Clean Air Action Group has recommended several modifications to the State Budget of Hungary since 1992. The Union of Workers in Public Collections and Public Education joined to that effort in 1993. The contents of recommendations prove to be well-grounded and reasonable from time to time during thorough discussions of the topic. Our efforts attempt to reduce the fiscal nature of the budget, therefore, expand the scope of the Hungarian economy and the budget itself. Our efforts have been successful: some of our recommendations have been incorporated into laws on budget or taxation. However, fundamental changes have not been introduced yet.

To lay the grounds for our recommendations, Clean Air Action Group has completed a situation analysis (see below) that has been agreed to by the employers’ representatives of the most important trade unions of state budget organisations.

Our team has looked into the 1997 State Budget Bill (SBB) as part of the entire Hungarian economic policy bearing in mind the economic processes and development. We have compared the 1995 historical figures, the 1996 estimations as well as the projections of the SBB for 1997 to the real economic performance in 1994.

An Economic Stabilisation Programme called “Bokros Package” (named after the Minister of Finance at that time) was launched in 1995 and was continued in 1996, and will also be continued in 1997 despite government officials often say the opposite. The level of inflation is expected to be higher than it is forecast in the budget, therefore amounts cut are even larger than projected in the budget. (SBB figures prove this fact.) Consequently, the State Budget Deficit (not including revenues from privatisation) reads as follows:

The improvement is not significant when it is compared to all the impacts of the entire budget. At the same time, an overall deterioration can be seen in the society and its capability to perform due to the large amounts cut down by the state.

The following table discusses amounts cut back from three major players in the society (local governments, social security funds and social welfare expenses of the state):

 (for details see Table 3, 4 and 5)

In addition to cuts having direct impact on the budget, wages costs of employees working for businesses also fell by HUF 170 billion in real terms in 1995. This amount added up to the one above totalled a HUF 500 billion re-allocation. However, the state budget saw only a modest improvement whereas income of businesses is much less than the 500 billion taken away from the society.

On top of all this, state, local governmental and private property of immense value has been sold chiefly to foreign owners. Recent estimations say large areas of private land in Transdanubia (situated in the West of Hungary) have been purchased by foreigners, although laws prohibit selling land to foreign owners. The National Bank of Hungary (NBH) must be aware of the prices of those transactions, i.e. USD 1 billion, for most of that amount was converted into forints. The foreign currency received has partly ”vanished”.

Increase in Unemployment

NBH says savings of individuals increased, whereas 1995 saw a decline of wages at an exceptionally high rate (12%), which did not stop in 1996 either - it went up to 7% in the first seven months. The standard of living was worsening not only because the decline of wages in real terms but also because decreasing employment figures: official statistics reveal that 155 thousand jobs ceased in 1995, and another 100 thousand is expected to be terminated in 1996. This contributes to the state budget deficit with HUF 103 billion (at 1996 prices) since

— HUF 44 billion fails to be collected by social security and other funds,

— HUF 20 billion of personal income tax is lost;

— HUF 39 billion needs to be paid for the unemployed in forms of allowances and other assistance.

The total loss of 255 thousand jobs over the years 1995 and 1996 is a ”torture” not only for those who lose their jobs but the entire economy.

— We estimate that total ”value” of manpower in Hungary is 10 times higher than the accumulated annual gross wages. Therefore, one person is ”worth” HUF 5.5 million forints, i.e. skills and experience of 255 thousand people worth HUF 1,400 billion are lost. Using an analogue based on accelerated depreciation we have found that in the first year of their unemployment 30% of that value is lost, in the second - 20% and in the third - a further 10%.

— Nearly 1.8 million jobs have quit since 1989 to date. This means an over 30% increase in per capita social expenses. We feel it is a waste of Hungary’s most important resources - the relatively well-trained human resources.

Expanding Black Economy

The unfavourable process of growing unemployment has been further aggravated by the program of State Budget Reform. More and more welfare services are charged directly to people and, at the same time, state support has been significantly cut back. As a consequence, quality of life in Hungary has deteriorated, which is not reflected in the official statistics. The above-mentioned savings hardly come from the pockets of the obedient public, rather from the growing black and grey economy.

The 1997 SBB recommends further reductions of funds of almost all existing organisations, which would lead to a critical point where the effectiveness of social reproduction is threatened (see tables 3, 4 & 5). The figures suggest that banks and financial institutions themselves (although indirectly) are drivers of the expanding black economy against public interests. Unfortunately, losers of this process are employees and law-abiding entrepreneurs.

Economic boom started in 1994 has basically stopped, number of investments has fallen. Industry output (without the energy sector) has also dropped. Bulk of the improvement of the external balance of payments can be explained by that stagnation. Therefore, most of the restrictive measures have not been justified or necessary at all, and re-allocated income has only been passed to the black economy and foreign money laundry.

Harmful effects of the Bokros Package on the entire economy are also reflected by worsening ratios: the terms of trade improvement was over 2% both in 1993 and 1994, however, it fell to 1% in 1995 and further 2 percentage points in the first six months of 1996. In the first eight months of the current year, this alone caused a HUF 30 billion deterioration in terms of trade.

Similar was the impact on foreign exchange; it was more or less consistent with the improvement in the international balance. Consequently, the deficit is basically unchanged in spite of the restrictive measures that damaged effectiveness of the economy and the society. (Note: part of the deficit in 1995 comes from imports accelerated by the introduction of additional customs duties.)

Taxation as Means of Social and Economic Decline

Recent years has seen changes in the taxation and pricing systems, and that change has reinforced the old-fashioned and wasteful structure of the Hungarian economy. Real prices of electric energy and natural gas have dropped by roughly 50% since 1990. However high they seem, prices of fuels have also moved down in real terms over the previous years. Costs of labour, on the other hand, have increased considerably between 1990 and 1996. Since 1.8 million jobs have been quit whereas taxes and other charges (personal income tax, social security tax) have not seen any change, employees are more heavily burdened with tax duties than before. This must be especially true of people on payroll and even more true of state employees, who earn their living without additional sources of income and are unable to hide income from tax authorities. (In the light of this, government communications of increasing subsidies for education, culture, healthcare and scientific research are all misinformation on purpose. They fail to mention the ever-growing tax burdens that strike areas most where wages costs represent an overwhelming share in total expenses.) Burdens are intended to be raised further in the 1997 SBB. (This year it is not the personal income tax but social security charges where the state budget expects growing revenues.)

Poor Customs Policy and Other Means of Protection

Another source of problems is the carelessly structured customs policy with duty reductions that are not compensated by other means of protection. Competitiveness of Hungarian products and services is dwindling as a result of state measures. Import duties as a whole will go down by nearly HUF 100 billion due to recommended reductions of duties and additional duties on selected products. The lost revenues from duties need to be compensated; and if it is done by imposing further taxes on domestic industry, overall competitiveness of the Hungarian economy over imports may drop by HUF 200 billion in six months, supposing additional duties are entirely abolished as of 1 July 1997 (see Table 6). Government officials were wrong when signed international agreements and had them ratified only on reducing customs duties, and at the same time failed to develop and implement measures conforming with WTO (World Trade Organisation) regulations and protecting domestic economy. It is vital that legislature devote extra time to that issue; and it is even more so for disputes on government papers about free trade agreements have already put on the agenda.

Protection of domestic industry and jobs are important, but special attention needs to be paid to the protection of industry meeting state-of-the-art environmental requirements, such as manufacturing of EURO-II engines and buses in a plant in the West of Hungary as well as domestic production of energy-saving equipment. Protection of those industries increases state revenues since it moderates unfavourable impacts of duty reductions. Implementation of a protection system other than duties could generate further direct and indirect revenues for the state by having foreign industries to pay.

Poor Debt Service

The SBB recommends that debt service in 1997 increase to HUF 835 billion as opposed to HUF 544 billion in 1996. (However, interest revenues go up by only 100 billion.) Therefore, debt service represents around one third of total state expenses. The bulk of the increase comes from paying interests on the originally interest-free bonds held by the NBH. This is an extra burden that should not be taken over by the state. The effects of anti-inflationary measures of this kind on the economy are harmful, and the only beneficiaries are players in the black market.

Conclusions

1996 and the years before prove that decision on reducing the state budget deficit against public interests has been wrong and in vain, because the deficit is negligible if calculated based on actual purchasing power, i.e. real GDP.

Hungarian economy could have recovered by well-grounded and sensible measures together with public actions instead of the passive approach represented by the Bokros Package.

Figures indicate that black economy in Hungary is not the source of revenues but rather an unlawful means of using revenues generated somewhere else. The revenues are partly re-allocated through the channels of banks and other financial institutions, in the course of which debt service is a key driver.

Unless the state budget and the tax system are capable of turning back the processes discussed above in 1997, key social institutions (such as healthcare, education, culture, social welfare) will collapse, the society will split in two and conflicts will arise to an extent when discontent may explode.

We have based our recommendations on realistic economics principles that may improve the performance of the Hungarian economy. Unlike short term crisis management, our policies focus on measures urging long term, structural changes.

Since Hungary is an open economy, the internal balance can only be improved on condition that the external balance is improved at the same time. Therefore, ongoing improvement of the external balance is the key element of the policy. The point of this statement is to draw attention to long term (i.e. longer than one year) trends. The current practice and approach of elaborating the annual (short term) state budget is not capable of managing the long-lasting, primarily external, deficit. Unfortunately, banks also pursue the same practice.

Bearing in mind the necessity of a long term approach, the milestones of the 1997 economic policy and state budget read as follows:

1) Costs of labour should be reduced not by cutting wages in real terms, but by the means of a better cost structure and improved efficiency. This way the national economy could gain better competitive position both in the short and the long run. Key element of improving the cost structure is to cut back social security taxes and charge them to end users carrying out activities harmful to health and the environment.

2) Activities harmful to health and the environment are heavy burdens borne by the entire society. The part of the burdens that are not borne by the consumers or the producers but the entire society is called external costs. These costs damage the quality of life, or in many cases make life unbearable. Once these costs are included in prices, and formal steps are taken to that end, life conditions may be bettered.

3) Black economy can only be controlled by specific measures that, on the one hand, withdraw black revenues, and on the other, prevent revenues from being generated there.

4) Protection of the national economy needs to be achieved in compliance with WTO guidelines; and based on that, the economics policy needs to be export-oriented.

5) True and not propagandist preparation for EU membership needs to begin with activities where adaptation is time-consuming, such as education, culture, scientific research, etc. Negotiations with the EU must prioritise economic interests versus the political ones.

6) Environment protection offers opportunities to be fully exploited:

Preparing the grounds discussed above for economic development would facilitate real improvement.

If implemented, our recommendations would significantly reduce per unit costs of wages (without damaging quality of labour by reducing real wages) and protect the national economy effectively. They would guard and increase job opportunities as opposed to the current downsizing efforts.

Budget recommendations approved by the government ignore indirect (long term) as well as direct (short term) impacts of expenses spent on human values.

Hungary requires qualified, well-trained, thoughtful and healthy ”human resources”. Only they can survive in a developed economy approaching the EU like Hungary. Unfortunately, the majority of unemployed people hardly meets this requirement, they have poor qualifications, if any. Unemployment of highly qualified people in Hungary or in developed countries is only structural, i.e. those people are jobless only for a short period since they are easy to be re-trained and find another job soon. Finding a job for poorly trained and unhealthy people is almost hopeless, even in the long run. Therefore, the less amount is provided for education, culture, healthcare and - in close relation to the latter one - environment protection, the more is the shortage of human resources that are capable of boosting the economy and the more people find themselves without jobs, which poses further difficulties for the state budget and the society. (Official statistics cannot reflect reality for they only discuss data on registered unemployment, and do not deal with the great number of jobless people unregistered.) It is only the highly qualified, well-trained people who are capable of producing goods of high quality above average; and only those products sell well in international markets.

The returns of the money assigned to education, culture, scientific research, healthcare and environment protection can be expected not only in the long run but sooner, shortly after its provision. Firstly, it is pumped back into the state’s ”pocket” within a short period of time through taxes. Secondly, it generates demand both indirectly (e.g.: more orders for industrial goods, construction industry or services) and directly through wages.

Therefore, the government’s efforts ”to save money” on those areas may lead to a decline in production as a consequence of slumped demand, and in this way, less revenues are collected from taxes. (And at the same time, acceleration of privatisation for cash - when goods are sold to Hungarian buyers - require huge amounts of money that can only be offset by increasing demand to ensure ongoing operation of the economy.) Ultimately, budget revenues may drop to an extent that exceeds the expected savings.

We feel important to note that majority of people dismissed from governmental institutions are not likely to find new jobs in businesses, so they will add up to the number of the unemployed. Again, budget expenses will not go down, however, further invaluable resources are wasted and social tensions are caused.

The Hungarian economy has shrunk to an extent where any further drop in performance (due to the diminishing number of working people who should keep a growing number of dependants) may paralyse financing of reproduction processes. And more importantly, society may lose its ability to function.

The solution is not to manage the country as a company, shrink its activities and initiate bankruptcy or liquidation, which all would be normal with businesses. A country, however, cannot be ”liquidated”, banking methods are of no use. The way a country is properly managed is by encouraging activities that are efficient and reducing activities that generate losses, and therefore, the national economy may operate effectively.

 In 1995 HUF 254.7 billion of 858 billion (1994 prices) was cut down, which was an approximate 30%.

* Prices of goods in close relation with the profile of the Funds grew more dynamically than prices of other products. (Prices of food and household energy grew by 131.1% and 150% respectively.) Prices of medicines related to the Health Care Fund went up by 153.5%.

*Note: Price index is an approximate calculation: 50% - consumer prices, 50% - producer prices

* As stated in the bill T/2859 as of September 1996.

** Customs duties and taxes on imports fall by HUF 95 billion (using comparable prices).

Reduction of Labour Costs

The basic task is to make Hungarian economy competitive through an increase in the proportion of labour and its efficiency. Unemployment benefit plus related government allowances, and minimum wages are nearly equal; to have a properly functioning system, the difference between government aids and earned wages needs to be created through a reduction of gross labour costs, namely, through financing social security expenses from other sources. The theoretical and practical reason for this is that costs of environmental and other kinds of damage that have been borne by the entire society, including end users, need to be represented in the prices of goods. (This principle is being put in practice in the EU.) EU calculations of external costs (i.e. costs of environmental damage borne by the entire society) can be easily adapted to Hungary. External costs of transport compared to real GDP amount to an annual HUF 600 to 800 billion, of which 500 to 700 billion are ”charged to the account” of road transport. (see Table 8.) Costs of energy consumption other than transportation, are estimated to reach HUF 300 to 400 billion (based on average figures of data published in a study titled Real Costs of Energy by Clean Air Action Group.)

We recommend the following modifications are incorporated into the state budget: consumer tax of fuels in 1997 needs to be increased so that it reaches the level of Austria. This ensures an increase of taxes (consumer tax and VAT as a result) by HUF 120 billion on top of the initially proposed increase of 15%. Extra revenues from that increase added to further net revenues of HUF 113 billion from other items will ultimately amount to HUF 233 billion that is sufficient to cover a reduction of social security taxes paid on wages by 15 percentage points (from the current 44% to 29). Social security will function properly since revenues for 1997 are secured. Furthermore, since consumer tax will be collected rigorously, funds will be filled up regularly.

If implemented, the above recommendations make it unnecessary to raise social security taxes, as proposed by the government.

Transport

Consumer Tax on Fuels

Prices of fuels and their tax portion in Hungary are much less than those in selected countries of the EU. (see Table 9.) Wages should not be the exclusive sources of social security; higher taxes (consumer tax and VAT) on fuels could in part cover the funds.

The following measures ensure that taxes are increased and paid by all who are concerned:

1) Restrict smuggling of fuels.

2) Encourage introduction of fuel prices that comply with EU standards in the neighbouring, non-EU countries. It needs to be one of the pre-conditions for them before agreements could be made with the EU. Unless the government gives up its practice to encourage environment pollution and smuggling, the country that it represents should not be granted with preferences of any kind.

The government proposes an increase in consumer tax on fuels by 16% as of January 1997. Adjustment of tax rates to inflation will be 14.4%, so the tax increase proposed by the government is lower than the inflation rate. Based on the inflation rate of 23-24% this year, prices of fuels will see a further downturn in real terms. Costs of labour (e.g. rates of social security taxes), however, will be higher than before.

Source: international comparable data

GDP in 1995: HUF 5,500 billion - current prices and HUF 8,250 - purchasing-power-based prices

GDP in 1996: HUF 6,600 billion - current prices and HUF 9,250 - purchasing-power-based prices

Note: purchasing-power-based calculations show GDP of Hungary is 1.61 times more than figures in official statistics (sources: EIU, International Comparisons Project, Alton Project, World Bank)

This is the calculation that meets EU standards.

*using average FX exchange rates on 9 October 1996

**extra revenues of the state budget assuming unchanging fuel consumption and introduction of prices of the selected countries in the table

State revenues from consumer tax and VAT would grow by an approximate HUF 120 billion annually if prices of fuels in Austria were introduced in Hungary, and assuming that fuel consumption was unchanged. Even if consumption fell by 20%, state revenues would still see extra revenues of over HUF 80 billion. It is up to the government to gain all the extra revenues by taking steps to abolish illegal purchase of fuels and legal but tax-free fuel imports.

Smuggling of fuels must be banned. To that end, stipulations regarding tax-free imports of fuels kept in tankers agreed with all countries where internal (domestic) prices of fuels are at least 10% lower than those in Austria need to be suspended unilaterally. We recommend a limit of 10 litres for motorcars and 20 litres for lorries and buses. Under international agreements new ceilings for tax-free imports of fuels can be introduced in three months after official announcement. This measure will probably be welcome and appreciated in the EU as well for smuggling from the East to the West have severe impacts (damage to the environment, increasing crime rate) on countries that are directly concerned, primarily Austria and Germany.

Objections are raised that prices of fuels are not possible or allowed to be increased any further because wages in Hungary lag behind those in Western Europe. By accepting those objections, we would agree that life and health of Hungarians are worth less than those of EU citizens, on the one hand. On the other hand, taxes on fuels need to be increased so that other taxes could be reduced, leaving room for wage increase that enables people to survive or even better their living conditions.

Increase of fuel prices generates inflation, however, only temporarily and slightly. The positive impacts of the increase may offset inflation in the second six months of 1997. Prices of fuels represent a negligible 3% in the prices of Hungarian products as a rule, therefore, average price level increase is not expected to grow high. (Prices of fuels represent only 8% even in taxi rates. Supposing that prices of fuels grow by 50%, rates would go up by 6%. However, we estimate that overall moderation of road traffic would by far offset the negative impacts of that increase. First, the continuous flow of vehicles on the road would save fuel for cabs, second, more people would travel by cab.)

Lower fuel consumption helps protect the environment, lower the number of accidents, boost public and railway transport and improve balance of trade.

There is also a relationship between the prices of fuels and the costs of labour. While prices of fuels and other energy sources are determined by the high prices of imports, prices of domestic labour depend on its performance in the Hungarian and foreign markets.

Consumer Tax on Liquidated Gas

Consumer tax on liquidated gas is only imposed when used as engine fuel. Since other products such as light fuel oil or other liquid fuels are taxed, under the law on fair competition, tax on liquidated gas needs to be levied also. Nearly 250 thousand tons of liquidated gas are used annually in Hungary. Once consumer tax is introduced, taxes worth HUF 15 billion (including VAT) are expected to be obtained on 200 thousand tons of liquidated gas, assuming a drop of 20% in consumption. Out of the 15 billion, HUF 4 billion should be refunded (2 billion straight to households that need compensation, and another 2 billion for rationalisation of the energy sector, but strictly for the purposes of households and public institutions.) The remainder HUF 11 billion needs to be transferred to social security funds to lessen taxes. The reason for implementing that measure is in part the same as for imposing tax on light fuel oil, i.e. it is the only way to collect consumer tax on liquidated gas used as engine fuel. The other reason is that with tax imposed on light fuel oil, liquidated gas has acquired a de facto monopoly in the market, which should be abolished under the law on fair competition.

Consumer tax increase of fuels and liquidated gas will have an evident but less serious than expected effect on consumer prices, that is on prices of food and consumer goods. Measures, however, to reduce social security taxes and compensate households will not only offset the unfavourable impacts seen in the price increase, but will also create additional capacities of consumption. At the same time, the national economy will become more efficient and capable of generating more revenues. Thus, implementation of our recommendation will favour employees.

Consumer Tax and Deposit Refund of Greasing Oil

We recommend HUF 40 of consumer tax and another HUF 40 of deposit imposed on 1 litre of greasing oil. The letter one is to be refunded once greasing oil is collected and recycled. Since one litre of oil may damage one million litres of drinking water, our recommendation seems to be well-grounded. Extra revenues are estimated at around HUF 4 billion from this source. Deposit fees worth also HUF 4 billion could become a useful tool of promoting collection of used oil. This is also a recommendation that should be introduced soon, and it is even more so for the reason that the majority of EU countries have already passed harsh laws on collection and partial reprocessing of used oil. In Hungary, 116 million litres of greasing oil are sold, of which merely 10 million litres of used oil are collected. Since sewage treatment in Hungary lags behind that in any country of the EU, damage caused by used oil emptied into fresh waters is relatively higher in Hungary.

Existing laws need to be modified to regulate sales of greasing oil. Only those should be allowed to sell greasing oil who ensure collection of used oil and its reprocessing in an environmentally acceptable manner.

Crisis Management in the Northeast of Hungary

(through supporting rail transport)

The north-east of Hungary is an underdeveloped region of the country hit by a serious crisis. Its economy needs to be assisted with various preferences by the means of which it may keep up with the rest of Hungary, and ultimately, Europe. Partial refund of costs involved in environment friendly transportation (by water or combined methods of transport) could be one of the means that helps the region move closer to important markets in terms of costs as well as increase its competitiveness. In 1997, it would take around HUF 2 billion, which could be financed from sources devoted to road construction in the region (M3). Our recommendation serves the interests of the EU as well. Since it reduces road traffic, which is regarded as being harmful to the environment, and ensures better use of EU railway capacities, it supports implementation of goals set in negotiations of European Ministers of Transport in Budapest. This pioneering step is expected to be rewarded with considerable financial support from the EU. (A similar solution helped Transsylvania see an economic boost at the turn of the century.)

Roads, Motorways

We recommend that support worth HUF 3.29 billion approved for accelerated construction of M3 motorway by a company involved in road construction and operations in the north-east of Hungary is abolished. Our reasons read as follows:

• The support would only be means of spending public funds on buying land from speculative sellers. (We also recommend the Parliament should review the subject.)
• The costs of the construction and tolls to be paid in the future are charged on inhabitants and business owners in the region, which would aggravate the already difficult situation of the region. There is a danger of further isolation (precisely 150 kilometres) of the region from the West if the motorway is completed up to Füzesabony and tolls are introduced. (Motorcars are expected to pay HUF 1,200, lorries - 3,600.)
• Construction of further sections of the motorway to Polgár would cost another HUF 100 billion, or rather, it would add to the debt of construction since the investment would never repay itself. Money is wasted on a project that even World Bank has found unacceptable; and it prevents the region from development.
• Transport policy pursued by the government is wrong because it requires further loans to build new roads, which increases Hungary’s indebtedness.
• Technical conditions of freight transport by rail are provided throughout Hungary and Eastern Europe, although, we agree, they need significant improvement. However, the road network is under-developed. Investments worth hundreds of billions of dollars would be necessary to link the region to the West. Financial resources are not available, which limit the scope of transport policy. Austria and Germany promote the idea of reinforcing and intensifying railway transport between the EU and Eastern Europe, which is also in line with real interests of Hungary.
• Road construction (giving priority to maintenance) is acceptable only to the extent that can be covered by tolls, primarily in foreign currency. It prevents Hungary from accumulating further debts. The existing debt of the fund set up for road construction (called Road Fund) needs to be paid back from its own resources within three years. Therefore, new rates need to be calculated to meet that requirement.
• Foreign countries have already experienced the impacts of creating road links between a developed and an under-developed region. The outcome is draining resources from the less developed one. Local economy of the under-developed region is unable to compete with products and services flowing in from the developed area. Therefore, the already existing gap between the West and the East of Hungary would only widen after the motorway was completed.
• Roads mean heavier traffic, with all the negative impacts it implies. It is even more so in towns and villages that are in the close neighbourhood of the motorway since existing, small roads should carry more vehicles.
• The planned motorway would run parallel to a main railway line that is not used to full capacity yet. Road transport on the motorway would lower the use of that capacity even further; the railway line would require state funds to survive without providing the state with revenues.
• Scientists say that the current practice of replacing 600 million old cars with new ones over an average of 10 to 15 years cannot last but a few decades; not to mention combustion gases of coal, oil and natural gas emitted into the air in a year, the amount of which equals the quantity settled and developed deep down under the ground for hundreds of thousands of years. Thus construction of the motorway requires investment worth several billion forints in a project that may become obsolete in ten years.

We also recommend that HUF 1.385 billion set aside for completing the northern section of M0 motorway should be removed from the budget. The investment requires a total of HUF 25 billion, and is not justified by either economic or transportation or environment considerations.

• The northern section would damage the surrounding areas severely. Air pollution, noise, heavy traffic and destroyed green areas are damage to the health of inhabitants. The construction would also put survival of the already shrinking resort areas near Budapest into jeopardy.
• The motorway would run above the largest water base of Budapest. Any investment that endangers the chief water reserves that provide three million people with potable water must be suspended.
• After opening the southern section of M0, traffic has been multiplied on and around it.
• Even if the new section failed to generate extra traffic, it would result in a less than 1% decline in the traffic of Budapest. Accepting that HUF 25 billion need to be invested and improvement of road infrastructure in Budapest continues in a similar manner, the entire road network designed to ”ease” heavy traffic would require over HUF 2,500 billion. We believe that other solutions such as improving public transport services, expanding control on car parking or traffic calming, etc. would be much more efficient.

Road Contributions from Foreign Motorcar Drivers

At present, only lorries pay contributions when using roads in Hungary. We recommend that foreign motorcar drivers should also be obliged to pay the contribution. To avoid discrimination against foreign drivers, the contribution would also be charged on Hungarian motorcar owners who, however, would be entitled to refund of vehicle tax charged by local governments of an equivalent value as the contribution they pay, provided local governments charge the maximum of the tax. Since the contribution is not a tax duty but rather a toll paid for using the roads, international agreements stipulating reciprocity on paying taxes do not prevail. The amount of contribution should be calculated to generate a total revenue of HUF 20 billion in 1997. The revenues, then, are used to:

• cover at least a portion of HUF 170 billion necessary to maintain roads and bridges, primarily in economically under-developed regions,
• improve safety in railway and road junctions.

Contribution revenues should finance the Road Fund, which would make it unnecessary to raise prices of fuels (as one of the financial resources of the Road Fund) by 27.3%, i.e. from the current HUF 12.1 per litre to 15.4. The amount could increase revenues of social security funds, therefore, cut back social security taxes, and ultimately, total costs of wages.

Fee of Airspace Use

Fees charged for use of airspace are extremely small compared to those charged in the West. We feel it is unacceptable, and recommend that the fees should reach the value of Austria or Germany. We base our recommendation on increased traffic and contamination in the airspace of Hungary during and after events to the south of Hungarian borders. (In 1990, 67,500 aeroplanes entered the Hungarian airspace, whereas in 1994, the number of aeroplanes was 323,000.) As a result of the rise, foreign exchange budget revenues would grow by USD 40 million (HUF 5 billion), which would improve the balance of payments accordingly.

Environment Friendly Fleet of Vehicles

The growing number of cars is damage to the environment, the health and the economy. It is especially important, therefore, to cut that number by improving other means of transport. In our view, HUF 6 billion would be necessary to introduce comprehensive changes in public transport in and around Budapest, i.e. to improve services and co-operation as well as to regulate fares among the Public Transport Company of Budapest (BKV), the Hungarian Railway Company (MÁV) and the national couch lines managed by Volán. In specific, improving the quality of public services of BKV and Volán as well as making railway lines capable of carrying passengers in and out suburbs of Budapest are the most urging issues.

We are aware that public transport needs improvement all over the county, still we recommend that the entire amount should be devoted to improvements in Budapest. The reason behind it is that 20% of all inhabitants live in, and nearly 30% of air pollution from vehicles come from Budapest, an extremely small area representing only 0,5% of the entire land of Hungary. Consequently, once conditions of transportation are improved in Budapest, environmental damage will be reduced and tensions in transport will be moderated cost efficiently. With actions taken, nearly 3 million people in and in the close surroundings of Budapest could live under better living conditions.

Costs of Road Accidents

To reduce social security taxes, and in that way, to increase competitiveness of domestic labour, healthcare expenses (costs of treatment, sick-leave benefits, etc.) of road accidents should be paid by insurance companies. Social security funds would not even be indirectly involved in taking care of the expenses because insurance companies should set up guarantee funds to finance or prevent costs of accidents. It would save HUF 3 billion for the state.

Energy Policy

The government spends nearly HUF 1,000 billion on energy. It equals 15% of GDP (HUF 6,560 billion) expected in 1996. The energy sector represents around USD 3 billion in the trade deficit directly and indirectly, which is nearly 30% of all exports. Real producer prices of energy have depressed since November 1990. Table 10 shows that price rises from December 1995 to date only reflect inflation and currency devaluation, so, relative advantage of prices can still be seen.

Exports of highly energy-intensive products tend to pay off most, which can be spotted in export volumes of raw-material-intensive products.

*HUF/DEM exchange rate divided by producer prices of energy for large consumers

The large share of energy and material-intensive products in Hungarian exports show how out-of-date and ageing is the economic structure of Hungary. At the same time, labour-intensive products represent a relatively small share in exports. (In essence, energy prices are back to the levels of the COMECON era.)

There is a strong inter-relationship between the reduction of labour costs and the increase of producer prices of energy, which drives the structure of exports into the direction of modernisation, whereas competitive advantage of Hungary (i.e. available human resources and their improving competitiveness) is enforced through economic rules. The multiplier effect works also in trade, because net results expressed in foreign currency of more efficient, labour-intensive products are positive, moreover, are significantly higher than revenues from energy and material-intensive products, several of which generate negative results.

Rise in prices of energy introduced on 1 January 1997 should be reasonably compensated. We support recommendations of the Advisory Board at the Hungarian Energy Office about compensation. Individuals and public institutions are entitled to compensation, however, we urge to provide funds for energy rationalisation. Moreover, we feel that majority of available funds needs to be allocated for the rationalisation of the energy sector, since it is the only way to reducing compensation in a fairly short time, improving the economic structure and creating new job opportunities. Energy rationalisation is a useful tool for increasing efficiency, and thus promoting economic growth in Hungary, which is an essential pre-requisite for approaching the European Union. It is important to note that although they exist, other methods of boosting economic growth (such as pure banking tools) may carry the risk that growth is not accompanied by better efficiency.

VAT on Electric Energy and Natural Gas

Privatisation in the energy sector, and as a consequence, large share of foreign ownership in it demand revision of the national energy strategy. Owners establish an extremely strong ”natural” monopoly that makes consumers defenceless. Therefore, it is the task of the government and the state budget to improve the situation of consumers by the means of an increase of VAT from the current 12% to 25%, and refund the entire difference between the two to consumers. It serves two purposes: (1) demand is restricted through the tax rise, which reduces profits earned by foreign owners, and (2) extra tax revenues are used for compensation, part of which goes straight to households to keep up existing levels of consumption, and the other part is used for energy rationalisation helping restrict demand for energy over the long run. In addition, capital investments in the energy sector become unnecessary in part, leaving room for modernisation. Share of imported energy supplies is growing. To avoid preferred imports of energy, the 12% VAT levied on imports needs to be raised to the proposed 25% VAT of products processed in Hungary. This way, domestic labour may be used to better efficiency. The integrated energy rationalisation program can only be implemented once taxation issues are properly addressed. Higher VAT rates would, of course, increase energy prices of households and public institutions by HUF 30 billion approximately, however, the amount of the increase would be refunded in the form of compensations.

Tax increase would generate inflation only in part and temporarily. On the one hand, prices of energy would fall as a consequence of energy rationalisation. On the other hand, better use of labour as well as improved economic structure would help control inflation since both increased efficiency, and significantly reduced social expenses due to the multiplier effect and as a result of higher rates of employment work against inflation. Instead of energy, well-processed goods with a high value added are used. Also, better use of labour reduces current unemployment rates as well as the allowances and supports ultimately charged on the society. At the same time, the 100,000 new entrants in the labour market reduce per capita social costs. Furthermore, cutback in energy consumption would improve the general state of the environment and help meet requirements set in international agreements.

Penalties for Damaging the Environment

There is also an urgent need of introducing damage penalties. They would facilitate fair and rational distribution of income by abandoning the current practice that only increases profits of foreign companies present in Hungary at the expense of damaging our health and environment.

* by a study (KTM 1234/K) from Péter Kaderják: Economic Scope of Integrated Energy and Environment Policy

**not including nuclear energy and electric energy imports

Note: Data reflect only air pollution and only consumption.

It is high time that penalties were introduced since total external costs may significantly vary depending on the kind of energy and technology used. (See Table 11 for details.)

We recommend that penalties should be introduced in 1998 and increased year by year, until they reach the required level. The agreed schedule of implementation needs to be published by the end of 1997.

Energy Sector Investments

After privatisation, an overall boom in capital investments is expected so that new owners could reach the desired 8% return on assets (ROA). New owners have the interests to spend the most possible amounts on ”improvement” by which they mean establishing new premises such as power stations, etc. Their contribution to the success of the Hungarian economy is questionable in some cases, the costs involved are highly uncontrollable. In our opinion, implementation of the following two projects are unjustified under the current circumstances:

• the so-called ”secondary reserve/quick-start power unit” with an expenditure of HUF 50 billion. In effect, it would not generate electricity. Instead, we recommend that frequency regulation should be introduced all over the energy sector to lower costs.
• a power plant based on lignite resources in Bükkábrány (north of Hungary), which would not only use up hundreds of billions of forints, but would lead to serious damage to the environment, a rise in external costs, and also, breaching obligations that Hungary has signed in international environment agreements.

By suspending the projects, energy price increase could be moderated.

Energy Rationalisation

Energy rationalisation is achieving similar or even better results by using less energy.

The energy rationalisation programme should be financed primarily from domestic sources of compensation provided once VAT is increased. At present, however, modernisation programmes are not feasible owing to the high level of internal interest rates. Therefore, it would be essential to ensure reduced rates of interest by the means of re-allocating already available funds, and to develop the national financial policy so that speculative financial activities could be controlled and the Hungarian banking system should operate with minimum margins. Energy rationalisation is the most effective way of economic growth and development, since it combines effectiveness and economic boost with better employment ratios.

Initially, HUF 10 billion, from increased VAT rates and extra revenues of energy price rises expected from 1 January 1997 on, would be sufficient to implement the energy rationalisation and modernisation programme. (On top of that amount, it may be financed from German loans.) Besides better efficiency, the programme could create a significant number (approx. 100,000) of new jobs. All in all, it would increase GDP, and improve the balance of the state budget by HUF 30 billion through extra revenues from taxes and contributions. We recommend that bulk of the compensation worth HUF 4 billion of tax increase levied on liquidated gas is also used for the rationalisation of the energy sector.

Energy rationalisation is a precondition and stimulus for the success of the modernisation programme.

Optional Right of Government on Yamburg Project

The Yamburg project was financed from budget resources, so the government is entitled to the revenue/income it has generated and the subsequent optional right.

Optional right means that after loans are paid back (after mid-1997), Hungary will keep the right to import 2 billion cubic meters of natural gas annually, for which Hungarian products are agreed to used for payment. The optional right also belongs to the government. We recommend that the products exported by the way of barter trade should be manufactured entirely in Hungary, using domestic labour as well as offered in large quantities. ”Ikarus” buses are good examples of a possible barter deal; gas imports worth USD 180 million could create demand and market for 3,000 buses. A successful deal like this one could create 30,000 jobs for manufacturers and other assisting partners.

We recommend an addendum should be attached to Article (2) Paragraph 40 of the 1997 SBB requiring ”the abolishment of 0.5% fee imposed on barter trade for deals relating to the Yamburg project”. The lost fee revenues are offset by taxes and social security contributions paid by the 30,000 new employees.

Crisis Management in the Northeast of Hungary

(through energy rationalisation)

The rise of energy prices will probably have unfavourable impacts on the industries of metallurgy and heavy chemistry in Borsod county (north-east of Hungary) since crisis management so far has not calculated with the consequences of that rise. Former mechanical engineering plants could serve the development of the region and house energy rationalisation mechanical engineering with German assistance. The Public Procurement Act needs to be modified so that employment ratios are bettered in the county and other under-developed segments of the region. We recommend that a modification requiring a minimum 30% share of the region in fulfilling public procurements should be incorporated in the Act. The share can be determined more precisely once wages and related tax burdens are known.

Consumer Tax on Beverages and Tobacco

Consumer tax on beverages and tobacco is another item of the budget that has not kept pace with inflation. Unfortunately, it has been an indirect promotion of consuming harmful products against the interests of the society (primarily families).

In August 1996 consumer prices of tobacco was 36.1% higher than in the previous year. Consumer tax, however, was increased by 7.6% over the same period, i.e. meanwhile prices went up significantly, consumer tax saw only a minor increase. It also means that unless consumer tax is risen by the rate of inflation at least, foreign companies will be able to increase their profits at the expense of state revenues. Furthermore, the more products are sold, the more people need healthcare the prices of which are paid by the society. So much about the government’s anti-inflationary policy...

Assuming an 18% rise in consumer prices in 1997, consumer tax increase of tobacco by 14.7% and that of alcoholic beverages by 15.6% (including the 8% increase as a result of strict collection of taxes) would ultimately lead to a nearly 20% decline in consumer taxes of those goods over a two-year period. Since tax rises have followed a similar trend over the past few years, i.e. they have been increased by a lower rate than the rate of inflation, consumption of goods that are harmful to health have proved to be a cheaper choice in comparison to either prices of previous years or those of food. The declining trend should be stopped as of 1 January 1997, which would generate HUF 15 billion of extra revenues, assuming unchanged volumes of consumption. Provided the government have the tools to curb black economy, collection of that HUF 15 billion (plus VAT) can be realistically expected. The collected amount should be transferred to social security accounts. (We feel important to note that harmful effects of beverages and tobacco may cost a lot more than 15 billion. A research in the EU, for instance, proved that costs of easing the harms caused by tobacco were double than related tax revenues. In Hungary, there are only estimates which show similar results.)

Anti-Inflationary Measures

Inflation is generated by the underdeveloped structure of the Hungarian economy and downsizing that erases jobs creating value added, therefore, contributes to relatively higher costs borne by the society. (A diminishing number of working people keeps a growing number of dependants.) The most efficient and lasting tool against inflation is economic restructuring since the current structure generates inflation. Reducing labour costs, abandoning energy price subsidies, improving effectiveness of labour and improving competitiveness through better use of manpower are all means of rooting out inflation. As a result, the state debt can be handled, and projected debt service of HUF 834.6 billion can be significantly reduced. To that end, measures taken by the National Bank of Hungary (NBH) that fuel inflation should be cut by the law as of 1 January 1997. NBH is wrong when it stands up against preserving the value of the forint through pointless devaluation simply because it needs to offset the upset balance by increasing inflation. It is wrong, because it ignores that doing so, it chases the economy into a steady inflation spiral embedded in a poorly-established economic structure. IMF and other impartial organisations have also expressed their disapproval of NBH measures fuelling inflation. Reducing labour costs through cutting social security taxes could boost Hungary’s competitiveness to an extent that allows currency devaluation at a lower rate than projected.

 

 

Encouraging Hungarian Agrarian Exports

 

We recommend that export subsidies in agriculture should be granted only for producers/farmers primarily for the purposes of expanding production capacities of exported goods and reducing costs to improve competitiveness. (The reason for this is that today, the major obstacle of agrarian exports, which could generate the most net foreign exchange income, is the shortage of products.) Subsidies in 1995 and 1996 were primarily extended for traders and banks. Increasing demand for Hungarian goods (without sufficient product supply backing it) gave a surge to domestic prices of certain goods (e.g. grains) by an amount exceeding subsidies. Ultimately, it fuelled further inflation - that is why the price of bread, for instance, went up. Inflation pushed up interest rates that also gave a push to the burden of servicing national debt. So subsidies had a twofold impact on the state budget deficit: (1) directly, and (2) indirectly through increased inflation and interest burdens.

The way subsidies are allocated to the agricultural sector and especially related exports are not satisfactory and the amount provided is not sufficient. Statistics of 1995 indicate that HUF 15 billion of total subsidies were granted to traders instead of producers/farmers. Therefore, subsidies could not serve the purpose of improving production methods or increase the volume of products offered, but they were used for speculation. Statistics prove the same in 1996 as well. We recommend that a law should be enforced that ensures that subsidies are only provided for producers and not for banks and traders. Legislation should be passed with appropriate sanctioning.

 

 

Factors Fuelling Inflation

 

International studies show that environment-conscious budget and tax policies might help curb inflation in the long run. When, for instance, prices of energy, including fuels, are raised, demand for energy-intensive products or activities drops, which reduces the impact of the price rise on inflation on its own. Accumulated impacts of the rise are also less and less significant than generally assumed, because energy consumption is concentrated in households and not at producer plants. Furthermore, the rise could control waste of energy, encourage innovation, which all have a cumulative cost-reducing effect on the entire economy.

It is also evident that when subsidies are cut somewhere, taxes (including wages related costs) or prices can be reduced. As discussed above, energy (electric energy and natural gas) as well as petrol-fuelled transportation are subsidised through both direct and indirect financial tools. Cutting subsidies will open up opportunities to lower social security tax and personal income tax rates, which, again, would reduce corporate expenses. Therefore, prices could go down, or at least, rise at lower rates.

Unless users of energy are forced to pay for the damage they cause, or cover the costs of prevention and/or remedies, others will pay the price at a multiplied rate. For example, maintenance and development costs of buildings and other facilities will surge as a result of corrosion, just as costs of making up the environmental damage caused by agricultural techniques, or costs of medical care and reduced working capabilities as a result of deteriorating health. Thus open or hidden governmental support of environmentally hazardous products and activities is not capable of preventing the forint from losing its value, but the other way round, it speeds up inflation.

That idea can be easily adapted to scientific research and education. Unless facts and processes used for decision-making are identified (and they are often left unknown in an attempt to save money needed for recognising them), wrong or poor decisions are likely to be made, which might result in actions that involve much more costs than the savings on proper preparation for decision-making. The prices are also paid when a country entirely or partly lacks well-educated, qualified experts, officials and executives who manage to get on in a complex world like ours. In simple terms: besides pollution, ignorance is the other most influential factor that generates inflation.

Impacts of the consumer tax increase on inflation, however, are only temporary; and its impacts on production are not significant. Beverages or tobacco are obvious examples, but the impacts of the rise in fuel prices are also expected to be temporary and moderate since motorcars, which account for nearly 70% of total fuel consumption, are primarily used for private and not production purposes. Furthermore, when use of motorcars by companies is restricted through tax measures, inflation can be depressed further. On the other hand, wages costs are constant factors of production, therefore, by reducing costs of wages, total production costs are also cut down. Cumulative impact of all measures detailed above is a lower rate of inflation by the end of the year. It is equally, or even more, important that by reducing costs of wages, competitiveness of industries involving relatively high wages costs can be improved internationally. Employers may also benefit from lower wages costs: the more people they employ, the more costs are saved on social security expenses; and they earn more as a result than they need to spend on increased taxes of fuels.

If approved and implemented, our recommendations and consequent measures could push down the rate of inflation to 15% from the projected 18% by the government for 1997. Assuming an unchanged structure of debt service, interests costs may go down to HUF 700 billion form 835 billion. Costs of interests can be reduced further by abandoning the idea of paying interests on the originally interest-free bonds.

Tuition

We recommend that EU directives are followed as regards introduction of tuition fees. The directives say that countries where the system of tuition has not been implemented yet should not introduce it, whereas countries where the system exists should abolish it. It is extremely important that reforms of education comply with the requirements set by the EU, since complete implementation of reforms may even take five to ten years. Lost of tuition revenues will cost the budget around HUF 3 billion.

Further Measures to Improve the State of Environment

Launch of Afforestation Program

Several countries of the EU provide finance for afforestation. Besides its favourable environmental effects and long-term employment benefits, afforestation is an efficient means against excessive agricultural growth. Funds from PHARE and other favourable loans are necessary to be used and re-allocated for an integrated afforestation programme in Hungary. It would benefit both the EU and the Hungarian economy in the long run. Airborne contamination carried by prevailing winds from the West is very likely to settle in the Carpathian basin, however, forests (if planted) serve as natural filters of the polluted air.

Renewable energy resources represent 8% of all energy consumption in the EU where serious effort is made to increase that proportion. Hungary lags behind Europe with its current share (1.4%) of renewable resources. Hopefully, the afforestation program may help increase that share.

Hazardous Waste Penalties

The law on environmental protection and Hungary’s commitment to comply with international agreements require more severe collection of hazardous waste penalties. The largest volumes of hazardous waste (red mud) come from processing aluminium oxide. Hungary’s major plant of processing aluminium oxide in Almásfüzitő (north-west Hungary) has been closed, however, production is being restarted by foreign sub-contractors who, under current regulations, are required to remove all hazardous materials, together with the processed product, from Hungary. Over the course of processing 100,000 tons of aluminium oxide, 200,000 tons of hazardous substances are produced. Storage and treatment of a single ton of red mud cost HUF 50 to 100 thousand. Only the restart of the production may cause damage worth HUF 5 billion, not including indirect government support through relatively low prices of energy that is provided for the highly energy-intensive aluminium oxide processing plants. The successor of the plant attempts to finance production from selling existing processing units in Almásfüzitő. Sales revenues are estimated around HUF 2 billion, which should rather be used for removal of hazardous materials.

We recommend that revenues of property sales should finance industries where new, up-to-date high technology is used without creating hazardous wastes, such as research of new processes in aluminium production. We also recommend an international campaign to remove and/or utilise dumping grounds of the already existing 50 million tons of red mud. We request assistance from the EU and other developed countries to re-use that waste in an environmentally safe manner, and also from the Hungarian government to elaborate a specific programme. Restart of the production initiated by the State Privatisation and Property Management Company (ÁPV Rt.) should be halted by law, and existing facilities should be involved in processes that comply with EU standards and meet quality requirements.

Curbing Black Economy and Crime

One of the most efficient ways to cut the size of the black economy in any country is to create interests of organisations that ”specialise” in it.

One of those organisations is the National Customs and Revenues Office (VPOP). It could serve several purposes. First, it could ensure protection of the Hungarian economy in compliance with WTO directives. Second, net state expenses could drop since a portion of import revenues could finance wage rises of customs officers and establishing better working conditions for them. Thus extra revenues of HUF 15 to 20 billion seem to be sufficient to create the interests of VPOP, whereas state funds (HUF 9 billion) currently spent directly on the operation of VPOP could be used for other purposes.

Wages are possible and need to be increased by an average of 50-100%, which is covered entirely from import revenues. The government should not save on this item since each forint spent reduces competitiveness of imports and reinforces the national economy. As, even after the rise, wages of customs officers would be far lower than those of their counterparts in the West, it is not regarded as discrimination against other countries.

The end result is an organisation that is efficient and interested enough in fighting against black economy, which generates extra revenues of at least HUF 40 billion annually.

We recommend that the National Internal Revenues and Tax Authority (APEH), the police, licensing procedures of foreign trade, environmental protection authorities, national healthcare institutions and consumer protection agencies are restructured by developing and taking similar measures and actions.

Restructuring is not only a means of modernisation but by doing so, the state budget may reduce the expenses to finance institutions of public administration.

Managers as well as the staff of the institutions can expect benefits from the restructuring, therefore, it is in their interest to back such efforts. The budget, on the other hand, also benefits from restructuring. First, it reduces government expenses. Second, the state becomes enabled to collect more revenues as a result of improved efficiency against black economy; and third, illegal activities can be detected and curbed. All in all, a package of extra revenues worth HUF 100 billion is expected to be achieved yearly.

Total outstandings of Social Security, VPOP and APEH are close to HUF 800 billion. Measures and actions described above are also capable of preventing those outstanding from growing further, moreover, a minimum of HUF 100 billion can be collected in 1997. Business owners who fail to meet their obligations break the laws. Therefore, when the state is unable to collect the debt from them, it supports black economy. The amount lost this way is around HUF 1,500 billion (current prices) that could have been used to modernise education, healthcare, culture and other social areas. Instead, a privileged minority has spent it on consumption and imports of luxury goods, rather than new investments.

VAT Revenues

Collection of VAT and other tax obligations from importers and other buyers in the black market is enabled through the legally operating sector. Other, primarily Western, countries collect taxes from the black market by enabling legally operating sellers to withhold their tax payments. Tax revenues exceeding 2% of the annual GDP (HUF 130 billion in Hungary) could be collected in that way. If elaborated and implemented in 1997, that method could secure extra revenues of HUF 20 billion for the government. (It would be a stricter and more integrated method than that described in the government’s proposal.)

Intermediary Trade

It is common knowledge that exports and imports are handled through intermediaries in Hungary. However, the current structure of exports is not wise to alter for fear that exports would decline. Until export financing through loans is completely solved, the issue of intermediary trade in exports is not relevant anyway.

A growing share of imports to Hungary is handled by intermediaries, the volume of which is expected to exceed USD 2 billion in 1996. Intermediaries play a primary role in importing goods of growing volumes and value from developing and ex-COMECON countries. It has adverse effects on the economy. First, intermediaries gain extra amounts of commissions, or sell the goods at a higher price. Second, they offer goods that compete with Hungarian-made (primarily processed) goods in markets where technology levels allow Hungarian products to enter. It aggravates the structural crisis of the Hungarian industry. Intermediary trade is linked to the mafia and black economy. Therefore, it is pressing to take decisive measures against them, as also required by international agreements signed by Hungary. Intermediary trade has seen an upturn since the collapse of large state-owned foreign trade monopolies that having split up, went to the marketplace to ”sell” their knowledge to whoever paid the most for it.

Paragraph (3) of a Government Decree (112/1990. - XII. 23.) regulates imports of goods and services. In specific, it says that imports from countries with which bilateral relations are not based on market-oriented institutions and instruments are subject to licence. Licence fees could increase revenues by HUF 1 billion.

Actions should be initiated by the government. As a result, Hungarian exports to ex-COMECON and developing countries might well be expected to surge by USD 1 billion a year, moreover, the structure of exported goods may improve. (Machinery or other processed goods could be sold.) It would create demand for domestic labour; another 100 thousand or more people could find a job. This structural change would increase state revenues by HUF 50 billion a year, and improve the balance of payments by USD 0.5 billion annually.

Standardised and Regulated Customs

Hungarians crossed the borders to visit other countries 13.1 million times in 1995. On their way back, tourists bring goods of significant value into Hungary. Assuming that each Hungarian carries home goods worth net HUF 10 thousand each time they leave the country, the total reaches HUF 131 billion. Customs, VAT and other duties paid on those imports amount to HUF 60 billion of which a negligible 2 billion was actually paid into the state budget in 1995. In fact, however, the value of imports often exceeds HUF 10 thousand; various jobs enjoy significantly greater benefits from travelling abroad. For instance, 6,000 Hungarian lorry drivers (not to mention the accompanying personnel) crossed the borders of Hungary on their way back home over 400 thousand times. Assuming they carried goods of net HUF 30 thousand each time, their imports totalled HUF 12 billion a year, which is a lost of at least 4 billion for the state budget, or in other words, lorry drivers were provided with an allowance of HUF 4 billion. Total loss from non-payment of customs duties and other taxes, therefore, exceeds HUF 60 billion a year. As matters stand now, foreign exchange and currency tend to leave Hungary since they are worth more over the borders than the value converted according to official exchange rates in Hungary. Thus, foreign exchange worth nearly USD 1.5 billion leaves the country annually. It is especially sad because it is the loss of state revenues that encourages people to use up foreign exchange savings outside Hungary.

Leaving the current customs system as it is would threaten Hungary’s foreign exchange revenues and balance. We recommend that allowance on imports is provided once a year for each individual only regardless the purpose of travel. Technically, it would require a separate sheet or a page in the passport to register the allowance already provided. In the event of loss of that sheet or the passport the allowance cannot be provided for that year. This measure may increase state revenues by a minimum of HUF 25 billion partly as a result of stricter customs procedures, partly because the growing demand for domestic products, which eventually could cut back on imports. The balance of trade would also be improved by at least USD 0.5 billion.

Another favourable effect of the recommended measure is that demand for forint (vs. foreign currencies) would grow, which acts against inflation.

Reduced Trade from Post-Communist Countries

In 1995, nearly 38.2 million visitors crossed the borders of Hungary, of which 27 million came from post-communist countries of the region. They are tourists on paper only, in fact, they carry goods to sell in Hungary at a reduced price since they avoid customs and tax payments. We estimate that even if they bring goods worth net HUF 10-20 thousand each only, the entire imports from the region total HUF 100-200 billion a year. More severe customs and tax measures are required to cut these imports at least by half, and the remainder half would increase state revenues by HUF 15 billion through customs and tax revenues of 30%. And it is not the only favourable impact: ”grey” imports could drop by at least HUF 50 billion, which would push up demand for domestic goods, and therefore, create jobs; as well as foreign exchange savings would stay in Hungary, improving the balance of payments this way. Visitors from the East sell articles of low technical quality, and they immediately spend the money they earn on goods (such as video recorders and other electronic equipment) imported from Western countries into Hungary. Doing so, they contribute to the worsening of the balance of payments.

Recommended measures have favourable effects on economic development since it is likely that once imports decline, demand for domestic products grows to the same degree, which again increases state revenues through taxes of labour. A fragment of extra revenues could be used for establishing performance measures that make Hungarian customs authorities more interested and ensures payment of higher wages. As a result, external balance of payments can be improved by nearly USD 200 million.

Measures against Corruption

Measures recommended in the sections above (e.g. on reducing social security taxes) make business owners consider to stop their activities in the black or grey economy on the one hand, and on the other, by strict control, clear legal regulations and severe punishment, the scope of black economy will probably be limited. It is equally important to take decisions and actions against corruption, which hold back development into a healthy economy. We recommend that a separate rationalisation programme should be launched to discover corruption, privileges and other unfair practices in public administration.

As mentioned earlier, we recommend that extra revenues of HUF 50 billion from penalties imposed on players of the black economy should counterbalance losses from social security tax revenues. HUF 25 billion is used to sustain the quality of healthcare institutions, whereas the other half is allocated for another 5 percentage point reduction of social security payments.

To curb black economy it is vital to develop measures and regulations restricting business owners in starting up their business. Owners should secure property or take out insurance against health or environmental risks that the business may involve. (Specific decisions should be made by environmental authorities.) It would save several hundreds of millions for the budget that are now spent on removing damage caused by businesses that are unable to provide the necessary funds, therefore, eventually tax payers pay for eliminating the damage harmful to their own health or environment. (Several billions are lost this way, since even the state lacks the necessary resources to pay for or remove the damage.)

The amount and scope of penalties should be determined without any delay to be proportional to the damage or the unlawful action they lead to; in other words, to be efficient in preventing businesses from causing the damage. It is essential since current regulations and practices may even boost black economy. For instance, the ceiling that the Customer Protection Agency is allowed to impose on a petrol station offering low quality fuel worth several millions of forints is HUF 30 thousand. Or, another example can be the HUF 50 thousand penalty imposed on using public land in resort areas near lake Balaton where the market value may well reach HUF 10 million.

The number of new petrol stations is growing in Hungary. Unfortunately, several of them disguise money laundry or other techniques of illegal trade of fuels. Besides being illegal, however, they pose a threat to humans and their surroundings. Funds are often scarce to remove old stations out of use or the damage they cause. We recommend that new petrol stations could be set up only on condition that the owner deposits the funds for potential removal of the station.

Besides other benefits it offers, the new structure of taxation recommended in the previous sections of the present document is a useful tool of eliminating black economy. First of all, taxes related to consumption are more easily collected than the personal income tax or social security taxes linked to wages. Second, it is especially true of taxes levied on energy (including fuels), where the number of tax payers is relatively small and they can be more carefully spotted. Therefore, the current structure of taxation not only delays development of the economic structure but also is an apparent tool of keeping black economy alive.

Government efforts to eliminate black economy cannot be taken seriously until they are reflected by revenue figures in the state budget. Unless extra tax revenues collected from illegally operating companies are specifically included in the state budget, all the efforts are in vain, or rather, they continue to support flourishing illegal entities.

Medical Tourism

We recommend that HUF 2 billion should be spent on improving services offered by medical tourism. Instead of limiting capacities and dismissing medical staff from hospitals and other institutions, Hungary should come to an agreement with EU countries and their social security funds about improving services. A programme is necessary to be launched to facilitate bilateral agreements with social security funds of EU countries, first Austria and Germany. (Hungarian medical doctors and other personnel are by far competitive since average wages are around twenty times less than their counterparts’ in the West.) The agreements would prevent Hungarian medical staff from being forced to find jobs abroad or finding themselves without any job opportunity in Hungary. But, they would also benefit the EU and foreign patients since treatment in Hungary costs significantly less than it does in EU countries.

Environmental Tax on Advertisements

We recommend that environmental tax on commercial advertisements published or broadcast in Hungary should be levied on advertisers.

Commercials often fail to be informative enough on buying or obtaining the advertised product or service. At the same time, they urge consumption, therefore, pose direct or indirect danger to the environment and humans. If introduced, the environmental tax could reduce the number and frequency of commercials, and create the necessary funds to publish non-commercial advertising that promotes culture, health, sports, gives guidelines to find useful leisurely pastimes and strengthens environmental consciousness, which, unfortunately, is very low in Hungary nowadays. From an economic aspect, the environmental tax is the cost of eliminating negative impacts of advertising.

The base of the environmental tax is the fee charged by the publisher/broadcaster for the advertisement, or the real costs of producing the advertisement. The tax is 50% of the base value. The tax is not levied on press advertisements that occupy 40% or below of the display space, and TV or radio commercials that are on air 10% or less of the total broadcasting time. (It means that environmental tax is chiefly and justifiably imposed on advertisements and commercials that do considerable harm to the environment, irritate people and aesthetically damage the cityscape or the landscape. However, we feel it equally important to grant tax exemptions for selected press advertisements as well as TV and radio commercials - under the above criteria - if they educate and serve public interests.) Non-commercial and political advertising is exempt from taxes as a rule.

The environmental tax would be completely independent from the so-called ”culture tax” imposed on all sorts of advertisements.

Revenues from the environmental tax (expectedly HUF 3 billion annually) should be transferred to the Central Environmental Protection Fund and spent on educating advertising that helps people become aware of their environment and health. Available funds should be allocated by issuing tenders with the consent of the Ministry of Social Welfare.

We strongly object advertising of tobacco and alcoholic beverages that, we feel, are harmful to the society. Should laws be passed that legalise advertising of those commodities, to avoid ”rewarding” already privatised tobacco and beverage manufacturers, their property ought to be re-evaluated for they were sold when legislation prohibited advertising. We estimate that the legal opportunity of advertising would increase the market value of manufacturers by at least HUF 10 billion. Damage, however, is more considerable than HUF 10 billion, so the extra privatisation revenues of the property growth should cover the allegedly increasing costs of national healthcare. The issue needs immediate attention; purchase agreements should be re-negotiated, and legislation on advertising should only been passed after agreements are reached.

Consumer Tax on Luxury Goods

Taxes are necessary to be imposed on consumption of luxury goods to favour domestic businesses and industry. Although those taxes do not have an immediate impact on foreign competition, it is true of Hungary that imported goods of higher prices are preferred to domestic ones. Therefore, besides protecting the domestic industry, consumer taxes on luxury goods contribute to profitability, and thus, higher tax revenues. Another reason for introducing those taxes is that they may counterbalance the falling revenues from customs duties. It would be essential to increase accumulation of savings at the expense of consumption of luxury goods. Therefore, taxes levied on them are not only sources of state revenues but also help determine a new direction of thinking in the society.

In our reading there are two approaches of introducing the tax on luxury goods:

a) Levy taxes on goods that are regarded as luxury goods by public opinion, especially when the country should make efforts to develop production and manufacturing. Luxury goods could primarily include costly cosmetics and clothing, high quality food, deluxe cars, luxury trips abroad and other, well-defined groups of products and services.

b) Impose a 20% tax on goods the price of which is 50% higher than the average price of the relevant product or service; and a 40% tax on goods that cost 100% more than the average price.

Extra revenues from this source would be around HUF 10 billion. We recommend that they should be used for reducing social security taxes.

Extra revenues as a result of the above well-grounded recommendations are expected to amount to HUF 532.7 billion. Estimated expenses are HUF 445.7 billion. So, the balance is HUF 87 billion not to be distributed.

HUF 50 billion are required by the increase in wages of state employees, the amount of which is already included in the expenses. The increase would be carried out according to calculations normally used in Hungarian practice. (The amount of wages is determined by qualifications and the time spent in work.) It would ensure increase in real terms whereas it would not add to state expenses. HUF 13 billion provided for implementation of laws on culture is indispensable so that agreements on the status of state employees are met and culture is promoted.

Reduction of social security charges would lead to better economic performance, enable inflation to move down and advance competitiveness. In addition, as a result of the multiplier effect, the economy may start to boost. If implemented, our recommendations could prepare for increasing child care benefits and pensions, which favour the everyday social climate.

We feel it is the only direction of development to improve Hungary’s reputation in other countries.

Budapest, 21 October 1996