Gergely Szakacs and Marton Dunai
December 13, 2010
(Reuters) - Hungarian lawmakers voted to roll back a 1997 pension reform on Monday, effectively allowing the government to seize up to $14 billion in private pension assets to cut the budget deficit while avoiding austerity measures.
With financial markets on edge across Europe over debt and deficits, Prime Minister Viktor Orban has spurned international advice to cut budget costs, as Ireland and Greece have done, in favor of unconventional policies meant to revive Hungary's moribund economy.
Parliament passed the pension legislation with 250 votes for, 58 votes against and 43 abstentions. Orban's ruling Fidesz party has a two-thirds parliamentary majority.
By plugging its budget shortfall with the pension funds and new taxes on banks and mostly foreign-owned businesses, Orban has promised to end years of austerity and bolstered the popularity of his right-of-center Fidesz party in opinion polls.
But the strategy -- which also includes regaining "financial sovereignty" by ending a 20 billion euro ($26.38 billion) safety net deal with the European Union and International Monetary Fund -- has worried investors, caused losses in Hungarian assets, and prompted a downgrade by Moody's ratings agency last week to Baa3, the lowest investment grade.
The government has also criticised the independent central bank for raising interest rates last month, and is poised to change the central bank law so it can fill the rate-setting Monetary Council with its own candidates.
Economists say that by raiding private funds, Orban will cut the deficit to below 3 percent of gross domestic product next year. But he will also only delay reforms which they say are vital to tackle a debt pile equivalent to 80 percent of GDP -- just above the EU average but higher than any other country in the bloc's post-communist East.
The plan depends heavily on economic growth -- a problem if Europe's recovery slows next year as expected -- and analysts have also warned of risks to long-term fiscal sustainability.
"While the country's headline deficit is forecast to move only to 2.9 per cent of GDP in 2011, it has achieved this through myriad short-term policies that mean the budget will be unsustainable after 2012 with a hole of some 500 billion forints ($2.38 billion)," said Peter Attard Montalto at Nomura in London.
DOUBT ON REFORMS
The legislation imposes stiff penalties on Hungarians who do not transfer their pension assets back into the state system by the end of January.
The government will sell the assets and use the income to cut debt, plug holes in the state pension fund, and create room for tax cuts for households and small companies.
It hopes tax cuts, including a 10 percent corporate tax rate for all companies from 2013, will boost growth to 5.5 percent by 2015, a faster pace than any achieved in the past 20 years.
The pension change -- which pension funds said amounted to nationalisation -- has not hurt Fidesz's popularity so far, as most Hungarians had not expected to get proper pensions anyway.
"I haven't worked in a fully registered job for more than 10 years. What kind of pension savings do you think I have? Take it, please, if it's good for the country," said Tamas Kemeny, 37, a radio technician.
Some Hungarians, however, are shocked by the lack of choice offered by the government.
"I have no idea whether the state system is better than the private pension system but now they tell me I can say goodbye to half of my pensions if I'm not in the state pension system. This is like choosing between a kiss or a smack in the face," said Gabriella Kiss, 21, a student.
Investors are sceptical. The forint has lost 5 percent against the euro since Fidesz's April election victory, and 3- and 5-year bond yields have jumped more than 2 percentage points to almost 8 percent.
The government has promised to unveil a structural reform plan worth 600 billion-800 billion forints in February, but little is known about the details.