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Backtracking on labor reforms would cut fiscal improvement, says former Fiscal Council member

Employment, labor market and pension measures outlined in the Hungarian government's restructuring program could improve the fiscal balance by double the targeted amount if they are all carried out but amendment to the government plans announced since the Széll Kálmán Plan was unveiled could halve the targeted net savings, according to an impact study of the Fiscal Responsibility Institute (KGIB), prepared by former Fiscal Council staff members, published on Tuesday.

Based on announced changes to the original restructuring program, the institute calculates that the fiscal improvement from labor market, employment and pension reforms will come to just HUF 144 billion in 2012, instead of the targeted HUF 288 billion. It sees the improvement reaching HUF 174 billion in 2013, also well under the HUF 342 billion targeted in the original plan.

The government must make up for the shortfalls elsewhere in order to deliver its fiscal targets if the modified plans hold, Balázs Romhányi, head of KGIB, earlier director of the former Fiscal Council's research staff, said.

The institute assumes the government will exclude Hungarians over the age of 57 from a review of disability pensions and support, as earlier announced by Fidesz parliamentary group leader János Lázár.

It also assumes the government will backtrack on plans to phase out early retirement rules.

The institute also calculated with a reduced unemployment benefit received, however, for 6 rather than 3 months, in line with a recently submitted bill. (An amendment to the bill reinstated, however, the 3-month eligibility period as announced in the original plan, a reduction from 9 months at present.)

Excluding those over 57 from the disability schemes' review would cut the resulting savings by about HUF 180 billion per year as they make up about 57% of the total number and 61% of the support received, Romhányi said.

Phasing out the early retirement and other preferential-age pension schemes would directly save the budget HUF 164 billion in expenditure in 2012 and HUF 233 billion in 2013, without the additional tax revenue generated, the researchers calculated. Omitting these plans would cut the expected savings accordingly.

If fully implemented, the employment, labor market and pension measures announced as part of the Széll Kálmán plan would improve the fiscal position by almost HUF 400 billion in 2012, and would generate a HUF 691 billion improvement in 2014, both far more than government's respective targets, the institute calculated.

The measures would sharply raise demand for the government's public work program: the number of people dropping out from the earlier schemes would be near 400,000 if the plans were fully implemented, and even the downsized plans would generate a demand for public work schemes for almost 200,000 people, the KGIB estimated.

The costs of the expanded public work program were included in their net savings projections. They assumed people employed on 4-hour work for half of the minimum wage for nine months on public work schemes.

The unemployment rate could still rise as about 60-70,000 people formerly on disability or unemployment benefit, taking jobs, crowding out other job-seekers, Romhányi said. The same effect would cut about 0.8% from wage growth, he said noting that system of minimum wage limits adjustment through wages.

The Fiscal Council was established by Hungary's previous government to issue opinions on budget policy. It was stripped of its staff and nearly all its budget by Hungary's current government through legislative changes at the end of 2010. The government also replaced the three independent economists on the council with the National Bank of Hungary governor, the head of the State Audit Office and an independent economist appointed by the President of the Republic.