STRUCTURAL REFORM COMES TO HUNGARY: GOVERNMENT

C O N F I D E N T I A L SECTION 01 OF 02 BUDAPEST 000475 SIPDIS DEPARTMENT FOR EUR/CE, EB/OMA, INR/EC, TREASURY FOR ERIC MEYER, JEFF BAKER, LARRY NORTON E.O. 12958: DECL: 07/01/2014 TAGS: ECON EFIN PREL HU SUBJECT: STRUCTURAL REFORM COMES TO HUNGARY: GOVERNMENT ENACTS MOST ELEMENTS OF ECONOMIC RECOVERY PACKAGE REF: BUDAPEST 312 BUDAPEST 00000475 001.2 OF 002 Classified By: Acting P/E Counselor Jon Martinson, reasons 1.4 (b,d) ¶1. (SBU) Summary. As Parliament wraps up its spring legislative session, the 75-day old "crisis management" government of Prime Minister Gordon Bajnai has secured passage of the major elements of the PM's economic recovery plan. Although the Bajnai government and its austerity package remain extremely unpopular, the measures constitute the most comprehensive reforms of the pension, social welfare, public sector, and tax systems in more than a decade. These measures should help put Hungary on a more sustainable macroeconomic path, and improve Hungary's economic competitiveness. With Parliament now in recess until September, focus has shifted to the 2010 budget, which the government hopes to pass in November. There is a chance that after the passage of the 2010 budget some Socialists or Free Democrats may withdraw support for the government, leading to slightly earlier elections. In public statements, both the government, and at least a portion of the MSZP, maintain PM Bajnai will finish the mandate and elections will be held in April 2010. End summary. ¶2. (SBU) On June 29, Parliament concluded its spring session with the passage of a number of bills that completed most of the major elements of Prime Minister Bajnai's economic recovery plan. The measures include tax law changes like the institution of a property tax, reducing personal income taxes, and other measures intended to shift the tax burden away from labor to consumption and wealth. The Parliament also passed bills reducing child care allowances from three years to two, and reducing the eligibility for family allowances from 23 years to 20 years of age. ¶3. (SBU) Together with measures already taken (reftel),these changes constitute the most comprehensive reform of the pension, social welfare, public sector, and tax systems in more than a decade. Many of the reforms were previously viewed as too politically difficult to achieve - such as the elimination of the "13th month" pension, curbs on child and family allowances, and reducing public sector employee bonuses. The expenditure cuts will help put Hungary on a more sustainable macroeconomic path, and help it meet deficit reduction commitments as part of its $25.1 billion loan from the IMF/EU/World Bank. The reduction in the tax wedge and the tax burden on labor is also expected to help improve Hungary's economic competitiveness. ¶4. (SBU) Although there have been fewer strikes and demonstrations than previously expected, the government and its austerity measures remain deeply unpopular, while the largest opposition party, FIDESZ maintains significant public support. Public opinion is particularly negative on the issue of a property tax, which the opposition FIDESZ party insists it will abolish if they are voted into power in the national elections, currently scheduled for next spring. ¶5. (SBU) With Parliament now in recess until September, focus has shifted to the 2010 budget, which the government hopes to pass in November. There is a chance that after the passage of the 2010 budget (the last major element of the Bajnai government's crisis management plan),some Socialists or Free Democrats may withdraw support for the government, leading to slightly earlier elections. They believe that by forcing early elections, FIDESZ would be forced to share the burden of enacting unpopular austerity measures, potentially helping Socialists candidates in local elections scheduled for Fall ¶2010. In public statements, both the government, and at least a portion of the MSZP, maintain PM Bajnai will finish the mandate and elections will be held in April 2010. ¶6. (C) Comment. After a decade of high budget deficits and a lack of structural economic reforms resulting in declining Hungarian competitiveness, the Bajnai government has achieved in 75 days reforms few thought possible. They were able to do so for several reasons, including the recognition by the political elite of the seriousness of Hungary's economic situation and the acceptance by the Socialist Party - if not responsibility for past mistakes in managing the Hungarian economy - at least that the way out of the current situation will require supporting measures that will directly and adversely affect their traditional voter base. Finally, although clearly not supportive of the reform measures, the major opposition FIDESZ party toned down its criticism of the Bajnai government, and has not actively rallied supporters against the reform measures. BUDAPEST 00000475 002.2 OF 002 ¶7. (C) These reforms are not without costs, however, and many Hungarian families are discovering they must tighten belts and get by with less, which is reflected in the steep decline in domestic consumption. With the end of Parliament's spring session, Hungary is entering its summer "uborka" (cucumber) season - the period when government ministries and public life tends to slow down as Hungarians leave Budapest for lengthy summer holidays. Given the difficult economic situation this year, however, many will be forced to spend their cucumber season closer to home. End comment. Levine