Choice and Competition Reform

LAJOS BOKROS
professor of economics and public policy
chief operating officer

Central European University

Budapest, Hungary 1
 First years in the EU with mixed
performance (2004-2006)
Higher growth to slow Fiscal deficit increase
once again next years ( 10% after austerity !)
Return to export-led Deficit target missed
growth in the last 2 yrs for 5 years in a row
Better trade balance CA deficit almost 9%
(less than 4 % of GDP) dangerously high
Higher net FDI (over 5 years of increasing
EUR 3 bn in all years) unemployment (7.4%)
Low inflation recently no improvement in
but to grow again competitiveness 2
 Performance average in V4 but
worse than Baltic3, Rom & Bul
Slovenia: small CA & fiscal deficit, little net
FDI, low inflation, relatively slow growth
Baltic3 + Rom & Bul: no fiscal but large CA
deficit, growing FDI, growth well above 5 %
Slovenia + Baltic3 are already in ERM II.
Poland: no CA but large fiscal deficit, little
inflation, FDI & restructuring, high growth
Czech R & Slovakia: large fiscal, smaller CA
3
deficit, large FDI and accelerating growth
 Macroeconomic problems in
Hungary
Large twin deficit clearly limiting growth
Large fiscal redistribution reduces savings
& investment performance & potential
growing structural unemployment with
large public sector overemployment
interest rates kept relatively high and keep
rising to support HUF & fiscal borrowing
suboptimal macropolicy mix: restrictive
4
monetary & expansionary fiscal policy
 Fiscal issues behind macro
picture in Hungary
Excessive public sector wage growth in
20O1-2OO5 has inflated wage bill in budget
Tax loopholes widened and multiplied,
widespread tax avoidance and evasion
Pension and Health Care Funds sharply in
the red and in need of growing transfers
Current expenditure crowds out public
investments and matching funds for EU
5
credibility of fiscal policy is extremely low
 Microeconomic problems
arising from macro and fiscal
Wage spillover reduces competitiveness
in low tech & low value added sectors
Inadequate spending on R&D in SMEs,
little innovation and low investment
Sectoral split between multinationals in
high tech manufacturing and the rest
Inadequate (re)training and education,
slowly but surely growing unemployment
6
Economic and social structure dualisation
Fiscal framework for substantive
structural reforms
Comprehensive, consistent and credible
reform program to reduce deficit & size
Focus on the expenditure side: reduce
public funding - increase private funding
Priority areas: health care and education
Rationalize and reduce fiscal transfers to
churches, NGOs, other special programs
broaden tax base; eliminate exemptions
7
separate social support from tax system
 Structural reforms I.
Health care
3 pillars for financing:
(1) public HC fund,
private (2) mandatory and (3) voluntary
health insurance provided by accredited
insurance companies in competition
Split financing for most services for all
secondary and tertiary providers: public
funds, private insurance and co-payment
universal HC (solidarity) tax to first pillar
regulated mandatory fee for second pillar
8
 Structural reforms II.
Pension system
First pillar to be replaced by a notional
defined contribution (NDC) scheme
automatic balancing mechanism (systems
liability is indexed to the growth of average
income with fixed contribution rates)
Even existing pensions are to be taxed by
the universal HC (solidarity) tax
Minimum social assistance to those who
never paid any contribution (0. pillar)
9
 Structural reforms III.
Employment and education
Public education (primary and secondary)
to be rationalized (less schools & teachers)
Tertiary education operating costs to be
financed by tuition fee ( X%exemptions)
No tenure and privileged public employee
status in higher education and health care
Flexible contracts, hiring and firing even in
public administration at all levels
10
No labor income without PIT and HC tax
Long term challenges in Hungary

Comprehensive tax reform with consistent

changes promoting growth and investment
Streamline & reduce public administration
Rationalize the structure of subsovereign
government, its tasks and financing
Modernize fiscal support for agriculture
and rural development (EU-coordination)
Create a new and transparent system for
11
financing political parties and campaigns
New convergence program
Euro ???

Will Hungary become once again a

regional leader in structural reforms
and convergence ?
12