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UNCLAS SECTION 01 OF 04 BUDAPEST 000132 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EUR/CE, EB/OMA, INR/EC 
TREASURY FOR ERIC MEYER, JEFF BAKER, LARRY NORTON 
 
E.O. 12958: N/A 
TAGS: EFIN ECON HU
SUBJECT: (CORRECTED VERSION) 2009 GYURCSANY PLAN: A 
POSITIVE STEP, BUT "NOT A WINNING PROGRAM" 
 
¶1.  (SBU) SUMMARY: Prime Minister Gyurcsany on February 16 
presented to Parliament a package of proposed measures 
intended to plug a roughly $1 billion hole in this year's 
budget and stabilize Hungary's careening economy through 
incentives to increase employment and investment.  The tax 
adjustments and budget savings contained in the program 
represent neither fiscal stimulus nor fiscal consolidation; 
apart from filling this year's budget gap, the measures are 
designed to be budget neutral.  Proposals affecting 
businesses eliminate the "solidarity tax" and decrease 
welfare contributions, but widen the tax base and increase 
the tax rate, resulting in a negligible overall benefit.  In 
addition to a number of positive, but modest, steps to 
rationalize Hungary's generous social welfare and pension 
systems, the proposal includes a hodge-podge of measures that 
the GoH has either already put in train or has no realistic 
hope of achieving during the remainder of its term.  This new 
"Gyurcsany Plan" will almost certainly have a more salutary 
impact on Hungary's economy than did the Prime Minister's 
2006 revenue-based austerity program, but most commentators 
agree that the measures are too little and too late to 
prevent a deep economic downturn in the near-term and, 
although they are steps in the right direction, they are not 
sufficient to place the Hungarian economy on a more 
sustainable and competitive footing over the longer term. 
END SUMMARY. 
 
ANOTHER "GYURCSANY PLAN" 
 
¶2.  (SBU) In a speech before Parliament on February 16, Prime 
Minister Gyurcsany formally unveiled a five-part package of 
proposed measures designed to prevent the 2009 budget from 
taking the Hungarian economy off course, potentially 
reversing the deficit reduction from 9.3 percent of GDP in 
2006 to less than 3.5 percent in 2008.  This new "Gyurcsany 
Plan" is also intended to lay a foundation for improving 
Hungary's investment climate and competitiveness.  The 
proposed measures, however, clearly assign priority to 
near-term job preservation and creation, particularly at the 
lower end of the wage scale, and efforts to get Hungarians 
off the dole and back to work.  They are not a comprehensive 
overhaul of Hungary's bloated social services sector.  In a 
televised speech on February 17, Gyurcsany explained that the 
GoH is not concerned right now with deep institutional 
reforms such as health care and education, because these 
would lead to layoffs.  (Comment: In reality, the Prime 
Minister probably also wants to avoid repeating the failure 
of his last attempt to initiate modest health sector reforms. 
 End Comment.) 
 
¶3.  (U) Apart from some specific tax adjustments, spending 
cuts, and investment incentives, most of the program appears 
to be more of a wish list than a detailed course of action. 
We expect further details to emerge as the proposals are 
submitted for parliamentary debate in the coming weeks. 
 
RESCUING THE 2009 BUDGET 
 
¶4.  (SBU) A number of the planned spending cuts appear 
directly aimed at filling a roughly $1 billion gap in the 
2009 budget.  The gap was created by the GoH's reinstatement 
last December of the "13th month wage," following the earlier 
removal of this benefit as part of Hungary's IMF/EU bailout 
last fall.  In addition, forecasted budget revenues have 
recently been revised downward in light of the deteriorating 
Hungarian economy.  Official forecasts now project a 3-3.5 
percent GDP contraction this year, in contrast to a 
previously projected 0.9 percent contraction.  Passage of 
these cost savings measures would allow the GoH to meet a 
revised deficit target of 2.9 percent of GDP, up from an 
earlier target of 2.6 percent.  This is still below the 3 
percent threshold for remaining in compliance with Hungary's 
euro-convergence plan and IMF requirements. 
 
¶5.  (U) The GoH expects to shore up its 2009 budget with the 
following: 
 
($ millions) 
 
  Frozen ministry expense allocations         250 
  Reduced housing subsidies                    30 
 
BUDAPEST 00000132  002 OF 004 
 
 
  Tightened disability pension eligibility     42 
  Decreased residential gas subsidies          83 
  Interest savings                            100 
  Reduced prescription drug subsidies         125 
  Reduced agricultural subsidies              138 
  Tightened welfare benefit eligibility        25 
  Revenue from CO2 emission sales              83 
 
TOTAL                                         876 
 
A MORE EMPLOYMENT-FRIENDLY TAX REGIME? 
 
¶6.  (SBU) The first chapter of the new Gyurcsany plan focuses 
on establishing a more "work-friendly" tax regime.  According 
to Peter David, CEO of the American Chamber of Commerce in 
Hungary, the proposed measures mark a step in the right 
direction--they generally accord with the recommendations the 
AmCham and the "Big Four" accounting firms made last 
year--but, in addition to the fact that they are several 
years too late, they "lack the magnitude" necessary to 
improve Hungarian competitiveness.  The proposed tax cuts are 
entirely compensated by other tax hikes in 2009. 
 
¶7.  (SBU) The proposed tax cuts include a reduction of the 
employer's share of employment taxes from 32 percent to 27 
percent, an important step toward lowering Hungary's "tax 
wedge," which is among the highest in Europe.  This reduction 
would apply to lower wage earners beginning in July and to 
all wage earners from 2010.  Hungary's largest trade union 
association has already registered its objection to the fact 
that the plan would cut taxes paid by employers rather than 
workers' contributions.  A proposed personal income tax 
reduction, whereby a slight increase in tax rates--from 18/36 
percent to 19/38 percent--is more than offset by an increase 
in the income taxed at the lower rate, also appears to aim at 
enticing job-seekers into the registered workforce. 
Elimination of the 4-percent "solidarity tax" on businesses 
is also a step in the right direction, but the draft plan 
offsets its positive effects by increasing corporate tax 
rates from 16 to 19 percent and widening the tax base through 
the elimination of most allowances.  The tax plan would also 
eliminate the 4 percent "solidarity" surtax on high-income 
individuals. 
 
¶8.  (SBU) The GoH proposes to pay for these tax cuts by 
increasing taxes on consumption: the VAT would rise by 3 
percentage points to 23 percent, as would excise duties on 
tobacco, alcohol and fuel by 3-7 percentage points.  Most 
analysts question the value of raising taxes on consumption 
during a deep global recession.  Along with decreasing 
domestic demand during a time when export markets are 
shrinking, a higher VAT would impose a greater burden on 
local governments and entities seeking to co-finance 
EU-funded projects.  Local tax reform advocates, however, 
applaud the proposed elimination of various tax allowances, 
which will make the tax code simpler, more transparent, and 
more difficult to evade.  A proposed tax levy on certain 
welfare benefits would recapture funds for the budget while 
also increasing the relative value of employment for those 
currently living on public support. 
 
¶9.  (U) The proposed tax modifications would have the 
following effects on the budget in 2009 and 2010: 
 
 
($ millions)                              2009     2010 
 
Reduced employer contribution             (346)   (1,279) 
Reduced personal income tax               (146)   (  804) 
Eliminated solidarity tax for individuals ( 42)   (  121) 
Eliminated solidarity tax for businesses     0    (  867) 
Change in corporate income tax               0       708 
Increased VAT                              446     1,033 
Increased excise taxes                      67       167 
Increased rehabilitation contribution        0        88 
Tax on welfare benefits                      0       896 
Change in welfare benefits                  21       125 
 
TOTAL                                        0    (   54) 
 
TIGHTENING THE SOCIAL SAFETY NET 
 
BUDAPEST 00000132  003 OF 004 
 
 
 
¶10.  (SBU) The new plan's second and third chapters aim to 
rationalize, without overhauling, the social safety net by 
tightening eligibility for social benefits, enhancing 
incentives to work, and placing the pension system on a more 
sustainable footing.  An already existing "welfare-to-work" 
program would be expanded and the concept applied to family 
allowances, which for families with older children would 
become education allowances subject to cancellation if the 
child leaves school.  As with disability benefits, 
eligibility for child-rearing benefits would be tightened, 
while measures to promote daycare provision would make it 
easier for young parents to go back to work.  The plan would 
also create by 2011 a "single social account" to allow 
authorities to track the aggregate level of support received 
by an individual to ensure that income from social support 
does not exceed that which could be earned through 
employment.  Savings on pension costs would begin in 2010 
with the elimination of the "13th month pension" and a change 
in the annual indexing formula that would base pension 
increases more closely on inflation and less on real wage 
growth.  A proposed gradual increase in the retirement age 
from 62 to 65 between 2016 and 2024 would bolster the 
system's long-term sustainability. 
 
ECONOMIC DEVELOPMENT AND ADMINISTRATIVE REFORM MEASURES: A 
SHOTGUN APPROACH 
 
¶11.  (SBU) The final two chapters of the plan focus on 
measures to promote business and infrastructure investment 
and to streamline the public sector.  The laundry list of new 
and existing, short-term and long-term business development 
initiatives includes a variety of proposed energy and 
transport infrastructure investments, rural development, 
market support for Hungarian agricultural and food products, 
a near-term effort to attract foreign investment in low 
value-added/high-employment sectors, and a longer-term effort 
to develop Hungary's knowledge-intensive industries.  The GoH 
plans to step-up its commercial diplomacy with "countries 
less affected by the crisis," among which it includes Russia, 
and back these efforts with export promotion assistance and 
credit insurance for Hungarian businesses.  A measure to 
promote employee retention would allow companies to use EU 
funding to place employees in job-related training one day 
per week.  The package would roughly triple funding to 
support small and mid-sized businesses and start-ups to $5.8 
billion through 2010, plus an additional $3.75 billion in 
government guarantees, through accelerated use of EU funds 
and previously-budgeted Hungarian co-financing. 
 
¶12.  (SBU) The plan presents a wish list of measures to 
streamline public administration, including reducing the size 
of Parliament to 199 members, cutting local government 
representation by 50 percent, reforming MPs' expense 
accounts, and a variety of measures to reduce the size and 
expense of Hungary's extensive bureaucracy.  Many of these 
measures would require a two-thirds majority in Parliament to 
pass.  (Comment: It is highly unlikely that these measures 
would be approved, given the current political climate.  End 
comment.)  The remaining proposals constitute a vague list of 
good intentions to cut red tape, improve bankruptcy 
protection, and reduce corruption.  We anticipate further 
details on these in the coming weeks. 
 
SECOND VERSE, SAME AS THE FIRST? 
 
¶13.  (SBU) Responses to the new Gyurcsany Plan so far have 
been fairly predictable.  The IMF, the EU, and financial 
analysts have cautiously praised the measures as a step in 
the right direction, albeit one that probably should have 
been taken months or years ago.  They also emphasize that 
further budget cuts and deeper institutional reforms will be 
necessary to place Hungary on a more sustainable long-term 
path.  On the other hand, opposition leader Viktor Orban 
immediately lambasted the plan as not simply "yet another 
brutal austerity package," but a package of "hopelessness, 
resignation, and surrender."  He offered few specifics on 
what Fidesz would propose as an alternative except to 
emphasize the need to cut taxes, but his reaction is a likely 
foreshadowing of public reaction, particularly as increased 
consumption taxes and decreased social benefits would indeed 
 
BUDAPEST 00000132  004 OF 004 
 
 
pour salt on the wounds of Hungary's struggling households, 
potentially deepening an already severe recession.  Speaking 
at an economic conference on February 19, Free Democrat 
(SzDSz) chairman Gabor Fodor described the new package as 
"too little, too late," arguing that budget balance should be 
achieved by spending cuts rather than by tax hikes.  Eva 
Palosz, director of Kopint-Tarki research institute, supports 
the tax changes, but also emphasizes the need to cut 
spending.  The tax and savings proposals are thus likely to 
undergo some changes as the Gyurcsany government negotiates 
with SzDSz and MDF for support for the plan; SzDSz has 
already vowed not to support any tax hikes. 
 
¶14.  (SBU) Comment: Speaking to business leaders earlier this 
week, Gyurcsany admitted that, from a political standpoint, 
this new package is "not a winning plan."  It does not appear 
to be from a business standpoint, either.  Given his already 
low level of popularity, he would have had little to 
lose--and the Hungarian economy much to gain--from a much 
more aggressive reform package.  End Comment. 
Foley