Hungary's Fidesz in a jam - Its pockets have been already emptied?

The 29 economists promoting a rejection of the 2010 budget bill include Zsigmond Járai (Finance Minister of the Fidesz government and former Governor of the central bank), Ákos Péter Bod (Ministry of the Industry in the MDF cabinet and former Governor of the NBH), György Szapáry (former Deputy Governor of the NBH, currently responsible for international relations in Fidesz), Tamás Mellár (head of the statistics office (KSH) during the Fidesz government) and Károly Szász (head of financial markets watchdog (PSZÁF) in the Fidesz era).

Please choose the statement below that you believe correctly describes Hungary’s current budget situation!

1. The global crisis and Hungary’s own vulnerability have together induced such a massive adjustment reaction that the situation of country’s budget has become comforting by now. Once we filter out the impacts of the deep recession, the budget gap will drop to below the Maastricht criterion of 3.0% of GDP in 2010.

2. The efficiency of the public sector remains painfully low in a number of areas. State-owned companies outside the budget have accumulated debts of hundreds of billions of forints. And as these will need to be consolidated sooner or later, the country’s budget gap may widen to above 7.0% of GDP next year. Subsequently, Hungary’s budget remains cyclical; elections every four years bring about extremely high deficits.

3. The size of the budget shortfall is solely up to the next cabinet to decide - it can be anywhere between 4.0% and 8.0%, whether or not substantial changes are implemented in the public sector.

You have guessed it right. All three statements are true. Instead of going into a lengthy explanation, it’s enough to read our previous analysis (see above) and to take a look at the central bank’s prognoses and a summarizing chart below.

With regard to Fidesz, there are two interpretations of this strange situation. Under the first one, the party is up to its neck, as the real consolidation need will lead to a nearly 6.0% budget deficit. And if it wants to create itself some elbowroom from 2011 (total debt assumption, perhaps even overconsolidation, which would not stand unprecedented) the gap would swell to over 7.0% of GDP. So much for tax cuts. But how could Fidesz “sell" this deficit to foreign organisations that “placed their bets" on the Hungarian economy? Blame it on the bunny or what?!

We have no intention to turn this piece into a political analysis, but we have to admit that it will be an entirely rational move by Fidesz if it blames the high deficit on its predecessor. And let’s face it: the Socialist government will not be a scapegoat in this matter; not only because the heap of debt was accumulated over the past years, but also because the MSZP had eight years (!) to tidy up state railway company MÁV, the Budapest Transport Company (BKV) and the Hungarian Development Bank (MFB). You just cannot finance the profligacy of obscure mammoths from our children’s money for an eternity.

On the other hand, it is obviously not true that the 2010 budget is worse than the previous ones from any aspect. The “basic" deficit is acceptable, the upside risks are not lethal and the extra-budgetary corporates keep making losses, just like they have for the past 20 years.

What makes the situation special is that:

1) this is the fourth year of the cycle, which is also an election year. And as such, it cries for a “confession of sins" for political reasons and also to ease tension; and
2) neither the IMF nor the EU would shrug off a dramatic jump in the deficit - according to our best knowledge leniency in this respect is out of the question.

From this point of view, the problems of Fidesz are clear as day. It seems it will not be able to play the card its every predecessor had. Instead it will be forced to shoulder the great burden of a gradual consolidation that may stay with it for years, greatly hindering its economic policy, e.g. the heralded tax reductions.

However, and this is the second interpretation, the situation is rather promising. Why? Because if debt assumption were conducted in a single swoop by the state the next cabinet would find itself in a favourable budget position from 2011. It would be able to announce a strategy aimed at early euro adoption and gradual tax cuts at once. And it would not even have to deal with the messy dealings of state-owned corporates; the problems could be swept under the rug until 2014 (the next election year).Now, let’s attempt to surrender the mindset of a party member and pretend we are observing from the sidelines. As such an onlooker we can state with a fair amount of assurance that the budget accounting regulations are far from being impeccable.

In this case, the ideal solution would be if every fiscal issue were to be assessed under the new Hungarian rules (that include every company that is majority-owned by the state) instead of the accrual-based ESA-95 methodology. This system would not provide any motivation to assume gigantic corporate debts accumulated over several years in a single step, given that these debts would need to be accounted every year. A compromise solution rooted in this would be beneficial for everyone:

- in exchange for such and undertaking the government would get the bigger manoeuvring room it craves;
- while it would be forced to restructure large state corporations that would be advantageous for taxpayers; and additionally
- even the EU and the IMF would get something out of it, namely an increased transparency of future budgets. In retrospect, this is not such a bad deal, is it?

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