Government Vows to Continue ʼInvestment-friendlyʼ Economic Policy

Minister of Finance Mihály Varga addresses the AmCham forum.

That goal would be served by both the 2020 budget and the “13+1” points of the Economy Protection Action Plan, which will provide some HUF 500 billion in support to the Hungarian private sector, the minister said at the Budapest Marriott Hotel on June 7.  

He mentioned reductions to business taxes and the accommodation tax, with the temporary lowering of the advertising tax rate to 0%. Not least among these changes, though, would be the 2% cut in social contributions (see separate box).  

The elements combined aim to shield what is still a robust Hungarian economy from the impact of a global slowdown. “As a result, taxes will continue to fall, the business environment will continue to improve, and it will be easier for enterprises to receive credit in the interests of promoting investment,” the minister insisted.

As he so often does, Varga sought to put the current figures into context by giving a brief historical overview. He remembered “how shocked I was in 2010 by the state of the country; the exchequer was empty, debts going through the roof”.

The entire system of government and how it is financed had to be overhauled, with a shift away from personal taxation and toward consumption taxes, he said, but the relationship with international business also had to be improved with “the establishment of a new dialogue-based approach”.

In this regard, Varga said the American chamber had proved itself a key ally that “has been working on improving Hungary’s competitiveness for years” and “played a role in the role in the introduction of the flat rate tax,” he recalled. “The government regards AmCham as a highly important partner,” he said.  

‘Grateful’

He referenced the chamber’s latest “Cooperation For A More Competitive Hungary” recommendation package, and added he was “grateful for the work that is jointly conducted on the national Competitiveness Council” that he chairs, and on which AmCham president Farkas Bársony sits.  

“We will continue our policy of tax cuts that aim to reduce taxes that place burdens on labor, companies and families,” he promised.

There can be no doubt how important America and its businesses have become to Hungary. Referring to the recent White House working meeting between U.S. President Donald Trump and Hungary’s Prime Minister Viktor Orbán, Varga said: “It has become clear we share views on the most important issues.”  

He added that, in economic terms, the “United States is the second most important country for Hungary after Germany,” noting that it was Hungary’s most important export partner outside Europe and the largest investor in Hungary from outside Europe; there are approximately 1,700 U.S.-owned companies operating in the country, employing more than 100,000 people, he said.

Hungary’s economy continues to outperform the European Union, with Q1 2019 growth in Hungary of 5.3%, compared to the EU average of 1.5%. The Minister of Finance said it is obvious that Hungary, indeed much of the Central and Eastern European region, is now much better represented in the global value chain. While that has brought clear advantages, it also exposes Hungary to global slowdowns, meaning it is only prudent to look now at creating rainy day contingencies, though the minister did not use that exact phrase.

“Hungary has a strong macroeconomic framework, so we are building fiscal buffers against similar trends we have seen in many neighborhood countries” in preparation for a period when “growth momentum gradually slows down in the EU and the entire global economy”, he said.

Lawmakers Vote to cut Payroll Tax

Parliament has approved a two-percentage-point reduction in the payroll tax to 17.5%, effective July 1, state news service MTI reported. The amendments reducing the tax were passed in an expedited procedure with a vote of 160 ayes, one nay and five abstentions. The payroll tax was cut from 27% in 2016 to 22% in 2017 and 19.5% in 2018. At the same time, the minimum wages for skilled and unskilled laborers were raised by double digits. The agreement stipulates that, from 2019, the payroll tax will be reduced a further four times by two percentage points on each occasion. The cuts are timed from the start of the second quarter of each calendar year as long as the gross average private sector wage rises at least 6% year-on-year in the first quarter of the given year. Private sector wages rose 11.8% year-on-year in Q1 2019.

Minister of Finance Mihály Varga (center) met with the AmCham ledership before the forum.