UPDATE - Govt to establish free zones for businesses in disadvantaged areas

Hungary's government is establishing free zones for businesses in the country's most disadvantaged areas, National Economy Minister György Matolcsy said in Parliament on Tuesday, presenting tax bills.

Businesses operating in the free zones would provide work for local residents, Matolcsy said.

Because Europe's liberal democracies are not prepared to do well in the global tax competition, Hungary started down its own road in the summer of 2010, Matolcsy said. It is creating financial balance, raising employment and restructuring the tax system within this framework, he said.

Tax centralization has fallen by 1.5 percentage points, a preferential corporate tax rate for companies with annual profit up to HUF 500m has been introduced, and the introduction of a flat-rate personal income tax system has started, he said. This year Hungarians yet pay a 20.3% personal income tax on average, he added.

Matolcsy noted that had the government not introduced the flat-rate tax in 2011, household consumption would have plummeted. The change left families with HUF 500bn in extra income, of which HUF 170bn came from the new system of family allowances, he added.

The foundation of the new economic policy is growth creation, and an element of this is reducing state debt, he said.

In its 2012 budget bill, the government wants to continue the switch to a tax system that that does not punish, but rewards employment, workplace creation, doing business and having children, Matolcsy said. "This series of steps is one of the Hungarian economy's steps to success in the mid and long term," he added.

Matolcsy conceded that the tax centralization rate would edge up to 38% in 2012, but said other measures would support the simplification of the tax system and bring the shadow economy into the light.

The tax changes close loopholes that can poke holes in the budget, Matolcsy said. The aim of the new tax system is not to achieve justice, that has to be achieved with other economic policy, but rather with the tools of social policy, he added.

The tax changes also aim to reduce the burden on incomes and raise that on consumption and turnover, he said.

Next year more tax will be collected because of improved efficiency, Matolcsy said. A screening of trade companies showed businesses fail to pay an annual HUF 500-600bn in VAT and excise tax, he added.