Identifier
Created
Classification
Origin
08BUDAPEST639
2008-06-25 11:48:00
CONFIDENTIAL
Embassy Budapest
Cable title:  

PLAYING WITH THE MARGINS: FEW SIGNS OF LIFE IN THE

Tags:  PGOV ECON EINV HU 
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VZCZCXRO2728
PP RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHUP #0639/01 1771148
ZNY CCCCC ZZH
P 251148Z JUN 08
FM AMEMBASSY BUDAPEST
TO RUEHC/SECSTATE WASHDC PRIORITY 3127
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
C O N F I D E N T I A L SECTION 01 OF 02 BUDAPEST 000639 

SIPDIS

DEPARTMENT FOR EUR/NCE; PLEASE PASS TO NSC FOR ADAM
STERLING; TREASURY FOR DAS MEYER

E.O. 12958: DECL: 06/23/2013
TAGS: PGOV ECON EINV HU
SUBJECT: PLAYING WITH THE MARGINS: FEW SIGNS OF LIFE IN THE
GOH'S ECONOMIC POLICY

Classified By: P/E COUNSELOR ERIC V. GAUDIOSI; REASONS 1.4 (B) AND (D)

THE FIERCE LASSITUDE OF NOW

C O N F I D E N T I A L SECTION 01 OF 02 BUDAPEST 000639

SIPDIS

DEPARTMENT FOR EUR/NCE; PLEASE PASS TO NSC FOR ADAM
STERLING; TREASURY FOR DAS MEYER

E.O. 12958: DECL: 06/23/2013
TAGS: PGOV ECON EINV HU
SUBJECT: PLAYING WITH THE MARGINS: FEW SIGNS OF LIFE IN THE
GOH'S ECONOMIC POLICY

Classified By: P/E COUNSELOR ERIC V. GAUDIOSI; REASONS 1.4 (B) AND (D)

THE FIERCE LASSITUDE OF NOW


1. (C) Following their recent meeting to discuss the fall
legislative agenda, there appears to be little stomach among
the MSzP leadership for further reforms. Party VP Imre
Szekeres confides that there is at least "full consensus"
within the party about one thing: "reversing our present
strategy."


2. (C) Although MSzP sources continue to emphasize their
commitment to continue with the Convergence Program, the
emerging party line is that further steps must not
"jeopardize social services." This has seemingly left most
of their attention focused on marginal and revenue-neutral
steps which will "rationalize services" and "redirect funds."



3. (C) While Szekeres concludes the party is now compelled
to ratchet back on reform ) "as we hoped to do anyway" ) he
believes there is still time to take action on selected
initiatives which will "do good for the people ( and look
good in the media." With a good crop expected this year,
Szekeres believes that exports will push growth above western
European levels and help give the GoH "400 billion forint
worth of elbow room" for targeted social spending.

BITING THE HAND THAT INVESTS


4. (C) But that may not be enough. As Oriens Consulting
Group Director Krisztian Orban points out, Hungary's labor
participation is the lowest in Europe thanks to a system that
offers few incentives for workers and places heavy burdens on
employers. With its generous pensions, rampant abuse of
disability provisions, and early retirement as a rule rather
than an exception, Hungary's current system is
"unsustainable." As Orban points out, however, the MSzP may
well choose to attract voters rather than solve problems."


5. (C) The MSzP's evident focus on social spending at the
expense of the investment climate will please no one in the
business community. But Minister Peter Kiss, head of the
Prime Minister's Office, appeared largely unmoved by strong

statements from the AmCham, pointing vaguely to positive
signs and predicting a turn-around this fiscsal year. Told
that the business community sees "no time to waste" on
transparency and fears that "taxpayers have become Hungary's
most endangered species," Kiss agreed to continue
consultations with the AmCham but referred repeatedly to the
importance of "social priorities" guiding the GoH's approach.
He was encouraging regarding the elimination of the hated
four percent "Solidarity Tax" on businesses but notably light
on details regarding the fundamental reform he conceded is
necessary. As one AmCham official concluded after a
frustrating session, Kiss "knew enough to preempt our
questions but not to solve our problems."

THE SOCIALISTS' CARDINAL RULES


6. (C) At this point, we discern few ambitious plans on the
MSzP's part. The broad outlines of their approach appear to
be:

Continuing the Convergence Plan: Although this will help
reduce the deficit, the Plan is a necessary but not a
sufficient step toward long-term economic prosperity. As the
investment community has warned, the pattern of enhancing
revenues rather than reducing spending will cntinue to
stifle growth.

Maintaining a revenue neutral approach: Kiss and others have
been clear that the government will have to operate in a
revenue-neutral environment. As Gyula Cserei,
newly-appointed as head of the MSzP's foreign policy cabinet,
observed, "there are things a Socialist government cannot
propose." This means that the high level of social services
and social subsidies will continue to dictate high tax rates.
This constraint will undermine the impact of positive steps
such as the prospective removal of the Solidarity Tax by
imposing new costs such as higher VAT levels.

"Targeted Intervention" on employment generation: Although
Minister Szucs emphasizes that her goal is to make work
"voluntary and not obligatory," her "Way to Work" initiative
will confront entrenched opposition. Its objective is to
"rehabilitate" many of Hungary's 1.3 million long-term
unemployed through professional training for workers,

BUDAPEST 00000639 002 OF 002


incentives for employers, and public works opportunities in
hard-hit localities. This focus on communities beset by
long-term unemployment may help the MSzP court important
voters, but the program will likely fall far short of a
dramatic transition from welfare to workfare.

Framing the debate: "Improved communication" remains part of
the MSzP's mantra, and their latest approach is to frame
their policy as the successor to the "Bokros Package" from
the mid-90s. Although these austerity measures did help turn
the economy around, the party's slow-down conveniently
ignores Bokros' present advice, which is to accelerate
reforms on all fronts.

LOSING THE POLITICS AND THE POLICY


7. (C) Comment: The marginal approach under consideration
will not be enough for an economy which is rapidly losing the
confidence of the very foreign investors on whom Hungary
relies to keep its export-driven economy afloat. With few
bold ideas seemingly on the horizon, it increasingly appears
as if the MSzP is losing both the political race and the
policy debate. In their recent meetings, both Kiss and
Szekeres have demonstrated why they are Prime Ministerial
aspirants and not Prime Minister. Often maddeningly vague,
Kiss in particular prompted one AmCham official to comment "I
was afraid that we weren't talking to the MSzP leadership (
and now I'm more afraid that we are." If these two long-time
insiders are so far removed from the economic realities, we
can have little confidence in the party's willingness to move
beyond marginal changes. Worse still, indications are that
any such changes will be in favor of voters rather than
investors.
Foley