A long-awaited plan by the Hungarian government to reform the country's tax system is losing steam as the ruling Socialist-Liberal coalition's partners wrangle over just how much room is available for cutting taxes, leaving some investors to openly mull exiting.

The ruling Socialists (MSZP) and their liberal coalition partner (SZDSZ) earlier said they would outline a tax reform package by January of this year, but the Finance Ministry last week announced that a bill would not be put forward before end of April. Hungary is struggling to breathe new life into its sagging economy as the country's real GDP growth fell to an 11-year-low of 1.8% in 2007, according to OECD estimates.

According to Figyelőnet, the government is looking at no fewer than 20 different proposals, all of them centering around three main lines.

The first would allow only a small tax cut, leaving the existing tax regime for the most part untouched. Finance Minister János Veres earlier this week said the government has roughly Ft 200 billion-Ft 250 billion (€750 million-€940 million) of wiggle room in next year's budget, but experts say this would make room for a tax cut of not more than Ft 100 billion due to budget reserve obligations. This, however, would offer little in the way of substantial tax cuts as lowering employers' social security contributions by a single percentage point (they currently stand at 29%) would cost the state an estimated Ft 80 billion.

Another proposal, favored by the Economic Competitiveness Round Table (GVK), would involve much larger cuts, the cost of which would be recouped by raising other taxes, most notably áfa (VAT). But according to sources close to the government, this idea has been discounted because of fears that bumping up the VAT rate would only prompt the Hungarian National Bank (MNB) to raise interest rates to counteract the resulting inflationary expectations, which in turn would defeat the government plan's to jumpstart the economy. Hungary's consumer price index surged to a worse-than-expected 7.8% last year fueled by soaring global energy and food prices.

For its part, the SZDSZ says the government would have more latitude to cut taxes if it placed more emphasis on paring back expenditure. The party estimates that the government in theory has around Ft 700 billion for potential tax cuts next year, including Ft 300 billion from cutbacks in spending on state administration. But the Socialists are dismissing this option, pointing to the country's tight EU convergence plan.

MNB governor András Simor appeared to be backing the junior government party's line at a conference earlier this week when he criticized the coalition for favoring tax hikes over spending cuts in its push to redress the budget balance. Simor urged the government to trim the tax burden on labor and to cut social spending in order to encourage investment and boost economic growth.

Whatever path it chooses, Hungary has to act fast if it wants to keep businesses within its borders as a growing number of large companies are joining in the chorus of complaints about high taxes and threaten to move on to greener pastures if the government fails to take steps soon.

French drug maker Servier, which only recently opened a new original drug research center in Hungary, said it may relocate to another country because of the country's high taxes and poor incentives, Reuters reported, citing chief executive Jean-Philippe Seta.

On the technology industry front, Sanyo has recently shut down a major plant in Dorog, while US-based electronics giant National Instruments said it decided to cancel a planned expansion in Hungary and would bolt the country altogether if relocating weren't so expensive.