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Thursday, November 09, 2006

The Longer Term Budget Outlook

One further point from Central Bank Vice President Henrik Auth's interview for the BBJ is the following one:

"By 2008, 2009, the deficit-cutting effect of the austerity measures will run out of steam......Cutting current expenditures should have been a priority. The emphasis should have been on social transfers.”

Now this seems to raise one of the major outstanding issues, the structural sustainability of the budget in the longer term due to the presence of what Alan Greenspan used to call 'accrued liabilities' - structural items in the budget like health spending and pensions - which are set to grow and grow as Hungary ages rapidly over the next decade.

Now this meshes-in with the politics, as revealed by this article in Bloomberg, which is ostensibly about the future of Fidesz leader Viktor Orban, but in reality raises much larger questions. In particular what exactly is the position of Fidesz in relation with next years referendum on reductions in the health and welfare programme:

When those failed to unseat the government, on Oct. 23 he called for a referendum, now planned for February or March, on the government's plans to reduce spending on social programs, including imposing fees for doctor visits.

So what is the Fidesz position on budget stability? In theory they should favour trying to bring spending in the longer term under control. But this may not prove popular with voters who are getting older by the year, so they could seek to gain short term advantage by exploiting the unpopularity that such measures will undoubtedly bring on Gyurcsany (remember what happened to Schröder in Germany) at the price of long term insolvency for the country.

This is the point, as we are now seeing in Italy, where politics fuses with economics. And the recent performance of Angela Merkel in Germany is none too encouraging in this regard.

So the current risks in Hungary are twofold: that the immediate package (spending cuts, drop in the value of the forint, rise in interest rates) provoke a decline in domestic consumption which is sufficiently strong to send the country into recession, and in so doing make it difficult to comply with the original terms of the rescue, *and* that the emphasis on short term management makes the longer term path of public spending lie on a constant knife edge, making for permanent difficulties in balancing political governability and economic systainability.

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