Gyurcsány is Hungary’s master teller of bitter truth

The prime minister said his speech, which brought him international prominence, was “a very emotional monologue about the necessity to change” following his Hungarian Socialist Party’s victory in elections a month earlier. He did not agree that the worst moment in his political life was when the leaking of the speech caused riots in the streets and calls for his resignation. Interviewed in his office in Hungary’s magnificent hundred-year-old Parliament building, with spectacular views of the Danube, the 46-year-old Gyurcsány was refreshingly frank about the limits to political power in a democracy.

He was a minister in the government of Péter Medgyessy and became prime minister after Medgyessy resigned in September 2004, only one and half years before elections were due. There was “no time to start reforms - my only opportunity was to finalize this period and start a new one,” Gyurcsány said. In April 2006 he was elected to a full term of up to four years, and he is now busy with a reformist, and deeply disliked, economic agenda that he believes will bring fruit by the end of 2009 or in 2010, when the next elections are due. “I want to be useful now; I have to be popular at the end,” he said. “It is long-distance running, and I am a long-distance runner. I run a half-marathon every two weeks.”

But if there were an election tomorrow, wouldn’t his Socialist coalition surely lose? “Beyond question,” he answered decisively.

Polls in October showed that the opposition Hungarian Civic Party, or Fidesz, was twice as popular as the Socialists. The fear among economists and business executives is that, to regain popularity in two years, Gyurcsány will loosen the purse strings. “Not at all, not at all,” he declared. “We are implementing new rules on public finance that will not let any government spend more than is written in the budget, and in 2009 we are meeting a criteria of 2.9%” for the budget deficit as a proportion of GDP.

The year Gyurcsány took office, the budget deficit looked likely to surpass 11% of GDP. In the end, it came in at 9.2% as the government raised taxes substantially: Corporate tax rates were pushed up to 20% from 16%, the value-added tax on basic items rose to 20% from 15%, and payroll taxes rose to 17% from 13.5%. The highest rate of income tax is 36%, but when other taxes are added in, the de facto marginal tax rate becomes 57% on the highest earners. Those hefty rises, arguably necessary at a time of crisis, are leading to a budget deficit that is forecast to be 6.1% of GDP this year. The taxes have also dampened growth considerably. “We have had to sacrifice a significant part of our growth potential during this period,” Gyurcsány acknowledged.

Economists forecast GDP rising an anemic 2% this year and less than 3% in 2008. Meanwhile, foreign direct investment has been falling since 2005. But Gyurcsány, a successful businessman in the 1990s, pointed out that taxes were only one factor in corporate investment decisions. “We are creating a better business environment,” he said. “Hungary is among those few countries where a new company can be set up in one hour. We are simplifying the tax system and by January will introduce a more comprehensive tax system. We have doubled the motorway network.”

Gyurcsány’s critics say that he needs to widen the tax base and that he is failing to tackle high government expenditure with enough gusto. “He has made some good decisions on pension and health care,” said Sándor Csányi, a prominent Hungarian with interests ranging from banking to sausages. “Where he is late is in changing and reducing the running costs of the state, including local government.” Government spending as a proportion of GDP was almost 53% in 2006.

It is forecast to fall to 51% in 2007, according to the rating agency Standard & Poor’s. But the prime minister, who studied economics in his university days, said there were limits to cutting spending. “Ordinary Hungarians are complaining, saying that we have done too many things and made life much more insecure, saying we cut back spending significantly,” he said. He said that his fellow citizens, governed by foreigners for centuries, needed to learn to be independent and that the state would work for Hungarians “but the state does not create us.” (iht.com)


Karina Robinson is senior editor of The Banker. This article is adapted from her monthly column.