The position of Fidesz on recently announced economic austerity measures by the Medgyessy-government

Dátum: 2003-08-01 13:55:00, eredeti URL: http://archiv.fidesz.hu/index.php?Cikk=13320
KCMDB-be feltöltve: 2024-05-04 18:38:21.542259, Feltöltő: fidesz_hu_scraper_v2

A year of mismanagement and drifting economic policy resulted in haphazard austerity measures in the last two months. The devaluation of the forint and budgetary cutbacks in the state administration in June (see our paper of 5 June, available at index.php?CikkID=11476) were followed last month by announcements on projected personal income tax rises, VAT rate increases, the introduction of new taxes and the abolition of certain tax brakes for the year 2004. Hungary faces a grim economic outlook.

Projected amendments in taxation:

Personal Income Tax:

Last October, the government introduced a Tax Bill for the years 2003 and 2004, which was adopted by the Parliament. The Act left the current rates (20, 30 and 40 percent) unchanged for the year 2003, but projected reductions to 18, 26 and 38 percent, respectively, from 1 January 2004. This legislation, however, seems to have been a mere campaign promise in advance of the unpcoming local elections last autumn, as the government recently announced that the Act in question would be amended in order to leave the current rates unchanged for the year 2004, as well. Unchanged tax rates with an inflation well above the projected 4,5 percent mark for next year will increase the tax burden on the economy and the society. The issue has already caused in-coalition tension, as the liberals are insisting on the original timetable.

Value Added Tax:

Hungary has had a three-rate VAT system so far, with 0, 12 and 25 percent rates, respectively.

In accordance with EU-regulations, the zero-percent rate will be increased to 5 percent. This category includes medicines and textbooks.

In spite of the fact that Hungary has gained a derogation until 2007 in abolishing its 12-percent VAT-rate (ironically asked for by the current government), all products and services in this category will be transferred to the 23-percent category already from 2004. This affects virtually the whole services industry, including electric energy (prices in this sector are due to increase by 35 % next year), public transport and transportation costs, having significant inflationary consequences.

The 25-percent rate will be reduced to 23 percent. Nevertheless, this will be compensated by the increase of excise duties in the case of petrol, alcohol products, cigarettes, etc., which make up a significant portion of the products belonging in this category.

Abolition of tax breaks:

Recent announcement show that the government is intending further cutbacks, in addition to those carried out already, on tax breaks related to housing loans. In the case of a family redeeming a debt, the brake available at the moment may reach HUF 20,000 per month. In addition to the social consequences, the abolition of housing loan tax brakes will lead to a fallback in the real estate market and the construction business.

The abolition of tax breaks related to private pension fund membership, introduced by the previous socialist government, is also on the agenda. This would especially affect those with or below the average income.

New taxes:

The government has also announced that a new tax would be levied on all citizens, comprising of 1 % of gross wage and to be called nursing allowance, in order to finance the deficit of social security.

As a consequence of the projected amendments in taxation, a Hungarian citizen with average income will lose almost a monthly salary. Similarly, pensioners will lose almost a monthly pension as a consequence of new taxation regulations.

Economic outlook:

When the Medgyessy-government took office, Hungary was Central Europe's leading economy in terms of indicators.

Central Europe is still among the fastest growing areas in the world, but Hungary has fallen back since then. With only 2,7 percent in the first quarter of the year 2003, Hungary is now lagging behind other EU-accession countries: GDP-growth is approaching or even exceeding the 5-percent mark in Romania, Slovakia, Bulgaria, Latvia, Lithuania and Estonia.

The government planned this year's budget with a projected inflation of 4,5 percent. However, the figure, expected to increase as a result of the increased tax burden, is already at 4,8 percent, but may even reach 5-5,5 percent by December. For the first time since 1997, inflation is on the rise again.

Budget deficit has been steadily increasing, and reached HUF 600 billion (approx. EUR 2,3 bn) by the end of June. This is 72 percent of the deficit projected for the year 2003, and may reach 5,2 percent of the GDP by December. Current account and trade balance deficits are steadily worsening, and for the first time in 13 years, the influx of foreign direct investment was less than the amount of FDI leaving the country in the period January to March 2003 (balance: approx. EUR -70 million). This may easily place the Hungarian economy in a spiral of indebtedness. Bad indicators, declining competitiveness and the loss in credibility in the exchange rate policy have also caused damage to the outside image of the Hungarian economy.

Upon taking office, the Medgyessy-government heralded a welfare turn for the Hungarian society. What the Hungarian society is expected to experience in the near future is a series of austerity measures leading to wage stop and even net wage loss in some sectors. Moreover, the austerity measures announced so far might be able to solve temporary budgetary problems by buttressing the revenues, but will do little to enhance the competitiveness of the Hungarian economy. A new strategy should be worked out to make Hungary again a preferable choice for foreign direct investment. Unfortunately, no such strategy is apparent for the moment.

Budapest, 31 July 2003