Hungary to lower windfall tax on banks, retain it on insurers

Landmines everywhere

The budget deficit target for next year, raised in the Convergence Programme to 2.9% of GDP from 2.5% previously, is subject to risks, the Fiscal Council points out in its opinion, and then lists these risks:

• The expected economic growth will not be attained, which will reduce budget revenues.
• Certain tax revenues, particularly sales tax receipts, could turn out lower than expected in 2023 which creates a worse base for the related goals in 2024.
• Operational expenditures of budgetary institutions could be substantially smaller than price increases carried out in 2022 and projected for 2023 and 2024.
• Other operating appropriations of several budget chapters of institutions not under the control of the government will be reduced by up to 10% compared to the 2023 appropriations, causing a very significant fall in real terms for these institutions. Without targeted austerity and rationalisation measures, there is a risk that maintaining the viability of the budget bodies will require large unplanned expenditures in 2024.
• The budget bill does not include the expected necessary loss compensation for the National Bank of Hungary (MNB), and thus it is not in line with the Central Bank Act, which provides that "if the amount of equity capital falls below the subscribed capital at the end of the year under review, the difference shall be reimbursed by the central budget in equal annual instalments [...] within five years directly to the profit and loss reserve."
• The Council has identified that the achievement of several revenue and expenditure estimates will require further action. In this context, the FC was informed by the Ministry of Finance that "these measures are being developed". What this means in practice is that the government is presenting a budget that in many respects is not sound. For this very reason, the FC argues that the early budget has a limited ability to meet its objectives because of the risks and the considerable uncertainties that are inherent in the draft. "The inherent risks may require a reprogramming, which limits the budget's ability to fulfil its role as an economic compass," they point out.

The European Commission has also criticised the government for the early adoption of the budget, among various other things.

As regards the tax burden on the financial sector, three important pieces of information emerge from this document:

Windfall tax on banks will be apparently halved

The target for payments by financial institutions for 2024 is HUF 253.4 billion, 29.2% of HUF 104.6 billion less than pencilled in for this year.

Receipts from the 'extra profit tax' are targeted at HUF 132 billion, half of this year's HUF 264 billion goal.

This means that the extra supplementary tax on banks and financial firms will only be partially phased out, but the legal basis for this is not yet in place, the Fiscal Council noted. The revenue from the special tax without the additional tax (by which the FC could mean the "old" bank tax) will increase by 29.1% to roughly HUF 121 billion compared to the base, the feasibility of which is risky, according to the Council.

It is interesting that the amount of the windfall tax on banks and financial firms would be exactly halved in the budget plans. This suggests that the tax rate would be halved compared to 2023, but we also know that this year the tax base is different in the first half of the year (net revenue) than in the second half (proportionate to profit), so simply halving the tax rate may not result in a halving of tax revenue. Leaving this aside, the figures also suggest that the tax base would be left at the 2022 profit base with a simultaneous halving of the tax rate, i.e. banks would be taxed on this basis in 2024 to avoid having to adjust, which is in line with what Portfolio has previously reported.

Transaction tax to: yeah, it's fine

The Financial Transaction Tax (FTT) revenue target is HUF 348.3 billion, which exceeds the previous year's expected outturn by 4.8% or HUF 15.9 billion. On this basis, it is easy to imagine that the regulation of the FTT will remain unchanged.

Supplementary tax on insurers: no problem, it can stay

The revenue target from the insurance tax is HUF 234.2 billion, 6.7% or HUF 14.8 billion more than expected this year, which also suggests that the additional tax on insurers introduced last year and raised before Christmas will remain unchanged in 2024, only the tax base will increase (due to the nominal increase in the premium income of insurers).

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