IMF Lauds Hungarian PM's Austerity Measures

by Lorys Charalambous, Tax-News.com, Cyprus

30 September 2009

Following the substantial reform of Hungary’s tax system by Prime Minister Gordon Bajnai, the IMF has released the final tranche of a Stand-By Arrangement (SBA) with the country amounting to USD79.3m.

Having tackled a number of tough decisions head-on, Bajnai was commended on September 25 by the IMF on the conclusion of the third review of Hungary’s economic performance under the SBA.

Since taking office in Hungary, Bajnai has set about revising the tax system to lessen taxes on businesses and individuals and has moved to introduce taxes on wealth, an approach lauded by the IMF. Following the approval of a tax bill for 2010 in July by Hungary’s parliament, the IMF considers that Hungary is correctly paving the way for recovery from the crisis.

“Macroeconomic and financial policies in Hungary are on track. Continued implementation of policies consistent with the program remains essential to strengthen macroeconomic stability and provide the basis for strong, sustainable growth over the medium term,” the IMF said in a statement.

Under the bill, to come into force in 2010, business will be pay less in social security contributions, there will be an increase in the VAT rate, and a wealth tax on property and luxury items will be introduced. With the economy facing a 6% contraction this year, Bajnai is being credited with making the tough choices that his predecessor could not, many commending recently-implemented austerity measures for putting the Hungarian economy back on the right track.

Affirming the success of Hungary's fiscal policy, the IMF statement concluded:

“Fiscal sustainability is being strengthened through structural spending reforms to the pension system, social transfers, and subsidies. At the same time, tax reform is shifting the tax burden from labor to consumption and wealth, which should boost labor participation and potential growth over the medium term. The full implementation of these comprehensive structural reforms is essential to put government debt as a share of GDP firmly on a declining path."

Whilst the country appears to be on the road to recovery, Bajnai, speaking in late-July, said that more austerity measures would be necessary in the forthcoming budget, to be tabled in November.

Bajnai, seeking to assuage concerns, confirmed that the Hungarian taxpayer had already suffered the "most painful measures," but noted that it would "not be an election budget" and thus "not a picnic." Despite being coy on specifics Bajnai said that the budget would certainly involve retrenchment in the public sector in order to further shore up government finances. He predicted that the bill would include broad cuts to government spending, which he said would almost certainly include cuts to local and national public administrations and public transport operators' funding.

Consequently the IMF and Hungary agreed at the meeting to extend the SBA by six months to October 5, 2010, to provide ongoing support to the country’s economic program particularly during forthcoming elections.

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