Hungary’s Economy Minister György Matolcsy will announce his proposals to help fill the HUF 100 billion hole the smaller-than-expected economic growth hit on the 2011 budget next Monday or Tuesday. Prime Minister Viktor Orbán said these measures will include a few tax hikes, e.g. in gambling and the excise tax on alcohol and tobacco will also rise. Additionally, the government will call off some expenditures that do not necessary have to burden this year’s budget, he told commercial television TV2 late on Thursday.
Hungary’s gross domestic product grew by a mere 1.5% year on year and was flat in quarterly terms in April-June, greatly undershooting expectations (consensus: 2.3% yr/yr). Orbán said that if this year’s GDP growth comes in one percentage point below the official target (3%) it is likely to hit a cc. HUF 100 billion hole in the budget. Mihály Varga, State Secretary in charge of the Prime Minister's Office, confirmed that if growth indeed undershoots the official forecast by 1 ppt and comes in at around 2% or below, the budget deficit could be HUF 80-100 bn larger than targeted. He added that in order to fill this hole and keep the shortfall below 3% of GDP, Hungary needs 8-10 measures as the problem cannot be solved at a one fell swoop.
“We will raise those types of taxes that are not necessarily linked to everyday life," the Prime Minister said yesterday. “Also we are putting a stop to all spending that does not need to be carried out this year, which we may implement either next year or in the budget two years from now," he added.
He declined to disclose specifics about the planned measures, saying Matolcsy will come up with his proposals in this matter next week and so the cabinet can already make decisions on Monday and Tuesday and make them public on Wednesday.
Some measures will be postponed
Orbán also said there is “not really a chance" for further freezing in the ministries’ budget. The government has reached a “critical point" in public spending, under which it cannot go. He also said some things will need to be done next year instead of 2011, but also declined to elaborate.
Hungary is targeting a general government deficit of 2.5% of GDP next year, compared with 4.3% in 2010, and a 2011 surplus after the effective nationalisation of private-pension funds and temporary taxes on the energy, financial-services, retail and telecommunications industries.
The measures aimed at filling the HUF 100 bn hole in the budget may include raising the VAT on certain products. Hiking the excise tax on tobacco may ‘sell’ even better, and it’s a measure that was reportedly on the cabinet’s autumn agenda already. But this tax increase would bring state coffers no more than a few billions of forints this year (and HUF 20-40 bn in 2012). And it would also lead to a drop in consumption. The cigarette lobby that has been operating so successfully in this regard - a proposal to raise the excise tax on tobacco products was squashed by MPs in July - would be the loser in this case. Raising the excise tax on fuel and alcohol is another possible solution and taking the registration tax higher (an item generating HUF 30 bn budget revenues annually) is also an option. Orbán reiterated his earlier statement about ‘splitting losses’ of FX debtors between those who had taken out the loans and the banks, which had left banks perplexed.
He noted that we have reached a point now when people are worse off with their foreign-currency-based debt than if they had taken out forint loans. Orbán said the debtors are aware that it was their own choice to borrow in foreign currency but they must share the risk of the monthly installments rising “sky high". He added that this burden cannot be borne only by the debtors or only by the banks.
The banks “will have to share the present financial burden of earlier ill-advised foreign currency loan products, and splitting these losses will be one of the key tasks ahead this fall," he said earlier this week.
“Meanwhile, the exchange rate barrier is already in place, the government programme for protecting homeowners threatened by repossession is being continued, or may even be expanded by adding new features," Orbán added.
“It needs a thorough consideration what the banking system can bear and what the peoples’ wallets can tolerate - in my view, we will conclude this probe next week," Orbán said.
No solidarity tax
The PM said he does not support imposing a ‘solidarity tax’ because it may lead to “the wealthy evading taxation" and taking their money out of the country.
Orbán said he remains committed to the flat-tax system, adding that the cabinet is examining jointly with the Hungarian Post how people could buy government bonds directly.
The PM said that at this moment he believes a 3-4-percentage-point reduction in state debt is an attainable goal. There will be an announcement made in this regard next week.
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