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The price we paid

Economic ministers of the Fidesz government have introduced many extra taxes throughout the last three years, and the economy has paid a hard price for the success in exiting the EU’s excessive deficit procedure (EDP).

The reign of former economic minister György Matolcsy, now head of National Bank of Hungary, evoked ambivalent feelings at best. After three years of ‘revolutionary war’ against the measures indicated by Brussels and the International Money Fund, the country was released from the EDP that had been in place against Hungary since its accession to the EU in 2004. But the ‘unorthodox’ measures and sectoral special taxes of the Matolcsy-era have throttled profitability and investment rates in many sectors and might have caused the Hungarian Economy deep wounds for the middle- and long-term, analysts the Budapest Business Journal spoke to warned.

What is an extra tax?

To define the impact of ‘unorthodox’ measures, it is first essential to clarify what, exactly, is meant by an extra tax in Hungary. According to the government’s own communication, only the new tax on financial institutions (the so-called bank tax) and on credit institutions includes the word extra tax (különadó) in their title. However, in practice, the extra taxes target a certain sector or industry (e.g. financial institutions, telecommunications, utilities, etc). According to this approach, currently 10 such taxes are in effect in the domestic tax system, most introduced in 2010. A special income tax on the energy sector (the energy suppliers’ income tax or ‘Robin Hood tax’) was introduced in 2009 by the former socialist government; a tax on energy itself was introduced in 2004.

“Last year, the total revenue of the state budget from different unorthodox measures was around HUF 268 billion, giving 2.8% of central revenues altogether. This figure doesn’t include public health product tax, commonly known as the ‘chips tax’ or ‘hamburger tax’, and the accident tax, as they don’t contribute to the central government coffers, but are revenues specifically for the Health Insurance Fund,” said Judit Jancsa-Pék, a partner and leading tax consultant at the firm Leitner+Leitner. “Revenues from special taxes were significantly higher in 2010 and 2011, when approximately 4.5% of the total budget revenue was accounted for these measures. In the original budget for 2013 – before the recently announced package of the new economic minister Mihály Varga – it has been reported that the rate would rise to 6.5% this year,” she added.

The price we paid

While the effect of unorthodox measures is clearly visible from the point of view of the decreasing deficit, Hungary has nevertheless paid a high price for its release from EDP. The country’s GDP fell by 1.7% in 2012 and new investments fell to a level where even amortization is not covered. “The overall effect of extra taxes on investments is very hard to estimate as sometimes it is not just the higher tax expenditure that has deterred companies from investing, but also a lack of confidence in the constantly changing business environment,” said Eszter Gárgyán, a leading analyst of Citibank. “Due to the multi-round effects of the extra bank tax on lending and investments, it is one of the most harmful. And taxes imposed on the energy sector may bring a backlash in the long-term through the amortization of the infrastructure,” she pointed out.

The special taxes also contribute to the change of ownership structure in each sector. The government openly aims in some cases to curb the dominance of large foreign companies, often reflected in size-related progressive tax rates (e.g. utility tax, the proposed media tax, and the 2009 bank tax determined by the closing balance sheet).

Rates too high

Additional taxes are not unknown elsewhere around the world, of course. In the European Union, many such taxes were in effect even before the global financial crisis. In the wake of the depression, many sectoral taxes were introduced partly to cover the budget expenses of bank rescues, and partly to consolidate national budgets.

Many countries have introduced bank tax, including Austria, Belgium, France, Germany, Slovakia, Sweden and the United Kingdom. However, the Hungarian rate is exceptionally high: the new measures of economy minister Mihály Varga would double the financial transaction tax (FTT) rate on cash payments from 0.3% to 0.6%, and transfers between accounts would rise to 0.3% from 0.2%.

Insurance provision is also taxed in most Western European countries. In international practice, either the service provider or the insured party could be liable to pay: in Bulgaria, Finland, France, the Netherlands, and Slovakia, for example, the insurer is liable to pay, but in Austria and Germany, it is the insured, the Ministry of National Economy told the Budapest Business Journal. But Hungary’s instant premium tax (IPT) rate is, again, unusually high: 15% in the case of comprehensive car insurance and 10% in the case of all other (non-life) insurance products and services.

Taxes for ever?

The restructuring of the Hungarian tax system is considered finished, with the government now endeavoring to sustain the stability of the established tax system, the Ministry of National Economy told the BBJ, when we asked how long the taxes might stay in place. The changing economic and legal environment and problems in the application of law or the need to eliminate possible loopholes could yet justify some fine tuning, the ministry added.

So based on the statement of the ministry, most of the measures are considered permanent, even if they were referred to as contributions to the war against the crisis in early Fidesz communications. Or perhaps it is better to say they will stay as long as the European Court doesn’t declare them illegal: the European Commission opened infringement proceedings against Hungary in late January of this year over the telephone tax imposed in the summer of 2012.

Less income than predicted

Although Hungary is no longer under the EDP, economy minister Mihály Varga recently announced his second set of measures to have an impact on the position of the 2013 budget. “According to available estimates, the increased level of the transaction fee might add HUF 50-70 bln to the revenues of the budget. This year, budget income might be higher by 0.5% due to the changes,” said Jancsa-Pék.

One possible reason behind rate hike is the less-than-predicted income the extra taxes have generated. The difference can be observed mainly in the Robin Hood taxes, the bank tax, and the industry specific taxes. In all three cases, these raised almost all that was expected in 2011, but lagged behind targets markedly in 2012: on average 36% under the expectations. The sector-specific taxes fulfilled their expectations in both years, but the bank levy and the Robin Hood tax lagged behind 40-45% last year.

It hasn’t escaped notice that 2014 is an election year. Although the government has repeatedly promised it will not implement an election budget and boost spending, none of its predecessors were able to resist doing so going back to the change of regime. If there is to be additional spending, it will need to be paid for somehow. More taxes?