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Proposed tax cuts are meant to impress credit rating agencies. Analysts are already impressed.

allowances; that is how the government refers to next year’s budget. While analysts welcome some major figures, they still miss large-scale structural reforms in the healthcare and education systems.

Apparently in the hope of a possible upgrade from international credit rating institutions, the Hungarian government drew up plans for next year’s budget well ahead of schedule in May so that Parliament can discuss and approve it before its summer break.

According to the plans, the government would leave HUF 170 billion forints more with households next year. Savings would come from reducing the personal income tax rate from the current 16 to 15%, cutting the VAT rate on unprocessed pork to 5%, and increasing family tax credits while lowering state administration fees, Economy Minister Mihály Varga said when presenting the budget bill on May 13. The bill assumes gross domestic product would grow by 2.5% with an inflation rate of 1.6% and a budget deficit of around 2% of GDP in 2016.

Budget losers

Definite losers in the bill are the healthcare and education systems. Funds for education will stagnate, and healthcare spending will practically be unchanged next year. When it comes to social security services, pension-related spending and expenditure for social purposes are to increase. The financing of cultural activities will rise tangibly

It is worth noting that while the government’s intention is said to be reducing red tape, public administration could actually cost taxpayers HUF 250 bln more in 2016 than this year. This comes partly from a rise in defense expenditure and increased spending on law enforcement. The cabinet aims to spend HUF 180 bln more on road transport, while it is to slash the budget for other traffic and transport operations by HUF 340 bln. 

The bill targets a total revenue of HUF 15,790 bln. It sets VAT revenue at HUF 3.351.9 trillion, up from HUF 3.172.4 trn in the 2015 budget. 

Revenue from personal income tax is targeted at HUF 1.658.4 trn, up from 1.639.7 trn forints in 2015. Some – now permanent – sectoral taxes are lowered: The bill targets revenue from the bank levy of HUF 89.2 bln, down from HUF 144.2 bln in 2015. Revenue from the telco tax is set at HUF 56.0 bln, down from HUF 56.4 bln for this year. The target for revenue from the utilities tax was lowered to HUF 52.2 bln from HUF 54 bln. Revenue from the financial transactions tax is targeted at HUF 200.9 bln, down from HUF 206.2 bln.

More revenue is expected, however, from the advertising tax: it is set to bring in HUF 10.9 bln, compared with HUF 6.6 bln planned for this year.

Positive reception

Analysts’ responses to the government’s plans were positive overall: Erste Bank’s Gergely Ürmössy told online business portal portrolio.hu that he welcomes the decrease in the key figures – more than HUF 600 bln cut on the expenditure side, and more than HUF 500 bln less on the revenue side. He warned, however, that if the government modifies key figures in the fall, it will definitely destroy confidence.

The main figures are in line with analysts’ expectations, said Dávid Németh, senior analyst at K&H Bank. He thinks that both the 2.5% GDP growth and the 1.6% inflation rate are achievable. While he agrees that the 2% deficit target can also be maintained, he says he misses large-scale structural reforms in healthcare and education.