WHITHER THE HUNGARIAN WELFARE STATE?

The angry woman spoke in a shrill voice to the television reporters. “The country should speak out against these measures, they go against the development of society!” she cried. Then, in a voice a bit quieter, but with the same vehemence, she tried to explain her position. “We will live longer, great, and perhaps we will be happier as well, even if we work longer, but still, this is not right! We won’t have any time to enjoy life, and they even violate the rights we worked hard to earn!” she concluded. The trade-unionist loafing next to her seemed to agree the most passionately.

The woman was in her early 60s, and many people heard the pronouncement she made, and even more shared her view – in Paris. For the exchange took place a few months ago in the French capital, when the Left encouraged the disgruntled to take to the streets and people protested against the pension reforms in some 150 cities across the country.

Yet France has little choice, given its dwindling economic reserves and the increasing demographic preponderance of the elderly, but to reform its pension system. And the reforms, the outcries of bon vivants notwithstanding, have been adopted.

In the United Kingdom there were no throngs of protesters in the streets. A few of the leaders of the institutions that were affected grumbled, and six trade unions expressed “extraordinary concern.” In mid-January David Cameron held a calm speech in which he declared that health care reform could no longer be postponed and the Conservative-Liberal Government would be certain to take the necessary steps. At the moment the untenable situation of the public health system is the most pressing problem facing Great Britain. Experts and politicians in government insist that this problem can only be addressed with fundamental, structural changes.

Portugal, which was saved from state bankruptcy in May by 78 billion Euro in rescue loans by the European Bank for Reconstruction and Development, the International Monetary Fund (EBRD, IMF) and the European Union, has no time for reform. The centre-right cabinet, elected in early June, had to rush to extinguish existing fires and quickly do what it could to avert serious disaster. Waves of dismissals, wage freezes in the public sector, and drops in unemployment benefits are inevitable. The same is true in Spain, where in the municipal elections in May the voters made clear that they were fed up with the restrictive measures of the Left, referred to as “reforms,” because as has become quite apparent to everyone, they will do little to help the country out of the deep crisis into which it has fallen.

European welfare states are struggling with a serious crisis, although a crisis which by no means has put an end to the welfare state, and indeed has left its mechanisms relatively untouched. Greece, Portugal, Spain and Ireland are on the verge of collapse, and in many countries of the Old Continent government officials have recently been attempting to restructure the system. They either borrow ideas and solutions from one another or they attempt to work out their own models.

In Hungary, one observes more of the latter. (Naturally, the conservative Hungarian government also draws on the experience of other countries, for instance the French practice of encouraging child-bearing.) At the time of the change of regime in 1989–91, a so-called mixed welfare system was adopted, which included universal social health care and the pay-as-you-go pension system. Hungarian society rejected neo-liberal approaches (embodied in the figure of one-time Minister of Finance Lajos Bokros), much as it decisively repudiated attempts to implement neo-liberal reforms by the left-wing/liberal government that fell from power last year.

However, the government in Budapest, which was elected by a two-thirds majority last May, must now not only address the rather warped structure of the economy, it must also transform the muddled welfare state model and thereby attempt to further the modernization of the entire country. First and foremost, it must struggle to cope with enormous state debt. Between 2002 and 2010, Hungary ran into debt to an extent unmatched in the last 150 years! The debt-GDP ratio is 80.2 per cent as opposed to the 2002 figure of 52 per cent and, though this figure is less than that of Germany, analysts nonetheless find it particularly tragic, for it reflects foreign debt, and this entails profound distortions of the economic structure that seriously encumber attempts to revive the national economy. Domestic entrepreneurs simply are not genuinely competitive, and they face dire financial uncertainties. The number of companies making barely any profit and struggling meanwhile with a lack of capital is growing dramatically. Over the course of the last two decades, due to flawed policies of privatization, whole sectors have disappeared or ended up in the hands of foreign companies. Often, after having been purchased by foreign investors, Hungarian companies were simply sold off or liquidated, and the successive governments sought to solve problems of unemployment and economic stability through encouraging foreign investment.

The economic policy makers of the Orbán Government, as statements made by the Prime Minister himself imply, have recognized that the situation is untenable. The hope is to transform this realization into practical action through the adoption of a package of measures (or to put it more elegantly, a model) still under discussion at the moment, but considered in any event innovative and different from all previous attempts, measures that deviate from customary European approaches.

The new government has reduced taxes and introduced a flat tax rate. It was also the first European country to introduce, in response to the economic crisis, an extraordinary tax levied on the giants of retail trade, and a tax on banks, (who earned extra profits in the credit crisis). According to analysts, however, the most important step was Budapest’s withdrawal from negotiations with the International Monetary Fund, in other words the decision to bring an end to the discussions concerning possible further loans from the international financial organization. The country has regained financial room for manoeuvre. The government must now finance the workings of the country with the profits of its domestic economy and international markets. This decision shocked many people and incensed adherents of neoliberal dogma. National interest became the primary concern in other questions as well. This naturally ran contrary to some foreign economic interests, as indeed was palpable in the anti-Hungarian campaigns of the international press. The new Hungarian Constitution, which comes into effect next January, stipulates the property rights of the state over water supply and arable land. 

Over the course of the past several years, under the governance of the liberal left-wing, Hungarian economic policy was often criticized as unstable and unpredictable. The new bases of the economic system will be regulated by the so-called cardinal laws (which require a two-thirds majority), as provided for by the new Constitution. In a recent television interview Prime Minister Viktor Orbán spoke of how in the future some of the basic regulations of the pension system, the tax system, and the budget would be determined by votes requiring a two-thirds majority, not the traditional simple majority.

By the beginning of 2011, the government had formulated the main outlines of the promised (and urgent) structural reforms. The essential thrust of the plan, which is named after early 20th century Prime Minister Kálmán Széll, and many of the elements of the programme have been described as promising by economic experts, including the permanent representative of the IMF in Hungary.

In particular, the reform of the welfare system was seen as positive. Benefits became more target-based, promoting the sustainability of the system. (Hungary spends more money on such benefits than the other countries of the region.) At the same time, according to expectations these reforms will encourage people to return to the labour market, and this will favourably influence employment, the development of the budget, and economic growth. It is worth noting that owing to an irresponsible early retirement policy introduced in 1995, Hungary has the lowest employment rate among the active population in the European Union, about 61 per cent. One could compare this with the American employment rate of nearly 80 per cent. One hardly need list the far reaching, disastrous social and economic consequences of this policy.

The transformation of the welfare system, so often a topic of discussion, means first and foremost the fundamental reform of the big social network systems, in other words the transformation of health care, health insurance, and the pension system. In the long run, today’s Hungarian pension system, which is part of the social network, is simply untenable, for essentially the same reasons as in France. Its basic pillar, the pay-as-you-go system, is showing fissures. The specific details of the transformation of both the health care system and the pension system have not yet been worked out, and experts are still examining several concrete European models, for instance the system in Sweden, and in all likelihood by the beginning of next year some of the most important outlines will have emerged. (The conceptual framework of the so-called Semmelweis-health plan and several of its particulars are already known, such the creation of a state health care system founded on regional units, the assumption by the state of control over twelve of the hospitals of Budapest, and the intention to reduce the expenditures related to the provision of medications over the course of the next two years.)

In the meantime, in practice, reforms of the welfare system have already begun. For instance, pay for sick-leave has been reduced, the period of eligibility for unemployment benefits has been cut, allowances and entitlements in some sectors have been cut, and the whole pension system is being re-examined, including disability pensions and early retirement. The intention is simply to put more people back to work. Of course the plans and the decisions of the government are also responses to the urgent need to reduce expenditures. (And the need to reduce expenditures is by no means unique to the social sphere…)

In recent weeks the streets of Budapest have echoed with the sounds of protests. This will probably continue for the next several months. Privileges, entitlements, and benefits are being abolished. Needless to say, these changes will infringe on the interests of many, and the trade unions are feisty in their attempts to rouse the defenders of their entitlements. Fifteen years ago disability pensioners in Italy held similarly vehement protests when their entitlements were re-examined and as we may remember, it turned out that in Naples there were several cases of people who, though they were receiving disability payments because they were allegedly blind, in the afternoons worked as taxi drivers. Similarly scandalous cases may not have come to light (yet) in Hungary, but no one would dispute that many had resorted to the practice of bribing the right person to get their hands on the papers certifying disability and, of course, the accompanying disability payments. At the same time, however, they have continued to work full steam, without paying taxes. Changes to the pension plans of people in law enforcement and public order (police, firemen) have also caused considerable controversy. In Hungary, thanks to various entitlements, in law enforcement employees have been able to retire as early as the age of forty, and even then most of them have tended to supplement their retirement incomes, which are higher than the average, by taking work in the private sector.

The government is by no means alone in its desire to change the situation.

The vast majority of voters support its efforts. The extremely early retirement age does not have the broad support of Hungarian society. According to a survey carried out by the Századvég Foundation in early May, 69 per cent of those polled believe that the current system is unfair and should be abolished. According to commentaries in the newspaper Magyar Nemzet, which is seen as a supporter of the current government, such privileges and entitlements for specific groups are characteristic of actual police states.

The current Constitution, which remains in force until the end of the year, was modified by the Parliament in early June: retirement allowances paid out before the recipient has reached the age of retirement can be reduced and transformed into social benefits, and if the recipient is able to work, they can be revoked. The government has attempted to give those returning to the labour market alternatives: those who for whatever reason can no longer perform in their original workplaces are offered other opportunities. As the plan goes, following the transformation of the system according to which retirement benefits are calculated will change, so that the last ten years spent working will count more in order to encourage people to remain in the workforce (as indeed is the case in Western Europe). In order to make this effective, career models themselves will be changed so that one will earn more in the last ten years and it will therefore be worthwhile to work instead of living off pension payments.

Alongside the cuts made to the welfare system, the government is also attempting to implement programmes for job creation, as well as broad public work programmes. Leaders in the economic sphere, such as Sándor Demján, the vice-president of the National Association of Entrepreneurs and Employers, have also urged investments in manufacturing.

The transformation of the welfare system in Hungary is hampered by the usual contradiction between welfare state expectations and a reluctance to pay taxes. True, this is due in part to the deep, almost unparalleled mistrust of government that has taken root over the past several years. The series of corruption scandals simply in recent years confirmed popular suspicions that it is better not to pay taxes, since these would inevitably be misused or simply stolen by corrupt politicians.

It has become quite apparent, by now, that there will be fewer funds available for pensions, health care, and unemployment benefits. The Hungarian welfare state has reached its end. Or at the very least, it has come to an end in the rudimentary, almost party-state form in which it is known today. Prospectively (and hopefully), a system will be introduced that is familiar in Western Europe, a solution comprised of a mix of state-funded care, redistribution of benefits, and individual self-reliance. Such systems are characterized by the intention to support families and link benefits to work and the payment of contributions. Benefits, therefore, will not be uniform.

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