Boosted tax intake proves to be no miracle cure

When Viktor Orbán won the elections in 2010, one of his initial drives was to increase legal employment alongside increasing budget revenues through more effective control of widespread tax fraud that is recognized as an everyday element of doing business in Hungary. Statistics show there have been actual results on that front.

Of countries in the Central European region, Hungary is one of the most reliant on tax revenues, according to the latest 2013 edition of an international tax survey published by the Organization for Economic Cooperation and Development (OECD). In 2012, the country had a tax to GDP ratio of nearly 39%, compared to 37.4% in Slovenia, 35.5% in Czech Republic, and 28.5% in Slovakia.

This thirst for tax revenues has prompted several revisions to the structure throughout its current term and there are more ahead, targeted at increasing central revenues from taxes, whether it’s new levies or increasing stringency to avoid dodging existing forms.

Keeping close watch
This is also reflected in the operation of the tax and customs authority NAV. A Deloitte survey published late 2013 found that 95% of the companies asked said they had been audited during the preceding three years. The average international response is 75%.

The authorities have good reason to monitor and inspect, given the extent of fraud and various other tax-related misdemeanors that can, on occasion, rack up quite a tab.

Most recently, a crime ring was exposed in Győr that committed fraud amounting to HUF 7.5 billion through unpaid value added tax. The latest annual tally from NAV shows a total of HUF 121 billion in investigated white-collar criminal offences in 2012, most commonly tax fraud. NAV currently has HUF 2.1 trillion in tax arrears on record.

This is of course only a fraction of the amounts estimated to be circulating in the semi-legal and illegal economies, estimates that range from astronomical through preposterous to the astronomically preposterous. The latest scandal involving alleged widespread VAT fraud on foodstuff is claimed to amount to HUF 1 trillion alone, well above 3% of the country’s GDP.

Double-edged sword
The government’s efforts to increase budget revenues have yielded results, but have also had unfavorable consequences in terms of the country’s overall competitiveness when compared to its regional peers. This appears to be all the more true regarding sectoral taxes that are levied on the finance sector.

A review from November by Viktor Zsiday of the Plotinus investment agency directly links Hungary’s muted growth to the absence of lending in the country that stems from the consequences of the Lehman Brothers crisis, heavily compounded by the taxes introduced by the Fidesz government.

He notes that Hungary had a cumulative GDP growth of 1.7% between 2009 and 2013, which is a feeble amount compared to Poland’s 12%, Slovakia’s 10.5%, or Bulgaria’s 3.5%, and is even below the EU average of 2.4%.

The muted growth originates from a balance sheet drop at Hungarian banks of 22 percentage points from 2009, compared to a 17-point increase in Poland, 20 points in Bulgaria and the overall EU drop of 3 points, Zsiday found.

His observations are underlined by the repeated comments of the Hungarian Banking Association, which has complained for years about the excessive degree of taxes that restrict the lending that could fuel growth. The latest measure, mandating two free cash withdrawals from ATMs, will alone cost the sector HUF 40 billion, the association’s secretary general Levente Kovács said. In turn, the measure will further increase overall banking costs for clients.