by the EU. One reason for the spending overhaul was the expected 1 per cent GDP growth instead of 1.6 per cent as previously forecast.

In 2013, the government will improve the fiscal balance by postponing the planned wage increase for teachers and improving tax collection efficiency. A social benefit ceiling of 47,000 Forints per month per capita will be introduced. The government hopes to reduce the public sector by not replacing 22,000 employees who are leaving or retiring. Retired public employees who decide to keep their jobs will not be eligible for pensions . From 2013, the social contribution ceiling (currently set at a gross income level of 661,000 Forints) will also be abolished. At a press conference, György Matolcsy also announced that the financial transaction tax will no longer apply to the Central Bank, thereby removing one of the stumbling blocks in the credit line negotiations with the EU and the IMF (see BudaPost July 9). Government politicians claim that the package is purely technical, and the adjustment will not be felt by average Hungarians. In addition the government hopes that after the introduction of the new fiscal measures, the EU will finally end the excessive debt procedure (in effect since 2005) against Hungary. The opposition parties, however, criticized the package as ‘brutal.’ Both left and right-wing opposition parties predicted that further restrictions will be necessary.

“An uneasy step back from the edge of the cliff”, Róbert Friss comments on the fiscal adjustment in Népszabadság. The left-wing columnist believes that by announcing the restrictions, the government has performed a U-turn and abandoned the unusual economic path it has followed till now. The proposed measures will improve Hungary’s economic outlook and increase the chances of reaching a loan agreement with the IMF. There is no guarantee, however, that the government will not reverse its new policy, he suggests. The damage caused by the administrations’ unorthodox anti-market measures can only be fixed by ousting Fidesz from power, he argues.

Pondering the possible impact of the package in a front page editorial, Népszabadság suggests that the fiscal adjustments will increase poverty. According to the left-wing daily, the announced restrictions will primarily be paid by those who have already been suffering to make ends meet – pensioners, the unemployed, and teachers, while top earners will have even higher salaries as a result of the full introduction of the flat tax.

“Unorthodoxy is dead”, Miklós Bonta contends in Népszava. The left-wing columnist believes that the proposed fiscal adjustments are in-line with the recommendations made by the IMF and the EU. He adds however that the restrictions are the consequence of the governments’ ill-conceived economic strategy. As a result, the 2013 budget now seems more realistic, and thus Hungary may not need the loan from the IMF after all, Bonta concludes.

“The architects of the initial draft budget have either cheated, or are completely incompetent”, Véleményvezér comments. The liberal conservative blogger finds it outrageous that it took so long for the government to realize that there is a huge gap in the balance sheet, since several analysts have warned of this for a long time. As the cuts had to be determined in a swift manner, it is no surprise that the last minute restrictions are neither structurally consistent, nor in-line with the long-term interests of the country, Véleményvezér continues. Such haphazard improvisations cannot be called governance, the blogger concludes.

In Komment.hu, Csaba Gaál welcomes the cuts. He expects however that the fiscal adjustment, intended to satisfy international investors, will be a disappointment. The analyst believes that the government overestimates the revenues implied in the adjustment, and thus the package will fall short of filling the budgetary gap. Similarly to Népszabadság, he also believes that although the government has not reduced pensions and wages in the public sector, the proposed cuts will nonetheless severely affect those who are most in need.

Analysts seem to agree that the announced fiscal adjustment is a return to orthodox economic principles. Does this all mean that the unusual strategy followed by Viktor Orbán’s government over the past two years has proven to be a dead-end?, Magyar Hírlap’s Mihály Szalontay wonders. The pro-government columnist believes that the government was right to resist traditional economic policies, including the restrictions recommended by the IMF. Although such measures were successful in the case of Ireland, the example of Greece shows that austerity can result in even slower growth and higher unemployment, he continues. The jury is still out, and we have to wait to see whether the government’s alternative model will kick-start growth – if not, the critics of the government will be proven right, Szalontay concludes.

Tags: austerity, budget, deficit, economy, IMF, Matolcsy, National Bank, restrictions