Hungary - Poverty and social transfers

Hungary's transition from a command economy to a market economy has involved important structural changes in the past few years. Although now recording modest GDP growth, the Hungarian economy experienced a four-year long recession (1989-1993) during which almost one fifth of GDP was lost. Yet Hungary, like other countries in Central Europe, inherited an extensive system of cash and in-kind benefit programs that was designed to complement low wages and redistribute large amounts of national income. While this system has cushioned the impact of the transition on households in general, the uniform nature of social transfers has led to their failure in preventing increased poverty among those most negatively affected by the economic changes. Social transfers also impose an enormous burden on public expenditures and the economy, and thwart economic growth. Further, cash transfers have an important impact on household and individual behavior through their incentive effects on labor market economy. How can social transfers be restructured so as to improve their contribution to poverty alleviation, both directly and indirectly, while reducing their impact on the Government budget? This report attempts to provide some elements of response to this critical question. In doing so, it analyzes the macroeconomic and poverty trends during the period 1989-93, and presents a detailed poverty profile of the population in 1993. Against this background, the report looks at the role of cash social transfers in poverty prevention and poverty alleviation. The report examines the poverty implications of recently agreed changes to cash transfers, and proposes some alternative policy reforms with the objective to improve their contribution to poverty alleviation while reducing their impact on the budget. The report also stresses the importance of achieving poverty reduction through economic growth and associated labor market income gains (new jobs and higher wages). Here too, reducing aggregate expenditure on social transfers, and adjusting elements to transfer programs to encourage pursuit of higher earned incomes (incentive effects) is of equal importance.