Today yet another “non-austerity” program. The first article that appeared about such a possibility appeared on Origo. That was around 6 a.m. Less than four hours later, after an emergency meeting of the cabinet, Economic Minister György Matolcsy came out with the latest version of the 2013 budget. He announced additional tax revenues amounting to 367 billion forints on top of the 397 billion that he reported on October 5. All in all, we are talking about 764 billion forints.
Economists who carefully study the government’s numbers knew soon after the announcement less than two weeks ago that the European Union would throw this version of the Hungarian budget back and would ask the Hungarians to rethink their phony numbers. Although it is likely that Brussels will accept this latest “non-austerity” package, experts on the Hungarian economy claim that the projected economic growth for next year is still too high. This is especially true in light of the fact that the German government just revised Germany’s projected 2013 growth downward to a modest 1% from the previously anticipated 1.6%.
Brussels is trying to speed up the process of getting a Hungarian budget in place. Originally, the European Commission promised an answer to the first Matolcsy effort by November 7, and here we are in the middle of October and the reaction is already public knowledge. The Orbán government must have known Brussels’ opinion earlier than yesterday or today because one would suspect that putting together a complete austerity package in four hours would be impossible even for a better functioning ministry than Matolcsy’s. What is also interesting is that although analysts were thinking in terms of 150-200 billion forints worth of adjustments, today’s version of the package contains additional revenue of 367 billion forints, that is, almost double the presumably necessary amount.
But how much is it really? According to Index there are too many items in the proposal that are far too unorthodox and uncertainty still abounds. But the real problem is that the newly introduced measures will further slow economic growth. Most people I heard on the subject predict that the recession will continue next year, and I read about a broker who exclaimed that “if this going to go on there will not be economic growth for ten years” in Hungary. Another analyst, Csaba Gaál, gave the following title to his article: “Matolcsy’s poison kills slowly.”
So, what are these poisonous items? (1) Cutting the extra bank levy in half, which was promised for next year, is being postponed. (2) The financial transaction tax will be doubled from 0.1 to o.2%. (3) The transaction tax on the Treasury will be also doubled from 0.1 to 0.2%. (4) There will be a new tax on underground utility cables. (5) Only 80% instead of 100% of revenues will be able to be deducted from the local business tax (iparűzési adó). (6) The tax rate will be hiked on “cafeteria.” “Cafeteria” in Hungarian means a non-taxable benefit in the form of a voucher for cold or hot meals. (7) The Hungarian Internal Revenue Service will individually check receipts up to 2.5 million forints.
Tamás Bauer, an economist and deputy chairman of DK, immediately called a press conference and announced that this new austerity package “undermines the growth of the business sector.” There can be no growth without credit, and the banks’ lending capacity is close to zero as it is due to the very heavy bank levies that now will continue for an unspecified period. The taxation on “underground cables will decrease the profitability of important foreign companies.” I assume he is referring here to the German-owned Magyar Telekom. Instead, the government should keep the so-called “half super-grossing” and introduce higher taxes on the well-to-do. It’s hard to find a good description of “super-grossing” or “half super-grossing,” but I learned this much: “Super grossing is a method introduced by the previous government in July 2009; the idea is that, for transparency, employees should see details of their whole salary (that is, gross wage plus employer’s social security contributions). The present government ended the concept of super grossing in 2010 and it will be gradually phased out by 2013.” I suspect that super-grossing increases the tax burden on people within certain income brackets. But perhaps someone with more knowledge of taxation could help us out.
The Hungarian National Bank is concerned about the continuation of the bank tax, and the banks are up in arms. They learned about the new plan from today’s newspapers. The forint weakened, and OTP’s stock lost almost 4%.
It is the very unfair flat tax that caused the bulk of Hungary’s problem in the first place, but retreating from the current tax system would be an admission that the Orbán government’s whole economic policy failed. Instead they lay the blame on the European Union.
Last Friday Viktor Orbán already claimed that if Hungary were on her own she wouldn’t need a 400 billion forint adjustment. Half of that would have been plenty, but Brussels is a real ogre. Then came Matolcsy who accused the European Union of double standards. The EU simply doesn’t like Hungary. For example, the Commission didn’t accept Hungary’s figures for higher revenues resulting from the connection of cash registers to the central taxation office while it accepted Bulgaria’s figures. I wonder why not? As György Bolgár said this afternoon, he wouldn’t suggest that Matolcsy play lotto. After all, up to now all the numbers his ministry submitted to Brussels were wrong.
As for the present problems of the Hungarian budget, I think it is worth recalling that one of the first acts of Orbán’s government was the purchase of a large chunk of MOL, a private oil and gas company under Hungarian management. Shortly afterward the government bought Rába, a company that makes trucks and military equipment. Currently they are negotiating with the German-owned utility company E.ON. If a government is strapped for funds it shouldn’t be nationalizing private companies. It shouldn’t be building football stadiums either for a country where practically no one attends the games because the players are so bad.
And finally, I heard an interesting interview this afternoon with László Békesi, finance minster in the Horn government. He suspects that the earlier announced plan to postpone the salary increase for teachers carried too much political risk. As I wrote earlier, I suspect that the majority of teachers voted for Fidesz and this move would certainly turn them away from Orbán and his party. Therefore, Békesi thinks that the government decided to shelve this idea and fulfill its earlier promise to the teachers. That is one of the reasons that the size of the new austerity package is so large. The head of the teacher’s union has a different opinion. We will see.
There are still analysts who think that even these latest measures will not be enough and that sometime in the near future we will find out that another 100 billion is missing. I wouldn’t be at all surprised.