Hungarian PM Sees Room For Tax Cuts

by Ulrika Lomas, Tax-News.com, Brussels

15 January 2008

The office of Hungarian Prime Minster Ferenc Gyurcsany has confirmed that the government intends to reduce the tax burden by 0.5% of gross domestic product over the next two years.

The Hungarian government is still mid-way through a fiscal austerity programme, with the objective of reducing its budget deficit to a level that will permit Hungary to converge with the eurozone, but Gyurcsany told Euromoney that the convergence plan allowed some room for tax cuts and for the overall tax burden to be cut to 37.6% of GDP by 2010.

When elected in 2006, the Prime Minister had to go back on a promise to cut taxes when presented with a budget deficit of almost 10% of GDP - easily the highest in the European Union. One of the key convergence criteria for member states with aspirations of adopting the euro, of which Hungary is one, is that budget deficits must be no higher than 3% under the terms of the Growth and Stability Pact. This meant that the new government had to put in place unpopular tax hikes and spending cuts to meet its targets.

In July 2006, Hungary put the seal on a package of tax increases designed to ensure that the country meets its fiscal targets. The legislation raised the middle tier of VAT from 15% to 20% and introduced a 4% 'solidarity tax' on business profits and personal incomes above HUF6 million (US$27,500), although this latter measure was subsequently watered down after protests from business. In addition, a 20% tax was introduced on interest rate and foreign exchange gains, banks faced a 5% tax on interest revenue from state-financed loans, and a simplified entrepreneurial tax was raised from 15% to 25%.

While the economies of neighbouring EU countries in Eastern Europe have flourished in the years since they joined the union, allowing them to cut taxes, Hungary's dose of fiscal medicine has caused its economy to slow to almost a standstill, and has led to protests from representatives of workers and businesses alike. However, recent figures suggest that the policy is bearing fruit, with the budget deficit having been cut to below 6% in 2007 on the way to a targeted 3.2% by 2009. Now with more in the fiscal kitty, the governing coalition has begun to debate a number of tax proposals with the aim of sharpening the country's tax competitiveness.

According to the business daily Vilaggazdasag, four tax packages were under discussion by the governing Socialist Party and its junior coalition partner Free Democrats last Friday: one would cut the 'tax wedge' on labour from 29% to about 20%, but increase the top rate of VAT by 2% to 24% and abolish tax allowances; the second would reform the personal income tax system, applying the principle of 'super grossing'; the third would reduce the tax burden on corporations; and the fourth would introduce a flat tax on personal incomes and/or corporate incomes and VAT.

It is intended for the new tax cuts to pass into law in 2009, but the report suggested that the coalition is split on the scale of proposed cuts, with the Free Democrats calling for tax cuts of the order of HUF550 billion (USD3.2 billion), but the Socialists favouring more moderate cuts of about HUF200-250 billion.

Recommended