Global Economics

Is Hungary's Head in the Sand?


Commentator Balint Szlanko lauds Hungary's leadership for fiscal responsibility, but says the country is in denial over its debt and demographic timebombs

Winston Churchill's adage about how Americans always do the right thing once they have exhausted every other opportunity may apply in Central Europe, too. Hungarian governments, for one, while generally mediocre or worse, tend to do OK when crises nudge them in the only direction left.

The government of Gordon Bajnai, appointed after the previous one was swept away by the crash of 2008, hasn't fared too badly so far. Partly on the back of a big foreign loan, partly thanks to improved market conditions everywhere, but also because it has rigorously enforced savage spending cuts, Hungary is no longer threatened by a currency crisis and debt default. Foreign investors are coming back as their loans are looking more secure, the debtor more credible. Lower costs to investors for insurance against credit defaults and falling short-term interest rates attest to that.

To be sure, most of it is just putting out the fire, fueled not only by last year's credit crunch but also by the profligacy of previous governments, both Socialist and conservative. By putting the brakes on rising public-sector wages and unrealistic social spending, Bajnai is simply undoing what never should have happened. But some of his steps, like reorienting the tax burden from employers to consumers and (slowly) raising the retirement age, are useful long-term remedies. Hungarian companies are so overburdened by social insurance costs that in many cases they simply can't afford to take on new workers even if they need them. The country has the second-lowest employment rate in the EU and gigantic pension costs. Every step that encourages people to go back to work is good.

But the ruling Socialists will lose next spring's elections. The likely winner, the center-right Fidesz party, says little about what it intends to do, apart from a mooted tax cut for which it has yet to show the corresponding spending cuts. But, on past record, it is against cutting public spending no matter what on the grounds that people cannot be expected to pay for the Socialists' mismanagement. It has spent the last seven years in opposition resisting all market reforms, traditionally pursued here by the center-left, while the right-wing press has been pushing a cocktail of mushy social populism and anti-capitalist conspiracy theories.

DEBTOR'S PRISON LOOMS

This doesn't bode well in an era when the next big challenge, for the West in general and Hungary in particular, is the reduction of public debt. Either because of their emergency spending measures or because of their social profligacy, most Western economies are mired in debt.

In the advanced economies debt is projected to rise to 110 percent of GDP by 2014, up from 80 percent just before the crisis, according to the IMF. Hungary's debt increased from 60 percent of GDP in 2001 to a projected 83 percent in 2009.

This debt is going to act as a drag on future economic growth, just when the aging of the population is about to deliver another massive blow to public finances. It is the big issue economically and, because spending cuts and reforms affect so many people, politically.

Yet the opposition and its leader, Fidesz chief Viktor Orban, doesn't tell the country anything about these things. If anything, they strenuously deny that they would follow the same path as Bajnai. Contrast that with Britain, where parties are coming out weekly with promise upon promise of new spending cuts, both general and highly specific.

Conservative leader David Cameron, guarding a healthy but by no means decisive lead in the polls, is not afraid to tackle a painful subject. Orban, leading the pack by anywhere up to 30 points in the polls, dares not utter a controversial word. Not for him are the tough choices of politics.

This has gone beyond being a problem of economic policy. It has become an obstacle to democratic politics, properly practiced. Cynics argue (wrongly, in my view) that voters, inconsistent in their wants and irrational in their expectations, cannot expect to be offered tough choices, since they are presumed to always vote for the party that promises them the easy way out.

Observing this pessimist view of their voters, politicians, in Hungary and elsewhere, are going out of their way "to listen" rather than lead. They blog, they tweet, they smile at us from their YouTube (GOOG) pages. They'd do anything but speak of hardship. But surely it's their treating voters as children that's partly responsible for voters treating them as what they seem to have become – spineless, unprincipled careerists, interested only in our opinions (and votes) to chase their dream of power.

Churchill was once advised to keep his ear close to the ground. He offered in response that the public would not have much respect for leaders observed in that position. This clearly no longer worries politicians. But they might reflect that reality, coming crashing down around their ears once in office, is a foe they cannot dodge forever.

Provided by Transitions Online—Intelligent Eastern Europe

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