“Matolcsy’s poison kills slowly”: The latest austerity measures prevent economic growth

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.

It is not the calculator’s fault

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.

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petofi
Guest

Hungarians come in first place in one thing–their tolerance for stupidity, especially when it is buttressed by mother, Catholic church, and the ravings of a nationalistic maniac.
What a toxic trifecta!!

I once thought that Hungarians read.
I was wrong. Hungarians can’t learn from others’ mistakes because…well,
because they’re ‘special’; different in a unique sort of way. So, you see,
even though Hitler and Germany was only 70 years ago; and it was written up 1000 different ways to Sunday, it means nought that a raving nationalist sent his country not only to defeat…but wasn’t finished until it was in complete ruin.

Hungarians must ‘see’ it for themselves…

Ron
Guest
OK This is going to be a little boring. Eva: 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. Well I am not a tax specialist, but I use to work in salary administrations environment. Supergrossing (according to the explanation above) is showing on the salary slip all salary related costs for the employer (yes and not employee) to the employee. The argumentation of transparency is that the salary costs consist mainly of three parts: (1) Net salary (employee receive this from their employer) (2) Employee related taxes and pension and social securities (deducted from the gross salary and paid by the employer to the tax and social security organizations) The Net Salary and Employee related taxes are together the Gross Salary (3) Employer related tax and… Read more »
spectator
Guest
The whole concept a disaster, fundamentally wrong from day one. Concentrating on minimizing debts for any price, results, that the whole economy halting to standstill, with no room for maneuvers, whatever happens in the world of macro-economy. Pulling out every forint of working capital from action, spending the reserves and robbing the people dry means, that there will be no development in the foreseeable future, which means, there will be no growth, no revenues, no BNP what deserves mentioning either. Like when someone cut back on the fuel when crossing a desert – you really can save money on that, never mind, that it takes ten times longer – enjoy the view, that’s all you have! While the level of the debt may decrease, the cost – nearly certain – does not: just remember, how the value of the Forint fell practically in a few hours a couple of times during the last years, with no solid economy behind it bound to happen time and again. Something else worth to remember. A few decades back, likewise Orban, one of his soul-mates were also obsessed with eliminating the foreign debts of the state, just like him they have done everything to… Read more »
Ron
Guest

Eva: Only 80% instead of 100% of revenues will be able to be deducted from the local business tax (helyi iparűzési adó).

Now this is something I do not understand. The definition of calculation of the local business tax (LBT) is revenue (as per profit and loss account) minus direct sales costs and material costs is the tax basis of the LBT.

I always said the LBT is the business killer. Services companies, such as audit, tax adivisory and bookkeeping firms were not able to deduct LBT, as they did not have material costs and therefore, paid 2% of the turnover as additional tax.

Production companies could deduct 100% of the material costs. Mind you if it is only 80% of the material costs they could deduct, than I expect a major problem as most production companies have low margins.

Btw Mercedes, Audi will not be effected as they “made” a deal. .

Ron
Guest
To come back on the Super Gross Salary issue. As a result a lot of people and companies went into a black or grey economy. And the Government lost a lot of income. Until they introduced the EVA company. 20% tax over income and simplified accounting. It was an instant success. Currently, the tax rate is 37% and as result it lost its appeal. So the government introduced the KAVA (small tax payer itemized lump sum tax) is a new tax system whereby you pay a lump sum tax (fixed monthly fees) of HUF 50,000 per month, half of it if the coy is not the owner’s main job. Limit is annual income is HUF 6 mio or lower. KIVA (small business tax) is an option if the workforce is smaller than 25 employees and have an annual revenue of below HUF 500 million, and then you pay a payroll tax of 16 percent and not the current 27 percent. For anybody who want to have this, you need to make a decision quickly, as the deadline is December 20, 2012, so effectively you need to make a decision before the middle of November and apply for it in the… Read more »
Ron
Guest

Sorry KAVA should be KATA

Ron
Guest
Eva S. Balogh : Ron; “LTB.” If I remember correctly this particular local business tax was very controversial. The question was whether it was legal or not under union law. Then–again if I remember right–the clever guys in Brussels decided it was OK because in Italy there was something similar. Apparently it is a terrible tax. But I know very little about taxes. I always problems filling out the tax returns myself. Yes this tax was controversial from its inception (before 1995). The tax was originally introduced in Sweden, but abolished within a year, as it was killing businesses. However, at that time, Hungary picked it up and introduced it to Hungary, and it became very political, because it was impossible to abolish it. However, some deals were be able be made with Local Communities, some gave a ten or more years statements for not introducing this tax in the community. You had to pay a fixed amount into the local development fund, which companies were happy to do as these were fixed up-front agreed amounts. Actually the OTP went to Brussels over this amount, due to the non-tax deduct ability of its salary costs, and therefore, they argued it… Read more »
Ron
Guest

Eva S. Balogh :
This is really off topic but I think that I must mention it. As we have been talking about Hungarians are being very aggressive I was thinking that almost every day I read about pedestrians being run over by cars. Just today I think I read about three different cases. Now I just learned the exact numbers for 2011: 123 dead pedestrians! Incredible

Are you surprised? Look at this video from Liveleak. Horrible. Btw it is from 2008.
http://www.liveleak.com/view?i=14b_1212060025

Ron
Guest

Eva S. Balogh :
Ron, please tell me how Hungarians are able to find their way through this maze of incomprehensible taxes.

They do not find a way. They wait until the tax inspector come, and pay their penalty. Tax inspector happy, he/she gets her bonus (no kidding). Until the next time.

My wife mentioned to me that Index had a report about a letter that went out to all governmental institutions to penalize more.

Ron
Guest

Ron :

Eva S. Balogh :
Ron, please tell me how Hungarians are able to find their way through this maze of incomprehensible taxes.

They do not find a way. They wait until the tax inspector come, and pay their penalty. Tax inspector happy, he/she gets her bonus (no kidding). Until the next time.
My wife mentioned to me that Index had a report about a letter that went out to all governmental institutions to penalize more.

Found it.
http://index.hu/gazdasag/magyar/2012/10/15/birsagok/

bernard de raadt
Guest

Any constructive ideas……………………..from the oposition or its a ” muro de los lamentos” only

Ron
Guest
Eva S. Balogh : Ron, please tell me how Hungarians are able to find their way through this maze of incomprehensible taxes. To elaborate more on this topic. Hungary is not fundamentally wrong on taxes, only on how they implement it and how they control it. Prime Minister Balkenende from The Netherlands was in Hungary, just before Hungary entered into the EU in 2004, and at a round table discussion the CEO of Dutch Multinational said the following. Hungary has beautiful and good laws, but there is no way these laws could work as the laws are not made for the people, but for the government. The same principle is applicable for taxes. The people do not see they tax HUF’s at work. Only the EU Euro’s. So in their mind: Why pay taxes?. Do they will not get anything back? A friend of mine is CEO of Company (Service) in Hungary. He has about 30 people working for him, but only he and his secretary are receiving a normal salary, the rest has a vehicle to invoice to the Company. He want to change this, but nobody wants to change. All his “employees” are fiddling with their income. In… Read more »
petofi
Guest

Eva S. Balogh :
This is really off topic but I think that I must mention it. As we have been talking about Hungarians are being very aggressive I was thinking that almost every day I read about pedestrians being run over by cars. Just today I think I read about three different cases. Now I just learned the exact numbers for 2011: 123 dead pedestrians! Incredible

A little anecdote to show how Hungarian ‘character’ impacts your insight: A lady I know always crosses
the street–any street–with her nose up in the air, and never looking either way for the traffic. I saw her do this one day and asked her about it. Her reply was:
“Let them look out for me!”

Ron
Guest

Ron :

Eva S. Balogh :
Ron, please tell me how Hungarians are able to find their way through this maze of incomprehensible taxes.

They do not find a way. They wait until the tax inspector come, and pay their penalty. Tax inspector happy, he/she gets her bonus (no kidding). Until the next time.
My wife mentioned to me that Index had a report about a letter that went out to all governmental institutions to penalize more.

Found it.
http://index.hu/gazdasag/magyar/2012/10/15/birsagok/

It first was awating moderation, and after a few hours it disappeared.

Guest

A bit OT:

I found this really strange site in German, but with a lot of English links too, on the power of Jews: http://einflussreicheleute.wordpress.com/

The subtitle is:

“Seit über 10.000 Jahren Erfahrung in Versklavung
Die Vorteile eines zinsbasierten Geldsystems zur Beherrschung und Ausbeutung”
Roughly translated:

More than 10 000 years experience in slavery – advantages of usury for domination and exploitation

It has info on famous Jews, from Marx and Trotzky to Lantos and Soros …

Maybe Karl Pfeiffer can say something on this.

Guest
Re: ” free use of public transportation for people of retirement age” Eva, I have to disagree here! Right now in my German home town there is a discussion about free use of local public transportation for everybody – well the town is not too big, so this means only free buses, but still … The old university town is so narrow, that cars are more than a nuisance and it’s impossible or expensive to find a parking space near to the center. Students e g already pay a lump sum per semester which includes a free bus pass. Re: Flat tax. This really is one of the roots of the problem – just as the ridiculously high AFA/VAT on everything. Basic needs like food should be low-taxed just like basic income should be tax-free. The funny thing is that Fidesz politics here resemble the US Republicans’ ideas – vulture capitalism at its best … Since we live in Hungary a lot of the time, but travel regularly for a month or so to Germany, it’s extremely obvious to us that inflation is rampant. Last time I bought sunflower oil, the price was around 450 HUF – now 6 weeks… Read more »
Ron
Guest

Wolfi/Eva Re: ” free use of public transportation for people of retirement age”

It is not only for the people of retirement age. Somebody working is entitled to have two return tickets (anywhere within Hungary) per year. This was valid at least in 2004.

MAV has some (in 2000) 200 tariff groups, at that time Malev had 300 plus tariff groups.

Hungary has no money, and therefore, these communistic relics should be abolished.

As to the flat tax, I do not consider it the original sin. The original sin is outsourcing the Hungarian way. In the early 90 massive firing took place and than the same people were re-hired on invoice basis. That is the original sin. The government lost a lot of income, but agreed somehow to let this situation exist. Even banks helped these “businesses” with providing financing.

spectator
Guest

Eva S. Balogh :
Spectator: “Something else worth to remember.
A few decades back, likewise Orban, one of his soul-mates were also obsessed with eliminating the foreign debts of the state”
How did I know whose name will be coming up? Nicolae Ceaușescu. I have a few friends from Romania who often remind me of the similarities.

I have similar experience, Eva, recently last week called one of my friends – living now in Hungary, but he spent the first 30 years of his life in Romania – escaped some 25 years ago – he said he’s getting déjà vu sensations day by day, and he recognize the alarming tendencies appearing in every aspect of the daily life, ‘slowly but surely we are getting there’ he told me.

I haven’t ever been there, but once I flew over Ploiești, Romania during the eighties, at night, and the captain called our attention, that if we can’t see a single thing down there, we don’t have to worry about our eyesight,- the blackout serves only energy saving purposes.
In one of the richest energy-fields of Europe…

spectator
Guest

bernard de raadt :
Any constructive ideas……………………..from the oposition or its a ” muro de los lamentos” only

Besides of what Eva told you already, I would further recommend to:
– backtrack on ‘prestige ‘investments – MOL, Rába, and the kind
– stop the ‘vanity’ investments – football stadiums for nonexistent crowd of nonexistent sport, for one example,
– throw out the narrow minded education-strategy and invest heavily in quality education instead – our only way to gain advantage in the coming times
– invest in quality ecologically produced food products and the adjoining agricultural bases – instead of creating oligarchs of cronies and falsifying products (paprika, honey, etc., or just a few days ago surfaced ‘pork colored to beef’)

I would add, as a personal interest: instead of the forced ‘nationalist’ national image would be a high time to go out and show to the world what really valuable in Hungary – and this is not the ‘Kalocsay’ racing-overall, believe me…

An
Guest

Eva, spectator; I think the parallel with Ceaușescu is a good one, as far as describing Orban’s dictatorial tendencies. Whether we are getting there where Romania was in the 80s? Good question. Time and circumstances are different. It was a lot easier to concentrate absolute power in the 80s in Romania than in the 2010s in Hungary. What “saved” the country so far from becoming a clear case of a totalitarian state is being part of the EU, and Orban needing the money from the EU. I believe if Hungary wasn’t part of the EU, the country would already look like today’s Ukraine (though its looking more and more like that every day).

Ron
Guest
I just received the September report of the Dutch Embassy. Here are some highlights: Wages in Budapest compare to Bangkok As to the wages, a recent study by UBS found that hourly wages in Budapest are relatively low. The survey examining 72 cities looked at four professions in manufacturing and 11 in the services sector. The average net USD 4.60 per hour earned in Budapest is on a level with pay rates in Bangkok and Beijing. Hungary falls considerably in Global Competitiveness Index Following a major downfall, Hungary ranks 60th on theWorld Economic Forum’s Global Competitiveness Index (GCI 2012-2013). WEF now shows also on an interactive map which countries in the world are the most competitive. Hungary’s international competitiveness has worsened considerably over the past year. While last year Hungary ranked 48th in the GCI 2011-2012, this year it came in only 60th, the latest report by theWorld Economic Forum shows. The severity of Hungary’s decline in the ranking is show that of the first 70 countries only Sri Lanka slipped more than Hungary (16 places). Hungary remains one of the main beneficiaries of Cohesion Funds According to the report of the EC on the use of the EU funds… Read more »
Ron
Guest

Sorry another highlight.

Employment figures improve temporarily
The average unemployment rate in Hungary was 10.4%in the 15-74 age group in June-August, down from 10.5% in May-July and from 10.8% in the same period a year earlier, data published by the Central Statistics Office (KSH) show. There were 455,700 unemployed in Hungary in the 15-74 age group on average in June-August, down 3,100 fromMay-July and down 7,100 from a year earlier. After rising to 500,000 – a new peak – in January-March 2012, unemployment gradually fell back to about 5,000 below the level around which it fluctuated between April-June and October-December of 2011.
The number of unemployed still exceeded the level before the 2008 autumn crisis by nearly 140,000. Analysts believe that this improvement is due to seasonal work in the Summer and thus will increase in the rest of the year.

What about the 1 million new jobs?

petofi
Guest
Ron : I just received the September report of the Dutch Embassy. Here are some highlights: Wages in Budapest compare to Bangkok As to the wages, a recent study by UBS found that hourly wages in Budapest are relatively low. The survey examining 72 cities looked at four professions in manufacturing and 11 in the services sector. The average net USD 4.60 per hour earned in Budapest is on a level with pay rates in Bangkok and Beijing. Hungary falls considerably in Global Competitiveness Index Following a major downfall, Hungary ranks 60th on theWorld Economic Forum’s Global Competitiveness Index (GCI 2012-2013). WEF now shows also on an interactive map which countries in the world are the most competitive. Hungary’s international competitiveness has worsened considerably over the past year. While last year Hungary ranked 48th in the GCI 2011-2012, this year it came in only 60th, the latest report by theWorld Economic Forum shows. The severity of Hungary’s decline in the ranking is show that of the first 70 countries only Sri Lanka slipped more than Hungary (16 places). Hungary remains one of the main beneficiaries of Cohesion Funds According to the report of the EC on the use of the… Read more »
Ron
Guest

Petofi: Very informative, Ron.
Now, why do you suppose that MSZP, DK, and LMP don’t rub the EU differential of 4.5 billion euros, into Orban’s nose–ie. publicize it in all the major papers–when he mentions–as he often does–that Hungary does not need the EU?

I think they regularly do this. But nobody wants to publish it?

petofi
Guest

On the latest poll just out, Fidesz support has strengthened.

Now what, on god’s green earth, has happened lately
that could possibly construed as a Fidesz “success”
warranting growing support?

It seems that, in Hungary, ‘moron-ism’ is infectious…and spreading wildly.

God help us all–

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