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Tax cut plan feasible, analysts say

As the prime minister promised a few months ago, the government turned in its budget plan for next year well ahead of schedule. And given how upbeat the document is, it is not surprising that officials could hardly wait to share it.

While analysts say the budget draft released on April 21 may be a bit too optimistic, as most expect GDP growth of around 2% next year, they add that the plan is close enough to reality to allow for the proposed tax cuts.

Right after handing the proposal to Parliament, Economy Minister Mihály Varga announced on April 21 that the 2016 budget, which banks on 2.5% growth, includes room for a 1% cut in the personal income tax, from 16% this year to 15% next year. In what may be considered a populist move in this pork-consuming country, the minister added that the VAT rate on unprocessed pork would be reduced from 27% to 5%.

In an interview on state TV, Varga said that the government decided it will use extra resources generated by Hungary’s economic growth to cut taxes next year, rather than making further investments or seeking to create jobs.

Realistic, unsurprising plan

Mariann Trippon, an analyst with CIB, told the Budapest Business Journal that the “macroeconomic plans for the budget of 2016 are realistic, however we foresee a slower GDP rise than the government’s 2.5%”. Trippon said she also expects inflation to be slightly higher than the government lays out in the budget plan, but says the difference is insignificant.

“The announcement of tax decreases is not a great surprise, as MPs already hinted that the increased financial margin – which was chiefly created by last year’s better than expected growth and the upcoming positive macroeconomic outlook – would be used for such purposes,” Trippon said.

Trippon added that the planned decrease in the personal income tax would have minor positive results regarding the consumption of households, and “in the long run, in order to improve the competitiveness of the economy and to improve potential growth pace, the taxes on workers should be decreased as well.”

Zoltán Török, head of research at Raiffeisen Bank in Hungary, agreed that the plan seemed reasonable. “Economic growth has returned to Hungary, which is beneficial for the 2016 budget,” he told the BBJ. “Income from VAT, employment and salaries are on the rise, therefore there is margin to make changes to the 2016 budget.”

More changes expected

According to Török changes to the budget are three-fold: firstly, the surplus income can be spent on decreasing the budget deficit; secondly it can be spent on infrastructure, health care and education; thirdly it can be used to reduce taxes.

“Increasing expenditure has not been included in the draft yet, but I believe later on it would be included, as will increasing tax incentives for families,” Török said.

The government’s projected 2% budget deficit is realistic, Török said, even if it “comes to 2.2% or 1.8%, it is under 3% and it can be decreased further as compared to the previous years, which is a good direction.”

Török said he believes that decreasing taxes could be the government’s tool to try and stop their dropping popularity, and, although it is not included in the draft yet, he anticipates sectorial taxes, such as telecommunication and bank levies, will also be decreased.

“I believe that the government could have included greater tax reductions,” Török said, adding that the tax burden in Hungary is currently quite large. “It is surprising that the government is planning to make a 1% decrease in the personal income tax, as it is insignificant.”