Philipp Fink, Inequality, Poverty and the Hungarian State in:

Philipp Fink

Late Development in Hungary and Ireland, page 189 - 194

From Rags to Riches?

1. Edition 2009, ISBN print: 978-3-8329-4173-4, ISBN online: 978-3-8452-1720-8

Series: Nomos Universitätsschriften - Politik, vol. 168

Bibliographic information
189 income threshold in 1999. Again, unskilled workers, single mother households, families with more than two children and members of the Roma minority are those socio-demographic groups deemed to be both poor and deprived (Spéder 2002: 158- 159).151 4.3.4 Inequality, Poverty and the Hungarian State As shown, the Hungarian development strategy had distinct social effects. However, it would be short-sighted to place the full responsibility on the inflows of FDI. The social implications of the strategy are also the result of the state’s educational, social and income policies. In the case of Hungary, the role of the state in these policy areas has contributed to deepening and to sustaining market-generated inequalities and poverty. Attempts by the state to reduce the individual costs of transition created social costs in the form of higher contributions to the social insurance system and rising state indebtedness. However, the social costs have not been evenly distributed. Middle and higher income groups have been able to complement their marketgenerated incomes by benefiting from wide ranging tax allowances leading to a regressive tax system. Transformation of the Hungarian Welfare State The process of transition fundamentally changed the country’s social and welfare regime. On the one hand, social welfare institutions were created and social citizenship rights strengthened. On the other hand, social policy repeatedly has been affected by expenditure cuts. These have affected the redistributive nature of the implemented instruments. In similarity to other transition countries, the transformation of the Hungarian welfare since 1990 is seen to have entailed three overlapping elements. The first element was characterised by the response to the economic decline of the SOE sector. The SOEs were the main element of the socialist welfare system (Wagener 2002: 156). The liberalisation and privatisation of the economy relieved the enterprise sector from its previous social tasks. Furthermore, the liberalisation of prices resulted in the abolition of price subsidies, which had constituted a major egalitarian instrument of the former regime (Wagener 2002: 157). The state introduced an insurance-based social welfare system with the establishment of health and social security funds financed by employer and employee contributions. The chosen models followed the “the conservative-corporatist Bismarckian model” (Wagener 2002: 160). The introduction of a mutually financed and 151 For the exact proportions and material deprivation definitions, see Spéder (2002: 162-165). 190 obligatory insurance fund also resembled a certain degree of path dependency, as Hungary returned to the pre-WWII system of social insurance (Wagener 2002: ibid). The second element was defined by the reform of the pension system. Hungary followed the model recommended by the World Bank. Its emphasis was placed upon combating old-age poverty and simultaneously enhancing economic growth by inducing higher saving rates, leading to larger capital accumulation and hence improved capital supply (Wagener 2002: 163). Essentially, the model introduced into Hungary in 1998 combined the classic income-based Pay-As-You-Go (PAYG) public fund system with mandatory and voluntary contributions for higher income groups to private pension funds. Furthermore, the state also provided a tax financed minimum pension for those pensioners unable to reach eligibility requirements (Ferge/Tausz 2002: 188). The third element was concerned with the sustainability of the social welfare system, which coincided with the aforementioned elements. As remarked, transition entailed the liberalisation, privatisation and deregulation of economic actors and activities. This resulted in the transfer of the majority of social welfare provisions to the state. However, the state was faced with deteriorating revenues due to the effects of the transitional recession. The decline in economic growth, firm closures and rising unemployment additionally reduced the sum of contributions to the social insurance funds. The state had to increase its financing share, which additionally strained the government’s already precarious fiscal position (Wagener 2002: 161). Additionally, extensive early retirement provisions were used as a labour market instrument to lower unemployment. Consequently, the pension system was financed by fewer than 1.5 active earners (Ferge/Juhász 2004: 244). Retirement transfers had to be financed via increasing state payments, which contributed to an estimated 50% of all social transfers to private households equalling 20% of the country’s GDP in 1994 (Haggard et al. 2001: 80).152 The high level of transfers was interpreted by economists as a sign for the continuation of the “socialist premature welfare state” (Kornai 2000a: 123). “Populist policies” (Milanovic 1998: 38) guaranteed a level of social transfers, services and redistribution “beyond actual economic capacity” (J.M. Kovács 2002: 176). The “populist state” attempted “to cushion the population, as much as possible, from the effects of real GDP decline” (Milanovic 1998: ibid). Within this context the Bokros- Package of 1995 resembled a watershed. The expenditure cuts aimed to support fiscal stability transformed the Hungarian welfare state from “paternal populism” to a “compensatory” welfare state (Molnár 2004: 25). A compensatory welfare state is defined by the compensation of those members of the population experiencing a loss in incomes through social transfers (Milanovic 1998: ibid). However, compensation followed the rules of political efficacy, whereby important socio-demographic electoral groups in form of the middle class disproportionately benefited from the reformed welfare measures (Ferge/Tausz 2002: 179). 152 An estimated 1.5 million pensioners are deemed to be hidden unemployed (Csaba 1998: 1389). 191 As a result of fiscal retrenchment, the public welfare effort dropped by 10% from 35.7% in 1991 to 25.7% of GDP in 2002 (Ferge/Juhász 2004: 241). However, although the Bokros-Package was responsible for the furthest reaching single cuts, social welfare expenditure has been decreasing ever since.153 The main emphasis has been a reorientation of social welfare benefits from universal measures towards means testing based on the very low minimum pension level (Ferge/Tausz 2002: 183). Furthermore, the eligibility criteria were tightened; duration and replacement rates for unemployment benefits were lowered. Social assistance was connected to public works schemes, decentralised and placed under the remit of local government (Galla 2004: 49-51; Ferge/Juhász 2002: 243-246). Inequality Reduction According to Giammatteo (2006: 17), the financially hard-pressed Hungarian state was nevertheless successful in reducing market generated income inequality. In line with the revaluation of educational attainment, rising unemployment experienced during the initial phase of transition, wages and salaries were responsible for more than 120% of income inequality between 1990 and 1994, higher than comparable levels in Russia and Poland. Although the contribution of wages to overall inequality decreased to 77% by 1999, the impact of incomes from non-agricultural selfemployment and income from property and capital grew substantially (Giammatteo 2006: 16). Social transfer components were able to reduce market generated income inequality by almost a third during the initial phase of transition. Accordingly, in 1994 the Gini coefficient for market-generated incomes stood at 55%, following social transfers this figure dropped to 32% (Cerami 2003: 10, 20). The most important components were retirement benefits and cash-based universal family allowances. The influence of pensions displays the importance of the early retirement schemes initiated by the state in an attempt to combat unemployment. However, by 1999 the role of social transfers declined to 8%, as pensions lost their inequality reducing impact, which fell from 18% to 13%. Furthermore, earnings from unclassified cash income became more unequal. Hence, the inequality reducing effect of redistribution declined in line with the resumption of economic growth after 1996 and as a result of the 1995 austerity package (Giammatteo 2006: 17). Molnár (2004: 9-10) shows that the distribution of social transfers has disproportionately benefited higher and middle-income groups. Between 1993 and 2001, pensions were increasingly concentrated in the middle-income groups with the proportion of eligible low-income households declining. Although the share of unemployment benefits in low-income households increased, the sum of unemployment benefits as well as general social transfers have continually decreased since 1995. 153 For a detailed policy field account on the various changes in social welfare expenditure in Hungary, see (Ferge/Tausz 2002: 182-195). 192 The decline in total social expenditure contributed to the loss in income in lowest earning deciles relative to the median income over the observed period, as higher income could avail of increased tax benefits (Molnár 2004: 9). The positive effect of means-testing and targeting is disputed. Molnár (2004: 10) finds no proof that low-income earning households have received a larger share of social transfers than higher earning households. Whilst means-testing for social assistance may have improved targeting, the eligibility requirements are regarded as too low. They are set at a disposable income corresponding to the minimum pension, which underscores the subsistence minimum (Ferge/Tausz 2002: 195). Moreover, income shares from social transfers are evenly spread, owing to the instrument of housing subsidies available to all families, which due to financial requirements are disproportionately availed of by middle and high income families (Molnár 2004: 10). Likewise, a major social transfer, child support and family benefits, contributed to net household income inequality (Molnár 2004: 19). After 1998, direct cash benefits were means-tested and independent of the number of children. In contrast, the child tax allowance was increased and indexed to the number of children. Consequently, this led to higher benefits for larger income households, as low income households are unable to avail of the tax breaks due to their lower levels of taxable income (Ferge/Tausz 2002: 190-192). Similarly, in contrast to corporation taxes, which have declined throughout the 1990s, average income and consumption taxes as well as social contributions since the latter half of the 1990s have been rising. Conversely, middle and high-income groups have been able to lower their effective tax rates due to the increased provisions of tax allowances and the lower taxation of capital income, which is a predominant feature of high-income household earnings (Molnár 2004: ibid). Furthermore, the increases in indirect taxes disproportionately affect lower income groups, who have a higher share of food and fuel expenditures. 154 Poverty Alleviation These developments are also displayed in the state’s record of poverty alleviation. Although poverty measured as 60% of the median disposable household income stood at 13% of the population in 1999, the rate would have been 20% higher without social transfers (Cerami 2003: 11). In terms of individual instruments, unemployment benefits reduced the poverty of the unemployed by 14% from 36% to 22% in 1999 (Cerami 2003: 12). However owing to the reductions in social transfers 154 In 2003, personal income taxes (24.5%) and VAT (40.4%) were responsible for almost 65% of state revenues. In contrast, corporation taxes only accounted for less than 11% of the state’s tax take. Furthermore, corporate taxes have been successively reduced from 40% in 1989 to 36% in 1994 to 18% in 1995 to 16% in 2004 (Pitti 2004). 193 since 1995, the effectiveness of this instrument has declined by one percent from 15% in 1991 (Cerami 2003: 13). Similarly, means-tested instruments in the form of social assistance reduced poverty for this group by 9% from 40% to 31% between 1991 and 1999. Again the share of population experiencing poverty despite receiving social assistance was one per cent higher in 1999 than in 1991 (Cerami 2003: 14). Finally, family benefits reduced poverty by 9% in 1999. However, as a result of the mentioned decline in family transfers, poverty reduction of this instrument was 5% lower 1999 than in 1991 (Cerami 2003: 15). Although the Hungarian measures to combat poverty are viewed positively in an international context with Hungary taking a midfield position in the EU in terms of policy effectiveness (Gábos/Szivós 2004: 112), the aggregate figures mask worrying developments in terms of the disproportion of the activity rates. An estimated 400,000 to 500,000 unemployed have left the labour market and therefore the official statistics (Ferge/Juhász 2004: 242). They contribute to the estimated 8% of the population with incomes below the official eligibility criteria of the minimum pension and receive no form of assistance (Ferge/Tausz 2002: 195). An estimated four percent of Hungarian households were classified as permanently poor in 2001 (Havasi 2002: 71). Szalai (2002: 46-49) chillingly refers to the consistently poor as “the social outcasts in 21st Century Hungary”. They are socially and economically stigmatised and have low chances to escape poverty prompting their social exclusion. They constitute a socialist legacy, as in the previous system they often belonged to untrained migrant factory labourers and farm hands. The permanently poor are consequently predominately unskilled. They experience a high degree of insecure multiple forms of employment to make ends meet and live in excluded rural areas of the country. Permanent poverty is also ethnic, 60% to 80% of the Roma population belong to this social strata and are subject to additional exclusion in form of racism. Due to institutional imbalances there is the acute danger of a social reproduction of poverty. The descendents of the permanently impoverished have little chance of improving their situation, leading to multi- and trans-generational poverty within permanently poor households. On the one hand, the Hungarian welfare regime has little experience in poverty alleviation, due to the ideological taboo of the existence of structural poverty under the previous socialist system (Szalai 2002: 37). The socialist taboo of structural poverty continued to exist after 1990, as poverty was seen to be a mere result of transition (Szalai 2002: 39-40). Furthermore, post- 1990 welfare institutions followed political efficacy by concentrating on ensuring the incomes of the transitionally insecure middle class voters in an increasingly politicised polity. On the other hand, the decentralisation of social welfare institutions resulted in poverty alleviation to be confined to local governments, who only follow framework legislation. This prompted the segregation of poverty issues from the broader social and political agenda. 194 The definition of poverty became locally discretionary with eligibility requirements, programmes and definitions displaying wide local differences. The lack of a concerted effort to understand and address structural poverty, therefore, resulted in the assistance instruments to only guarantee the subsistence of the poor instead of attempting to tackle the underlying reasons of poverty (Szalai 2002: 41-42). Finally, although the period of large wage volatility has subsided, meaning that wage earners are less prone to experience large declines or increases in their incomes, relative and income positions have become increasingly rigid (Molnár 2004: 24). Hence, the possibility to escape from low pay and poverty has become more remote. Therefore, the danger to remain in the low wage sector and thus to possibly experience poverty and social exclusion has increased. The importance of educational attainment has increased for new entrants on the labour market (Róbert 2005: 85). However, despite a substantial expansion of higher education since 1990 in Hungary, the permeability of access to higher education is increasingly constrained (Lannert 2005: 53). Pupils from socially disadvantaged households are finding it increasingly difficult to enter upper secondary and third level institutions as a result of financial constraints (Liskó 2005: 93). The level of parental educational attainment is of increasing importance. The higher the level of education of the parent, the larger are the chances for the child to access higher educational institutions (Varga 2005: 81). Hence, the revaluation of educational credentials since 1990 has increased the social determinism of the educational system. Thus, institutional imbalances increasingly contribute to the social reproduction of success and failure in post-1990 Hungary. 4.3.5 Hungarian Social Dichotomy Hungary’s transition from a socialist planned to a market economy unleashed a dramatic reconfiguration of income and wealth positions. Post-socialist Hungarian society is characterised by a dichotomy defined foremost by the level of skills, nationality of employer and increasingly social status. The large inflows of FDI have contributed to a distinct labour market demand shift in favour of younger and skilled employees to the detriment of low skilled and older workers. Institutional deficiencies of the Hungarian wage bargaining process additionally amplify direct market income inequality. The market-generated inequalities feed through into the dispersion of household incomes. The household income position is defined by the educational profile and employment status of the main earner. Initially the Hungarian state was able to avert the widespread marginalisation of the population via extensive social transfers. The resumption of economic growth after 1995 has disproportionately benefited higher income households. The situation of those households experiencing low pay and poverty has difference only marginally improved. Moreover, lower income groups disproportionately

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