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A reformist with an appetite for honesty

Ferenc Gyurcsany, Hungary’s prime minister, tells Karina Robinson how he plans to rein in public spending yet confound the polls and get re-elected .
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Ferenc Gyurcsany laughs into his tie as he predicts that his infamous May 2006 speech to party MPs – which included the line “we have obviously lied throughout the past 18 to 24 months” – would one day be on the university curriculum, as will the case of his negligence in allowing it to get out.

The 46-year-old prime minister says the speech, which brought him international media prominence, was “a very emotional monologue about the necessity to change” on the back of his Hungarian Socialist Party’s victory in elections a month earlier. He does not agree that the worst moment in his political life was when the leaking of the speech – with such gems in it as “we screwed up. Not a little, a lot. No European country has done something as boneheaded as we have” – caused riots in the streets and calls for his resignation.

Interviewed in his office within Hungary’s magnificent 100-year-old Parliament, with spectacular views of the River Danube, the father of four was refreshingly frank about the limits to political power in a democracy.

He notes that he became prime minister when the last government only had one and half years in power before elections were due and there was thus “no time to start reforms. My only opportunity was to finalise this period and start a new one.” He is now in the second year of the current term and busy with a reformist – and deeply disliked – agenda which he believes will bring fruit by the end of 2009 to 2010 when the next elections are due.

“I want to be useful now. I have to be popular at the end,” he asserts. “It is long distance running and I am a long distance runner. I run a half marathon every two weeks.”

But if there was an election tomorrow, his Socialist coalition would surely lose? “Beyond question,” he answers decisively. October polls show the opposition Hungarian Civic Party, known as Fidesz, would win 59% of the votes if an election were held now while the Socialists trail far behind with 30%.

The fear among economists and businessmen is that, to regain popularity in two years, Mr Gyurcsany will loosen the purse strings.

“Not at all. Not at all,” he emphatically declares. “We are implementing new rules on public finance that will not let any government spend more than is written in the budget and in 2009 we are meeting a criteria of 2.9% [budget deficit to gross domestic product].”

When it took power in April 2006 the government faced a dire situation – of its own making – with a budget deficit-to-GDP ratio that looked likely to be more than 11%, due to rising government expenditure and negative primary balances. In the end, this came in at 9.2% for 2006 as the government raised taxes substantially: corporate tax rates rose to 20% from 16%, VAT on basic items up to 20% from 15%, and payroll taxes up to 17% from 13.5%. The highest rate of income tax is 36% but, when other taxes are added in, the de facto marginal tax rate becomes 57%.

Those hefty rises, albeit necessary at a time of crisis and leading to a forecast 6.1% budget deficit-to-GDP ratio this year, have dampened growth considerably.

“We have had to sacrifice a significant part of our growth potential during this period,” admits Mr Gyurcsany.

Meagre growth projections

Economists forecast GDP rising an anaemic 2% this year and less than 3% in 2008. Added worries are the severity of the German economic slowdown, which affects exports and the continuation of the credit crunch in international capital markets, which affects Hungary’s financing. The IMF in its latest predictions warned that eastern European economies with high current account deficits were vulnerable to global financial upheavals. In 2006, Hungary’s current account deficit was 5.8% and is forecast to fall to 5.2% this year, while Hungary’s 151% government debt to government revenue ratio is almost double the mean for the same rating peer category, notes rating agency Standard & Poor’s.

Meanwhile, foreign direct investment has been decreasing from 2005, not helped by the rise in taxes. But Mr Gyurcsany, who was himself a successful businessman during the 1990s, points out that taxes are only one factor in corporate investment decisions.

Fiscal simplification

“We are creating a better business environment. Hungary is among those few countries where a new company can be set up in one hour. We are simplifying the tax system and by January will introduce a more comprehensive tax system. We have doubled the motorway network in the past few years,” he says.

“In the International Monetary Fund tables for the ease of doing business we improved our position by 21 ranks past year, which is fantastic.”

Mr Gyurcsany’s critics say he needs to widen the tax base and is failing to tackle high government expenditure with enough gusto. Government expenditure as a percentage of GDP was almost 53% in 2006. It is forecast to fall to 51% in 2007, according to rating agency Standard & Poor’s, on the back of pension and healthcare reforms.

One of Hungary’s premier businessmen, Sandor Csanyi, with interests ranging from banking to sausages, comments: “He has made some good decisions on pension and healthcare [reform]. Where he is late is in changing and reducing the running costs of the state, including local government.”

But the prime minister, who studied economics at university, believes he is doing everything possible in this country of 10 million people.

“Ordinary Hungarians are complaining, saying that we have done too many things and made life much more insecure, saying we cut back spending significantly,” he says, adding that this is the first year in the last 17 where the health budget has not over-run by about 1% of GDP.

On local government reforms the former head of the Central Committee of the Communist Youth Alliance at university points out that a two-thirds majority is needed in parliament to change local government, so he has manoeuvred around this obstacle by instituting a series of reforms that depend on financial incentives for the local governments. His critics believe that, in this case and in general, he could accomplish more if he was less quick to take offence and alienate people – although it is extremely doubtful that the opposition would play ball in any reform process.

“I don’t want to say it is definitely not true [that I offend people]. I come from almost nothing. I come from deepest poverty in fact. Everybody in my family is a blue-collar worker and I am the only person with a university degree. Maybe this makes you tough. Maybe you feel all the time that you can only thank yourself,” he says thoughtfully. “That transforms you. I think it is true that I am quite a direct person.”

“Nevertheless, I don’t think I take offence easily,” he adds.

Free thinking

His background has certainly shaped his vision of modern Hungarians. He says in a country that was governed by foreigners for centuries, the population needs to learn to be independent, that the state will work for them “but the state does not create us”.

On the corporate front, parliament recently passed a law to protect strategic assets. In theory, the law is not in response to any specific situation. However, it is popularly known as ‘Lex Mol’ and few doubt that it was passed to protect local energy company Mol from a ?10bn takeover bid by Austrian company OMV. The Austrian state is the largest shareholder in OMV with a 31% stake. Mr Gyurcsany’s line is that he would not object to a takeover from a fully private company, but “we do have cause to be worried if any other state would like to gain control of the Hungarian oil market and companies”.

He adds that Russian president Vladimir Putin denied speculation that energy giant Gazprom, which has close ties to OMV, is behind the bid.

“I was sitting next to President Putin and he agreed that if they have any intention to control in any way any Hungarian company with strategic importance, they will send notice in advance. They do not have anything to do with it. I asked him directly and he answered directly. Therefore I believe that Vladimir Putin keeps his word to me.”

As for the thorny issue of whether Turkey should join the EU, Mr Gyurcsany gives a terribly long and involved explanation – as do most EU members – with frequent mention of words such as referendum, nations and culture. It is not entirely clear what his answer is, but he does appear to wink halfway through – although perhaps this was a trick of the autumnal light flooding his office.

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