Increasing burden, grim outlook: the Hungarian economy in 2004

Dátum: 2003-09-24 14:39:00, eredeti URL: http://archiv.fidesz.hu/index.php?Cikk=15034
KCMDB-be feltöltve: 2024-05-04 18:51:10.305253, Feltöltő: fidesz_hu_scraper_v2

When the Medgyessy-government took office, Hungary was one of Central Europe's leading economies in terms of indicators. The situation has changed a lot since then, in spite of the fact that the global macroeconomic environment has not changed significantly in the last 18 months. A year of mismanagement and drifting economic policy has left Hungary with a grim outlook for 2004.

Economic indicators:

GDP-growth is stagnating. Central Europe is still among the fastest growing areas in the world, but Hungary has fallen back since then. With only 2,4 percent in the second 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.

For the first time since 1997, inflation is on the rise again. The government planned this year's budget with a projected inflation of 4,5 percent. However, all analysts expect a figure exceeding 5 percent by the end of the year, whereas the government itself expects that avarage inflation reaching 6 percent next year.

Budget deficit has been steadily increasing. It has reached HUF 708 billion (approx. EUR 2,8 bn) by the end of August. This is 85 % of the deficit planned for the year 2003. The annual deficit level may thus reach 5,2 percent of the GDP in 2003.

Foreign investors are becoming increasingly uncertain about Hungary. For the first time in 13 years, the inflow of foreign direct investment was less than the investment amount leaving the country in the period January to April 2003 (balance: EUR -328 million). 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.

Investment stimulation is falling. The projects offered by the government are either underfinanced or their conditions are impossible to meet for small and medium-sized enterprises. Smart Hungary, the project heralded with great fanfare, has only supported 14 companies so far. Only 5 percent of the sums allocated for a preferential credit-scheme heralded within the so-called Europe Plan has been used by small and medium-sized enterprises.

Taxing regulations:

The desperate situation of the budget and the economy in general is well indicated by next year's taxing regulations, as decided on recently by the government. In the final effect, the combined impact of VAT and personal income tax measures will result in a general increase of tax burdens in all income categories in 2004.

Following months of fighting within the coalition, the government approved the Personal Income Tax rates for the year 2004: current rates of 20, 30 and 40 percent will be reduced to 18, 26 and 38 percent, respectively. In fact, these rates for 2004 have already been fixed in October 2002, but the desperate situation of the central budget almost killed the concept. In the end, the pressure coming from the public opinion, from the opposition and from the very inside of the coalition parties, the government was forced to leave the projected amendments unchanged.

However, rate cuts in the Personal Income Tax are financed and eliminated by projected rises in other tax categories, by the abolition or cutback of certain tax allowances, as well as by new taxes in the corporate sector. The volume of these increase in tax burdens is well beyond the cuts in personal income taxes in all income categories.

Increase of Value Added Tax rates:

Hungary has had a three-rate VAT system so far, with 0, 12 and 25 percent rates, respectively. From 2004, these rates will be modified to 5-15-25 percent.

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 preferential VAT-rate on energy, electricity consumption will be transferred to the standard VAT category (25 percent), a decision which will certainly have significant inflationary consequences.

Contrary to the original concept, the 25-percent VAT-rate will not be reduced to 23 percent.

Prior to the government decisions the effective VAT rate was already far above the European Union average. Due to government action, the effective rate will rise to 17,5 percent, an incredibly high level which even exceeds the maximum level used in Europe (14,6 percent in Denmark).

Inreasing the burden on entreprises:

In order to improve competitiveness, the government decided to cut corporate tax rate from 18 percent to 16 percent, and to increase certain tax allowances related to development, as well as those concerning investment credits. At the same time, competitiveness is hardly facilitated by the introduction of a new tax (called innovation contribution, which is 0,2 percent of net income), a significant rise of taxes related to company assets (e.g. cars) and of employers' contributions.

Increase of employees' healthcare contribution:

An increase of 1 percentage point is projected for 2004.

Increase of excise duties:

Increase in the tax content of petrol, alcohol products, cigarettes, etc.

Abolition of tax allowances:

The government has decided to cut back, in addition to those carried out already, on the tax allowance related to housing loans. Until now, in the case of a family redeeming a debt, the allowance available may have reached HUF 240,000 per year. The government has now decided to halve the available tax allowance (to HUF 120,000 a year), to be implemented even on running debts. In addition to the social consequences, the abolition of housing loan tax allowances will lead to a fallback in the real estate market and the construction business.

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

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, 24 September 2003