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Hungary must cut tax on labor, create jobs

Hungary needs to cut its high taxes on labor and create more jobs for the economy to be able to return to annual growth rates of 4 to 5%, Economy Minister Gordon Bajnai said on Friday.

Bajnai, 40, an economist and businessman, was appointed to his post last month when Prime Minister Ferenc Gyurcsány reshuffled his minority Socialist government after the junior coalition party the Free Democrats left the ruling coalition. “Hungary needs economic growth ... It is a sustainable growth track of between 4 and 5% (annually) which can get Hungary closer to Europe,” Bajnai told a news conference. Bajnai, who is also in charge of allocating European Union funds, said Hungary’s annual growth should exceed the European average by at least 2% for the foreseeable future.

The government is working on next year’s tax plans and will decide any changes in the light of fiscal results for the first half of this year, Bajnai said. The minister said changes must not be allowed to pose a risk to cutting the budget deficit – “Fiscal balance, and Hungary has learned this tough lesson, comes before everything else.” Bajnai is seen as a close ally of Gyurcsány and has been named in local media as a potential successor to the prime minister if he is replaced, though Bajnai denied he would have such aspirations.

Hungary’s economic growth slowed drastically last year as a result of the government’s big tax hikes and spending cuts which reduced the budget deficit to 5.5% of GDP in 2007 from 9.2% in 2006, but also fuelled inflation. For the first time after five quarters of continuous slowdown the economy accelerated in the Q1 of 2008, growing 1.6% year-on-year, double the 0.8% recorded in the Q4. But analysts say Hungary must resolve deep structural problems in its labor market for a significant recovery.


Bajnai said the main obstacle to a pick-up in growth is a low employment rate, as only 57% of the working age population works. “Three things are needed: to create jobs, to encourage people to work and to train skilled workers,” he said. Bajnai also said Hungary must revamp its tax system and reduce taxes on labor, channel investments to the country’s less developed regions where unemployment is high among unskilled workers, and help small and medium businesses.

When asked if he saw room for hiking consumption-type taxes, such as value added tax, in order to create room for tax cuts elsewhere, Bajnai said his ministry was working with the finance ministry on taxation plans, but no decisions had been made yet. “If we want to move from this growth situation where we are, we will have to reduce the taxes and social contributions on labor ... and shift the focus within the tax system,” Bajnai said. (Reuters)