BUDAPEST, SEPT. 18 -- Hungary's communist government, acknowledging serious problems in the country's economy, announced today a new policy of tough austerity measures and vowed to extend the country's widely watched effort to reform the socialist system.
The new "work program," outlined in a National Assembly session this week and a press conference today by Prime Minister Karoly Grosz, could have far-reaching implications for policy makers in the Soviet Union and other East Bloc states, who look upon the Hungarian economy as a model.
Under the new program, Hungarians' living standard will be forced down for at least the next three years. Huge subsidies to state industries will be slashed while the government seeks to increase its exports to the West and stop the growth of its $16 billion debt to western banks and governments.
Grosz vowed to pursue new reforms of the socialist system designed to create a market-based economy in Hungary with profit-oriented competition and prices similar to those of the West. As a first step of the new reform push, the assembly is expected to adopt Saturday the East Bloc's first personal income tax and its first value-added tax.
The policy was drawn up because persistent economic stagnation and a rapidly rising foreign debt have brought this country of 10 million people to the brink of insolvency despite its policy of adopting many of the market mechanisms of capitalism in a bid for efficiency.
Neither the austerity program nor the exact nature of the reforms has yet been described in detail. But Hungarian officials and journalists here said the policy would be closely watched around the East Bloc by both supporters and foes of Soviet leader Mikhail Gorbachev, who has turned the Hungarian reform from a barely tolerated deviation from Soviet socialism into a widely imitated model.
"It's going to be a great problem for Gorbachev and the Soviet reformers if we can't solve the mess we have here," said Matyas Vincze, editor of the economic weekly HEG. "The opponents of reform are going to start pointing at Hungary and saying, 'See -- that's where reform policies lead.' "
Hungary began in 1968 to reorganize its socialist system,something now being tried in the Soviet Union, China and Poland. The changes have raised Hungarians' living standards above most of the rest of the East Bloc and have created socialism's most dynamic agricultural and consumer sectors. But Budapest's pioneers have concluded that their policies have not been radical enough to make state-owned industries efficient or save the economy from stagnation.
"If we want to create a certain future for socialism then we must build a firmer economic foundation. This is the historical lesson we have not yet solved," said Socialist Workers Party leader Janos Kadar on Wednesday.
The success of the government in Budapest is also likely to play a crucial role in the transition of Hungary's communist leadership from Kadar, the country's ruler since 1956, to a new generation. Grosz, who took over the job as prime minister in June, has since emerged as the front runner in the competition to succeed the 75-year-old party chief.
Grosz, 57, a Politburo member and veteran of the party propaganda apparatus, declared today that he expected his government to be unpopular because of the austerity it intends to enforce. But, he said, "We will have to find new methods and we will have to be very firm in the road we have set.
"We have to bring about national unity, because we cannot implement the program without it," Grosz said.
Although his plan was short on technical details, Hungarian journalists and politicians said Grosz's performance over the last three days had served to alleviate somewhat the image of self-destructive paralysis that has grown up around the Hungarian leadership in the last year and was frequently blamed on the aging Kadar.
Both men stated openly that poor management of Hungary's economy and defects in the socialist system were largely responsible for the crisis.
"The political atmosphere and public feeling are noticeably worse than a few years ago," Grosz said. "Major groups of society have no clear view of the future. Their confidence in the leadership has dwindled and sometimes they doubt the viability of socialism."
Grosz said that to stabilize the situation, living standards, which have stagnated throughout the 1980s, would have to drop by 6 to 8 percent over the next three years so Hungary could turn its chronic trade deficits into surpluses beginning next year.
Under the new tax system, Hungarians will have to begin paying income tax on a scale ranging from 20 to 60 percent beginning next year as well as a value-added tax on consumer products averaging 25 percent. Meanwhile, the huge taxes of up to 85 percent currently applied to profitable companies will be cut back and subsidies to money-losing companies, which currently make up 30 percent of the state budget, will be drastically curtailed.
Grosz said that unprofitable firms would be allowed to go bankrupt, resulting in "manpower regrouping," a euphemism for temporary unemployment. However, he vowed that unemployment, ideologically taboo in the East Bloc, would not be allowed to take on western proportions.
In the longer term, Grosz said the government would draw up new measures to make the reform work. These are expected to include a plan for state companies to sell stock to their employes, a restructuring of wages to increase the differentials between good and average workers, new opportunities for the already substantial private sector and a further decontrol of prices.
At the same time, the prime minister, who had a reputation as a hard-liner before taking his present post, has been cool to calls for major political reforms emerging from the liberal wing of the Hungarian political establishment and from the small opposition movement. He has promised to strengthen the role of the elected National Assembly and promote more open debate, but ruled out substantial cutbacks in communist power.
Several Hungarian economists praised Grosz for taking the political initiative, but stressed that it remained to be seen how effective the plans would be.