The long awaited speech of the Hungarian prime minister took place this afternoon. It was a 29-point laundry list. The immediate domestic reactions, from the right as well as the left, were restrained. Most economists admitted that they couldn't pass judgment on the proposals for the simple reason that they were vague. Moreover, it was almost impossible to judge whether the austerity measures would suffice to meet the 3.8% budget deficit that is demanded by the IMF and the EU.
Just to give you an idea of how vague some of these announcements were here are two examples. Viktor Orbán announced the introduction of a special tax on the profits of lending institutions. This surcharge will be in effect for three years and it will yield 200 billion Hungarian forints. Economists and bank experts who listened to the speech couldn't decide whether the government was hoping for additional revenue of 200 billion in one year or over three years. (As it turned out by the evening, they expect 200 billion every year, starting in 2010.) The second example is the 15% cut in the salaries of government employees. Again, there was disagreement over whether this 15% across the board cut would affect only the civil service or all government employees, i.e. all people who work in the public sector. The difference in numbers is quite substantial. There are only about 40,000 civil servants but about 700,000 people, including teachers and healthcare workers, are public sector employees. (Again as it turned out after hearing János Lázár's interview with Olga Kálmán of ATV it will affect everybody in the public sector.)
As promised there will be tax cuts, but if I understand it correctly the chief beneficiaries of these cuts will be the top 10 percent of society. Right now ninety percent of the wage earners belong to the lower tax bracket of 17% and only about ten percent pay at the higher rate of 32%. The Orbán government will introduce a flat tax of 16% but this flat tax will be combined with deductions for children. Thus 90% of wage earners will receive a tax cut of 1% plus the "family" deduction. Not exactly substantial. On the other hand, people with large incomes will also pay only 16% instead of 32%. That is substantial, though I assume that some currently untaxed income such as long-term capital gains will now be taxed. At the same time the poorest stratum of society, people who receive the minimum wage (73,500 Ft) and who at the moment pay no taxes, will be taxed. Again, it is not clear whether the government is planning to raise the minimum wage in order to compensate for their loss of income. (Even Lázár couldn't answer that question.)
Even people who are very well versed in financial matters like Péter Ákos Bod, former chairman of the Hungarian National Bank and an economist close to Fidesz, or Tamás Bauer who belongs to the other camp couldn't follow the twenty-nine points Orbán outlined in his speech. Considering that the speech itself was just about 40 minutes and the "action plan" wasn't the only topic covered it is obvious that not much information could be squeezed into this time frame. But here's a summary of the salient points.
First he claimed that with the introduction of these twenty-nine points "an entirely new economic system" will be established. Seven of the points concerned taxation. (1) Business tax that is quite low even now (19%) will be lowered to 10% for companies whose profits don't exceed 500 milllion forints per annum. I assume the rest will still be taxed at the old rate and most multi-national companies are in this category. (2) Introduction of the 16% flat tax but its introduction wouldn't be immediate but during the next two years while "1.3 million new people would be included in the system of taxation." That can only mean those who until now didn't pay taxes. (3) Ten kinds of taxes that only complicated filling out the tax forms but brought in little revenue will be abolished. (4) A new wage concept will be introduced. If I understand it correctly, it means that if someone with income that has already been taxed hires someone to mow his lawn on a weekly basis this man wouldn't have to be pay taxes. (To tell you the truth that sounds nonsensical to me. In addition it is a perfect way to avoid paying taxes period.) (5) Any kind of movement of money among blood relatives–dead or alive–will not be taxed. So, no more gift tax, no more inheritance tax. (6) As it stands now to establish a business one needs 51 different permits. One-third of these will be repealed. (7) The present form of taxation on temporary work should be scrapped and the authorities will return to the earlier practice. (Since I have no idea about the present or earlier system, I am not sure what he was talking about. My feeling is that the majority of Hungarians don't have a clue either.) (8) The owner of rental real estate property shouldn't be considered an entrepreneur. (9) Brewers of rotgut stuff will be legal in the future. (Huge applause from the right.)
From here on I will mention only the most important plans. The first is that the government will cut its yearly expenditures by 120 billion forints by freezing wages and no longer hiring outside experts among other things. They are introducing a wage ceiling of 2 million forints a month and that ceiling is applicable even to the chairman of the Hungarian National Bank. (Perhaps Orbán is hoping that András Simor will get so disgusted that he will resign. His current pay is over 7 million. That amount was arrived at during the first Orbán government's tenure at the insistence of Zsigmond Járai, the finance minister who moved over to the National Bank.) The 15% savings in the wages of government employees that I wrote about above would mean another 48.2 billion forints per year. Political parties that are getting money from the budget will receive 15% less in the future. (I assume the government party will have other sources of income.)
Then came the announcement of the special tax on financial institutions. Banks, leasing companies, and insurance companies will have to pay a special tax for the next three years. According to MTI's report this tax that exists even now to the tune of 13 billion forints a year will be raised to 200 billion. This amount will have to be paid starting this year. We don't know what the reactions of these institutions will be. After all, their combined after-tax annual profit is about 400 billion forints. Half of this money would go to the government's coffers. The effect of this move is hard to predict but it might be very negative. The banks might introduce a tighter lending policy.
The government will propose legislation that would forbid the use of foreign currency mortgages. That might be a sensible move but it will undoubtedly have a negative effect on the real estate business and thus on the building industry Fidesz wanted to bolster.
Finally he mentioned a couple of decisions that would help people who got into financial hot water. Some of these people have been unable to pay their mortgages and thus can be removed from their houses or apartments. The government will extend the moratorium on evictions until December 31 and at the same time it will start mediation between lenders and debtors although he added that he knows that the lending institutions don't support this idea.
I think that this is a fairly complete summary of the most important points of Viktor Orbán's speech. But we don't know how thoroughly Matolcsy's team has modeled the potential financial consequences of these changes. Foreign analysts want more details. I have the feeling that the IMF and the EU will also demand more than a laundry list.