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Think tank publishes report on Hungary income tax, consumption, international businesses

The majority of businesses are raising wages, stagnation in retail trade is due to changed patterns of consumption and no significant changes took place in the international business, says Hungarian think-tank IEER in a freshly released report.

Institute for Economic and Enterprise Research (IEER) released its quarterly findings on the effects of the new income tax regime on the SME sector, macroeconomic trends in consumption and international business.


The aim of the study was to illustrate the proportion of SME workers adversely affected by the introduction of a flat personal income tax in 2011, as well as show which employees were most affected by the law.

The results show that the gross wages of employees at 35% of the companies surveyed has not changed in 2011, and declined for 1% of SMEs. A majority of businesses in turn raised wages: 27% of companies raised wages by less than 5% while 36% raised wages over 5%.

The wage rate together with a company's business situation and outlook for the future are significantly related: a favorable business outlook means that a higher wage increase will be more likely. The results found that 82% of SMEs have workers whose real incomes fell as a result of the tax system changes introduced in 2011. For those businesses that are entirely Hungarian owned an average of 53% of workers are adversely affected by the new income tax law, while at entirely foreign-owned companies it’s only about 36%.

The changes in personal income tax rules may lead to the beginning of different adaptation strategies by companies. 52% of companies claim to fully compensate workers for lost wages, while another 19% claim to only partially offset lost wages. The remaining 29%, however, are unable to compensate their workers at all for the loss of income. Thus, companies in a favorable business position are able to wholly or partially offset the loss of wages, while those in an unfavorable financial situation are typically unable to compensate their workers for a loss of income.

Macroeconomic trends of consumption

The stagnation of retail trade in Q1 does not yet appear to justify the expectation that the tax changes associated with those layers of the economy that drive increased consumption can become the engine of growth in 2011. The lack of recovery in domestic demand may call into question the government's ability to meet its 3.1% GDP growth forecasts.

This stagnation in consumption can be attributed to various causes: households with uncertain income prospects have turned to "more cautious" patterns of consumption; the high installments on foreign currency based loans have shrunk the disposable income of many; and, finally, what is also perhaps an obstacle to consumption are the tax changes themselves for higher income earners with more money in their pockets have shown that they are more likely to save this extra amount rather than spend it.

International business trends

There was no significant change for German industry and trade in the index for the month of June as compared to May, which means that the strong improvement that had been apparent over the past two years has come to an end. By comparison, German business executives in the current business climate expected further improvements in June, the highest level reached since 1991. A turning point of business expectations, however, could be detected: according to the June survey, German business expectations declined further in June. The second half of this year is predicted that the German economy will slow down in comparison to previous periods, however the economy as a whole will still remain positive.