Posted by: Gabor Grenczer, Counsellor, Economy and Trade Posted on: Thursday 03 March 2011, 19:08

The government on Tuesday unveiled a broad structural reform plan that aims to improve the fiscal balance by HUF 550bn in 2012 and by HUF 900bn in both 2013 and 2014.The Szell Kalman Plan aims to reduce Hungary's state debt as a proportion of GDP from around 80pc to 65-70pc by the end of 2014, National Economy Ministry Gyorgy Matolcsy said presenting the plan at a press conference. In 2012, four-fifths of the improvement will come from spending cuts and the ratio will fall to three-quarters in 2013 and 2014, he added.

Steps take under the Kalman Szell plan will result in higher economic growth, expanded employment, improved competitiveness and, in the mid-term, a sustainable financial balance. "The operation of the state must be cheaper but more efficient, serving the public interest and not increasing, but decreasing, state debt," according to the plan. Some HUF 57bn is available from the New Széchenyi Plan for the restructuring of Hungary's public administration system, the plan notes.In a show of solidarity, members of government, ministers and state secretaries are to take a 15pc pay cut and forego all bonuses until Hungary's state debt falls under 65pc of GDP.The plan, together with the New Széchenyi Plan, will establish the conditions for 4-6pc GDP growth in Hungary, Mr Matolcsy said. The faster growth rate will raise payroll numbers by 300,000, he added.The government plans to use 63pc of assets transferred from private pension fund members returning to the state pension pillar to reduce state debt to 76-77pc of GDP by the end of 2011, Mr Matolcsy said. But it targets further falls in the level of debt supported by narrowing fiscal deficits in the years ahead, he added.The plan outlines new sources of revenue, such as an electronic road fee to be introduced from 2013, and raises revenue targets from existing sources -- the banking levy and the corporate tax -- that will improve the balance by HUF 90bn in 2012 and HUF 220bn both in 2013 and in 2014.

The additional revenues from the three items will be put into a State Debt Reduction Fund to be set up at the start of 2012. The plan rolls back a reduction in the corporate tax rate from 19pc to 10pc earlier planned from 2013. The tax rate reduction will not happen either in 2013 or in 2014, but the plan keeps the 10pc preferential rate for companies with annual profit under HUF 500m. The measure will improve the balance by HUF 120bn. The plan targets the same amount of revenue from the bank levy in 2012 as in 2010 and 2011. Revenue from the tax was to have been halved in 2012, according to targets in the 2011 budget. The additional revenue will mean a HUF 90bn improvement to the balance.The plan seeks to restructure the system of drug subsidies in a way that prevents the price of medicines from rising while reducing the taxpayer support for them. Regulations on the new system are to be drawn up by July 1, 2011.In the interest of protecting families whose livelihoods are threatened by high repayments of foreign currency-denominated loans, the government wants to freeze the cost of necessary utilities through regulating prices and cutting extra profits.

Under the plan, a new pension system will be introduced from the start of 2012 that eliminates the possibility of early retirement and special pension benefits. The changes will plug the pension fund deficit and allow pensions to be financed entirely from contributions. Changes to criteria for disability pensions will have effect from July 1, 2011.The plan calls for a "government return to education", implying a shift of control from local governments to the central government. Planned legislation scheduled to take effect in September 2012 will cut the school-leaving age to 15 from 18, and will allow the government to fix annually the number of students whose college and university education is financed by the state. Decisions on higher education will be made with an eye to labour market demand and steps will be taken to prevent young professionals from leaving the country to work abroad.Hungary public transport system will be reorganised from the start of 2012. The National Development Ministry is to draw up a plan to settle state-owned railway company MAV's HUF 300bn in debts and to restructure the company by the end of 2011. Some HUF 752bn is available for transport developments and renovation under the New Szechenyi Plan, the plan notes.The plan aims to raise Hungary's employment rate from 55pc to 70pc in ten years.

To help achieve the target, the government will launch a new public work scheme which places temporary workers with private sector companies. The scheme will be supported by HUF 73bn available for public work schemes in the New Szechenyi Plan.Data on the plan published on the National Economy Ministry website show the plan seeks to save HUF 195bn in 2012 and HUF 213bn in both 2013 and 2014 on changes to employment and labour market policy. Reforms of Hungary's pension system are set to improve the balance by HUF 93bn in 2012 and by HUF 129bn in both 2013 and 2014. Changes to public transportation are expected to improve the balance by HUF 45bn in 2012 and by HUF 60bn in both 2013 and 2014. Changes to higher education policy is set to improve the balance by HUF 12bn in 2012 and by HUF 38bn in both 2013 and 2014. Changes to the drug subsidy system are to improve the balance by HUF 83bn in 2012 and HUF 120n in both 2013 and 2014.

Changes to financing of the central and local governments are to improve the balance by HUF 32bn in 2012 and by HUF 122bn in 2013 and 2014. Payments from the State Debt Reduction Fund will come to HUF 90bn in 2012 and HUF 220bn in both 2013 and 2014.