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Hungary: Tax reform delay

Hungary: Tax reform delay

15.1.2008 13:22
Autor: KBC/Patria

Finance Minister János Veres said that the coalition was unlikely to agree on tax reform by the end of January, as indicated by the prime minister earlier in January. He was quoted by local media saying it would take "several weeks" until agreement. In the light of fundamental disagreement between the Socialists and Free Democrats, discussions could last well into 2008. Mr Veres pointed out that the coalition agreement did not contain any deadline for tax reform. According to media reports, the coalition will debate four different proposals. Apart from technical details, the main disagreement is over the size of tax burden reduction. The Free Democrats reportedly target HUF500-600bn (2% GDP), while the Socialists seem to offer no more than HUF250bn. Given the complexity of the issue and the senior coalition party's reluctance to entertain a meaningful reduction in the tax burden, we do not expect cuts of substantially more than 1% of GDP. Nevertheless, any step towards simplifying the tax system and reducing non-wage cost of labour would be welcome in our view.

Mr Veres also said the ESA-95 budget deficit would probably amount to 5.7% of GDP in 2007. This would be the upper end of the range mentioned earlier in January, but still considerable lower than the initial target of 6.8% GDP. Higher than planned tax and excise and interest revenue, lower than planned interest expenditure and debt re-scheduling in late 2006 were the main reasons for the remarkable perfomance. On the flipside, the government also spent more than initially planned. However, 2007 provides a good basis for meeting the 2008 budget deficit target of 4% of GDP. Indeed, Mr Veres said the government would remain prudent and the deficit could fall closer to 3%.

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