The Government decided not to deteriorate from their original idea of hiking the middle bracket VAT of 15% to 20% as announced in the new reform package on 10 June 2006. The Government decided to stick to the original idea, as its coalition partner SZDSZ (Liberals) did not support the idea of hiking both the middle bracket (from 15% to 17%) and upper bracket (from 20% to 23%) given they support the idea of converging towards a flat tax rate of 20% to be introduced in 2009. The Government will also stick to the planned increase of the employer’s social contribution. This is negative for the employers, whom have reached an agreement with the Socialists yesterday to keep this contribution flat in exchange for hiking the upper tax VAT bracket.
We see the news as neutral, as we have already priced into our models the increase in the company’s wage costs, which we have not yet altered with yesterday’s developments. The increase of the middle bracket VAT will also put somewhat lower pressure on inflation than hiking both VAT levels, and we believe this original scenario is more or less priced into the base rate expectations as well.