None of the government’s tax cut proposals are suitable to jump start Hungary’s stalling economy, László Parragh, chairman of the Hungarian Chamber of Commerce and Industry (MKIK) told Világgazdaság. In light of last year’s growth data and recently lowered forecasts for 2008, the threat of Hungary veering toward stagnation is looming ever larger, Parragh continued.
If Hungary fails to implement real structural reforms, the government’s efforts to redress the budget balance and make the deficit more amenable would not last long and all these years of fiscal stringency will be wasted, he further added. It’s become clear that the course Hungary is now taking is unsuitable to help growth.
While the country is badly in need of tax reforms, the government’s Ft 250 billion tax cut plan would do little in the way of boosting growth.
What’s more, the government seems to be increasingly inclined to pare this back in the wake of growing fears of an interest rate hike and the recent downgrade by S&P of Hungary’s fiscal outlook.
None of the government’s three tax cut alternatives are suitable to put Hungary back on the path to long-term economic growth, therefore the MKIK is proposing a Ft 1,000 billion tax package that would cut payroll taxes by 3%, raise the ceiling of the lower income tax bracket to Ft 2.5 million a year and lower its threshold to Ft 600 million.
The organization would also tighten regulations on unemployment benefits and channel extra income from measures rolling back the shadow economy toward tax cuts.
The government should also consider cutting welfare spending, which today accounts for 31% of GDP compared to the OECD average of 26%, he said.
The reform process needs to be restarted but all decisions on reform must now be based on a national consensus.
The tax wedge is at least 56% (hitting 61% for those who earn over 6,000 EUR per year). Reducing this by a small percentage is insufficient. HU is trapped in a “vicious circle” (The System Dynamics definition of the term). Consider:
1) High taxes drive the tax base to evasion or other countries with lower wedges.
HU, unwilling to cut costs, instead makes ends meet either by deficit budgets or raising rates.
HU (and those buying its bonds) anticipate conversion into the EURO zone.
To adopt the EURO, deficit spending must be capped.
HU does not reform gov’t largesse nor reduce any “big ticket” items (eg the number of local authorities).
Ergo: all HU can do is raise taxes, completing the circle until eventually something gives.
2) There are ways to improve a tax base: resources, population growth, innovation. HU isn’t long on the 1st 2.
Innovation is risky.
Multinationals willingly take risk, but prefer R&D where taxes are favourable, talent plentiful (& also inexpensive). Even more so, they prefer to “buy” proven ideas from entrepreneurs.
Entrepreneurs also need favorable taxes, trained/capable & incentive-ised resources and capital to start up. More entrepreneurs, more able resources.
Combine the 2 Systems reveals that tinkering with high taxes doesn’t solve the problem.
Add in a desire for at least “status quo” as far as welfare is concerned (after overspending for years) and the only escape from the viscious circle is when it runs out of fuel.