Hungary's government has decided on additional fiscal measures to end the Excessive Deficit Procedure (EDP) brought against the country by the European Commission and ensure it can avail of its full Cohesion Fund allocation, National Economy Minister György Matolcsy said at a press conference on Wednesday.
The measures, which have a combined fiscal effect of HUF 367 billion in 2013, will ensure the general government deficit is "well under" the 3% of GDP threshold, Matolcsy said.
The additional measures come on top of a combined HUF 397 billion in fiscal improvements to Hungary's 2013 budget balance announced on October 5.
Matolcsy said that the additional steps are needed because the EC assessed that these earlier announced measures would have only about two-thirds of their estimated fiscal effect and Hungary's economy would not grow as much as the government anticipates. The EC puts Hungary's general government deficit at 3.7-3.9% of GDP in 2013, over the government's revised target of 2.7%, he added.
The government disagrees with the EC's assessment, but decided to introduced the additional measures to end the EDP and ensure that the country does not lose any of its Cohesion Fund allocation, he said.
Even if the EC does not accept the estimated effect of all of the new measures, Hungary still has a lot of reserves, he said.
The measures are not part of an austerity package, such as ones seen in Southern Europe, he said. We really hope that the EC will change its position, he added.
The bank levy will not be halved from 2013, Matolcsy said, describing the new measures. The step will add HUF 72 billion additional revenue to the budget, he added.
The government decided to increase the scale of the financial transactions duty from 0.1% to 0.2%, bringing in HUF 90 billion more from banks, he said. The rate will also rise for the Treasury, generating an additional HUF 40 billion in revenue, he added.
Local business tax rules will be changed, generating HUF 35 billion in additional revenue.
The government will introduce a utilities tax that will generate HUF 30 billion more in budget revenue.
The payroll tax on in-kind contributions, such as food and vacation vouchers, will be raised from 10% to 27%, bringing in HUF 40 billion more in revenue.
Lowering the threshold for one-off audits of invoices from HUF 5 million to HUF 2.5 million will allow the National Tax and Customs Authority to collect an additional HUF 60 billion in tax revenue.
The government will outline the measures in a letter to be sent to European Commissioner for Economic and Monetary Affairs Olli Rehn on Thursday, Matolcsy said. The government will also communicate the measures to the International Monetary Fund, he added.
Matolcsy said the government lowered its projection for GDP growth in 2013 to 0.9% from 1%.
The forint traded at around 279.3 to the euro after the announcement from 278.6 before.
Shares of OTP Bank traded down 4.12% after the announcement after edging up 0.16% at the start of the session.
On October 5, Matolcsy announced a package of measures that would result in a HUF 397 billion gross improvement to Hungary's 2013 budget balance. At the same time, he said the government lowered its projection for economic growth next year and raised the deficit target to 2.7% of GDP.
The financial transactions duty will not be levied on the National Bank of Hungary, Matolcsy said.
The government expects HUF 95 billion more in revenue from VAT next year as the National Tax and Customs Authority (NAV) establishes online connections with retailers.
The extension of reverse VAT to the pork sector is expected to bring in HUF 10 billion in additional revenue, while new regulations on small business taxation generates HUF 15 billion more.
The government will scrap the ceiling on social insurance contributions, generating an additional HUF 51 billion in revenue, Matolcsy said. It will postpone an increase in teachers' wages from September of next year to January 2014, resulting in savings of HUF 73 billion, he added.
The government will establish an upper limit on social subsidies paid by local councils from 2013. It will also cut state co-financing for European Union-funded developments from 15% to 5% next year, he added. The move will result in savings of HUF 55 billion.
Matolcsy said that 22,000 public sector jobs would be cut from 2013 with the restructuring of the local council system and the takeover by the state of local schools and hospitals. He added that in some parts of the public sector positions left empty by retiring employees would not be filled for the next three years.
Matolcsy said the government is raising the general government deficit targets for both 2012 and 2013 to 2.7% of GDP from 2.5% and 2.2%, respectively.
The government is lowering its projection for GDP growth next year to 1% from 1.6%, he added.
The EDF report shows the government calculates that the lower growth outlook and the exemption of the central bank from the financial transactions duty will have a negative impact equivalent to 1.2% of GDP on the budget balance next year. The government's Job Protection Plan, announced in summer, will take 0.9% of GDP from the balance, while reaching an agreement on precautionary financing from the International Monetary Fund and the European Union is set to improve the balance by 0.%c of GDP.
The government knocked down its GDP projection for 2012 in the report from near stagnation to -1.2%.
The EDF report shows the government targets a 2.2% of GDP deficit for 2014, up from the 1.9% ratio targeted earlier.