Idiosyncrasies of recent growing inequalities in Hungarian income distribution

BALÁZS KRÉMER Idiosyncrasies of recent growing inequalities in Hungarian income distributioni Introduction During past years of financial crises and “great recession” most of the European countries have experienced widening income inequalities. These growing disparities are multifactorial, not simply affected by earned incomes in labor markets, social transfers or fiscal policies and revenue regimes, but also by indirect consequences of earlier running indebtedness and amortizing loans. This paper attempts to take into account various factors of growing income inequalities, and Hungarian biases from international trends. As a conclusion, we will argue that relatively high and rapid growths of Hungarian inequalities cannot seen and interpreted as an unlucky consequence of great recession, rather as an outcome of intended politics of ruling government. Income inequality trends Contemporary social discourse has put the subject of inequality into new insights. Social inequality is not simply identical issue with the humanitarian trouble of poverty, any more; it is rather an overall factor of social and economic development. Wilkinson and Picket (2009) provided evidences that larger inequality not only leads hardships for bottom strata of societies, but also, overall social and well-being indicators are worse in less equal societies, than in more unequal ones. Krugman (2012), Stiglitz (2012) and Piketty (2014) confronted with traditional approaches supposing that more unequal distribution of income and wealth would create more savings, more investments, more job-creation, and finally faster economic growth – and egalitarian fiscal intervention and redistribution by their nature slows down healthy markets and economic developments. The after-crises “new economics” discuss social inequalities as damaging factor of market demands, the “security” of market mechanisms, creates concentration of power that destroys such foundations of markets and capitalism, like free competition and entering new actors into markets. In the below paper we do not want to contribute into that high-lifted debates on the relevance of inequalities in economics and political economy – we simply accept that social inequality seems to be more important and more general question than it used to be, and I shall try to present Hungarian findings on inequality in that wider context – whatever it means “wider”. Balázs Krémer – Idiosynerasies of recent growing inequalities in Hungarian income distribution 119 Hungarian public opinion and policy narratives look back past decades, as a period of permanent growths of inequalities, more or less as “natural consequence” of capitalist transition. The inequalities expressed by differences of nominal incomes (not corrected by inflation) illustrate and “confirm” that perception.ii Figure 1.: Nominal income growhts of bottom and top decile and average income (HUF) Source: Social Research Institute (TÁRKI): Household Monitor Report, 2012 However the above graph seems to prove the popular narratives, it shows also that inequalities started to grow not after the transition, but rather during the late communism (actually from the late ‘70s). Meanwhile, the curves let us suspicious whether the inequality has been permanently growing. In fact, no, the relative ratios show wavy, and not permanently widening curves. 120 METSZETEK Vol.3. (2014) No.4 Figure 2.: Relative income of bottom and top decile as ratio to average income Source: SRI (TÁRKI) op. cit. Synthetic inequality indicators confirm the wavy character of inequality changes. If we would to avoid the measurement uncertainties and unavoidable mistakes of income figures in bottom and top deciles, and we use the lower breaking point of top and higher breaking point of bottom deciles (P90/P10), we gain the below graph from Tárki 2012 data. Figure 3. Source: SRI (TÁRKI) Monitor, 2012 Balázs Krémer – Idiosynerasies of recent growing inequalities in Hungarian income distribution 121 Or applying Gini-coefficients that refer for overall distribution (and not only to the bottom and top tenth): Figure 4. Source: SRI (TÁRKI) Monitor, 2012 Giving brief historical and descriptive explanation to the inequality waves illustrated above, we may differentiate four different time-intervals. The first period is the transitional crisis that started during late communism and ended at the beginning of 2000s. Inequalities were growing partly by impoverishment and mass unemployment, since 1,5 million jobs of former socialist economy disappeared by the collapse of Eastern bloc, by restructuring and privatizing former state-owned industrial and agricultural firms, as a consequence of post-industrial transition, and as confronting to low competitiveness accessing to open, globalized economic world. Applying Marxist language, same period was the era of “original accumulation of capital”, the birth of new Hungarian bourgeoisie that raised inequalities on the richer side, as well. The second period started in 2002, when socialist-liberal coalition won the election and socialist Prime Minister opened a “new course” of so called “welfare transition” (indicating that after the democratic and capitalist market-transition there came the time for transition of welfare toward a more generous one giving more to the people). That policy supposed a booming GDP growths right after the accession to EU – that was an unrealistic hope. Expanding welfare expenditures could be financed from depths and deficits – that partly reduced social inequalities, but also brought to dramatic shortages the state budgets. 122 METSZETEK Vol.3. (2014) No.4 The third period was very short. From 2008 the socialist government almost “gave up” the political competition for the 2010 election, and their only objective remained a proper crises-management trying to avoid a final collapse of economy. Looking back to that period, it was a properly successful treatment of crises in economic and social sense, as well: they managed the state budget and did not cause as much social pains and hardships, as it had been predicted before. The social inequalities were growing – on a modest range. On the other hand, while government indeed avoided a major imbalance occurring, but the deficit was still well above the Maastrich-level and left the EU with no other choice but to continue the EDP against Hungary; also, the relative balance was financed by increasing government dept, from foreign (mainly IMF) depts. From 2010 the new right-wing (FIDESZ) government started a new era widely criticized by their autocratic use of political power, cutting back the rules of law and “unorthodox” economic and fiscal policies. From that time the scissors of inequalities permanently opened – that we will analyze in detail. Following evaluation of Tárki Household Monitor report of 2012 we may summarize the overall past decades’ trends of inequalities as follows: Table 1. Ratio of income strata within the population (%): 1992 2000 2012 Rich (more than double of median income) 7 9 8 Upper-middle strata (120-200% of median) 25 25 27 Middle strata (80-120% of median) 42 34 30 Lower-middle strata (50-80% of median) 20 23 21 Poor (less than the half of median) 6 9 14 Total 100 100 100 Source: SRI (TÁRKI) Monitor, 2012 We may observe two major shifts, namely the intensive growths of the poor, and the remarkable loss of the middle. Both shifts are unusual from the viewpoint of “middleclassism” that progress is typical in developed countries. (Even if the recession broke that “middle-classist” tendency in many countries and middle classes were narrowed during those hard times. The Hungarian specialty is the twenty years continuity in shrinking middle strata.) Concentrating onto past years and ongoing developments the trend has become craggy and definite: inequality has been strongly grown. (Tárki, Household Monitor, 2012) Balázs Krémer – Idiosynerasies of recent growing inequalities in Hungarian income distribution 123 Table 2. 2009 2012 Gini 27,2 29,3 P90/P10 3,53 3,87 P90/P50 1,81 1,84 P10/P50 0,51 0,46 Source: SRI (TÁRKI) Monitor, 2012 Thus, the profile of income structure behind the overall growing inequality is very special. Figure 5.: Average total income of households in Euros, calculated in PPP basis Source: Eurostat, SILC, 2013 One special character is the falling income of the poor: stepping back to the first graph (Figure 1), it is unique since contradicts to basic principle of justice by John Rawls that the nominal income of the poor has fallen in past years. 124 METSZETEK Vol.3. (2014) No.4 Despite of falling income of the poor the real breaking point is not at the lower income segments, it is rather at the top. In a period when the average income increased, the income distribution has shifted roughly in a simple manner: the loss of the lower deciles became a gain of the richest. Figure 6.: Real income change calculated on HUF basis 2009-2013 Source: Eurostat SILC 2014 Compared to above two graphs it shows that only the top deciles realized average income growths of the whole society; and, the gains on the top is much higher than the loss on the remedy of population. Looking at pure distributional effects during past years we may observe that 9.-10. deciles have gained a growing proportion from total incomes, while 1.-8. deciles lost from total incomes. Balázs Krémer – Idiosynerasies of recent growing inequalities in Hungarian income distribution 125 Figure 7.: Changes in% as gained or lost shares of deciles from total income (2009 to2013) Source: Eurostat SILC 2014. As we said earlier, the poorest are suffered by biggest loss of income, but also the lower three quarter has experienced definite income declines. Searching causes why households have less money they had had before, we should draw the attentions onto following factors. First, the government cut down the levels of welfare benefits, also the duration of unemployment insurance to 3 months and restricted eligibilities to disability pensions and benefits that reduced the income of poorest, social transfer recipients. Second, while employment rates remained, or slightly increased caused by the extension public work programs (employing people in very poor conditions for very low wages) and the rapidly growing emigration and foreign job-placements – these employment-growing tendencies did not compensate the loss of “standardemployment” in public private sector, and the relative higher wages earned in business enterprises and open job-markets. 126 METSZETEK Vol.3. (2014) No.4 Figure 8.: Changes in open job market employment compared to 2008 3rd quarter Source: Hungarian National Bank, Report on Employment, 2012 Third, the FIDESZ government introduced and implemented flat rate tax (and other fiscal policies, analyzed later in that paper) reduced fundamentally the revenues paid by the rich, and at the same time, abolishing tax deductions for low wages that put heavier tax burden onto the poorer and middle strata that reduced the net income in these segments. “Almost incomes” – impacts of consumer credits to household incomes Inequality literature probably underestimates the impacts of depths and credits onto social income structure. Analyzes often characterize ongoing recession as “creditcrises”, or, at least as rooted in credit crises, but analyzes focus onto transition of political-economic systems and fiscal implications, and less to social consequences. - 100 - 80 - 60 - 40 - 20 0 20 40 - 100 - 80 - 60 - 40 - 20 0 20 40 2005 2006 2007 2008 2009 2010 2011 2012 firms employing less than 10 persons firms employing more than 10 persons Changes in open job-market employment compared to 2008 3rd quarter Balázs Krémer – Idiosynerasies of recent growing inequalities in Hungarian income distribution 133 Figure 15.: Change of retail traffic and residential consumption by quarter years, in % Source: HNB report on GDP trends, 2012 Losses expressed in kind make us suspect that trends “in kind well being” of people might be even worse than shrinking amounts of incomes. As an indicator of in-kind well being we may profit from EU deprivation data, showing the ratio of population missing, being deprived from goods and services are seen as standard and normal needed prerequisites of life. Eurostat defines factors of indicators, as follows:iv “Based on the limited information available from the EU Statistics on Income and Living Conditions (EU-SILC) data-set, the EU MD rate is currently defined as the proportion of people living in households who cannot afford at least 3 of the following 9 items: • coping with unexpected expenses; • one week annual holiday away from home; • avoiding arrears (in mortgage or rent, utility bills or hire purchase instalments); • a meal with meat, chicken, fish or vegetarian equivalent every second day; keeping the home adequately warm; • a washing machine; • a colour TV; • a telephone; 134 METSZETEK Vol.3. (2014) No.4 • a personal car.” Similarly, Eurostat defines as “severely deprived” households those who cannot afford 4, or more items of above list. The Hungarian figures on ratio of severely deprived population show worse situation, than in the “old” member states; but the dynamics of declining living condition is much faster worsening data compared to both, “old” and “new” member states. Figure 16.: Ratio of severely deprived (4+ deprivation factors) population Source: Eurostat SILC 2014 Meanwhile, not only the ratio of severely deprived household had grown, but also the “deepness” of deprivation had worsened at the same time in Hungary. Balázs Krémer – Idiosynerasies of recent growing inequalities in Hungarian income distribution 135 Figure 17.: ,,Deepness” of deprivation – Eurostat, 2013 (average number of deprivation factors) Source: Eurostat SILC, 2013, Hungarian data Deprivation is not identical with poverty with regard to the fact that not only the poor miss basic prerequisites for “normal life”. Of course, poor people and families are suffered more often from shortages in everyday life, but other strata miss also certain goods and services regarded as standard and normal elements of consumption. Also it is true, that dynamics of deprivation indicators show more rapid decline in case of lower income-groups, but ratio of deprived households has grown in every income level. 136 METSZETEK Vol.3. (2014) No.4 Figure 18.: Ratio of severely (4+) deprived within in come quintiles, Hungary Source: Eurostat, SILC, 2013 If we want to illustrate declining living standards by less sophisticated figures than deprivation and severe deprivation index, we should take a look onto data provided by Gallup Group in collaboration with OECD on how people are frustrated for not to be able feeding properly their family.v As explanation of below charts we must draw the attention onto the subjective nature of data: data do not show the proportion of population experiencing or living permanently in hunger, data shows the ratio of those reporting hardships to afford appropriate food. Many and often criticize subjective well-being data as showing uncertain realities beyond subjective perceptions, but longitudinal data prevent this turbulence, since basics of perception on what is proper and what is not – do not change overnight. Following that concern, increasing ratio of those who are unable to afford appropriate meals – is a clear and valid indicator of declining living standards. Also we should add that developed countries regard nutrition as evidentially fulfilled need within their population, inadequate nutrition is basically a trouble in the developing world. Data confront as with said reality: a large, and rapidly growing strata Balázs Krémer – Idiosynerasies of recent growing inequalities in Hungarian income distribution 137 of people suffered by being incapable for insuring appropriate food, with special regards to kids. Figure 19.: Top 9 OECD countries with highest incidence of families struggling to afford foods 2013 Source: Gallup report in co-operation with OECD (2014) In international comparison we may observe that the fastest and deepest decline of adequately feed families and children can be observed – in Hungary. Figure 20.: Families with children reporting difficulties affording foods, in OECD countries with largest increase between 2007-2013 Source: Gallup report in co-operation with OECD (2014) 138 METSZETEK Vol.3. (2014) No.4 Applying in-kind measures for indicating trends of living standards, we may evaluate a worse decline in Hungary, than in monetarist indicators. By other words, the “exchange rate from money to products and services” of shrinking income of Hungarians has been also devaluated during past years. Changing character of revenue and tax policies would found casual explanations for above observations. The flat-rate income tax-reform (by abolishing earlier taxdeductions and rising revenues on low, and reducing burdens on high wages) decreased the overall direct burdens on wages and personal incomes, and various consumption-related taxes (e.g. lifting VAT to 27%) compensated shortages of state budget. This means also to pay higher taxes in gross prices and less net counter-value for purchased goods. Less income of lower 80% of population, makes pay even less in terms of consumption and living standards. Household savings and investments – the lost security Savings and investments are not so exciting issues for sociologists dealing with social inequality. It is rather a classical topic for economists analyzing savings – with special regards to savings of households – as resource for investments, basically for company investments. Monetarist and banking services are interesting issues as technical ones: how efficiently they may implement that trade off, how efficiently they channel private-individual savings to job-creating and development-gearing investments. For us household savings have different, probably less sophisticated meanings. Roughly, if someone owns any forms of savings or investments, he/she keeps in store some reserve that may serve survival in hard times; that might serve as startup capital, if something must be changed, something new must start. In contrast, having no reserve means having no choice, no change and no power to change – show must go on, how it goes. Below figures will illustrate how Hungarians lost their previous savings that ever used to be smaller in international comparisons – but for us that means also a process of losing security and freedom, as well. Balázs Krémer – Idiosynerasies of recent growing inequalities in Hungarian income distribution 139 Figure 21.: Gross household saving rates (as % of household incomes) 20032012 Source: Eurostat, 2013. Generally speaking, the overall value of households’ financial assets had grown until 2009, and after 2010, they have fallen back to the level of 2006. Figure 22.: Fiancial assets of households, in USD, Hungary Source: OECD Statistics, 2013 140 METSZETEK Vol.3. (2014) No.4 Looking at the major factors of assets, investments and life insurance reserves stagnated with minor increase, loans fallen as illustrated above, and also pension fund equities fallen dramatically, since the government abolished privately managed mandatory funded pension schemes by converting equities to eligibility in pay-as-yougo pension system. Figure 23.: Trends of different financials assets in USD, Hungary Source: OECD Statistics, 2013 The overall ratio of households’ investments is almost the half of same ratio in Euro era, and the trend of changes is slightly positive in time, despite of the crises. As we mentioned earlier, government programs like “exchange rate embankment” and, “subsidized payment of full” generated trade-offs between savings-investments and loans, but above turbulences caused by government regulations the trends of declines are explicit. Balázs Krémer – Idiosynerasies of recent growing inequalities in Hungarian income distribution 141 Figure 24.: Saving and investments rates of households, Hungary Source: Eurostat, 2013 Overall rates do not inform on allocation and distribution of shrinking household savings and investments. The only accessible help to know more on that is the relative small-simple, but representative survey made run by Gfk Ltd. By our assumption Gfk data cannot seen as punctual, partly because 40% of survey-interviewed persons did not answer at all about their savings, partly because self-reported data on wealth are even more uncertain than income data. Meanwhile, cleaned data (without non-answers and later no savings) seem to be accurate in a sense that they correlate strongly with data from external sources on same topic. The loss of savings rooted basically in loss of savers. Since less people have savings, parallel fewer people consider making pay to maintain their client-relation with banks. Ratio of savers and bank-clients were all the time smaller than international standards, both ratio fallen during the crisis even deeper from that relative low baseline, as well.vi 142 METSZETEK Vol.3. (2014) No.4 Figure 25. Ratio of those owning savings and being bank clients within 16-64 population 0 5 10 15 20 25 30 35 2008 2009 2010 2011 2012 2013 Owns savings Bank clients Source: Gfk Ltd, 2013 (ratio of persons reported they own savings among those were answered to relevant question of inquiry, in the representative survey of RBM research program) The loss of savers are proportional in all of the cohorts, meaning also that older generation’s readiness and advantage to save remained proportional in lower levels, too. In absolute terms, this means also a weakening material security for younger generations. Balázs Krémer – Idiosynerasies of recent growing inequalities in Hungarian income distribution 149 Figure 32.: Social spending increased least in countries most affected by the crisis (percentage changes in real public social spending and real GDP, 2007/08 to 2012/13) Note: Estimates for 2007-08 and 2012-13 are averaged over two-year periods to allow for the different years in which the crisis began across countries and to limit the effect of year-on-year fluctuations. Source: OECD (2013), OECD Social Expenditure Database (SOCX), preliminary data (www.oecd.org/social/expenditure.htm). 150 METSZETEK Vol.3. (2014) No.4 Regardless Greece (experiencing an extreme GDP loss), Hungary is the only exception by not increasing (definitely reducing) social expenditures during the crises. That cannot be explained by extra high ratio of welfare expenditures (Hungarian ratio to GDP is on the middle rank in EU), and also the ratio of recession does not explain, why the Hungarian government did not want to ease the hardships of lower strata by strengthening welfare schemes, and why we can observe a solidly shrinking social expenditures. In fact, government cut back the amount of social benefits by more than 25%, shortened the duration of unemployment insurance to 3 months (from 9 months), cut back dramatically disability pensions and benefits – that resulted a definite loss of income of welfare recipients. Meanwhile, if we talk how government made actively social inequalities grow, the major impact is not how the poor became poorer, but rather how government benefited the rich to be richer. In 2013 State Audit Office published a report (Tóth G. Cs. – Virovácz, P. 2013) on its’ website, analyzing the impacts of fiscal programs implemented by the government from 2010 to 2013, applying micro-simulation methods on administrative (tax-reports) data. By that report, the income taxes paid by different income deciles were as follows: Figure 33.: Average income tax paid by income deciles (thousands HUF), Hungary Source: Tóth G. Cs. – Virovácz P. op. cit. micro-simulations on SAO data, 2013 Balázs Krémer – Idiosynerasies of recent growing inequalities in Hungarian income distribution 151 The difference between taxes paid in 2013 compared to 2010 (presented in the above chart) shows extreme gap between lower 7 deciles to which tax burdens were growing, and the top 3 deciles, especially the top (10.) deciles, where taxes were reduced to less than half. Figure 34.: Difference of average income tax paid by income deciles (thousands HUF), 2013-2010 Source: Tóth G. Cs. – Virovácz P. op. cit. micro-simulations on SAO data, 2013 Government rhetoric argued tax reforms by pro-natalist objectives giving incentives to better-off, working “middle-class” via family-related tax-deduction schemes – replacing and converting partly the universal family-allowance scheme. Not reflecting to the policies and realistic projections how states may “buy” children from middle strata by tax reliefs (no evidence on that would result positive shifts in fertility rates…), data show that natalist impact is minor, almost symbolic, compared to widened gaps between poor and rich. 152 METSZETEK Vol.3. (2014) No.4 Figure 35.: Difference in income taxes (HUF) paid in 2013 to 2010, by deciles and different types of families Source: Tóth G. Cs. – Virovácz P. op. cit. micro-simulations on SAO data, 2013 Summing up we conclude that different sources, survey and administrative data are converging and correlate strongly about the profile of widening gaps in living standards, also we demonstrated the very special nature of Hungarian genre by growing inequalities is, that not the markets, not the crises – but the government and fiscal policies raised inequalities in income and material well-being. Balázs Krémer – Idiosynerasies of recent growing inequalities in Hungarian income distribution 153 Conclusion Income distributions become globally more unequal in 2000s, especially during the “great recession” almost everywhere on the Earth. Social sciences, especially affected by Th. Picketty’s popular concepts exerted in his book explain global trends of opening income-scissors by strong concentration of wealth and capital incomes of the richest. In contrast of global trends the growing income-inequalities in Hungary cannot be explained by capital-concentration, or, the impacts of economic crises. As we demonstrated above, growing income-inequalities, and overall weakening material insecurity of Hungarian population can be seen rather as a consequence of government fiscal policies. It is unique – at least in Europe – that government decreased social expenditures during the crises, and even more unique that beneficiaries of fiscal reforms are exclusively the top income-strata of society. While mean income of total population increased – just only the top decile realized growing incomes, and the income position of the “rest”, the 1-8 income deciles lost from their income position, mainly as an effect of government fiscal, revenue and redistributive policies. References Crouch, C. (2009): Privatised Keynesianism: An Unacknowledged Policy Regime. The British Journal of Politics and International Relations. VOL 11, 382–399. 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Solinger (ed.): Socialism Vanquished, Socialism Challenged: Eastern Europe and China, 19892009; Oxford Scholarship Online: September 2012 DOI: 10.1093/acprof:oso/9780199895977.001.0001 Stiglitz, J. (2012): The Price of Inequality: The Avoidable Causes and Invisible Costs of Inequality, W.W. Norton and Company Tóth G. Cs. – Virovácz P.: Nyertesek és vesztesek - A magyar egykulcsos adóreform vizsgálata mikroszimulációs módszerrel, (Winners and Losers – Investigation of 154 METSZETEK Vol.3. (2014) No.4 Hungarian Flat-rate (single rate) Tax-reform with Micro-simulation Methods) http://www.asz.hu/penzugyi-szemle-cikkek/2013/nyertesek-es-vesztesek-amagyar-egykulcsos-adoreform-vizsgalata-mikroszimulacios-modszerrel/tothvirvacz-2013-4.pdf Notes i This paper is a shortened and modified version of the chapter: Krémer, B.: How mafia-state spoiled the society? In: Magyar, B. (ed.): The Hungarian Octopus – The Post-Communist Maffia-State 2.tome, 2014 Noran Libri, Budapest ii Source of Tárki Data: Szívós, P. - Tóth, I. Gy. (ed.): Egyenlőtlenség és polarizálódás a magyar társadalomban, (Inequality and polarization int he Hungarian Society) TÁRKI MONITOR JELENTÉSEK 2012, http://www.tarki.hu/hu/research/hm/monitor2012_teljes.pdf iii I am deeply indebted to DATAHOUSE for providing me unpublished data on new car selling. iv Measuring material deprivation in the EU, Indicators for the whole population and child-specific indicators, Eurostat, 2012 Edition, p.1. v Dugan, A.- Wendt N.: Families Struggling to Afford Food in OECD Countries, More than one in five individuals with children had trouble in 2013, http://www.gallup.com/poll/170795/families-struggling-afford-food-oecdcountries.aspx vi I am deeply indebted to Gfk Hungary Ltd. for providing me unpublished, or partially published data on savers and savings.