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Monday, March 10, 2008

Sunday's Referendum in Hungary

Hungarians are set to vote tomorrow on whether to scrap government-imposed fees on visits to doctors and hospitals in a referendum that may initiate a period of political instability as Prime Minister Ferenc Gyurcsany's fights to maintain the credibility and integrity of his adjustment programme.

The ballot which is sponsored by the opposition Fidesz party proposes the abandonment of the charges for doctors visits, typically 300 forint (1.30 euro)per visit, for hospital stays and university tuition fees. These were introduced a year ago as part of the Socialist government's attempt to put some order into Hungary's large budget deficit problem. Voters are being asked to offer a straightforward "yes" or "no" decision on each of the three issues.

The referendum is expected to result in a rejection of the charges, and 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. The poll, published on Feb. 27, had a margin of error of between 2 and 5 percentage points. For the referendum to be valid and have effect at least 25% of the eligible voting population will need to vote in favour of rejection of the charges (since even if less than 25% vote on each side the status quo would prevail, the referendum would fail, and the charges would say in place). At the present point the polls indicate a turnout of around 40% of eligible voters, but they have been very unreliable in the past, and it would still seem that with 61% being for abolition the validity of the result (a majority in favour of rejection of the charges seems more or less assured) will be a touch and go affair.

The next step, if the referendum were to be valid,would 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 in the evetuality this was the verdict they would act earlier, possibly within a few weeks of the vote).

Many commentators are suggesting the referendum could constitute a point of no return "breaking point" for the Gyurcsany administration.

The biggest opposition party, Fidesz, has taken advantage of a clause in the Hungarian constitution that permits referendums on specific government policies if sufficient signatures are gathered in order to attempt to undermine the authority of the current government and try to force elections. In my opinion they 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 are now showing that most Hungarians are badly disillusioned with Gyurcsany and favour his departure following the implementing of an austerity programme which cut public jobs and raised taxes and utility prices in order to reduce what had become a balooning fiscal deficit, fueling protests that even on occasion turned into violent street riots in mid 2006.

Support for Fidesz was running at 35 percent support in February, compared with 17 percent for the Socialists, according to a poll of 1,500 voters by Budapest-based Szonda Ipsos. Gyurcsany's personal approval rating was 28 percent, compared with Fidesz leader Viktor Orban's 45 percent. The poll had a margin of error of 2.5 percentage points.

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 Gyurcsány was doing a bad job.

Viktor Orban first called for this 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 seen yesterday, whether events in the financial markets will give him the possibility of staying on even as his authority - like the liquidity in Hungaries 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 continuie to do so. But will Gyurcsany have the will to continue in office should he lose the referendum and the central bank, as seems likely, find itself forced to tighten Hungary's already high interest rate even further? This would seem to be a much more open question.

And even if Gyurcsany does decide to soldier-on his defeat in the referendum would 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 country’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 may be about to vote against today.

Again even if the rumour were worse than the reality here, Gyurcsany might well have to work hard to convince sceptical market participants that a further deterioration in the deficit wasn't about to take place. In other words, after tomorrow, and happen what may happen in terms of the outcome, 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 are at issue were first introduced a year ago, involve fees for doctors vistits 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, the Health Ministry says, 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 tomorrow isn't especially the actual revenue received, since the government estimates that losing the fee revenues would cost them no more than HUF50bn ($289m, €189m) but rather the whole principle of the reform process.

Among those defending the fees is 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 adminstration.

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.

While the median age of the Hungarian population is about to shoot up over the next decade:

Clearly the short term future of the Hungarian economy may well be decided tomorrow, since if the electorate decide to make the governments 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 moving in opposite directions. First we have the total Hungarian population which will steadily decline in size between now and 2020.

The we have the over 60 population, which of course moves in the opposite direction, rising by roughly 25%, from just below 2 million to just over 2.5 million.

Update Sunday Evening: at 22:00 CET according to data on the Hungarian National Election Office Referendum Website with 95.52% of the vote counted the results are as follows:

Abolish the Daily Hopspital Fee "Yes by 84.37% to 15.683%
Abolish the Consultation Fee "Yes" by 82.73% to 17.27%
Abolish the Tuition Fee "Yes" by 82.53% to 17.47%

The referendum is thus valid in all three cases and the charges now will have to be abandoned.


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, like me, could see this one comin 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 Gyurcsány 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.


Antal Dániel said...

The opposition suggests that the income from the fees could be replaced by tax revenues from the national lottery. Hungary has odd public finances.

Edward Hugh said...

Hi again Daniel,

"The opposition suggests that the income from the fees could be replaced by tax revenues from the national lottery."

Oh I'm sure there are 101 ways to creatively "claw back" the money, but I don't think it is the money that is important here. The major issue would seem to me to be the future of pension and health service reform (even in Italy, where the debt is around 107% of GDP) they are still fighting about this one. Older voters are obviously not inclined to keep voting for a worsening of the status quo as far as they are concerned.

And even if the word "reform" has a feeling which suggests that there might be something positive about it, in this case the reforms may bring some advantages for those who are now young, they will hardly do so for those who are already over 50.

Another indication here is the recent unemployment data, where it looks like people are leaving public sector employment to take early retirement, and not - as in Japan - for another 10 years or so of work at much lower pay and with much lower status, which is what the labour market reforms you will eventually have to get to grips with will effectively mean.

None of this sounds too pleasant, but it is what getting old before you get rich means. It is reality, and there is no side-stepping reality.

But of course harsh realities aren't always popular with voters, and this is what Fidesz has been playing around with - irresponsibly in my view.

In the short term the result can only be read as a vote of no confidence in the way the whole adjustment process is being handled, and the political instability, and jokeying for position which we will now most likely see over the coming months will only interact with the economic and financial dynamics which are at work in a way which it will be hard to call positive.

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