Trade unions reject stringent EU convergence programme

In line with the requirements of European Union membership, Hungary must submit convergence programmes to the EU each year which should present how the country envisages meeting the Maastricht criteria. On 1 September 2006, the re-elected government submitted a revised convergence programme reflecting its new strategic plan. It sets out an extensive reform programme, targeting primarily the public sector, and with increases in tax and social contributions, which represent a further burden for the private sector. When preparing the programme, the government announced strict economic measures to redress budget imbalances. While social partners, in general, accepted the need to correct budget imbalances, each side formed a different critical outlook on the package, with the trade unions rejecting it.

EU convergence programme

The European Council did not consider Hungary’s convergence programme, submitted in December 2005, to be acceptable and therefore invited the Hungarian government to present an adjusted programme by 1 September 2006. The Council requested that the programme should outline firm structural measures that are fully consistent with the Maastricht criteria for joining the euro-zone in the mid term. By setting 1 September as the deadline, the Council took into account that parliamentary elections would be due in April 2006, and granted time for the newly re-elected Hungarian government to prepare a realistic programme. The deadline, in practice, also allowed the then serving socialist-liberal coalition government to avoid implementing strict and unpopular measures during the electoral campaign period.

In preparing a realistic convergence programme, the re-elected socialist-liberal government had to tackle the problems arising from the extravagant budgetary policy of previous governments since 2000.

New medium-term economic policy

The government’s medium-term economic policy consists of two stages. Between 2006 and 2008, the major strategic goals are macroeconomic stabilisation and redressing of budget imbalances. It is expected that in this period, economic growth will decline to 2%–3%. The programme anticipates the stagnation of employment and a decline of real wages in 2007, and envisages a return to real wage growth only in 2009. Although the government is fully aware that sustainable budgetary equilibrium can only be achieved by structural reforms, in 2006 – in order to redress imbalances rapidly – it increased tax and social contribution obligations and introduced measures to reduce budget expenditure primarily through rationalisation in public administration (HU0607059I).

The second stage, beginning in 2009, is planned as a period of sustained economic growth, also characterised by job creation and improvement in living standards. It is expected that economic growth will return to around 4% and real wages will begin to increase, although overall both figures will remain somewhat below the expected growth in gross domestic product (GDP).

Expected macroeconomic indices of mid-term economic policy (%)
Expected macroeconomic indices of mid-term economic policy (%)
  2006 2007 2008 2009 2010 2011
GDP growth 4.1 2.2 2.6 4.1 4.2–4.5 4.5
Real income 1.9 -1.7 0.1 2.5 3–3.5 3.5
Inflation 3.5 6.2 3.3 3 2.5–3 2.5–3
Budget deficit (% of GDP) 10.1 6.8 4.3 3.2 2.7 2.2
Gross public debt (% of GDP) 68.5 71.3 72.3 70.4 68–69 65–67
Employment 0.3 0.0 0.3 0.7 0.7–1 1
Unemployment 7.3 7.5 7.4 7.3 7.2 7.2
Labour force participation rate 61.7 61.9 62.1 62.6 63.3 63.9
Productivity growth 3.8 2.2 2.3 3.3 3.6 3.7
Real wage increase 3–4 -4 0 2–3 2–3 2–3

Source: Hungarian convergence programme to meet Maastricht criteria, 2006

The convergence programme assumes that maintaining the competitiveness of the small and open Hungarian economy requires that wage increases shall be in line with productivity growth. In recent years, however, wages have increased at a significantly higher rate than productivity. The programme estimates that real wages per head of population will drop by approximately 4% in 2007, and will stagnate in 2008. Only from 2009 onwards will real wages grow by 2%–3% annually, at a somewhat lower level than GDP growth and the increase of productivity.

Impact of reform on welfare state provisions

According to the convergence programme, the budget deficit, as a percentage of GDP – without taking EU transfers into account – will decline by almost six percentage points between 2006 and 2009. The expenditure cut affects the public sector in particular, and will be realised in a reform of the healthcare sector, restructuring of the pension system in the long run, a reduction of state price subsidies, and broadening of the tax base.

  • In the public sector, the rigid promotion and remuneration system will be relaxed, and performance-related wage packages will be introduced. Operational expenditure in the public sector is expected to drop from the current 18.4% to 15.2% of GDP by 2009.
  • In the healthcare sector, from 2007 onwards, the current universal service will be available only for those people whose healthcare contribution is paid. According to estimations, at present, approximately 600,000 citizens are not covered by healthcare contributions. In future, only basic services, such as emergency ambulance or mother and child protection, will remain universal. Co-payment will be introduced in the form of a visiting fee, which should be paid whenever patients call on family doctors or attend a hospital. The reforms also propose to encourage the establishment of competing health insurance providers, instead of having only the present single state-owned insurance system.
  • With regard to the pension system, the government plans to increase the lowest age limit for retirement by one year. Furthermore, it intends to ensure that only people whose health condition justifies it should use the disability retirement option, and to make rehabilitation available for them. The plan aims to suspend pension benefits for pensioners below the retirement age if they pursue any income-earning activity. Moreover, the government plans to review retirement age regulations and the pension indexation scheme by 31 December 2006.
  • In the area of subsidies, the most important measure is to abolish the natural gas subsidies. At present, every household is eligible for gas price support, but this will be replaced by targeted and means-tested social subsidies to households in need, and to large families.
  • In terms of broadening the tax base, the government hopes that closer monitoring of eligibility for healthcare will force hundreds of thousands of people to legalise their undeclared employment as social insurance will become essential in this respect. The reform programme also plans to introduce a property tax in 2008.

Reactions to the programme

The government’s measures immediately provoked protests across the economy. Employer organisations criticised the increase of taxes and social contributions on the wage bill, which further reduces the competitiveness of Hungarian companies (HU0607049I). Meanwhile, trade unions criticised the package on the grounds that it primarily penalises employees, and organised a demonstration against it (HU0607039I).

The social partners’ protests had indicated that heated debate of the programme would take place at the national tripartite forum, the National Interest Reconciliation Council (Országos Érdekegyezteto Tanács, OÉT), which was summoned for 28 August 2006.

Before the meeting, the Prime Minister, Ferenc Gyurcsány, met separately with both employer organisations and with representatives of the six national trade union confederations. Prime Minister Gyurcsány assured the trade unions that no further package was planned, and that the government intended to adhere to the agreement on minimum wages set for the coming years (HU0512104F). However, trade unions expressed their misgivings concerning the 4% drop in real wages projected for 2007. The representatives of public sector employees were particularly critical of the government plans.

Trade unions

At the OÉT meeting, the trade unions reiterated their concerns about the convergence programme putting too much burden on workers by reducing their real income in the coming years. They demanded that, from 2009 onwards when economic conditions allow, any tax reduction would primarily reduce levies on wages. Trade unions welcomed reform measures that aim to broaden the tax base and combat undeclared work but expressed their concerns about the planned healthcare reform, criticising the proposed doctor visiting fee and the abolition of universal health insurance.

Moreover, the unions did not accept the reform proposal concerning the new salary scheme for public service employees, which would overthrow the fixed wage tariff system and introduce an evaluation-based wage system. The government’s policy would eventually result in an 8%–10% real wage drop for public sector employees, which the unions find unacceptable.

The trade unions called for a greater focus on job creation and reform of the vocational training system. Given their serious objections, the trade unions declared that they do not support the convergence programme.

Employer organisations

Employer organisations acknowledged the need for redressing the budget imbalances and expenditure cuts. They agreed that a stabilisation programme was needed and that the goals of the convergence programme would serve the long-term interests of the country. They warned, however, that the government underestimated the resulting increase in unemployment which, according to their own estimations, would reach up to 8%.

According to the employer groups, the planned reduction of real income would particularly affect small and medium-sized enterprises (SMEs), which predominantly serve domestic markets. Employer organisations welcomed the measures aimed at increasing the labour market participation rate among particular groups, such as school-leavers, older people and women returning to work after maternity leave. Nevertheless, they proposed further measures, such as reducing taxes, to facilitate job creation.

Following the discussion at the OÉT meeting, the government adopted the final version of the programme on 31 August 2006, which was endorsed by the European Commission on 26 September with a warning regarding the substantial risks if the necessary spending cuts were not implemented.

Commentary

Following more than five years of lax fiscal policy, the convergence programme aims primarily to redress worrying budget imbalances and represents a new policy direction for Hungary. This involves cuts in budget expenditure and the reform of key areas of public services, such as healthcare and the pension system. The programme primarily targets the public sector, where expenditure must be reduced by nearly six percentage points in relation to the GDP ratio between 2006 and 2009, followed by a further 1–2 percentage point drop by 2011.

The government hopes that this programme will allow Hungary to join the euro zone in the foreseeable future, although external financial analysts, like Goldman Sachs, see little chance of this before 2014.

The government enjoys the support of the business community as far as the policy shift is concerned, although employers strongly criticised certain measures which are likely to lessen the competitiveness of undertakings and have a negative impact on job creation. Trade unions, in general, rejected the convergence programme. The severe measures will have a major impact on the public services and administration sector, which represents the last remaining stronghold of the trade unions.

Trade unions active in the private sector also reject the government’s plans to reduce real wages and increase taxes. The strict measures are likely to result in escalating levels of conflict, and the government’s resolution to carry out the widespread reforms will be tested by the trade unions and workers.

András Tóth and László Neumann, Institute of Political Science, Hungarian Academy of Sciences

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