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Expert panel calls for tax cuts - extended

The Reformszövetség (reform alliance), a group of economic and business experts commissioned with drafting alternative economic policies for Hungary, called for reducing central expenses and labor-related taxes in order to improve competitiveness. PM calls Reform Alliance proposals impressive, but social effects “chilling”.

The panel found reducing the current 50% level of budget centralization by 8 percentage points by 2013 could reduce tax burdens by HUF 2,200–2,300 billion, said László Békesi, former finance minister. Payroll taxes should be reduced this year by 5 percentage points, by another 3 in 2010 and 2 in 2011, panel member Péter Oszkó said. At the same time, Reformszövetség urges raising the upper threshold of the 18% personal income tax bracket to HUF 5 million this year, Oszkó said.

The desired reductions to central expenditure could best be achieved by reducing the operational expenses of the state, Éva Palócz, CEO of the Kopint-Tárki research institute said. Employment, innovation, small and middle enterprises and transportation are the four key areas that will play a fundamental role in improving Hungary’s competitiveness and its successful recovery from the global crisis, panel member Attila Chikán said.



A package of economic reforms put together by the Reform Alliance is “impressive”, but the social effects of the proposals are “chilling”, Prime Minister Ferenc Gyurcsány said after meeting with the body of experts on Saturday. In the assessment of the Reform Alliance, earlier announced government measures are a step in the right direction, but the body believes more radical moves are necessary, Gyurcsány said. The main message sent by the alliance is that resources freed up because of budget restructuring should by used to spur economic growth, he added.

The alliance proposed cutting budget revenue by HUF 1,325 billion by 2013 and reducing the rate of budget centralization by eight percentage points to 42% in order to improve competitiveness and boost growth. A proposed cut and a following freeze of budget expenditures would improve the fiscal balance by an additional HUF 1,000 billion, László Békesi, who heads the alliance, said at the Hungarian Academy of Science (MTA).

If budget centralization is reduced, Hungary’s growth rate could rise 1.5 percentage points to 3-4%. The alliance proposes cutting state operating expenditures by HUF 200 billion in 2009, HUF 150 billion in 2010 and HUF 150 billion in 2011. The total expenditure cut between 2009 and 2013 would reach HUF 550 billion.

Alliance member Éva Palócz said the annual bonus system of a 13th month pay in the public sector should be eliminated or at least curtailed, and the pension systems for those on disability and those who retire early has to be rethought. Pension savings could come to HUF 65 billion in 2009 and HUF 120 billion in 2010. Savings on pensions would reach HUF 65 billion this year and HUF 120 billion in 2010 and could add up to HUR 335 billion in 2009-2013.

The alliance does not propose any changes for spending on health care, the police and the military, as expenditures in these areas are in line with proportions in other EU countries. It also proposed only a small HUF 20 billion cut in education spending in 2009-2013.

The alliance proposes that the payroll tax rate be lowered by five percentage points in 2009, three in 2010 and two in 2011. The threshold for the lower personal income tax bracket ought to be raised to HUF 5 million already in 2009, said Péter Oszkó. Taxes account for 54% of all labor costs, which puts Hungary at a competitive disadvantage, he added. In a related move, a value-based property tax on properties worth more than HUF 30 million could be introduced as early as 2009.

The alliance proposes raising the fixed healthcare contribution from a monthly HUF 1,950 to HUF 5,000 in 2010. It says the main VAT rate ought to be raised from 20% to 24%. The alliance wants the 4% ‘solidarity tax’ scrapped from 2010, but the corporate profit tax raised from 16% to 18% at the same time. The local business tax can be eliminated only after the system of local government is restructured, Oszkó said.

The leaders of nine employee organizations in the National Coordination Council, the chairman of the Hungarian Chamber of Commerce and Industry and the present and former presidents of the Hungarian Academy of Sciences have established Reform Alliance last November with the objective of formulating a comprehensive reform program that can be built into Hungary’s 2009-2013 social and economic program. (MTI-Econews)