The Hungarian Parliament today passed the law on the much debated extraordinary bank tax. However, the lex Járai was left out of the final version and several smaller amendments came in.
Parliament voted on Thursday for the controversial financial institutions tax, which was meant to bring in an extra HUF 200 billion of budget revenue.
The most important change from the expected outcome is that the amendment that would have allowed some exemptions from the tax was taken out. The so-called lex Járai would have freed insurance companies established after June 1, 2007 from the tax. Instead, all insurance companies will have to pay a tax increased to 6.2% from the originally announced 5.8%.
For credit institutions, the tax would be 0.15% for the first HUF 50 billion of tax base and 0.5% above that, based on the corrected balance sheet total of last year.
The financial sector’s extraordinary tax of HUF 200 billion was also codified for the next year.
In a speech before the agenda, Orbán claimed the contract with the IMF a consequence of a bad fiscal policy. These kind of agreements push the country into a debt trap, he said. When answering to the other parties speeches, he said we will always argue inside and outside the country to best protect our nation’s interests.
András Schiffer, MP of green party LMP agrees with this intent, but questions the form. Schiffer said the nation’s strategy should be represented on international talks following a five-party agreement.
Attila Mesterházy called the talks with the IMF the Pannon puma that’s holding a gun (which is just about the equivalent of saying the tail wagging the dog, and refers to the cover of the most recent issue of weekly HVG). However, Hungary doesn’t have the chance to shoot. Mesterházy also expressed fears that the bank tax, which is supported by the MSZP, would be passed on to taxpayers by the banks and other institutions.
Today’s vote came only five days after the IMF and the EU suspended their review of Hungary’s EUR 20 billion emergency bailout without backing the government’s budget plans. The IMF said a number of issues remained unresolved, including the bank tax, which would “adversely affect lending and growth.”
The bank tax, quoted as “brutal” by the some of the international media, was first introduced as part of the
new government’s 29-point action plan at the beginning of June and aimed to raise HUF 187 billion through the tax on banks, insurers and other financial-services companies to meet its IMF- and EU-approved budget deficit target of 3.8% of GDP for this year. Reactions were immediate: not only the Hungarian bank sector raised its concerns, but the international press also picked up and criticized the plans.
“Hungary’s plan for the tax caused a storm in the global business community,” Economy Minister György Matolcsy said in a July 2 interview. “There’s fear that if Hungary introduced a bank tax of this magnitude, Germany, France, the UK, Romania and Slovakia will follow suit.”
After it became clear that the government is insisting on tapping the bank sector – that reported notable profits at the end of last year in spite of the worsening economic situation in Hungary –, banks seemed to be accepted the new burden but were still arguing about its extent.
The bank tax is inappropriately high, head of the Austrian Central Bank Ewald Nowotny told news agency Dow Jones at the end of June. According to him, introducing bank taxes in the Central Eastern European region is worrisome, as it can negatively affect the stability of the financial sector that has already been seriously hurt by the deteriorating credit portfolios.
“The bank tax, which is three times larger than any other similar tax planned in Europe, could have a large negative effect on the economy and it will not solve Hungary’s fiscal problems,” Christoph Rosenberg, head of the IMF’s mission to Hungary, said in a July 18 interview. The IMF would like to see “durable and non-distortive measures.”
The tax, levied at 0.45% of banks’ assets at the end of 2009, would bring in revenue equal to 0.5% of GDP annually. That compares with the US plan for a 0.15% tax on liabilities and the UK’s proposed levy on balance sheets that would peak at 0.07%, the Bloomberg wrote.
Hungary’s credibility is expected to worsen further after the vote, Peter Attard Montalto, an analyst with Nomura told Bloomberg just before today’s voting took place. The forint, the world’s worst-performing currency against the euro in the past three months, fell 1.3% to 285.31 in the past three days. It dropped 2.9% July 19, the first trading day after the IMF and EU walked away from the Hungarian talks.
The already approved changes to the government's bank tax bill will reduce revenue generated by the tax by HUF 10.5 billion in 2010, the independent Fiscal Council (MKKT) said in an assessment submitted to Parliament on Wednesday. The council had already done a review on the bill on July 7, before the amendments. That review concluded that the budget balance would improve by HUF 80 billion this year, but this advantage would turn to a higher annual deficit from 2011. (BBJ)