By Krisztina Than
BUDAPEST, Nov 4 (Reuters) - Hungary has averted financial crisis in the short term with a huge IMF-led rescue package but even this narrow escape has failed to sober up the country to the need for economic reforms.
The worst global financial crisis of 80 years and the prospect of a recession have failed to galvanise the country's politicians to find a compromise on reforming social spending, a bloated state sector and the tax system.
Without these fundamental changes Hungary will inevitably
remain a laggard of central eastern Europe, with anaemic
economic growth, an oversized state and the highest interest
rates in the 27-member European Union at 11.50 percent
Neighbouring Slovakia, which carried out reforms in time, has seen its growth surge and its imminent euro adoption on Jan. 1 has largely shielded its markets from the global crisis.
"The danger of explosion is over but there is no real chance for reforming the state and re-thinking its redistribution and regulation role in the coming two years," think-tank Political Capital said. "Problems such as the extremely high tax burden and social expenses will be choking the Hungarian economy."
The crisis has failed to remove deep political rifts and the Socialist minority government is unlikely to push through any meaningful reforms before the next elections due in 2010.
The October crisis was the fourth time since the end of communism in 1989 that Hungary had to avert the threat of a collapse of public finances and stem a flight of foreign capital from its financial markets and government bonds.
Quick-fix spending cuts and tax hikes had in the past always resulted in a "soft landing" from periodic crises, but this time the global credit crunch threatens, along with forecasts of a protracted economic recession and rising unemployment.
A $25.1 billion mega loan from the International Monetary Fund and the EU and a government promise of faster budget cuts helped restore some confidence in Hungary's markets.
The government pledged to cut the deficit to 2.6 percent of gross domestic product next year from 3.4 percent this year, by cutting public sector wages and curbing pensions -- politically unthinkable prior to the recent financial troubles.
"An IMF package with EU support will act as a key anchor on fiscal policy going forward," said Gillian Edgeworth, analyst at Deutsche Bank in London.
"Nonetheless the path will not be an easy one and lowering debt ratios towards those seen in other emerging markets in Europe and elsewhere will be a multi-year process."
REFORM A DIRTY WORD
While the emergency spending cuts could prevent a loosening of the budget ahead of the next parliamentary elections in 2010, the crisis looks unlikely to prompt Hungarians to rethink the role of the state and support painful reforms.
Prime Minister Ferenc Gyurcsany has failed to complete changes in the health sector due to high public opposition.
A lack of consensus has also prevented downsizing in local governments, which number a staggering 3,200 for a population of 10 million. Hungary also has a record of heavy pre-election spending and its tax wedge is among the highest in the EU.
Only around 57 percent of the potential workforce is active and high social transfers make it a viable economic choice not to work, while tax cut plans have now been scrapped.
"There is a chance that for once the budget will not be loosened ahead of the election," said Citigroup analyst Eszter Gargyan. "But there hasn't been a dramatic transformation which would result in an improvement in the structure of the economy that would allow the country to escape the trap of low growth."
The government reckons the economy will contract by up to 1 percent next year as exports slow, real wages fall and bank lending slows, dampening domestic demand.
While the smaller opposition parties the Free Democrats and the Democratic Forum support spending cuts, the main opposition party Fidesz has rejected austerity measures and said it was a shame Hungary had to turn to the IMF for help.
Fidesz, which ruled in 1998-2002 and at the moment looks set to win elections in 2010, blames Gyurcsany for the crisis and it has not yet proposed a clear economic programme apart from saying that taxes must be cut to boost economic growth.
Political divisions between the two main parties are so deep that Fidesz walks out of parliament when Gyurcsany speaks.
Those divisions and the state's expanded role in society as the crisis bites may combine to undermine future reforms such as the downsizing of the public sector, Political Capital said.
Some analysts are more optimistic, saying the tough short-term cuts in pensions and wages, and a Free Democrat initiative to cap spending are positive signs.
"This could create room for the next government to implement a budget overhaul, including ... tax reform," said Gyorgy Barcza at K&H. (Reporting by Krisztina Than; editing by Tony Austin)