As I have just indicated in my last post Hungarians went to the polls yesterday in a vote over whether or not to scrap government-imposed fees on visits to doctors and hospitals introduced as part of a belt-tightening adjustment programme, designed to bring what was at the time of its introduction the EU’s largest fiscal deficit back into line with Commission criteria. The referendum, as was well to be expected, resulted in a resounding defeat for the government, and with 94 percent of the votes counted, each of the three questions placed on the ballot received 82-84 percent support, according to data from the national election office OVB. As I say, to the intelligent observer this result should not have been entirely unexpected – the reason being, as I suggest in my previous post, that Hungary’s citizens may well now be suffering from what could best be described as a severe bout of “belt tightening fatigue” – and the outcome may may well initiate a period of political instability in Hungary (signs of a rift between the ruling Socialist – MSZP – Party and junior coalition Free Democrats – SZDSZ – partners were only too evident in an inadvertent moment yesterday, captured live for all the world to see by HirTV) and Prime Minister Ferenc Gyurcsany’s administration will need to struggle hard to maintain the credibility and integrity of its economic adjustment programme in the referendum aftermath, while “punters” in London meticulously dedicate themselves to trying to short HUF denominated assets to the best of their ability (that is when they are not otherwise entertained trying to short the Spanish Banks or Italian government debt).
The ballot – which was sponsored by the opposition Fidesz party – proposed the abandonment of charges for doctors visits, typically 300 forint (1.30 euro) per visit, charges for hospital stays and university tuition fees. These charges were introduced a year ago as part of the Socialist government’s attempt to put some sort of order order into Hungary’s large fiscal deficit problem (see chart). Voters were asked to offer a straightforward “yes” or “no” decision on each of the three issues.
The referendum was always expected to result in a rejection of the charges, with one survey of 1,200 voters by Budapest-based pollster Median showed that 61 percent of those who expressed the intention of voting supported the abolition of the fees. For the referendum to be valid and have effect at least 25% of the eligible voting population needed to vote in favour of rejection of the charges. This minimum threshold was easily exceeded.
The next step will now be for the Hungarian parliament to vote to scrap the measures. Constitutionally it will have until January 2009 to do this, but there is every indication that they will now act much earlier, possibly within a few weeks of the vote. Indeed Prime Minister Ferenc GyurcsÃ¡ny was quick to say after the closing of the polls that the contested measures would be scrapped from April 1, but he also added that the government would not give more money to GPs, hospitals and universities. (The total value of the measures involved amounts to about 0.1% of GDP).
Many commentators are suggesting the referendum could constitute a point-of-no-return or “breaking point” for the Gyurcsany administration.
The biggest opposition party, Fidesz, took advantage of a clause in the Hungarian constitution that permits referendums on specific government policies if sufficient signatures are gathered, with the objective of trying to undermine the authority of the current government and try to force early elections (although given the severity of Hungary’s underlying economic crisis, it is not clear whether or not they really want to force elections in the short term, or simply seek to irrevocably weaken the government before the next general elections scheduled for 2010).
In my opinion Fidesz are being pretty opportunistic about this whole affair, since while the particular details of the present package may certainly be open to legitimate debate, there is no doubt that a large majority of those voting against these measures will be voting against coming to terms with the fact that Hungary has an ageing and shrinking population, and in these circumstances (and being a poorish country to boot) high quality free health care is going to be a very hard objective to sustain financially. That is, at this point in time a majority of Hungarians are undoubtedly still in denial on the severity of their economic situation, and the difficulties involved in sustaining a health and welfare system in current circumstances.
Opinion polls now consistently show that most Hungarians are badly disillusioned with Gyurcsany and favour his departure since the austerity programme has cut public jobs and raised taxes and utility prices (in order to reduce what had become a ballooning fiscal deficit) but has yielded little in terms of tangible economic benefit in the short term, and indeed the economy has been sent of into what gives all the appearance of being a very long “time out” in the listless purgatory of a hard to throw-off dose of persistent stagflation.
Support for Fidesz was running at 35 percent support in February, compared with 17 percent for the Socialists, according to a recent poll of 1,500 voters carried out by Budapest-based Szonda Ipsos. Gyurcsany’s personal approval rating was 28 percent, compared with Fidesz leader Viktor Orban’s 45 percent.
Gallup in their February poll found 42% support for Fidesz among eligible voters, up 4 percentage points from a month earlier, while support for the MSZP edged up 2 percentage points to 15%. Gallup also said that 19% of the respondents felt the Prime Minister was doing a good job, while 69% of them felt he was not delivering as he should. In January 71% of those polled had said GyurcsÃ¡ny was doing a bad job.
Viktor Orban first called for the present vote during a rally in Budapest back in October 2006. Since that time he has called repeatedly for Gyurcsany’s resignation.
“The government is legal but not legitimate, because the people do not accept it” Orban told reporters on Feb. 27. “Leadership, policy, something must be changed. An early election could be a solution.”
Gyurcsany has so far remained defiant, rejecting calls for his resignation. He has said he will stay on regardless of the referendum’s outcome, but as we have increasingly seen in recent days, whether events in the financial markets will give him the possibility of staying on even as his authority – like the liquidity in Hungary’s financial markets – evaporates remains to be seen.
“After March 9, it will be March 10” he wrote on his Internet diary on Feb. 22. “The politics that we started will continue on the 10th.”
Formally Gyurcsany can only be removed against his will by a majority vote in parliament. His party and its coalition partner, the Free Democrats’ Alliance, have consistently given him their backing in difficult moments such as the confidence vote in October 2006 and can be expected to continue to do so. But will Gyurcsany have the will to continue in office after losing the referendum and if the central bank, as seems likely, finds itself forced to tighten Hungary’s already high interest rate even further in an Alamo like attempt to support the increasingly attacked Hungarian forint? This would seem to be a much more open question.
And even if Gyurcsany does decide to soldier-on his defeat in the referendum will undoubtedly serve to increase pressure for fiscal loosening ahead of the 2010 general elections. We have already seen some indication of the growing pressure in this direction, and on Feb. 18 Gyurcsany announced a package of tax relief measures intended to boost the countryâ€™s stagnating economy, saying, “Our primary target is to create jobs by lowering the tax burden. (…) The government is aware that payroll taxes have to be reduced to have fewer obstacles to legal employment.” This change in tone and direction has already caused the EU Commission to give Hungary a specific and explicit warning, since it is not at all clear how the deficit can be reduced and taxes lowered at one and the same time. Or at least this can’t be done without very large changes in the scope and quality of the free social services provision which makes up a significant part of the spending which the taxes are used for, and this is just what electors were effectively voting against yesterday.
Again even if rumour were worse than the reality here, Gyurcsany might well have to work hard to convince skeptical market participants that a further deterioration in the deficit wasn’t about to take place. In other words, after yesterday, and happen what may happen in terms of the immediate impact, the pressure is really going to be on this administration, and it isn’t going to lessen anytime soon.
The Charges Themselves
The fees which were at issue in the referendum were first introduced a year ago, and involve payments for doctors visits and hospital stays, and the introduction of university tuition fees. One of their objectives is to discourage unnecessary use of state medical resources in a country which currently has one of the highest per capita rates of doctor’s visits in Europe. In 2005, the average adult in Hungary made 12.6 visits to the doctor a year, compared with 7.5 by Belgians and 5.4 by the Dutch, according to the latest available figures from the Organization for Economic Cooperation and Development.
The charges have added around 21 billion forint to doctors’ incomes, while the resulting 25 percent decline in visits allowed the state to save about 15 billion forint on drugs, the Ministry estimates. Clearly what is at stake here isn’t especially the actual revenue received, since the government estimates that losing the fee revenues would cost them no more than HUF50bn ($289m, â‚¬189m), but rather the whole principle of the reform process itself.
Among those who defended the fees was Miklos Szocska, acting director of the Health Services Management Training Center at Semmelweis University in Budapest. Abolishing the fees may discourage investment in health-care infrastructure he suggests, and as he pointed out at a press conference in Budapest last month: “The issue is, where will the health-care system get its resources” since if the referendum triumphs “the profit-producing potential of health care will be restricted.” The decision to allow for-profit firms to buy stakes in the state-controlled health insurance companies has been especially unpopular.
And Szocska isn’t alone in his worries here. The EU Commission itself only last month warned the Hungarian government that that slower-than-forecast economic growth over the next two years may adversly affect deficit-cutting plans and far from suggesting the present charges were unnecessary in fact advised the government to take further measures if needed. Indeed the Commission specifically identify age-related spending and health, education and pension structural reform as urgent and pressing priorities for any Hungarian administration.
In view of the Commission assessment and of the recommendation under Article 104 of 10 October 2006 and given the need to ensure sustainable convergence, the Council should invite Hungary to: (i) rigorously implement the 2008 budget, take adequate action to ensure the correction of the excessive deficit by 2009 as planned; where necessary through additional measures; and allocate the better-than-expected revenues to further deficit reduction, also given the insufficient margin in 2009 in view of the risks, thereby also contributing to accelerating the pace of debt reduction towards the 60% of GDP threshold; (ii) ensure permanent expenditure moderation by continuing to enhance fiscal rules and institutions and by adopting and swiftly implementing the remaining streamlining measures announced in the fields of public administration, healthcare, and the education system; (iii) in view of the level of debt and the increase in age-related expenditure, improve the long-term sustainability of public finances by making adequate progress towards the MTO, and continue to reform the pension system as announced after the initial steps taken in 2006-2007.
The problem is not only the existence of a short term annual deficit, but rather that the level of Hungarian state indebtedness still stands above the 60% of GDP EU limit – at a level of 65.9% of GDP in 2007 (see chart here). And the median age of the Hungarian population is about to shoot up over the next decade, from the current level of 39 to the comparatively high one of 43 (see chart).
Clearly the short term future of the Hungarian economy may well have been decided yesterday since if the electorate’s decision makes the government’s position impossible, the financial markets may well prove to be unforgiving. But longer term it gets even worse, since the challenges are enormous. Perhaps the whole thing is easily summarised in two graphs which are steadily moving in opposite directions. In the left hand corner we have the total Hungarian population which will steadily decline in size from the current level of around 10 million to about 9.6 million in 2020 (see chart). But while the total population moves one way, we have, in the left hand corner, the over 60 population, which is busily moving in the opposite one, rising by roughly 25%, from just below 2 million to just over 2.5 million over the same period (see chart). So at the end of the day this is the issue which was really at stake in yesterday’s referendum, whether or not the Hungarian electorate is really ready and prepared to accept responsibility for its immediate and evident demographic destiny.
Since writing the above post I have come across a very well written and well informed blog by a Hungarian living in the United States (see here). While most of the press have been busy talking about how surprising the outcome is, our erstwhile blogger is basically unphased. He (sorry she, see comment below), like me, could see this one coming a mile off. And he also sees the significance of what has just happened. Perhaps I would write and say things in a rather different way, but in essence I think the following extract sums up what it has all been about:
The overwhelming percentage of “yes” votes should not have been surprising, even though the Pollyannas (including me) hoped for less of a thumping. What nobody foresaw was the large turnout: slightly over 50% of all eligible voters went out, and over 80% of those who voted said “yes” (in effect “no”) to three cleverly worded questions about co-payment, daily hospital fee, and tuition. They don’t want to pay. Understandable. Unfortunately, the overwhelming rejection of the introduced changes means a bit more than simple answers to three simple questions. It means, in my opinion, that the overwhelming majority of the Hungarian people doesn’t want any part of the New Hungary Ferenc GyurcsÃ¡ny talks so much about. They don’t want to change. They don’t want to accept the new rules of a new game. They want to be taken care of by the state. They believe that the state will find the way to support them, provide them with free university education and with absolutely free medical services (not counting the envelopes, of course, but they are accustomed to that). Where will the money come from? They don’t rightly care.
……….it is obvious that the “re-education” of the Hungarian people has failed miserably. What to do in this department? The often mentioned criticism about the lack of good communication is, in my opinion, not the real culprit. They explained, and explained, and explained. The problem is not with the understanding. The problem is that the majority has equivocally rejected this new concept of the relation between state and citizen.