Hungary: Bleak prospects for public sector workers under economic programme

The Hungarian Government submitted its Convergence Programme for 2014–2017 to the European Commission in April 2014. While it sets out a dynamic economic growth, it assumes a stringent macro-fiscal policy in order to avoid slipping back into the excessive deficit procedure that had been lifted just a year earlier. Regarding the public sector, the Government does not intend to apply any general wage increase or to ensure additional budgetary resources for employment growth. Public sector trade unions have demanded a general wage increase of 20% to compensate for the losses due to the wage freeze imposed in the sector, with some partial exceptions, since 2008. However, the government has not launched any consultation about the draft programme.

Background

In 2013, Hungary exited the excessive deficit procedure (EDP) it had been subject to on joining the European Union (Council Decision 21 June 2013 Abrogation Decision 2004/918/EC on the existence of an excessive deficit in Hungary 2013/315/EU). Under the EDP, the Hungarian government had been obliged to make economic and fiscal adjustments and to implement tight restrictions over the last decade, especially after the economic crisis in 2008. As regards the expenditure ratio, reductions have been achieved by nominal wage freezes or restraining salary increases to below the inflation rate for the public sector. Consequently, the wages of public employees have declined in value and employment in the public sector has been shrinking. This is due to the fact that employment figures are calculated in two different ways: 

  1.  persons employed in the public sector by normal employment contracts, covered by the relevant wage-tariff scheme;
  2.  the previous group, plus persons employed  for several months in public works schemes in the public sector (in hospitals, in schools, by local governments, etc.). 

Calculating according to (1) shows a decrease in employment while calculating according to (2) indicates an increase in employment. Although the government usually uses the first method in its calculations, the second method in fact provides a more accurate picture of real labour market changes. The Convergence Programme 20142017 shows much similarity to the previous fiscal path and economic rigour.

Convergence programme 2014–2017

According to the Convergence Programme for 2014-2017, the Government expects economic growth of 3% and a fiscal deficit of 1.9 % by 2017. By that time, the state debt should be cut by 75% of GDP and unemployment will have been reduced to 8.2%.

The Government acknowledges that both activity rate and employment rate are low in regional comparison but stresses the positive signs: the 4.1 million employed and the declining unemployment rate. These results are attributable – according to the European Commission – in part to an increase in the number of employed persons (the extent of which is debated), supported by massive public works programmes, numbers of Hungarian workers abroad (approximately 500 000 persons according to the government estimate) and the 'whitening' of the economy (successful fight against the black economy).

Supporting vulnerable groups

One persistent problem is the low activity rate of unskilled workers, the elderly, the young and women of child-bearing age. When they are employed, their income is typically low, with lower levels of tax evasion. In order to assist these disadvantaged people, the Government launched the Job Protection Action Plan in 2012 (Act CXLVI of 2012 on the modification of various acts in order to implement the Job Protection Action Plan) which provides targeted tax relief from 1 January 2013. Although this measure has had a positive impact on current employment figures, it has failed to reverse employment trends.

Against this background, the Convergence Programme forecasts a steady rise in employment rates from 51.6 % in 2013 to 54.3 % in 2017 – still far below the EU average. It would result in around 100,000 more persons in the labour market.

This increase could result from private sector employment growth only, since the public sector remains under strict budget control. As is stated in the document:

at present the Convergence Programme does not project any general wage increase ... The disciplined fiscal management will affect all major types of expenditures - with the exception of public education. ... The gradual introduction of the career path model for teachers that began in September 2013 raised the level of expenditures most in 2014, after which the increase of compensation of employees in the government sector will be lower than the GDP growth rate.

Public sector adversely affected

To implement the outlined fiscal path, the budget planning circular for 2015 issued by the Government in June 2014 (made public on the website of the Ministry of Economic Affairs), provides strict rules and a narrow annual planning framework for the relevant public bodies regarding public employees. Some of the rules are:

  • it does not allow any staff increase, except for those institutions or capacity building programmes where the related expenditures are financed from EU sources;
  • it indicates no modifications of the wage-tariff system for public employees, nor foresees any increase of the basic wage for the public sector (which serves as the basis for the entire wage system). Teachers are the only exception to this;
  •  it keeps the total wage bill constant in real terms for every year, providing no additional sources to finance expenditures for promotions during the length of service; 
  • it stipulates that in case of retirement the vacant position remains unfilled.

Thus again, public employees whose wage and income level has already significantly deteriorated due to the wage freeze implemented, with some partial exceptions, since 2008 will be adversely affected . According to an article in Policy Agenda, the share of  public employees who earn less than the subsistence minimum has rocketed from 4% in 2008 up to 19 % by 2010. Since then, the situation slightly improved due to some one-off measures and thus the ratio referred to above has moved to 16% by 2013. Nevertheless, for the first time in the recent history of the country, there is an entire branch in the public sector social care where the average earnings do not reach the subsistence minimum.

The fact that labour costs are planned to be kept constant in real terms in the public sector practically excludes any significant employment growth in this area. The Convergence Programme does not forecast 'any further considerable extension of the public work schemes in view of the improved economic environment'. Contrary to this assumption, prior to the general elections of 2014, the Government has broadened this scheme considerably. To illustrate the magnitude of public works, in some months in 2014,  out of the 4.1 million employed in Hungary, about 4.5%4.8% were involved in the schemes financed from budgetary sources. The question is whether the Government is able to keep this boosted level in the future while pursuing stringent fiscal policy or if it will have to reduce the scale of the initiatives. Should it be the latter case, employment figures could decline noticeably.

Trade unions’ position

As the planned reduction in public debt and budget deficit will have a negative impact on public sector employment and income, three trade unions have made their voices heard most.

Public sector unions

Trade unions of the public sector have put forward a claim for a general wage increase of 20%, claiming it is justified by the fact that their wages have simply lost their value. The congress of the Confederation of Unions of Professionals (Értelmiségi Szakszervezetek Tömörülése) confirmed that the claimed wage increase should take place from 1 January 2015.

Teachers' unions

Although teachers seem to be in a privileged position, they continue to strive for lasting and systematic changes in public sector remuneration. The Chairperson of the Trade Union of Teachers (Pedagógusok Szakszervezete) has criticised the Convergence Programme for not outlining any progress in this regard. She has also urged the National Public Service Council (Országos Közszolgálati és Érdekegyeztető Tanács, OKÉT) to resist this Government approach.

Public workers' unions

The Trade Union of Public Workers (Közmunkások Szakszervezete) has attacked the Government repeatedly, arguing that workers engaged in public works should not be exempt from the national minimum wage, as this is discrimination that cannot be justified by any objective reason. As of September 2011, these workers are subject to a special law  which sets their minimum wage at 73%78% (changing annually) of the national wage. The Convergence Programme indicates no intention to eliminate this differentiation.

Government's position

The Government has not launched any consultation about the draft Convergence Programme. It briefed the Nemzeti Gazdasági és Társadalmi Tanács (NGTT, National Economic and Social Council) on April 23, 2014 – a week before submitting the document to the European Commission. (NGTT is a consultative, proposal-making and advisory body independent of the Parliament and the Government. The members of NGTT are trade unions, employer organisations, churches, NGOs, representatives of science.) At that meeting no written material was provided by the Government, neither was the floor opened for debate. The Deputy State Secretary of the Ministry of Economic Affairs outlined the content of the Convergence Programme, emphasising that it did not contain any new measures as a new Government – actually led by the same political party would come into office soon, afterthe general elections in early April. Since then, there has been no consultation about the final version of the programme, nor has the Government responded to trade unions’ critics so far. It is interesting to note, that employer organisations have not expressed their opinion publicly on the Convergence Programme.

Commentary

When presenting the Convergence Programme at a press conference, the Minister for Economic Affairs, Mr Varga, said that the development of the economy would be determined by 'an accelerating growth coupled with a declining debt'. However, the pro-growth labour market measures, which would underpin this path, are not presented in the Programme. It can be reasonably assumed that the Job Protection Action Plan will be further pursued with its limited impact on employment growth, while public works programmes will continue to attract the bulk of budgetary resources available for employment measures.

As regards the public sector, although the Government does not plan any drastic cuts, it fails to increase expenditure, including wages, until 2017. Thus the employment and income situation in the public sector is likely to continue worsening rather than improving. Public employees therefore have to face a further decrease in their living standards.

The public sector trade unions are likely to continue protesting against the development path outlined in the Convergence Programme, arguing that the burden of the stringent fiscal policy is again disproportionally put on the public sector. Wages kept at low level would strengthen migration (especially in the health sector) and could prompt public employees to leave their profession. As no changes are foreseen in how public works schemes are used and how workers are paid, the debate  about vulnerability, discrimination and distortive effects on the labour market is likely to continue.

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