Business | Features
Crisis exposes cracks in Hungary
Slump has forced government to make changes in its generous social system
- By Chris Bryant, Financial Times
- Published: 00:00 March 13, 2010
- Image Credit: corbis
- Hungary has brought in a raft of changes to tackle the economic crisis. These efforts have been geared towards giving incentives to Hungarians to rejoin the workforce.
Budapest Sheltering from the cold at a central Budapest railway station, Mihaly Bayer, 76, a softly-spoken retired pipe fitter cannot begrudge the wait for his train. Like all Hungarian pensioners, he travels free on public transport, allowing him to take the 170km trip from his home town of Pecs to honour his father at a war memorial in the capital.
Carrying some bread in a trusty leather briefcase because he cannot afford Budapest's expensive restaurants, Bayer can hardly be described as rich.
Nevertheless, a $390 (Dh1,431) monthly pension, free health care and subsidised gas bills provide him with a living standard that would be the envy of pensioners in some wealthier countries.
Like many Hungarians, however, Bayer is beginning to comprehend the severity of the economic crisis and what it might mean for the generous social system that has looked after him since he retired with a back-injury aged 56.
"We've got real economic problems and they are going to carry on," he says. "If we lie about that we are going to get in trouble again."
Faced with a near-unmanageable level of public debt Hungary began trying to tackle bloated public spending in 2006. Its success in narrowing its budget deficit from 9.2 per cent in 2006 to a projected 3.9 per cent last year has therefore attracted interest in other European capitals.
The achievement is all the more remarkable because structural reform of pensions and social welfare programmes was until recently thought nigh-on impossible in Hungary.
Hungarians who grew up under Communism were loathe to abandon the idea that the state should provide for them, becoming adept at exploiting a complicated, yet generous, system of subsidies and welfare payments. But in October 2008 the country was forced to turn to the International Monetary Fund for a 20 billion euro (Dh100 billion) standby credit.
"The crisis has worked for Hungary . . . as if somebody suddenly switches on the headlights and you see the cracks in the wall," Gordon Bajnai, prime minister, said recently. Since Bajnai's technocratic government took power last April, Hungary has abolished the so-called 13-month pension and from 2012 the retirement age will start rising from 62 to 65. Pensions have been indexed to inflation with increases conditional on strong econ-omic growth. The state has also cut child support benefits for stay-at-home parents, abolished an interest-rate subsidy for home buyers and tightened criteria for other benefits.
Importantly, these efforts have been geared towards incentivising Hungarians to rejoin the workforce.
Many of the country's three million pensioners retired long before the current statutory age of 62, often as a result of a disability claim. The average effective retirement age in Hungary between 2002 and 2007 was 59.7, among the lowest surveyed by the Organisation for Economic Co-operation and Development. As a result, the percentage of the workforce in employment was only 57 per cent in 2007, some 10 percentage points below the OECD average.
"It's not just a question of the availability of jobs, it's also the willingness to work . . . If you're earning the minimum wage or close to that and your potential social benefits are roughly the same, why would you work?" says Gyorgy Barcza, economist at K&H Bank.
Call for transformation
But some argue that Hungary requires a cultural, as well as fiscal transformation. "There's a lot more that needs to be done to motivate people to go out there and work instead of living off social aid. There's still a mentality that the government will provide and that the state will help you out," says Laszlo Balassy, managing director of Citibank Europe in Hungary.
The opposition Fidesz party is expected to sweep to power following a general election next month and has warned that this year's budget deficit could widen to seven per cent, albeit because of the way state-owned entities are accounted for. In coming weeks, the concerns of voters like Bayer are therefore set to be at the forefront of politicians' minds.
"I hope the future is going to be better, because at the moment things are tough," he says.
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