Government's tax increase package is even bigger than we thought

There was no avoiding the tax increase

For months, Portfolio has regularly reported that the government is having a hard time with the budget because it is facing another slippage. We have also predicted that an adjustment was on the cards, and that the package would build on tax increases. In light of all this, our readers should not have been completely caught off guard by the announcements made at last Monday's Government Press Briefing and the further details that have subsequently trickled out.

But what is reassuring news for the quest for fiscal balance is that the government's current package of measures not only addresses the slippage in the 2024 budget, but also

partially addresses the 2025 budget already.

Tax revenues in the hundreds of billions already forecast for 2025

Based on publicly available information (announcement, communication, government decree, ministerial responses), we have worked out the true size and potential impact of the government's summer adjustment package.

It is known from last Monday's Government Press Briefing that the government aims to raise an additional HUF 400 billion in revenue this year through this draft measure. This will be achieved partly through tax increases and, according to information obtained by Portfolio, an extra HUF 150 billion payment by Hungarian Electricity Works (MVM), but it is possible that there will be further measures to cut spending. In our analysis, we focus mainly on tax increases.

1. A new item is the increase in the rates of transactional levy and the creation of an additional levy on foreign exchange. According to a statement by the Ministry of National Economy, this will bring a total of HUF 92 billion in additional revenue to the state coffers in 2024, and will improve the revenue side by HUF 230 billion in 2025. We wrote about its impact in detail in a separate article.
2. There was also a lot of news on the windfall tax on banks. The government has clarified the rules under which banks can deduct 50% of their extra profit tax liability and that this nominal tax burden would continue next year. This year, this would (from the state's point of view) at worst do nothing to improve the revenue side of the budget, and at best it would add HUF 130 billion (when banks fail to claim the discount). Next year, however, the original baseline for the budget would have seen this item completely removed, meaning that depending on the enforcement of the discount, the budget could receive an extra HUF 140 or 280 billion compared to the baseline.
3. There is a lot of uncertainty about the windfall tax on the energy sector, as the government has so far officially announced only one change for this sector, a special tax based on the Brent-Ural spread, and only interpretations are available about the change in the extra profit tax based on turnover (if it remains, it is estimated to bring in HUF 75 billion in extra revenue). However, it is not known what the fate of the other energy surtaxes will be from 2025 (key increase in income tax on energy suppliers, balancing power plants, exits from the subsidy system). The government originally projected a HUF 300 billion reduction in revenue from this line in the 2025 budget. However, it is possible that part of this will be retained. Likewise, there is no information on what will happen to the mining tax rules.
4. For the time being, there are indications that the windfall tax burden on the retail sector will be maintained next year. This would save the government over HUF 100 billion in the 2025 budget compared to its original plans (which called for a phase-out in 2025), but it is important to stress that this is a hypothetical case.
5. The range of sectoral taxes affecting pharmaceutical manufacturers is also extremely complex, perhaps the most so (not coincidentally, this is where the prototype of the special tax originated, almost 20 years ago). On the one hand, it increased the rate of the existing special tax on pharmaceutical distributors (from 28% to 40%) and then maintained this rate for 2024. The government's intentions in this regard are not known. Pharmaceutical manufacturers also pay a special tax in proportion to their sales, but at a reduced rate this year. We know from Economy Minister Márton Nagy's presentation that the government will phase out these special taxes from 2025. This has been the expectation on the revenue side of the budget so far, so it will not affect the balance next year, the question is what the government plans to do with the other special taxes affecting the pharmaceutical sector.
6. The special tax called the airline contribution is in a special situation. This item is interesting because the government said last year that this is the extra profit tax that it intends to maintain after 2024 and included it in its medium-term budget plans. However, the Minister of National Economy, as the new de facto owner of Budapest Airport, announced this week that the government will abolish this windfall tax after 2024, which means that this HUF 41 billion will be missing from the original plans.
7. The windfall tax burden on the insurance sector will also change, at least compared to what was the baseline for 2025. The baseline was also last year that the additional tax would be abolished after 2024, but now Minister of National Economy Márton Nagy said at another press conference that the tax burden on the insurance sector will remain in 2025, but half of it will be deductible. If we assume that what happens with the banking sector (i.e. half of the extra profit tax can be written off) will also happen here, then half of the HUF 90 billion could remain. This means that compared to the baseline (no insurance extra profit tax in 2025), the budget will gain HUF 45 billion next year.
8. It is also known from a press conference that the government will abolish the windfall tax on telecommunications. The 2025 budget had originally calculated that the telecoms extra levy would disappear, so there is no quantifiable impact on next year's budget.

Based on all this, we have estimated what the government has done to this and next year's budget with its measures (increases in transaction tax and, in some cases, the retention of the full amount of the windfall tax or half of it) compared to the baseline we have presented so far (windfall tax to be phased out in 2025). The most interesting point of our calculation is that it reveals that

the government has actually tidied up the 2025 budget better with the newly announced tax increases, because there too a HUF 600-700 billion tax increase will be implemented.

It is important to note that the additional tax revenue of HUF 566-716 billion in the coming year, as shown in the table, is surplus revenue in the sense that if we consider 2025 without these tax measures (rather than the government collecting so much more in special taxes, which will vary from 2024 to 2025).

Our aggregation above also shows that a significant part of the HUF 1,100-1,200 billion slippage now identifiable in the 2025 budget has already been addressed by the government through the current tax increases. That said, the planning for next year's budget, which starts in November, promises to be exciting, especially when combined with the autumn tax package.

Important notes!

As for the calculations reflected in our spreadsheet, it is important to note that this time there is an even greater uncertainty surrounding them than usual.

• On the one hand, in many cases we have made estimates, since there may be no official new legislation or even a precise announcement for a given windfall tax item, but only a guideline communication (e.g. a windfall tax item "will not decrease" or the special tax burden of a sector "will remain"). It is possible that these guideline communications may change in the future, the government may change them, and the calculated effects may change.
• On the other hand, it can be seen that we have included in the chart items of special taxes and extra-profit taxes that have not yet been tabled, either by official decree or through government communication. This also means that the government still has room for manoeuvre if it wants to introduce extra-profit taxes at a later stage, including in the context of the tax changes that will be announced in the autumn.

If there are changes to any existing or new special tax, or new information and communication, Portfolio will continue to report on any significant changes, as we have done in the past, and put the announcements into context with our new calculations and tables.

Stay tuned, don't get lost in the maze of creative tax policy!

Cover photo: MTI Photo/Prime Minister's Press Office/Zoltán Fischer