EC criticizes Hungary's rudderless public works scheme

May 26, 2015

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Translation of the article “Hungary is blindly shooting with its wonder weapon” appearing on daily economics news portal napi.hu.

The Hungarian government really loves its public works scheme, but there are many cheap and effective tools it can use to help the unemployed find employment. The primary problem is that the government doesn’t really have a goal for the public works scheme, something only made worse by the government spending an enormous amount of money on the least effect program program to help the unemployed. The second alarming fact concerning the government’s public works scheme is that it is taking over as the country’s primary source of employment. Such statements and more were made at expert discussion hosted by the European Commission’s representation in Hungary.

The European Commission invited Hungarian, Polish, and Slovakian, governmental and non-governmental experts, as well the European Commission director general on employment affairs, to participate in the discussion concerning active labor markets. While organizers intended for the discussion to bring regional employment issues into focus, it quickly transformed into a discussion centered on Hungary’s public employment scheme, arguably one of the most drastic policy steps taken by the Orbán government.

The disproportionately high level of those employed through the public works scheme distorts Hungary’s employment figures, a point that has made been on numerous occasions in the European Commission’s country reports for Hungary.

Funding for the public works scheme has quadrupled over the past four years and costs 0.8 percent of Hungary’s GDP. Forecasts estimate the cost of the public works scheme to double to 1.6 percent of GDP by 2018.

Hungary’s public works scheme is utterly ineffective in terms of transitioning the unemployed back into the active workforce. Only 13.8 percent of those participating in the scheme managed to transition into the active labor market during the first six months of 2014. (In comparison, 60 percent of those taking part in the Poland’s public works scheme managed to transition to the active labor market within three months). The European Commission thinks Hungary would be better off if it spent this money on pursuing employment policy that encouraged participation in the active labor market. The 2015 budget allocated HUF 270 billion (USD 1 billion) for the public works scheme.

Spending with no particular goal

The discussion also looked at the different ways the governments of Hungary, Slovakia and Poland use public employment. Jirí Svarc, head of the European Commission’s employment directorate, said that, based on the results of comparisons of public works schemes in several EU Member States, it is clear that pursuing a policy of public works schemes is the least effective way to encourage participation in the active labor market. He said public works can be used but the use of such policies should be strictly defined.

The problem with Hungary’s public works scheme, Svarz said, is that the Hungarian government still has not defined what it hopes to achieve. He said the European Commission still hasn’t received a definitive answer from the Hungarian government regarding its public works scheme.

Svarz said such policies must be targeted and utilized differentially. It needs to stated whether the purpose of the program is to encourage social mobility, increase social transfers to those with low income, or assist in the transition of the unemployed to the active labor market. Different perspectives and methods must be used depending on the what the actual goal is. The Hungarian program is a sort of hybrid, one that doesn’t target any of the aforementioned goals, said Svarz.

The most alarming trend Svarz sees regarding Hungarian public works scheme is that it is beginning to replace the active labor market. He said the Commission is aware of several cases in which highly qualified individuals in the public sector have been dismissed from employment, only to be rehired as public works employees for the same job. Svarz illustrated this by pointing at examples of such tricks in Hungarians state run media companies and in the public education system.

Representatives of Hungary’s interior ministry and the ministry of national economics went on the defensive and stated that these cases must be investigated because, if they turn out to be true, than it’s a sign of systemic problems that need to be corrected.

What government plan?

Anna Marosi, an analyst with ministry of economics, said the government plans to keep its public works scheme in its center focus, only it will be more targeted in the future. She also said that the employment offices will try to streamline their services to be more focused on the individual.

Marosi said the government would categorize the unemployed according to the three following groups: those who can find work for themselves, those who need the help of employment offices, and those who are can only can get employment in “secondary” labor markets but need some kind of assistance transitioning to the primary labor market.

Marosi said legislation would be crafted which would restrict those under the age of 25 from work in the public works scheme. The ministry of national economics would include incentives, too. Marosi said one such incentive includes continuing to pay salaries to public workers who successfully transition from the public works scheme to the active labor market, currently a maximum of HUF 22 500 per month. Such “incentives” can be co-funded by the national government and the EU, she said.

Marosi said the government has intentions to gear its public works scheme more effectively, but the government’s 2016 budget isn’t giving it enough wiggle room to do so.

The government spends a yearly average of some HUF 80 billion strengthening Hungary’s active labor markets between 2007-2014. For the 2015-2022 cycle, the government will raise that to HUF 96 billion. The increase in funding will primarily be funded through EU funds.

During the discussion several experts warned of the risks associated with a high dependency on EU funds. They suggested that if the government relies too heavily on EU funds to create an active labor market, then the government is exposed to the risk of the EU cutting funds and leaving the program unfunded. The experts also said that institutional support and profile matching would also help the unemployed enter the active labor market.

Marosi also said that the government has no intention of extending welfare payments to those who have been unemployed for more than three months.

Ágota Scharle, an expert with the Budapest Institute, said that the government saved about HUF 50 billion in recent years by introducing the public works scheme and drastically reducing welfare for the unemployed. She pointed out, however, that the government is spending two to three times more on its public works scheme compared to funding it provides from strengthening the active labor market. It may be more cheaper over time to simply provide unemployment benefits for the unemployed for a longer period of time.

Scharle said that many of those who are unemployed don’t need much more than a little time to find a workplace that meets their profile. Currently, it takes about one year to find employment, or four times longer than then period for which one can collect unemployment benefits.

Scharle said that as long as Hungarian policy makers can cushion Hungary’s unemployment figures with the public works scheme, there will be no incentive to change the practice.