Hungary to refrain from tax cuts through 2011

Banking

Hungary's government will refrain from lowering taxes until the end of 2011 as the country strives to reduce the European Union's largest budget deficit compared with the size of the economy, Prime Minister Ferenc Gyurcsány said. Our "program isn't calculated with a decline in total tax revenue in mind, based on the current tax rates and forecasted income levels," Gyurcsány told reporters in his office at Budapest's Parliament building today. Gyurcsány is boosting tax revenue, increasing energy prices and reducing the size of the state bureaucracy to trim the budget deficit and move the country toward euro adoption. The currency has lost 9% this year, the third-worst performance by a European currency behind the Icelandic krona and the Turkish lira. Even with an unchanged overall tax rate, the government is considering a shift toward more consumption-based taxes instead of taxing incomes, Gyurcsány said. The government is also working on a package of measures to help attract investment without lower taxes.

The government will hold off from cutting pensions and family support, to keep the program from being too harsh, which would possibly increase the appeal of national radicalism, Gyurcsány said. Neighboring Slovakia's government of Prime Minister Mikulas Dzurinda, who slashed taxes and spending to push euro-adoption preparations ahead, lost its bid for a third term in June to a party that advocates more social programs and includes a party that opposes Hungarian emigration. In Poland, the Law & Justice party won over the business-friendly Citizens' Platform. Law & Justice formed a coalition with two parties that oppose euro adoption and are skeptical of the nation's EU membership. "The Slovak and Polish examples are very much cautionary," Gyurcsány said. "Hungary won't achieve anything, however extensive and brave its reform policies are, if national radicalism sweeps away its political stability. We can't go so far where the end is a total reversal in four years."

"The local elections are not irrelevant, but if there's a conflict between the short-term political objective and the interests of our reform policies, we must chose the latter," Gyurcsány said. Hungary's central bank and the government agree about the economic fundamentals contained in the euro-adoption program, except for a difference in inflation forecasts, Gyurcsány said. The discrepancy is methodological, mostly a function of the difficulty in modeling retailer behavior, he added. The central bank's higher inflation forecast for 2008 also resulted in a half-point increase in the benchmark interest rate yesterday, the third increase since June. Though the bank signaled it may raise the rate, the EU's highest, further, Gyurcsány expects Hungarian bond yields to decline as his deficit-cutting program takes effect. Gyurcsány said he expects his policies to invigorate economic growth from 2009, returning the economy to 4% annual growth rates after a slower pace in the next two years. Rising investments, the inflow of EU funds and growing consumption will help boost growth, he said. (Bloomberg)

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