Budapest - Regardless of how a government crisis in Hungary turns out, one thing seems clear: economic reforms aimed at cutting the former East Bloc nation's budget deficit are over for now. The desertion of Prime Minister Ferenc Gyurcsany's junior coalition partner follows government belt-tightening that slashed the deficit but also nearly stalled the economy in 2007.
The slowdown - a sharp contrast to the early post-communist years, when Hungary was considered the shining example of transition to a market economy - has drained the government's popularity.
At the heart of the crisis is the decision by Gyurcsany's governing Socialist Party to back off from reforms, which cut the budget deficit from 9.2 per cent of gross domestic product in 2006 to a still-hefty estimated 5.7 per cent in 2007.
After the prime minister announced a retreat on health care reform, the liberal Alliance of Free Democrats decided Monday to leave the government within a month. The move would leave the Socialists four seats short of a parliamentary majority.
Already, polls show voter support for the Socialists has fallen to as low as 15 per cent, while the Free Democrats are at 1 per cent.
The crisis built up over the past month. First, in a sweeping referendum defeat for the government, Hungarians voted to cancel fees for medical treatment and education that were introduced to help cut the deficit.
Last week, Gyurcsany said the government would rethink unpopular plans to introduce private capital into the health insurance system. On Monday, he sacked Health Minister Agnes Horvath, a Free Democrat and key architect of the scheme.
Analysts said the decision signalled a halt to painful measures.
"We believe every group within the ranks of the Socialists, including that of the premier, sees the essence of the reforms done with," financial analysis website portfolio.hu wrote.
"Neither the coalition, nor a potential minority government will embark on any major reform measures in the period left until elections in 2010," it said.
The Free Democrats feel the same way, saying Gyurcsany had "turned his back on the reform process."
Economic reforms, aimed at getting Hungary ready to adopt the euro by about 2014, were first introduced in the summer of 2006 after years of missed deficit targets.
But the measures fanned inflation, now at 6.9 per cent after peaking at 9 per cent in 2007, and cut economic growth to 1.3 per cent in 2007 - the lowest in Eastern Europe.
Even before the referendum, the government was showing signs of loosening fiscal discipline.
There was talk of tax cuts worth almost 2 billion dollars - a suggestion that worried many observers who had warned that the government would loosen the purse strings in the run up the 2010 general elections.
After the referendum, credit rating agency Standard & Poor's downgraded Hungary's outlook from "stable" to "negative", saying that it expected the deficit to stall at 4.5 per cent this year and in 2009.
With the latest chaos, investors are unlikely to be reassured. Many experts believe more reforms are needed, not fewer - in particular, government spending cuts.
Christoph Rosenberg, who heads the International Monetary Fund's regional office, is one of many such voices.
During a recent visit to Budapest, he said public finances were still bloated and that social-welfare spending must be cut further to balance the budget.
Government debt, meanwhile, has risen to 65.6 per cent of GDP in 2007 from 54 per cent in 2000.
What happens next politically is open to debate. Calls from main opposition party Fidesz, riding high in the polls, for new elections are likely to be ignored.
Many believe the Free Democrats are trying to force out Gyurcsany. But there appears to be no credible contender to replace the man who, until recently, was the driving force behind Hungary's reforms.
