Hungary gov't strikes down on banks with new austerity package (2)

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Hungary’s government will not halve the special tax on banks in 2013 and the financial transaction tax will be raised to 0.2% in its latest austerity package. The government has today morning decided on a HUF 367 bn additional fiscal adjustment programme.

Is it time for the IMF deal then?- 10:59

Asked when Hungary could sign an agreement with the IMF/EU now that this package has been revealed, Matolcsy responded: “I hope that after a not exactly fast 11-month process our negotiating partners will feel the importance that Hungary shows an outstandingly good financial performance; unfortunately growth has not yet kicked in."

“We are conducting a successful fiscal consolidation, the deficit will be under 3% (of GDP), a turnaround in the budget trend has occurred and public debt is also decreasing," the minister added.

With respect to the IMF deal Matolcsy stressed that “we do not need a credit; we do not need the money of German taxpayers or the IMF, we need a safety net."

As for the talks he said “we are in the last stage, I trust in a positive outcome."

Doubts about a quick deal

The Hungarian government continues to have a strong intention to secure a financial backstop with the IMF/EU, said Mihály Varga, Hungary’s chief aid negotiator, at Portfolio.hu’s Budapest Economic Forum on Tuesday. The majority of the audience at the conference, however, did not believe this intention is strong enough to sign a credit deal with the lenders before the elections in the spring of 2014.

No confidence even in a 0.8% GDP growth - 10:39

In parallel with the new austerity package the Hungarian government has also trimmed its 2013 GDP growth estimate to 0.9% from 1.0%.

With its 0.9% forecast the cabinet is still more optimistic than the market.

At this point we need to note that the participants of Portfolio.hu’s Budapest Economic Forum yesterday expressed doubts even over the achievability of the IMF’s 0.8% estimate. The 125 responses showed that according to 38% of the respondents assign an at least 60% chance to a scenario where Hungary’s GDP grows by less than 0.8% next year.

Talking about predictability (ever newer adjustment programmes, deficit target and GDP estimate revisions), the breaking of the agreement with banks is yet another sign that in terms of transparency the government still needs to learn a thing or two. The audience of our conference yesterday were of a similar view. The chart below speaks volumes of this.

How much banks will pay? - 10:36

On top of the previously announced HUF 140 bn targeted revenue from the financial transaction tax the government expects another HUF 90 bn. The bank tax should bring in HUF 144 bn vs. the originally targeted HUF 72 bn.

Against the previous target of HUF 40 bn FTT revenue from the State Treasury the current goal is HUF 80 bn. Treasury transactions amount to HUF 120,000 billion and one third of this is subject to the levy. Government spokesman András Giró-Szász highlighted that the FTT will not be extended on the payment of wages and pensions, or on social benefits and EU funds.

According to the latest estimates of the ministry, the FTT is to generate HUF 230+80 bn for the state. Matolcsy reiterated that the FTT will not be imposed on the central bank (NBH), “because the EU and the IMF vetoed" it.

The government spokesman also said the service providers will not be able to pass the public utility tax onto customers because the cabinet has frozen overhead costs.

Seven measures - 10:13

The new adjustment package will improve the budget balance by HUF 367 billion, Matolcsy said. The size of the programme reflects the cabinet’s strong commitment to taking the country out of the Excessive Deficit Procedure (EDP), he added.

The government will not the EU strip Hungary of the cohesion funds, the minister said.

1) The bank tax will not be halved in 2013. “We cannot uphold the agreement with the banks. We wanted to but because of the EU we just can’t. The state will collect HUF 72 billion more from the bank tax next year" than originally planned.

2) The rate of the financial transaction tax will be doubled to 0.2%. This would bring state coffers HUF 90 bn more.

To a question whether the banks will pass this down to customers Matolcsy responded that some will and some will only to a smaller extent. “This will not cause a change of behaviour at the banks," he said.

3) As a result of the 0.2% FTT the State Treasury will pay HUF 40 bn more.

4) The way the base of the local business is calculated will change. The purchasing price of the products sold may be deducted up to 80% of the revenues. This puts a bigger burden on wholesalers, the minister said. This is not a crisis tax for the retail sector, he stressed. The budget will have HUF 35 bn extra revenue from this measure, which - to a smaller extent - will affect the energy sector too, Matolcsy said.

5) The government will introduce a public utility tax which will be payable on every underground duct not only in Budapest but in every Hungarian settlement. The new levy will burden primarily foreign-owned service companies in the bigger cities, Matolcsy said. “This is also a step we wanted to avoid, but the EU forced us to take it. HUF 30 bn could be generated by this."

7) In scope of the previously announced plan to enhance tax collection efficiency of the tax authority (NAV) a major increase in VAT revenues is expected by stricter control on receipts (up to HUF 2.5 m). This should bring state coffers HUF 60 bn.

Why the new austerity measures are needed? - 10:09

The Commission found the HUF 95 bn revenue target linked to higher tax collection efficiency unfounded (online cash registers linked up to the tax authority). “What Bulgaria has achieved we would not be able, according to the EU," Matolcsy said.

The EC has accepted only two-thirds of the HUF 400 bn package as valid, while it has also revised the growth estimate downward - “these are the factors that led to this situation," he added.

The good news is that the EU executive deemed the 2.7% (upwardly-revised) deficit goal for 2012 attainable, the minister said.

He noted that the EU is applying double standards because for 11 member states it allowed the budget deficit to exceed 3.0% of GDP.