Hungarian PM announces a further 10% cut in utility costs: three questions

By Sergio Tirado Herrero

In Hungary, the price of imported natural gas – the most common fuel for domestic space heating – has been a key factor determining the affordability of household energy services during the 2000s. If in the first half of the decade its price increased at a relatively slow pace, above inflation rate and below the rate of increase of salaries and pensions, this situation changed drastically in 2006. In that year, the Hungarian government allowed a major rise gas prices in order to compensate distribution companies for the losses accumulated in previous years due to existence the of regulated retail prices, a practice introduced in the late 1990s to buffer the impact of rapidly growing import prices of natural gas on domestic economies. As a result, natural gas prices in Hungary experienced a frightening four-fold increase between 2000 and 2011, which compares significantly to an accumulated rate of inflation of just 70% in the same period.

These developments have reflected in the structure of  Hungarian household consumption expenditures, which has changed perceptibly. As seen in the Figure below, the category Housing, maintenance and household energy has steadily increased its share on total household expenditure per capita (pushed by domestic energy expenditures alone) until becoming the largest household expenditure item in 2009. In fact, if household energy (which is in reality part of the category Housing, maintenance and household energy) was considered a two-digit COICOP category of its own, it would be the second largest item of a household budget after Food and non-alcoholic beverages, taking up over 15% of a Hungarian household’s total expenditure per capita as of the end of the 2000s.

Evolution of the composition of consumption patterns in an average Hungarian household in 2000-2010, for the 4 most important COICOP categories. Note: Household energy is shown separately for the sake of the analysis but is part of the COICOP category ‘Housing, maintenance and household energy’ Source: Household Budget Survey – Hungarian Central Statistical Office (KSH)

Though high energy expenditures have been a burden to the budgets of Hungarian households for a number of years, it was not until December 2012 that the ruling centre-right FIDÉSZ government reacted by decreeing a compulsory 10% reduction in household utility prices (natural gas, district heating and electricity). This measure was accompanied by the restructuring of the energy regulator (the Hungarian Energy Office) and by putting legislative barriers to ensure that energy companies complied with the cuts. The decision was based precisely on the documented increase of utility costs in Hungary: as stated by  State Secretary of the Prime Minister’s Office Janos Lazar, “several specialists are saying that natural gas and electricity prices are at least 30% higher today in Hungary than what families or pensioners can afford” given that “families living off wages and salaries spend a minimum of 20% of their income on utilities”. More recently, Hungarian PM Viktor Orbán has announced that his government intends to enforce a further 10% cut in utility prices next October.

Whereas these compulsory cuts are most likely benefiting energy poor households to a certain extent, they also raise some questions about its adequacy to address a complex energy vulnerability situation:

• It is unclear what the distributional effects of the enforced cuts are, and it is questionable whether a better targeted reduction in utility costs would have been a more desirable alternative. The reduction in household utility costs is certainly improving the material well-being levels in low-income households, allowing the energy poor to buy more energy and/or reduce their domestic energy costs. However, since all residential consumers benefit from the measure to the same extent (10% reduction in prices so far), those households with a higher energy consumption (and less likely to be in energy poverty) will be the most benefitted. Though more burdensome to implement, an alternative means-tested approach providing larger discounts to the low income or energy poor may render better results in terms of energy poverty alleviation.

• The suitability and sustainability of this measure as a long-term solution to domestic energy deprivation in Hungary is uncertain. First, because two key elements of the problem – the energy inefficiency of Hungary’s residential stock and the country’s dependency on imported Russian or Russia-transiting natural gas – are left unaddressed. Second, because utility companies may resist this decision with arguments of legal certainty and the need of a stable regulatory framework for energy infrastructure investments infrastructure, or through litigation in international courts for the compensation of incurred losses, as Budapest-based CEU professor Michael Labelle has noted. Note that Orbán’s government attempt to control domestic energy prices is not new: in the decade of the 2000s, direct price support schemes (gázártámogatás and távhőtámogatás) and regulated retail prices were put in place by previous governments with the same aim but lasted for just a few years. And in the latter case, the decision to control natural gas prices resulted later on in an additional price increase for compensating utility companies for the incurred losses, as discussed above.

• A third question revolves around the link between the government’s decision and the current state of affairs in Hungarian politics, thus opening the ground for exploring how energy vulnerability issues interact with political strategies and discourses in a context of increasing domestic burdens. Having received an enormous electoral support in the 2010 general elections, the FIDÉSZ government has used its more than two-thirds majority in the Hungarian parliament to pass a number of controversial laws and to approve a new Constitution that was put under severe scrutiny by the European Commission. FIDÉSZ political action, which has a tradition of interventionist economic policies,  includes  decisions that are unconventional for European centre-right political parties like imposing high taxes and levies to banks, energy and telecommunication companies. In spite of the pressure exerted by European institutions, FIDÉSZ keeps a comfortable lead in opinion polls and faces an opposition divided between the socialist party (MSzP) and the Együtt 2014  (Together 2014) movement led by ex-PM Gordon Bajnai. Still, with the next general elections scheduled in spring 2014,  utility price cuts could be interpreted as part of a wider political strategy aimed at securing the support of Hungarian voters based on “capitalising on popular disgust at post-Soviet privatisations”, as a recent editorial of The Guardian has lately suggested. This interpretation may help explain recent statements of high-ranking officials of the Hungarian government, which have suggested energy companies to stop paying dividends for two years and accept the cuts because they “had earned a lot in the previous period while people’s pockets are empty“.