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This document discusses Hungary's economic challenges and proposes reforms in three areas:
1. Health care reform involving three pillars of financing including mandatory private health insurance.
2. Pension reform replacing the first pillar with a notional defined contribution scheme and taxing existing pensions.
3. Employment and education reforms such as rationalizing public education, financing tertiary education through tuition, and making the public sector subject to normal hiring and firing practices.
The goal is a comprehensive set of fiscal and structural reforms to reduce deficits, stimulate growth, and put Hungary on the path to long-term economic convergence.
This document discusses Hungary's economic challenges and proposes reforms in three areas:
1. Health care reform involving three pillars of financing including mandatory private health insurance.
2. Pension reform replacing the first pillar with a notional defined contribution scheme and taxing existing pensions.
3. Employment and education reforms such as rationalizing public education, financing tertiary education through tuition, and making the public sector subject to normal hiring and firing practices.
The goal is a comprehensive set of fiscal and structural reforms to reduce deficits, stimulate growth, and put Hungary on the path to long-term economic convergence.
This document discusses Hungary's economic challenges and proposes reforms in three areas:
1. Health care reform involving three pillars of financing including mandatory private health insurance.
2. Pension reform replacing the first pillar with a notional defined contribution scheme and taxing existing pensions.
3. Employment and education reforms such as rationalizing public education, financing tertiary education through tuition, and making the public sector subject to normal hiring and firing practices.
The goal is a comprehensive set of fiscal and structural reforms to reduce deficits, stimulate growth, and put Hungary on the path to long-term economic convergence.
LAJOS BOKROS professor of economics and public policy chief operating officer
Central European University
Budapest, Hungary 1 First years in the EU with mixed performance (2004-2006) Higher growth to slow Fiscal deficit increase once again next years ( 10% after austerity !) Return to export-led Deficit target missed growth in the last 2 yrs for 5 years in a row Better trade balance CA deficit almost 9% (less than 4 % of GDP) dangerously high Higher net FDI (over 5 years of increasing EUR 3 bn in all years) unemployment (7.4%) Low inflation recently no improvement in but to grow again competitiveness 2 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 3 deficit, large FDI and accelerating growth 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 4 monetary & expansionary fiscal policy 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 5 credibility of fiscal policy is extremely low Microeconomic problems arising from macro and fiscal Wage spillover reduces competitiveness in low tech & low value added sectors Inadequate spending on R&D 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 6 Economic and social structure dualisation 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 7 separate social support from tax system 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 8 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) 9 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 ( X%exemptions) 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 10 No labor income without PIT and HC tax 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 11 financing political parties and campaigns New convergence program Euro ???
Will Hungary become once again a
regional leader in structural reforms and convergence ? 12