VERES: REFORMS ON TRACK

C O N F I D E N T I A L SECTION 01 OF 02 BUDAPEST 000815

SIPDIS

SIPDIS

FOR EUR/ERA AND INR/EC

E.O. 12958: DECL: 05/21/2027
TAGS: EFIN PREL HU
SUBJECT: VERES: REFORMS ON TRACK

REF: BUDAPEST 781

Classified By: Economic Officer based upon E.O. 12958, reasons 1.4 (b)
and (d)


1. (C) Summary: In a brief May 16 meeting to discuss the
recently released International Monetary Fund (IMF) Report on
Hungary (Ref),Finance Minister Veres expressed confidence in
ongoing reforms, noting the successful, quiet (without
prompting any of the recent demonstrations or other strong
grass roots opposition) implementation of a series of
reforms. He downplayed most of the most serious IMF
concerns, arguing that Hungary can and will make spending
cuts that will yield macroeconomic improvement, but that
cutting expenditures all the way down to the IMF-preferred
level would take ten years. Avoiding any mention of a target
date for euro adoption, Veres nevertheless appeared
comfortable in his assessment of robust tax revenues and
declining deficit and debt projections. He anticipates
sweeping tax reforms that could be implemented as soon as in
2008, but cautions that the government must cut expenditures
first. One step he sees as essential is the creation of a
Congressional Budget Office-like body
in Hungary, which he expects to be enacted into law this
year. End Summary.

Success - the Veres View


2. (C) Veres listed reforms that have already been
successfully implemented: reduction of the natural gas
subsidy for home heating, modified pharmacy pricing system
with greater avalability of over-the-counter drugs,
co-payments for doctor visits, introductionof a modest
higher education tuition fee, adding an extra 2 hours
instructional time for elementary and secondary teachers each
week, and an over 17,000 reduction in the government work
force. Drawing an apparent contrast to political unrest and
demonstrations over the past year, Veres added through his
translator: "We did all of this. No demonstrations,
nothing." He said certain reforms would continue as planned:
increasing restrictions on early retirement, transforming
the disability system to increase workforce participation,
and further energy price subsidy reductions (primarily
through limiting the number of beneficiaries).


3. (C) Despite these reforms, Veres acknowledged some
ongoing challenges, notably the lack of a Constitutionally
required two-thirds Parliamentary majority to reduce the
number of local governments. The government has already
built the failure of some reforms to pass into their
projections, so this should not affect deficit targets.
However, he clearly chose to highlight as success two key
figures: consistent nearly-adequate tax receipts and the
shrinking budget deficit. On the budget, he said that every
annual target on the way from 9.2 to 3.02 per cent "can be
met," noting that the government has already revised the 2007
deficit target down from 6.8 to 6.6 per cent, and expressing
his agreement with analyst views that it would be closer to
6.4 per cent.

Sidestepping Criticism: Health Care and Public-Private
Partnerships


4. (C) Veres sidestepped the intense public intra-coalition
debate on health reform between MSZP and SZDSZ, noting that
the general budget target for health care is agreed upon, so
that further discussion on the specifics, such as single
payer or multi-payer insurance plans, while interesting and a
sensitive topic, would not affect the budget targets. SZDSZ
chief/Economic Minister Koka has told us that he fears that
the political debate is becoming the story, rather than the
merits of the health care issue. That said, political
analysts tend to agree with Veres, the budgetary targets are
set and the question is how to divide the pie, not how big it
will be. On Public-Private Partnerships (PPPs),Veres took a
similar approach, saying that the budget already includes the
government annual required contribution ("availability
payments") and that PPP debt has a minimal impact on national
outstanding debt. According to Veres, the IMF possibly
"didn't understand" what Hungary was doing in these areas,
because he could find no basis for their criticism. This
discussion prompted an offer for a working-level follow-up
meeting for a more precise exploration of these elements of
the report - an implicit acknowledgement that these perennial
issues are not so simple.

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Looking Ahead: Competition, Revenue, Expenditures, Oversight


5. (C) Veres readily discussed differences between Hungary
and its economically booming neighboring country, Slovakia.
He discounted conventional wisdom that low and simple taxes
alone played the key role in Slovak competitiveness, instead
asserting that low public expenditure levels made lower taxes
possible. Applying this to Hungary, the IMF lower target of
government expenditures as forty per cent of GDP is simply
unrealistic. Rather, lowering expenditures down from fifty
per cent to forty-six percent is more likely. In this
context, Veres supports tax reform, but only after the
government seriously cuts expenditures. In order to keep the
budget process honest, Veres strongly favors an office
modeled after the U.S. Congressional Budget Office to provide
a clear picture of expenditures. Looking ahead, then, he
sees the current trend of lowering the government debt as
share of GDP to continue because of robust revenue streams
and declining fiscal deficit. He hopes that most of the
reforms will be completely enacted within one or two years,
and sees tax reform as something that can and will enhance
competitiveness in the years to come.
LARSON