The tax cuts, worth Ft 1,000 billion – Ft 1,200 billion, are part of a proposed multi-year program Hungarian Prime Minister Gyurcsány published in a paid ad in the national daily Népszabadság last Wednesday. The program aims at financing the tax cuts from the “bleaching” of the economy, namely from an increased propensity of taxpayers to pay lower taxes, increased tax discipline and cracking down on tax evaders.
The following is a press release published by S&P on Monday on the report, titled “Hungarian Government’s Proposed Multi-Year Tax-Cut Package Likely To Lead To Fiscal Loosening:”
“When we assigned a negative outlook to the (BBB+/A-2) ratings on Hungary in March 2008, we based that decision on our expectation that Hungary’s progress in fiscal consolidation would eventually come to a halt, given the strong incentives for fiscal loosening and Hungary’s historical record,” Standard and Poor’s credit analyst Kai Stukenbrock said. “The tax-cut package appears to validate our expectation, with these cuts alone potentially adding about 1% of GDP to the general government deficit by 2010.”
“On the face of it, the overall thrust of the tax plan points in the right direction and addresses some of the Hungarian economy’s structural issues. However, the envisaged financing of the proposed tax measures, through so-called “bleaching” of the economy, is not credible. While it seems plausible and in line with economic theory that reductions in tax rates could increase tax compliance, it is unlikely that this step could generate such a significant yield in extra tax revenues, particularly as some incentives contributing to tax evasion in Hungary remain in place. Furthermore, if a dividend of such magnitude could so easily and painlessly be retrieved, this raises the question of why it hasn’t been done before.”
“On the positive side, the government’s fiscal consolidation path has so far remained firmly on course, and as a result any fiscal loosening would occur from a better base than we initially expected. We expect the 2008 deficit to amount to 3.8% of GDP, ahead of the government’s initial target of 4.3%. Despite this improvement, however, concerns remain that tax cuts, potentially in concurrence with further fiscal relaxation, could contribute to sustained failure to stabilize and eventually reverse the upward trend in Hungary’s very high general government debt ratio (at an estimated 68% of GDP in 2008). This could eventually lead to a downward revision of the ratings.”
“On the other hand, should the government hold on to its fiscal target, the demonstrated ability to tighten public finances over the entire political cycle and not only the first half of it would provide strong support to the ratings,” Stukenbrock said. (MTI – Econews)
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