Hungarian Finance Minister Lajos Bokros Explains His Package
"Garnering Public Support Is Indispensable"

ungarian Finance Minister Lajos Bokros could not be de- scribed as the most popular politician in the present-day Hungary. His austerity program, announced on "Black Sunday," March 12, attacked head-on the thankless job of dismantling the socialist welfare state, radically downsizing the public sector, cutting expenditures, and increasing revenues. The aim is to stop the dangerous slide into deeper foreign debt and an ever-widening budget gap, after long years of delays. But the public considers the welfare system as part of their national heritage. Transition editor Richard Hirschler asked the minister, who accompanied Prime Minister Gyula Horn to the United States, about the visit and the economic challenges facing the Hungarian leadership.

A. World Bank President Wolfensohn seemed extremely interested in learning the details of Hungary's economic program, especially our initiatives to accelerate privatization, to extend it to public utilities and the oil, gas, and electric power industries, and to complete the process by 1997. He voiced support for our stabilization package and hinted that

World Bank resources could be useful to help consolidate and privatize Hungary's financial sector, as well as to streamline the overextended public sector. The World Bank loans are closely linked to the outcome of our negotiations with the IMF over a possible standby credit. At present, no accord has been reached, but that may come in October, once we agree on some key figures in the 1996 budget. The Fund wants to contain the budget deficit at 3 percent of GDP; but we foresee a deficit of 3.5 to 4.0 percent. The numbers are not that far apart; much depends on how the calculations are made. We expect a $2.5-3.0 billion current account deficit, and the IMF would like us to match it with a corresponding amount of direct capital inflow, to prevent a further deepening of the foreign debt. That is fine; but again there are grey areas: how, for example, should we consider the asset transfers of multinationals to their Hungarian subsidiaries? We see these transfers as part of capital inflow, but the IMF thinks otherwise. So both parties are now working on compromises.

A. During the past 25 years Hungary has been unable to achieve economic growth without increasing the balance of payments deficit and the national debt. This is because the public sector is too large and inefficient; if there is economic growth, the public consumption expands even faster. Thus, the budget deficit soars, and the current account balance deteriorates. Restrictive measures are required, but they constrain economic growth. Last year the economy did get off the ground, though slowly, but once again the external balance deteriorated. In 1993 and 1994, annual exports increased by just 5 percent while imports grew by more than 35 percent. The 1994 current account deficit shot up to a record $3.9 billion. Over the past two years, gross debt grew by $7.5 billion, while foreign direct investment reached $3.8 billion. Hungary's $29 billion gross foreign debt remains the highest, per person, in Central and Eastern Europe. In the first three months of 1995, the budget deficit soared to 150 billion forints ($1.2 billion). Only one-third of that amount could be covered from domestic savings. Financing the budget deficit crowded out investment and hindered the development of business and industry. So we have to cut public spending and domestic consumption, and put the country on a path of sustainable, exports-led economic growth. The austerity package—which Parliament approved on May 23, amending no fewer than 21 laws—will have the immediate effect of cutting this year's budget deficit to 156 billion forints ($1.2 billion) from the originally planned 282 billion.

A. A country as indebted as Hungary cannot afford to spend the equivalent of 27 percent of annual GDP on welfare and social services. It cannot afford universal child-care benefits, two years of maternity pay, and free higher education for all. The universal entitlement will have to go. We have to limit social assistance to those in need—about 3 million Hungarians live under or at the subsistence level. From now on, family allowances, child-care benefits, and maternity payments will depend on individual income and wealth, even though effectively, for some 80 percent of families, family allowance and child-care assistance.

A. Hungary's million public sector employees put a heavy burden on a country of just 10 million people. As part of our downsizing, before the end of this year various ministries and central budgetary agencies will see 19,000 positions cut from the total 105,000 civil service jobs. The cuts will not yield savings this year; in fact, 2 billion forints have been put aside for severance payments. In the second stage of downsizing, we will use performance criteria to make a 15 percent cut in a wider group of public employees, including teachers and doctors. This is expected to start in the fall. Also, underutilized schools and hospitals will have to be closed. But that will require new regulations in local-central government relations, since local governments operate most schools and hospitals, but the funding comes for the most part from the central budget. As for our tax policy, we want to ease the burden on entrepreneurs, increase the overall number of taxpayers, reduce the level of social security contributions, and clamp down on tax evaders.

Without touching on every detail, here are some of the major points:

• Hopefully, privatization of the "big fish,"—the gas, oil and electric power industries and the connected utilities, the Hungarian Telecommunications Company (MATAV; second tranche of privatization), and two major banks (the National Savings Bank and Budapest Bank)—together with a number of agrobusinesses and other manufacturing companies, can start in July. The first tender documents should be completed by midyear, with tenders announced, in order for the deals to be concluded before the end of the year. That would help realize our plan to collect roughly 150 billion forints as privatization revenue. [See table on privatization revenues.]

•The boards of the two privatization agencies, AVU (SPA, State Privatization Agency) and AVRt (State Asset Holding), will merge. The two organizations will function for a while side by side, and then the SPA will privatize itself out of business, as its last firms are sold off. The AVRt will remain the gatekeeper of public assets, and will play a key role in coordinating the sale of energy sector companies.

•Hungarian pension and insurance companies will be encouraged to enter the stock market in order to increase the volume of domestic shareholdings and the stability of the market.

A. In 1996, without a doubt, there will be further belt-tightening. This is the price we have to pay for containing the budget and the current account deficit. We expect foreign direct investment to accelerate as privatization resumes and foreign investors regain confidence. If this happens, we could meet our target of $1.5 billion in foreign investment for the year. (Editor's note: foreign direct investment was $1.1-$1.2 billion in 1994, down from $2.4 billion in 1993 and $1.6 billion in 1992. Some $200 million flowed into the country in the first quarter. The government also received $500 million from the sale of MATAV.) Our three-year economic program foresees a 4.2 percent economic growth by 1998, a $1.5 billion current account deficit, and a 15.5 percent inflation rate.

A. True, the program seemed to most Hungarians to come like a bolt of lightening out of a clear blue sky. But we had no other choice. The economic situation was deteriorating and (For example, just hours before the prime minister appointed me and my good friend, Gyorgy Suranyi [Suranyi is president of the national bank], Standard and Poor had revised its rating outlook for Hungary's foreign debt downward, from BB+, with a stable outlook, to BB+, with a negative outlook, reflecting concerns about the direction economic policy was taking, privatization, the high budget deficit and low domestic savings. We couldn't wait any longer; we didn't have enough time to work out all the details, let alone consult the public or discuss possible alternatives. Infact, there were even some government members who were unaware of the package. Two ministers resigned immediately when the program became known. Besides, we didn't want any leaks about the planned devaluation and import surcharge, to prevent speculation. Now we have a different situation. To further fine-tune our economic policy, public debate is absolutely necessary, including regular television discussions. We are open to criticism, ready to listen to policy alternatives, and willing to integrate sound proposals into our strategy. We are aware that without large-scale public support our program simply will not fly. Garnering public support is indispensable.