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Additional measures needed to ensure fiscal sustainability beyond 2012

Including the effect of "crisis taxes" levied on telecommunications companies, energy suppliers and retail chains passed by the Hungarian parliament on Monday, the tax changes proposed by the government will improve the fiscal balance this year and in 2011, but additional measures will be required to ensure fiscal sustainability from 2012 on, the Fiscal Council, an independent body that assesses the budget, said late on Thursday.

The crisis taxes, which the government expects to generate an annual HUF 161 billion in 2010-2012, will more than offset the overall negative effect — revenue shortfall — of the tax package, now being debated in Parliament in 2011, the council said. But the measures will leave a HUF 200 billion gap already in 2012. Net revenue lost as a result of the planned tax measures could rise to about HUF 700 billion a year in 2013 and 2014 when the temporary crisis taxes and the bank levy end.

In 2012, the gap could still be filled with HUF 200 billion from the bank levy, however, the council did not calculate this revenue as no approved or proposed legislation exists on the tax for this year. The council did take into account the effect of the bank levy for 2011 as it is part of tax legislation currently being debated.

The council calculated the net revenue changes arising from the taxes compared to its latest technical projection, assuming no change in legislation, prepared in August.

Including indirect effects, the tax package will worsen the cash flow-based fiscal balance by HUF 28 billion, not including revenue from the crisis taxes, in 2011, in spite of HUF 162 billion in net proceeds of the bank levy, adjusted for corporate tax lost, and by HUF 363 billion in 2012, not including revenue from the crisis taxes or the bank levy. In 2013 and 2014, the revenue shortfall would exceed HUF 700 billion based on direct and indirect effects.

The tax package includes changes to the personal income tax regime, which, together with other labour-related tax changes, will cut central government revenues by net HUF 310 billion in 2011, HUF 515 billion in 2012 and HUF 785 billion in 2014, the council projects.

Of the other taxes in the package before Parliament, the extension of the Robin Hood tax, payable by large energy companies, would add HUF 32 billion to government revenues in 2011, and the proceeds would gradually rise to HUF 46 billion in 2014.

The increase of excise duties would raise an extra HUF 15 billion in 2011 and an annual HUF 16 billion in the following three years.

The tax package includes a reduction of the corporate tax rate to 10pc from the year 2013. The measure is projected to generate additional growth and additional fiscal revenues in the longer run, but, as a direct effect, is seen reducing government revenues by HUF 150-160 billion in both 2013 and 2014.

The changes proposed in the tax package are expected to raise GDP growth by about 0.2 percentage point in both 2011 and 2012, raising consumer spending and imports growth but cutting investments compared to the static scenario, the council projects.

Measures affecting investments adversely in the tax package include the extension of the Robin Hood tax which will dampen energy sector investment. Larger companies may delay investments in the next two years until the current preferential 10% tax rate applies to them from 2013. The tax changes could add 1.1 percentage point to domestic consumption in 2011 and 0.7 percentage point in 2012, in part because of growing imports. The increase in consumption could raise the inflation rate by 0.2 percentage point in 2011 and 0.3 percentage point in 2012.

The changes will raise wage growth in the private sector by a one-off 0.4 percentage point in 2011. They will add 0.1 percentage point to the increase of the number or employees in the sector in 2011, 2012 and 2014 and will add 0.2 percentage point in 2013. (MTI-Econews)