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Last Updated: Tuesday, 19 September 2006, 12:33 GMT 13:33 UK
Economic woes fan Hungarian riot fires
By Ben Richardson
Business reporter, BBC News

Woman in beer bottling plant
Hungary has attracted a lot of investment despite the problems
The admission by Hungary's Prime Minister that he lied to voters may have sparked the country's worst riots in decades, but the violent street protests have deeper-reaching economic and political roots.

Despite greater freedoms, many Hungarians feel they have been marginalised and left behind in a fast-changing nation as a small and powerful elite get richer at their expense.

At the same time, Hungary's economy has deteriorated to the point where the government has had to draft a package of emergency austerity measures in the hope of putting its finances back in order.

Whilst policymakers and analysts argue that there is little choice other than to accept tough decisions and tax hikes, for much of the population the memory of the last set of financial measures - the Bokros package - is still very raw and painful.

Especially when they were told that the sacrifices made little more than a decade ago would ensure Hungary's stable economic future.

"There is an element of general dissatisfaction with the economy, and an element of political dissatisfaction," explained Zsolt Papp, a senior economist at ABN Amro.

"People think they are not getting the benefit of economic changes and the country is still being run by the same old guys."

Tighter reins

Since the fall of the Berlin Wall, one of the biggest problems facing governments in former Eastern Bloc countries has been how to marry the expectations of the electorate with the harsh realities of running free-market economies that aspire to join the single European currency.

Though Hungarian wage levels have risen to an average of about $750 (399) a month and are on a par with other nations in the region, this has come mainly as a result of increased state spending, analysts said.

Unwilling to upset the electorate, in recent years Hungary has failed to take difficult decisions on delicate issues such as healthcare spending, unemployment benefits and pensions.

The government's appetite for reform will be really tested
Zsolt Papp, ABN Amro

As a result, the nation's budget deficit has spiralled to massive proportions, now totalling about 10.1% of annual gross domestic product (GDP).

That compares with a figure of about 3.2% in the Czech Republic and is more than three times the limit set for members of the euro.

About 50% of the annual state budget goes on social security spending, a figure that is not sustainable, analysts say.

The budget problem has been exacerbated by Hungary's poor record in collecting taxes and other state revenues, and a seeming inability to impose rigorous checks and controls on state spending.

Analysts said they see inflation accelerating to as much 6% next year, thanks in large part to the largesse of the state and compared with a rate of about half that in the Czech Republic.

Interest rates are tipped to increase from their current level of 7.25% and economic growth is seen as slowing from about 4% this year to as low as 2% in 2007.

By comparison, growth in the Czech Republic is expected to power ahead at 6% this year and 5.5% the next.

Faced with this depressing economic reality, it is not surprising that government plans to boost taxes and cap spending are met with suspicion and in some quarters downright hostility, analysts said.

Reform hunger

Hungarian Prime Minister Ferenc Gyurcsany
Hungary's Prime Minister may struggle to get his message across

However, at the same time too much should not be read into the protests in Budapest, despite the question marks hanging over whether or not the Prime Minister Ferenc Gyurcsany can stay in power.

Most of the nightime violence was limited to a small area of the city and was blamed on a minority of troublemakers.

Analysts are not predicting another violent flare-up even though protests have continued in a more peaceful manner, and have spread outside of the capital.

And if anything, the violent events in the Hungarian capital may help drive home to voters just how serious the nation's economic problems are and concentrate the government's mind on its reform and cost-cutting programme, analysts said.

"Hungary has been lagging," said ABN Amro's Mr Papp. "The government's appetite for reform will be really tested."

The problem facing Hungary is that after the Prime Minister's candid gaffe, voters may prove unwilling to swallow the latest set of economic promises.

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