Heavy referendum defeat weakens Hungarian government

(dpa) - Hungary's government faced a long-term headache Monday after voters rejected welfare-state cuts in a referendum, weakening the prospects for further crucial economic reforms.

Prime Minister Ferenc Gyurcsany suffered a larger-than-expected defeat in Sunday's vote on fees for medical treatment and higher education, which sparked an unusually high turnout in the former East Bloc nation.

"This is a complete defeat for the government," said Gabor Torok, the director of political analysis institute Vision Consulting said on InfoRadio. "It could act as a long, gradual poison."

Almost 85 per cent voted to abolish fees for visiting the doctor and hospitals as well as tuition fees, but it was the unexpectedly large turnout that proved tricky for the government.

The centre-right opposition party Fidesz had billed the vote as a judgement on the ruling Socialist-liberal coalition and its reforms. After Sunday's victory, Fidesz leader Viktor Orban urged the government to withdraw a plan to introduce private capital to the health insurance system.

Almost 50 per cent of the electorate voted, making it one of the largest referendum showings since the changeover to democracy in 1989-90. Prior votes were called on subjects such as European Union and NATO membership.

The fees were part of unpopular austerity measures aimed at reducing the budget deficit and, ultimately, at getting Hungary ready to adopt the euro.

While Gyurcsany did his best to play down the defeat, he said his government would act quickly - the cabinet was expected to put forward the necessary law changes to parliament as early as Monday - and the fees should be scrapped by April 1.

Further elements of the government's reforms could be endangered, particularly if Gyurcsany, who has led the way, resigns.

The measures have cut the budget deficit from 9.2 per cent of gross domestic product (GDP) in 2006 to an estimated 5.7 per cent in 2007, but they have hit economic growth and pushed up inflation and unemployment.

Most analysts believe Gyurcsany is likely to hold on for the moment, but with general elections looming in 2010 he will not have much time to win back voters.

"If his popularity stays low, then we will see a crisis inside the party, which might end in his resignation," Krisztian Szabados, director of the Political Capital Institute think tank, told Deutsche Presse-Agentur dpa.

The austerity measures, coupled with the September 2006 leak of a tape on which Gyurcsany admitted concealing the need to take economic action prior to that year's general election, have dramatically cut the government's popularity.

Polls have shown that the government would only receive 15 to 20 per cent of the vote if general elections were held now. Fidesz appeared to back off earlier calls for the government to resign if it lost the referendum, but analysts believe the opposition will keep up the pressure.

"Going forward, there is likely to be a constant questioning of the government's credibility from the opposition, and possibly new referendum proposals - the next obvious target is the restructuring of the health-care system," Istvan Zsoldos, emerging markets analyst at Goldman Sachs investment bank, said in a note.

Parliament recently passed a law to introduce private capital to the healthcare insurance system - a bill the government says is needed to cut down on spending.

Fidesz leader Viktor Orban seized on the law after Sunday's result, saying the government should now think seriously about withdrawing it before it faces another referendum challenge.

Yet the European Union's executive, the European Commission, amongst others, has warned Hungary that further economic reforms are needed to keep the deficit reduction programme on track.

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