BUDAPEST, (Reuters) – Hungarian lawmakers will roll back a 1997 pension reform today, allowing the government to effectively seize up to $14 billion in private pension assets to reduce the budget gap while avoiding painful austerity measures.
With markets on edge across Europe over debt and deficits, Prime Minister Viktor Orban has spurned international advice to cut costs, like Ireland and Greece, in favour of unconventional policies meant to revive Hungary’s moribund economy.
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-centre Fidesz party in opinion polls.
But the strategy, which also includes ending a 20 billion euro safety net deal with the European Union and International Monetary Fund, has spooked investors, caused losses in Hungarian assets, and prompted a downgrade by Moody’s ratings agency.
Economists say the pension law will almost certainly allow the central European state of 10.5 million people to meet a pledge to cut its budget deficit to below 3 percent of annual output next year, as well as potentially lift growth.
But they also say that by raiding private funds, Orban will only delay reforms vital to tackling a debt pile equal to 80 percent of gross domestic product, just above the EU average but higher than any of Budapest’s peers in the bloc’s emerging East.
The plan depends heavily on growth, a problem if the recovery in Europe slows next year as expected.
“A possible leap in growth should be factored in as an upside risk when planning the budget, not serve as the baseline assumption,” said analyst Zsolt Kondrat at MKB Bank.
Budapest and eight other mostly new, ex-communist EU states have complained their pension reforms have unfairly driven up debt and deficits under EU accounting rules. They have asked for exemptions from Brussels but have not yet come to a deal.
“This experiment, through which the Hungarian pension system was transformed, resulted in the country sinking in debt up to its ears,” Orban said in a video on his Facebook page yesterday.
Despite a legal challenge by pension funds, the government’s two thirds majority is expected to pass the law, which will impose stiff penalties on Hungarians who do not transfer their pension assets back into the state system by 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 slash a jobless rate of 10.9 percent and boost growth to 5.5 percent by 2015, a faster pace than any achieved in the past 20 years.
Markets expect economic growth to accelerate to 2.7 percent next year, well above 1 percent projected for 2010, but below the government’s forecast for growth over 3 percent.
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.
They worry Orban’s pro-growth approach means he will eschew painful reforms such as public sector job cuts, which would complicate rising debt repayments from 2011.
The government has pledged to unveil a structural reform plan worth 600 billion-800 billion forints ($2.9 billion-$3.8 billion) in February, but little is known about the details.
“The entire market is waiting for this reform package but there are some doubts over it, which are based on the government saying growth will help us reduce our fiscal deficit,” said analyst Zoltan Arokszallasi at Erste Bank.
“This would indicate the government wants to implement reforms on a much smaller scale than necessary.”
