Press Release of the Spokesperson’s Office of the Government of the Republic of Hungary

Hungarian Prime Minister Gordon Bajnai

The country has successfully absolved the first, most difficult stage of crisis management

Established in the middle of April, the government undertook to manage the crisis and take responsible action; and it has been progressing with decided and large steps ever since. The government started immediate crisis management to protect jobs and families, to restore the equilibrium, to lay the foundation for long term growth, and to restore external and internal confidence and the self-confidence of Hungary. The better part of the last 75 days was spent with solving these tasks: the government has been taking numerous and large steps in all of these areas.

The responsible majority has approved all the most important crisis management measures in Parliament on the last session day – from the reform of the pension and social welfare systems through modifications of the tax regime to an amendment of the Criminal Code. This has concluded the first, most difficult part of the crisis management exercise.

The crisis manager government has sent a clear message to the world: Hungary understands the challenges of the world, and can respond to these challenges. The decisions taken in the last few weeks and months and on the session of Parliament on 29 June have each been important steps on the road that leads us out of the crisis.

The results of crisis management are already visible. We have one of the lowest rates of budget deficit in the European Union; the forint has appreciated by 10% over the last weeks, so that the burdens of families servicing housing debts have also fallen by the same rate. More than 100 thousand businesses have received government subsidies, 56 thousand jobs could be rescued. The pension system has been made sustainable for the next 40 years – family subsidies have become more targeted, efficient and equitable. Tax cuts this year and the next will result in substantial increase of incomes, while businesses can also employ people at lower costs. All these are the benefits and meaning of crisis management: all of them achievements of the country that were reached under very difficult circumstances and gained in a hard way.

The international environment still remains insecure, the confidence towards Hungary fragile, and some additional proposals need to be approved for the further strengthening of the country, which will be submitted by the government to Parliament this autumn.

It is attributable to the difficult but necessary steps taken so far that the government can progress more at ease but with unrelenting decidedness in the coming months. The task of the country is now to reinvigorate growth and to eliminate the barriers to growth. We should cut bureaucracy and make government agencies more efficient. Citizens should receive better services at lower costs, be that the operation of local governments or community transport. Also we need to take innovative and even more decided steps to help most-in-need social groups, and public safety must be improved along material security.

Objectives of the crisis management government

The crisis management program approved by the government in April 2009 prevents the deeper and more serious consequences of the global economic crisis from hitting Hungary. It protects the country and Hungarians from an even bigger problem, it stabilizes the funding of the state and the equilibrium of the budget, while it puts the economy back on track.

The program of the government has set clear objectives:

1. for comprehensive, decided measures taken for short term crisis management;

2. for the long term improvement of the equilibrium of the budget;

3. for the sustainable intensification of growth;

4. for the long term restoration of confidence.

In the course of short term crisis management, the most important objectives included the protection of jobs endangered by the crisis, the easier and better targeted use of EU funds, and the mitigation of the liquidity shortage caused by the financial crisis. The concurrent implementation of these objectives can secure the best chances to protect Hungarian families, to protect jobs and the functionality of businesses. In order to eliminate and mitigate the imbalance the government has set the level of state debt on a falling trajectory, while the state household deficit will be kept – pursuant to the agreement with the IMF and the European Commission – under 3.8% this year and 3.9% next year, which ranks Hungary with the third of the EU member states with the lowest deficit rates.

Hungary ranks among the countries with the lowest deficit rate in Europe in 2009

The key to the long term success of the entire program is that the growth potential of the Hungarian economy keeps on increasing: the program works towards the target that the Hungarian economy consistently outperforms the average of the European Union by 2% within a foreseeable time. This is served by a substantial cut in the burdens on employment through the transformation of the tax regime, the increased rate of activity and the improvement of economic competitiveness. The crisis management program can only be successful if the government is able to restore the confidence of the markets towards Hungary, and if it is able to improve the opinion of investors on the country.

The macro-economic course

According to macro-economic indices and current forecasts, a contraction of the Hungarian GDP by 6-7% is expected for 2009. As a result of the corrective measures, the GDP will slightly contract also in 2010, however, the increasingly more intensive growth of domestic consumption will show its effects from 2011. As a result of the measures taken now, the growth of the economy may reach 3.5-4% by 2012-2014. The measures planned for 2009 will cause the primary balance to the GDP to improve substantially by 2 percentage points to reach 3% after structural adjustment already this year, while the same index may well be 4% in 2010 and remain on that level on longer term. State debt will peak in 2010, and then it will fall dynamically with the expected intensification of economic growth. The lower level of indebtedness and the expected drop in interest rates will result in lower debt service levels, which will automatically curb state expenditures from 2013.

Source: Ministry of Finance

Expenditure cuts – the state starts the cuts with itself…

The first and most important task of the crisis management government was to cut the state household deficit and mitigate the financial dependency of the country. This made it necessary for the government to save on the operation of the state. Therefore the government has approved a cost cutting program worth 1,300 billion forints over two years.

The state started crisis management measures with itself: the salaries of members of the crisis management government were cut by 15%.

The managers of companies in majority state ownership were requested to offer the portion of their salaries exceeding 2 million forints for the needy, and to pay that amount into the Crisis Fund established by the government.
Per-diems for foreign trips have been reduced.
Costs attached to board and supervisory board memberships in state owned companies were cut by 50%.
Jubilee bonuses have been eliminated for the prime minister, ministers and state secretaries, and holidays cannot be paid out for high ranking officials working within the administration.

Funds spent on the operation of the state had to be cut further even beyond these measures, so that the following measures were necessary:

salaries in the public sector have been fixed for 2 years;
13th month salaries have been eliminated in the public sector, because this is how the equilibrium and the jobs in the public sector can be safeguarded.

Measures in social welfare and family support

Social welfare spending that makes up the largest part of state expenditures also needed to be cut. The principles of targeting and means based approach must be enforced, so that those most in need of help from the community can actually get more support. This is the objective of the reform of the social and family support systems. And in order to make sure that the economic crisis does not cause a deep social crisis, we must pay particular attention to helping those living under the most difficult circumstances with specifically targeted measures; we must make sure that the management of the crisis demands the least of sacrifices from these people. The solidarity of the wealthier is absolutely necessary to achieve this.

The new family support system

The sum of the family allowance will not increase for two years; the government protects its sustainability.
The maternity leave period is capped by the government at two years so that the system of maternity pay and child rearing subsidy remains sustainable, and women who stay at home can return to the labor market in time.

Parallel to this, the following decisions were taken:

simplification of the rules on child care;
family daycare for children has been introduced as a new format of care;
part time work must be offered mandatorily in the public sector, the period of protection has been extended to 3 years.
Pursuant to a decision of the government, the network of nurseries and kindergartens will become more extensive: the current overcrowdedness will abate, and children born now and in the near future can be enrolled into the newly developed institutions from 2012, which involves an increase by almost 15 thousand new places for child care,
normative payments by the state will be increased for family daycare units.

Transformation of the social welfare system, pension reform

In order to secure funding for other social benefits, and also in order to curb abuses of the system:

the government has cut the rate of sick-pay by 10 percentage points;
and it will cut and gradually eliminate the compensation on gas and distance heating prices.

For safeguarding the long term security of the pension system, and also in order to increase the level of employment, the government has decided:

to gradually increase the age of retirement to 65 years of age;
to withhold the unpaid portion of the 13th month pension for this year, and to eliminate this benefit entirely from next year in order to secure the payment of pensions for the other 12 months.
However, as soon as the economy starts to grow again at a proper rate, pensioners and employees in the public sector will receive bonus payments depending on the rate of growth.

The new system of housing subsidy

When looking at cost cutting measures, the system of housing subsidies also had to be reviewed. Paying due regard to the need to cut state expenditures, the government suspended the former subsidy system, and has introduced a new, smaller and more targeted home building subsidy scheme.

This scheme entails an interest subsidy for forint loans to individuals younger than 35 years of age for the purchase, construction or modernization of a new home, which also contributes to ascertaining that the number of people with foreign currency loans and exposed to the volatility of exchange rates does not increase further.
The age limit is 45 years of age for families with children, the rate of subsidy increases with the number of children.

The new system of taxes and contributions

In order for the government to be able to revitalize the economy and set it on a course of growth, taxes on employment must be reduced, and the ability and willingness of individuals to work should be increased. The performance of the country will not increase unless the performance of the individual is recognized, and only if the state levies bearable and reasonable burdens.

This is the rationale behind the structural reform of the regime of taxes and contributions that has been approved by Parliament in two stages.

In case of the personal income tax:

The lower band is widened from 1.9 million HUF in 2009 to 5 million HUF in 2010;
The lower band will widen even further from 2011: the tax will be only 17% up to an annual income of 15 million HUF;
The tax rates will change from the current 18% and 36% to 17% and 32%.

This means that more than 1.3 million people can take home net 36 thousand HUF more in 2009. From 2010 onwards 90% of all taxpayers will pay tax in the lower band with a tax rate of 17%. This means for an employee earning on average 200 thousand HUF monthly that they can keep one and a half month's worth of pay extra on an annual level (180 thousand HUF net).

There is a way out of the crisis, and we have already started walking down that way...

Taxes:

1,350,000 people will take home 36,000 HUF net more in 2009.

The income of 3,000,000 people will increase next year as 250 billion HUF will be left with the taxpayers, while the burdens of the top 10,000 incrase.

After reducing the burdens on employment, businesses will find it easier to provide new jobs and safer to retain existing jobs.

The rate of contributions payable by employers will reduce by 5% from 2010;
The per-capita health care contribution will be phased out;
The corporate tax will be reformed.

These measure will yield the result that Hungarian businesses will be left app. 400 billion forints more to use in 2009 and 2010. The measures effect a significant cut of the burdens on labor.

Simultaneously – in order to avoid that the burdens on the state budget increase any further – the proportion of consumption and wealth had to be increased in the tax regime, so that the taxes on labor can be effectively cut.

The value added tax (VAT) will be temporarily increased to 25% from the 1st of July, 2009;
The excise tax on gasoline and cigarettes will increase by 7.2% and 9.7% respectively from the 1st of January, 2010;
A property tax with three bands will be introduced and levied on real property, ships, land vehicles and aircraft.

Property tax on real property:

The rate of tax is 0.25% between 0 and 30 million HUF; 0.35% between 30 and 50 million HUF; and 0.5% above 50 million HUF;
The first property is free of tax up to 30 million HUF, the second property up to 15 million HUF, while the third and every subsequent property is taxable after its total value;
Large families are entitled to a credit of 15% after their children;
Pensioners and unemployed may be eligible to a suspension of the tax.

Example: After a property of 32 million HUF value the property tax will be 112 thousand HUF in 2010.

When introducing these measures, the government respected the groups of the society in more difficult situations, therefore basic foods and distance heating have been allocated a preferred tax rate of 18%.

The Bajnai government is the first to effectively take steps to tax incomes hidden in tax havens. All income and wealth earned and generated in Hungary is taxable in Hungary from 2010 onwards.

Helping people with housing loans

The government submitted and Parliament has passed the law on prompt payment warranties for housing loans to protect individuals with foreign currency loans who have ended up in a difficult situation due to the fluctuation of the exchange rate of the forint and economic crisis. The law will enter into force when approved by the European Commission.

The state will provide a temporary prompt payment warranty to those who drew a housing loan as defined in the law, and then lost their jobs due to the crisis and for a reason not attributable to them after the 30th of September 2008. In June 2009 the government also extended the supportive payment warranty scheme for housing loans also to low income debtors who have not lost their jobs but struggle with servicing their debts.

The Solidarity Package

The government has passed the Solidarity Package with regard to citizens who ended up in a tight situation due to the crisis. The Package intends to provide quick, temporary relief mainly to low income families with children, and pensioners.

Small sums of non-refundable state grants can also be extended from the Crisis Management Program set up with an initial equity of 1 billion forints from the state. This facility allows quick help within 30 days to low income families, primarily those with children if they find themselves in a difficult situation because of the global economic crisis. Sums between 20 and 50 thousand HUF can be requested in the first phase of the Program between August and November.

The leading executives of state owned businesses donate the portion of their monthly incomes exceeding 2 million HUF gross into the Crisis Management Program, which can be complemented by voluntary corporate and private donations.

The government has topped up the equitable pension chapter of the Pension Fund by 200 million HUF, and the funds available for non-recurring grants by 300 million HUF. This allows the payment of grants of 15-20 thousand forints to app. 40 thousand pensioners, and the equitable pension increase may add several thousand forints to the pensions of pensioners who are most in need.

The government also decided to retain the free travel allowance of individuals older than 65 years of age, and to establish the registration system of benefits until 2011, so that support from the community is channelled specifically to those who really need it.

Retaining jobs

Retaining jobs has been the priority of the government in the last seventy-five days. Job retention is supported with increased amounts of funds; and several programs have started and will start on the basis of consultations with businesses. A central program has been devised to prevent mass redundancies (more than 50 persons), and to promote the restructuring of employment.

Following the government's proposal, Parliament passed without a vote against the modification of the law on ordinary labor relations, the most important element of which is that – considering the challenges posed by the economic crisis – only employers who commit serious irregularities will be excluded from subsidy procedures of the EU or Hungary, and also public procurement procedures.

Launched with 20 billion HUF of EU funds in May 2009, the crisis management government provides state aid to the retention of 50 thousand jobs under the 4+1 job retention program combined with training courses.

Sector policies – agriculture, tourism, automotive industries, logistics, construction

Labor intensive sectors like the agriculture, tourism and construction that employ many people, and industries that produce high added value such as the automotive sector, logistics, IT and telecommunication should be supported simultaneously in order to improve employment and increase competitiveness.

The government took the following steps to support these sectors:

for tourism, the VAT on commercial accommodation has been assigned the preferred 18% rate;
for agriculture, various bank guarantee and working capital loan facilities have been launched in the food industry;
action plans have been passed for the automotive industries and logistics.

The construction industry is particularly important for the management of the crisis. Therefore the crisis management government decided at the end of April and Parliament passed in the middle of June certain modifications of the law that accelerate construction investments further.

These measures are not only a help for investments of key importance, but can also contribute to the speeding up of all construction and building operations. The administration of construction projects will generally become simpler, cheaper, more efficient and faster, too; the preparation of investments will become more reliable than before. The launch of the Steady Hands program next year will also be part of this acceleration plan. This intends to introduce certain legal institutions to manage the cover of builders by creating guarantees, reducing risks and curbing debt chains.
More than 600 investments can start under the investment stimulus program of 1,800 billion HUF, thereby generating a massive body of large orders placed with the Hungarian construction sector. Businesses can maintain their functionality and retain jobs. The investment stimulus package contains an itemized list of European Union development projects and their schedules that include the renovation of 267 schools, 23 medical units, 78 urban areas, and the building of 400 kilometers of railroads and 350 kilometers of public roads.
The program announced for the modernization of pre-fabricated houses is another major order for the construction sector at 15 billion HUF. This program entails energy efficiency upgrades in some 55 thousand apartments.

Vocational training

The government has cancelled the limitation on starting vocational training under 16 years of age in order to achieve more flexible training at vocational schools, to reduce the rate of erosion and to make working careers more attractive. This enables pupils to join practical vocational training immediately after elementary school. Pupils in the 9th and 10th forms of vocational training can acquire or complete their basic skills, they can lay the foundation for continued studies; while it becomes possible throughout the entire vocational training that skills acquired in preparation for any training will be recognized in the vocational training itself, which effectively shortens the actual time of training.

Law and order, public safety

The citizens of Hungary rightfully expect the state to provide them with peace, the protection of their lives and property and public safety. In order to ascertain that these expectations are met, the crisis management government changes laws and regulations, strengthens the police and organizes wider cooperation.

Crime should be followed by proper punishment, so the government initiated certain modifications of the Criminal Code. Perpetrators of armed and violent crimes, particularly repeat offenders should face much more rigorous sanctions than today. On the other hand, the government reduces the risks of the victims of crimes, their rights will enjoy stronger protection.

The punishments for repeat offenders will be increased (e.g. after the third incidence – e.g. bodily harm or robbery) and no extenuating circumstances or conditional release will be allowed, imprisonment cannot be suspended.
The perpetrators of armed crimes can also expect more rigorous sanctions in the future. The new regulation would consider the use of a weapon (e.g. in case of armed robbery the punishment currently is 5-10 years, it would be increased to 5-15 years in the future).
The lower and upper limits of pecuniary fines will also be increased.

In order to strengthen the police the government has decided, with the provision of necessary financial conditions, to organize police presence or regular patrols in every settlement by the end of this year, and in towns with higher crime rates the presence of police in public areas will be increased by at least 20%.

A new form of financial incentive is introduced for long serving policemen and women who undertake to stay in service for at least five more years.

The crisis management government has also passed some legislation to create the conditions for the efficient cooperation of local governments and all other organizations in settlements that are involved in public safety, so that they can effectively work with the Police and augment their strength. The government relies particularly on public area supervisory organizations (their authorities should be extended widely), and civilian guards who voluntarily undertake a role in law enforcement.

Public area supervisors can, in certain cases, get cars towed if parked illegally (e.g. if these cars obstruct traffic), and they will be allowed to use batons in case attacks that go directly against their lives or bodily safety.
Civilian guard organizations can request tear gas sprays from the police as a passive defense tool, and they use it exclusively for justified self-defense.