Hungary Reform Adjusts to Realities

By Kenneth W. Banta/Budapest

Even in Hungary, the most reform-minded country in the Soviet bloc, a few cornerstones of Communism had long seemed inviolable. One was the absence of that onerous capitalist tool, income tax. Another was the rubber-stamping role of the Parliament in a system controlled by the Communist Party. By last week, all that had changed. In an unprecedented session in Budapest's Chamber of Deputies, impassioned legislators demanded, and often won, amendments to a controversial package of sweeping economic policies. At the core of the new legislation: Eastern Europe's first major personal income and value-added taxes. Said Richard Hirschler, an editor at the respected economic weekly HVG: "This could be the start of a fundamental shift in economic and political equilibrium in Hungary."

The package was prompted by the deepening malaise of Hungary's once vigorous economy. Main causes of the slump: sagging exports, stagnating manufacturing and high government spending, which has helped push the country's hard currency debt to $16 billion, the highest per capita in the East bloc. The government hopes the new tax system, coupled with an austerity program and new incentives for industry, will fix things.

Hungary's economic woes have been tied to a period of political stagnation under Party Boss Janos Kadar, 75. Last week's parliamentary debate, however, threw the spotlight on a younger, more dynamic figure: Prime Minister Karoly Grosz, 57, the former Budapest party leader, who assumed the post only two months ago. "Time is pressing. We cannot wait. We have to act," Grosz declared to loud applause from the 340 assembled Deputies. His performance fed speculation that he is the leading candidate to succeed Kadar, who has held power for 31 years.

The legislation passed by Parliament calls for a graduated personal income tax, with a top rate of 60%, and a value-added tax of up to 25%, applied to wholesale merchandise as well as consumer goods. Revenues from the new levies will partly offset major business-tax cuts intended to stimulate industry. The package also imposes bruising austerity measures, including reductions in subsidies for consumer goods and faltering enterprises, which now account for one-third of government spending.

The grim new provisions are far different from the liberalizing reforms begun by Kadar in 1968. Those initiatives had gradually introduced small-scale free enterprise, allowed farmers to sell crops at market prices and permitted families to boost income with after-hours work. Last week's changes will produce a decline of as much as 15% in real income for ordinary Hungarians next year. In addition, the closing of inefficient enterprises under a new bankruptcy law could in the direst scenarios put as many as 500,000 people out of work.

Unemployment, new taxes and rising prices may prove to be a combustible mixture. Privately, Hungarian officials say that the regime has begun bracing for strikes and protests. "Things just keep getting worse," says Tamas, 19, a blue jeans-clad vegetable seller in Budapest. "Everyone I know thinks there's going to be an explosion." The challenge for Hungary's rulers, as for Moscow's innovative Party Leader Mikhail Gorbachev, will be to contain such public discontent long enough for the economic reforms to bear fruit.