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VAT rate cut proposal by Rural Development Ministry will create huge budget gap, analysts say

The Rural Development Ministry’s proposal to reduce the VAT of basic foodstuff to 5% will create a several hundred billion forints gap in the budget, so it is unlikely that the government will support it, analysts said.

It might slightly speed up the economy, but it contradicts the government’s plans aimed at simplifying the tax system, and it is also an impossible move, given the current state of the budget – said Dávid Németh, economist of ING.

According to Gergely Suppán, analyst of Takarékbank, there is no doubt that the 25% VAT rate is too high, but the government currently lacks resources to make up for such a large budget revenue loss.

Supporters of the proposals claim that lower VAT rates will stop the decline in consumption and will also inspire grey market businesses to legalize their activities, which could make up for the budget gap created by the rate cut.

The Rural Development Ministry will submit three draft scenarios to the government in the coming weeks, according to the information of political daily Népszabadság. The first scenario will only include pork and poultry products, the second scenario will add dairy products and bread (currently 18% VAT) to the preferential VAT rate circle, while the third plan is expected to extend the discounted tax rate to oil and eggs, too.