Choice and Competition Reform

1
Choice and Competition Reform

• LAJOS BOKROS
• professor of economics and public policy
• chief operating officer
• Central European University
• Budapest, Hungary

2
First years in the EU with mixed performance
(2004-2006)

• Higher growth to slow once again next years
• Return to export-led growth in the last 2 yrs
• Better trade balance (less than 4 of GDP)
• Higher net FDI (over EUR 3 bn in all years)
• Low inflation recently but to grow again

• Fiscal deficit increase ( 10 after austerity !)
• Deficit target missed for 5 years in a row
• CA deficit almost 9 dangerously high
• 5 years of increasing unemployment (7.4)
• no improvement in competitiveness

3
Performance average in V4 but worse than Baltic3,
Rom Bul

• Slovenia small CA fiscal deficit, little net
  FDI, low inflation, relatively slow growth
  
• Baltic3 Rom Bul no fiscal but large CA
  deficit, growing FDI, growth well above 5
  
• Slovenia Baltic3 are already in ERM II.
• Poland no CA but large fiscal deficit, little
  inflation, FDI restructuring, high growth
  
• Czech R Slovakia large fiscal, smaller CA
  deficit, large FDI and accelerating growth

4
Macroeconomic problems in Hungary

• Large twin deficit clearly limiting growth
• Large fiscal redistribution reduces savings
  investment performance potential
  
• growing structural unemployment with large public
  sector overemployment
  
• interest rates kept relatively high and keep
  rising to support HUF fiscal borrowing
  
• suboptimal macropolicy mix restrictive monetary
  expansionary fiscal policy
  

5
Fiscal issues behind macro picture in Hungary

• Excessive public sector wage growth in 20O1-2OO5
  has inflated wage bill in budget
  
• Tax loopholes widened and multiplied, widespread
  tax avoidance and evasion
  
• Pension and Health Care Funds sharply in the red
  and in need of growing transfers
  
• Current expenditure crowds out public investments
  and matching funds for EU
  
• credibility of fiscal policy is extremely low

6
Microeconomic problems arising from macro and
fiscal

• Wage spillover reduces competitiveness in low
  tech low value added sectors
  
• Inadequate spending on RD in SMEs, little
  innovation and low investment
  
• Sectoral split between multinationals in high
  tech manufacturing and the rest
  
• Inadequate (re)training and education, slowly
  but surely growing unemployment
  
• Economic and social structure dualisation

7
Fiscal framework for substantive structural
reforms

• Comprehensive, consistent and credible reform
  program to reduce deficit size
  
• Focus on the expenditure side reduce public
  funding - increase private funding
  
• Priority areas health care and education
• Rationalize and reduce fiscal transfers to
  churches, NGOs, other special programs
  
• broaden tax base eliminate exemptions
• separate social support from tax system

8
Structural reforms I. Health care

• 3 pillars for financing (1) public HC fund,
  private (2) mandatory and (3) voluntary health
  insurance provided by accredited insurance
  companies in competition
• Split financing for most services for all
  secondary and tertiary providers public funds,
  private insurance and co-payment
  
• universal HC (solidarity) tax to first pillar
• regulated mandatory fee for second pillar

9
Structural reforms II. Pension system

• First pillar to be replaced by a notional defined
  contribution (NDC) scheme
  
• automatic balancing mechanism (systems liability
  is indexed to the growth of average income with
  fixed contribution rates)
  
• Even existing pensions are to be taxed by the
  universal HC (solidarity) tax
  
• Minimum social assistance to those who never paid
  any contribution (0. pillar)

10
Structural reforms III.Employment and education

• Public education (primary and secondary) to be
  rationalized (less schools teachers)
  
• Tertiary education operating costs to be financed
  by tuition fee ( Xexemptions)
  
• No tenure and privileged public employee status
  in higher education and health care
  
• Flexible contracts, hiring and firing even in
  public administration at all levels
  
• No labor income without PIT and HC tax

11
Long term challenges in Hungary

• Comprehensive tax reform with consistent changes
  promoting growth and investment
  
• Streamline reduce public administration
• Rationalize the structure of subsovereign
  government, its tasks and financing
  
• Modernize fiscal support for agriculture and
  rural development (EU-coordination)
  
• Create a new and transparent system for financing
  political parties and campaigns

12
New convergence programEuro ???

• Will Hungary become once again a regional leader
  in structural reforms and convergence ?