Hungarian Government Split Over Tax Cut Delay

by Ulrika Lomas, Tax-News.com, Brussels

07 August 2003

The decision to postpone tax cuts scheduled for 2004 is causing much friction within Hungary's coalition government according to investors and observers in the region.

According to reports, coalition partner the Alliance of Free Democrats has objected to a decision by Prime Minister Peter Medgyssey to delay $656 million worth of tax cuts until next year. The issue is crucial for the Socialist-led government of Medgyssey as it depends on the Free Democrats' support. "The alliance of Free Democrats insists that the government's manifesto and the tax brackets that had been jointly approved by the coalition parties be implemented," said Free Democrat Chairman Gabor Kuncze at a press conference this week. It is thought that talks between the two parties could commence next week.

Governments in Hungary's neighbours, such as the Czech Republic and Poland are experiencing similar problems as they attempt to meet the criteria for EU entry, and some analysts think these problems may persist. "Unfortunately for the region, these countries ended up having left-wing governments when they need to be ruthless in cutting spending," said Dwyfor Evans, emerging-market strategist at Bank of America in London in a Bloomberg report. "That combination doesn't work."

Evan's viewpoint is echoed by Tibor Schindler of Raiffeisen Capital Management in Vienna, who manages 880 million euros in East European bonds and stocks. "They are trying to meet the euro criteria by 2006. This is what's making these disputes so intense. They can only do this if they squeeze people really hard," comments Schindler.

Under the original proposals by the Megeyssey government, personal income tax rates would have been cut from 40% to 38% in the top bracket, from 30% to 26% in the middle tier and from 20% to 18% in the lower band.

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