Planned tax, transfer changes could lift employment 1.5% in ten years - MNB

The full implementation of tax and transfer changes introduced this year and announced for next year would increase Hungary's GDP by about 5.5% in ten years, but would lift employment less, by 1.5%, or 60,000 jobs, in the period, National Bank of Hungary (MNB) researchers forecast.

The package, if implemented in full, would result in only a limited fiscal revenue shortfall and could result in significant savings on the long run, the study published in the latest edition of the research bulletin MNB Szemle on Wednesday.

But it would also raise the disposable income of high-income groups and would result in losses in the lower-wage groups, raising Hungary's income concentration measure GINI from 26.4 to 30.4.

The projected long-term rise in employment would result exclusively from a tightening of transfers, namely the planned tighter conditions of support for disabled people and for jobless support, including a cut in the eligibility period, which would each raise employment by 1% on the long term, the authors - Péter Benczúr, Gábor Kátay, Áron Kiss, Balázs Reizer and Mihály Szoboszlai -- calculated.

They assumed that the so-called crisis taxes, levied on telecom, energy and retail companies last year, would be phased out and the extraordinary bank levy reduced as planned starting in 2013. These steps, together with the reduction of capital taxes under the current government's term, could generate a sizeable capital inflow and, in turn, would boost employment by about 0.3% on the longer term.

The 2010-2011 changes in the personal income and in payroll taxes, among them the introduction of a flat tax rate this year, would boost growth on the whole through acting as an incentive in the higher wage/income groups, but would have practically no effect on employment.

The full elimination of payroll taxes paid by employers from the personal income tax base would add 0.8% to employment levels over the long run, but the full elimination of the tax refunds in effect in the lower wage categories would cut employment by about 2% and the planned rise of health contribution from 2012 would result in an additional 0.3% decline.

While the income tax changes result in an almost HUF 300bn budget revenue shortfall in an immediate effect, they will reduce budget revenue by less than net HUF 100bn over the long term, the researchers calculated.

The immediate effect would be a slight HUF 10bn shortfall, and a HUF 212bn improvement in the long-term budget position if the full elimination of both the tax refunds and of the current wider personal income tax base, planned changes in the VAT rate (a rise in the standard rate from 25% to 27% next year), and the planned rise in health contributions (of 1.5% form employer's and 1% of employee's contribution) were included.

Including the effect of last year's rise in the profit tax to 19% parallel with the extension of a preferential 10% rate for business with annual profit up to HUF 500m, the 2010-2011 tax changes cut budget revenues combined by net HUF 114bn on the short term but raise them by about net HUF 280bn on the long run, the calculations show.

The changes in jobless support and disabled support would improve the fiscal position by more than HUF 110bn immediately and by almost HUF 220bn over the long run.

Maintaining the crisis taxes and the bank levy at their current level over the long run, combined with reduction in disabled support and keeping the current wider tax base for above-average wages -- keeping the effective tax for the categories at about 20.3% instead of an over-the-board cut to an effective flat 16% -- would, however, eliminate the bulk of the long-term positive growth effect, it would result in lower employment, the researchers said. It would also more than halve the long-term fiscal savings, to HUF 230bn.

Based on the above assumptions the long-term addition of the tax and transfer measures to GDP would fall from 5.5% to 0.9%, and employment would actually fall 0.2% instead of the otherwise forecast 1.5% rise on the ten-year horizon. Hungary would also experience a capital outflow worth 2.5% of the stock instead of receiving a 6.8% inflow.

A rise in risk spreads -- in the expected yield of Hungarian investments -- would again considerably reduce the long-term boost the full package would give to growth and employment, and would result in a net deterioration of the fiscal position instead of about HUF 480bn in budget savings expected over the long term under the base scenario.