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Orbán's reforms lead to larger deficit, says Independent Fiscal Council

The first batch of fiscal changes the government has drafted could lead to a more positive balance this year, but it would break the law banning governments from raising the deficit from 2011, even with the HUF 200 billion bank tax, says the state fiscal council.

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.

The most important of the changes are on the budget revenue side of the draf law, that is, these affect the bank tax. According to the council, the exemption for new insurance companies, dubbed Lex Járai would lead to the bank revenues of HUF 10.5 billion less than the original version of the bill. Thus, instead of bringing in HUF 190.7 billion this year, financial institutions would only pay HUF 183 billion.

However, this highly controversial passage in the bill is expected to be removed from its text, as a Fidesz politician has admitted – some say, accidentally – that it was included as a protectionist measure for Hungarian companies. This would make it easy for the EU to ban the exemption as protectionist.

Together with the other new measures, the council sees a HUF 5.5-6.0 billion improvement in the deficit compared to previous estimates. But the bill would still result in a worse deficit from 2011 on, breaking the law that the government cannot enlarge the deficit, says the council.

 

THE BIG PICTURE: WORSE BUDGETS FROM NEXT YEAR

The new report is the also the first full evaluation of the fiscal effects of Orbán's reforms, as the previous report was only a partial review. The full evaluation shows that the budget would profit from that batch of changes the government is making only in 2010, while it would increase deficits from 2011.

The council's theory is that the taxed financial institutions would roll down their costs to the consumers. Of the HUF 190 billion total next year, the panel expects that some HUF 140 billion will have to be covered by clients through higher insurance fees and commissions. This would result in a HUF 32-91 billion annual drop in budget revenue over the next few years due to bank tax, mostly because there would be less transactions to tax. So even if the bank tax amounted to HUF 200 billion as planned, it would only raise budget revenues by HUF 109-168 billion. Together with the other planned measures, most of which do not generate income for the budget, this would lead to a higher deficit even with bank tax revenues, the report says.

 

THE DETAILS

The legalization of distilling at home will alone reduce budget takings by HUF 7.4 billion. Personal income tax reductions will expand the gap by HUF 15 billion. Extending the scope of the 10% industry tax bracket will mean losing HUF 50 billion in revenues this year which will grow to HUF 110-120 billion in the next two years.

Even if the bank tax brought in the HUF 200 billion as planned from 2011, it would not offset the other changes planned, states the council. Also, it would lessen income from corporate tax by maybe even HUF 10 billion as banks could write the bank tax off their corporate tax base, the council pointed out.

 

The effects of the government's amended bill (HUF bn)
2010 2011 2012 2013 2014
Extending the 10% corporate tax -53.4 -111.5 -112.7 -117.4 -122.6
Financial institutions tax* 145.6 -75.2 -91.9 -59.3 -32.4
Other measures, including the direct effects of:
Untaxed income -0.1 -0.3 -0.3 -0.3 -0.3
Income tax changes -7.6 -15.4 -15.9 -16.4 -17
Scrapping the wealth tax -1.2 -1.2 -1.2 -1.2 -1.2
Scrapping gift and inheritance burdens -0.8 -1.5 -1.6 -1.6 -1.6
Home distilling -4.4 -7.4 -7.4 -7.4 -7.4
Unlisted measures 2.8 5.6 6 5.7 5.8
TOTAL 80.9 -206.9 -225 -197.9 -176.7
* the bank tax is not listed from 2011 as it is not in the draft

 

Parliament is scheduled to vote on the package of measures containing the bank levy on Thursday.

The council is a state body independent from the government. It is obliged by law since 2008 to calculate the fiscal effects of laws.

(BBJ)