Analysts: Tax plan would have minor impact

Banking

The following article is from the Octover 31-November 13 print edition of the Budapest Business Journal.  

While the proposal for an Internet tax drew tens of thousands of demonstrators into the streets, analysts assessing the current tax proposals for 2015 say the impact of the whole package on the Hungarian economy would be mixed, and probably slightly negative.

Although Gergely Gabler, chief economist of Erste Bank Hungary, cautioned that it is still early to draw conclusions about the tax package, as the whole budget plan has not yet been published, he did say he thought the proposed Internet tax is a negative surprise. He maintained that it is strange, as it would generate HUF 20 billion in revenue for the state budget, far less than the special tax levied on the bank sector, which generated HUF 200 bln.

Buda Cash analyst Gergely Tóth told the Budapest Business Journal that as there are only negligible changes to the tax system, and as no major structural changes were made, its effect would hardly be earth shaking, though he did say that the unusual tax structure, such as the Internet tax, might weaken trust in the economy. In general, Tóth said, the so-called “unorthodox” policy of the government is unfavorable for businesses. The introduction of the Internet tax would place unexpected and significant burdens on companies in the telecommunication sector, while other companies might also encounter hardships as a result of many new taxes aimed at them.

On the spending side, Gabler said if Hungary acts upon its plans to increase military wages by 50%, it would increase disposable income, which could give a significant boost to the GDP as a result.

WATCHING EXTERNAL FACTORS

According to Gabler, taxes and the budget will not have as strong an impact as other external factors. He said Hungarian exports to Russia and Ukraine only account for 4% of GDP, so the sanctions do not have a strong direct impact. He said that the impact the sanctions have on Germany, and the resulting reduction of business there, will have a more significant impact on Hungary’s economy. Tóth says the Russia-Ukraine crisis might reduce Hungary’s GDP by a couple of tenths of a percent, and that the slowdown of the Eurozone, especially Germany’s economy could hurt the domestic economy more. Further pessimism is warranted by a worsening economy in regions that are important for Hungary, and also by the disappointing macroeconomic figures of the domestic economy, including drops in industrial output, retail sales and exports.

Tóth also said that the foreign policy of the government could have negative effects on the economy, especially the recent tension between Hungary and the United States, sparked by the American blacklisting of six unnamed Hungarian officials. American multinational corporation General Electric (GE) is present in numerous sectors in Hungary, employing more than 13,000 people, and it is crucial for Hungary to maintain GE’s positive attitude towards the country, he said.

In terms of GDP growth, this year has been outstanding, according to Gabler, who said by the end of the year Hungary is expected to achieve 3.3% GDP growth. For the following year, J.P. Morgan recently downgraded the GDP outlook for Hungary from 2.5% to 2.2%, while both the Hungarian government and the National Bank of Hungary expects it to be 2.5%. Tóth said that 2.5% is in line with the expectations for the global market, while Gabler said that Hungary could be satisfied with 2.3%.

The cabinet is expecting to see a state deficit of 2.4% and to reduce state debt to 75.4% by the end of this year. Gabler believes that the latter figure is an optimistic one, though not impossible. The main decisive factor will be the forint’s stance on the interbank market. He thinks the forint will strengthen this year, and will reach around 305 to the euro.

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