Gov’t announces strict economic measures for next year, plans to raise VAT to 27%

Hungary’s government calculates with economic growth of 1.5 percent and a budget deficit target of 2.5 percent of GDP in its preparations for the 2012 budget, the economy minister said on Friday.

The government expects to improve the budget balance by 750 billion forints (EUR 2.6bn) next year and put aside 300 billion forints as a buffer, Gyorgy Matolcsy said. Half of that amount is to be paid into the National Protection Fund, he said.

The government plans to raise value added tax (VAT) from 25 to 27 percent and raise employee health-care contributions by 1.5 percentage points.

It expects budget revenue to rise by 445 billion forints in 2012.

Next year, the government plans to phase out super-grossing – adding social contributions to the tax base – and scrap tax credits, gradually bringing the flat-rate income tax rate down to 16 percent.

Insurance companies will be required to pay a sectoral tax from 2012 and the tax on company cars will be raised by 40 percent depending on their environmental class.

Inflation is forecast at 4.2 percent for the year as part of the 2012 budget calculations, he said.

Hungarian analysts gave mixed reactions to the budget plans outlined by Matolcsy.

Zsolt Kondrat of MKB Bank welcomed that the government had opted for lower-risk measures to cut the deficit. “The macroeconomic course seems realistic,” he said.

Concerning the planned VAT rise, he said the cabinet would make a good choice if it raised consumption taxes rather than income taxes.

“The solutions chosen by the government will bring back the hope that no matter how tough next year will be, the targets set for it can be met,” he said.

Gyorgy Barcza of K and H Bank was disappointed to see the plan “traditionally” focus on tax hikes rather than spending cuts. He expressed doubt whether the planned VAT rise would be compatible with the EU directives.

Zoltan Torok of Raiffeisen Bank welcomed that the government had realised that it must calculate with a lower growth rate.

Although the VAT and social contribution rises have some negative effects, they are easy to collect, he said.

Torok expects an economic decline rather than growth next year.

The main opposition Socialist party said next year’s budget presaged rising prices and poverty. Istvan Jozsa, a senior Socialist economic spokesman, said the VAT rise would hit the poor and would be Europe’s highest sales tax. He added the fact that the government now calculated with growth of just 1.5 percent, as opposed to its earlier projection of 3 percent, meant that it no longer believed in the success of its pro-growth economic policy.

A lawmaker of green party LMP said that Matolcsy had announced the biggest austerity package for the last 20 years. Gabor Vago said, “it looks like Matolcsy has entirely gone round the bend” when he said that there was no need for austerity. He said that the minister had been “plugging the hole made by the flat tax for the past year” by raising other taxes on a monthly basis as well as other austerity measures. Vago added that the VAT rise would drag down growth.

The deputy group leader of radical nationalist Jobbik said Matolcsy’s “new austerity package” pressed further down the “neo-liberal” path. Tamas Hegedus said the flat tax favoured the rich and the cost of the forced pace of reducing the public debt was being paid for by the poor and middle classes.