The Political Economy of Crisis Management in East–Central European Countries

Abstract

The financial and economic crisis in the Central and East European countries raised the profile of economic policy themes that relate to the role of taxation and state spending. The key policy differences related to public budgets and support for a demand stimulus. Responses fall broadly into two categories that we link to a social-democratic and a neo-liberal response. The distinction indicates that the policy responses were linked to the party affiliation of the government on the left–right spectrum. There were some remarkable common trends that cannot be explained by the logical requirements of the economic situation alone. There are differences in timing and in severity, but every country has at some point moved towards a policy of balancing the budget by making cuts. In all cases there were cuts in benefits for marginal groups in society and a switch towards indirect rather than direct taxes. These carry clear distributional implications.

Notes

Ivan Lesay thanks Tatiana Bujňáková for her help and acknowledges support from the VEGA grant (#2/0104/12).

¹ The impacts of the crisis on individual countries up to the end of 2009 are discussed elsewhere (Myant & Drahokoupil 2011, 2012).

² This is true even where so-called flat tax systems have been introduced as they contain significant allowances before tax is levied.

³ Addressing parliament on 18 February 2009 (PSP 2009).

⁴ The actual costs of the reform were uncertain as the entry into the private pillar was made voluntary. There was thus uncertainty about the number of people who would divert part of their insurance contributions to the private pillar and thus reduce revenues of the budget. Costs for a compulsory private pillar were expected to peak at 1.1% of GDP by 2040. The reform thus involved substantially lower costs than was common in the earlier reforms in other Central and East European countries (see Drahokoupil & Domonkos 2012).

⁵ An IMF mission reported on 19 July 2010 indicating that significant cuts would be needed to reduce the deficit to below 3% by 2013 (IMF 2010).

⁶ The pensioners thus received an additional monthly pension in a calendar year.

⁷ Comments on the stand-by arrangement programme submitted to the IMF by the Hungarian Ministry for National Economy, the Central Bank and the Hungarian Financial Supervisory Authority (IMF 2011, pp. 37–38).

⁸ A so-called ‘flat tax’ on the personal income implied a real rate of 20.3% for those on the average wage, a level comparable with that in Slovakia and the Czech Republic (Myant & Drahokoupil 2011, p. 180). It included a substantial allowance for families with children and the latter, together with the high-income earners, therefore benefited. In contrast, lower-income workers without children could lose almost 10% of their net income (Szabó 2013).

⁹ By 2011, the government expected the contribution of expenditure-side adjustment to 2012 consolidation to drop below 60% (NM 2011b).

¹⁰ Subsidised public-sector employment programmes are widely considered to be the least effective form of active labour-market policies (Card et al. 2010). Public-works scheme experiments in the past had failed to improve the employability of participants and to provide a foothold in the open labour market (Fleck & Messing 2010; Budapest Institute 2011).

¹¹ No agreement was concluded by November 2012, but further discussions were anticipated for early 2013.