Orbán’s New Action Plan Will Help Hungary Maintain Its Strong Fiscal Position

Evaluation of the action plan

• Concerns about whether Hungary’s new government will loosen budgetary discipline appear to have been laid to rest. Communications blunders by leaders of the governing Fidesz party last week pushed Hungary to the brink of a currency crisis. Meanwhile, Prime Minister Viktor Orbán met with European Commission President José Manuel Barroso on June 3, who emphasized straightforwardly that Hungary must not abandon the route of restrictive fiscal policy. It is now clear that the government has no choice but to follow the road of fiscal prudence.
• Orbán presented his government’s 29-point Economic Action Plan in a speech to Parliament on June 8. While there are some risks over the implementation of the plan, the government is determined to fulfil its original 2010 deficit target of 3.8% of GDP.
• The package focuses on slashing state bureaucracy, simplifying the tax system to help small- and medium-sized enterprises, and decreasing general taxation levels over the next two years. The main message for markets is that the Orbán administration will follow a similar path to the previous government when it comes to budgetary matters.
• While some details of the action plan remain unknown, it appears to include the necessary ingredients for Hungary to maintain its strong fiscal position. The main “victims” of the measures will be the public sector (possible layoffs and salary cuts) and the financial sector (huge taxation on banks). While these measures can bring severe conflicts with bankers and trade unions, the government is politically strong enough to implement its plans.
• Tens of thousands of public-sector employees may lose their jobs. This, along with taxation on the minimum wage, may significantly boost unemployment, which is currently at 11.8%.
• The political impact of the measures is still incalculable. Fidesz stands to lose support among trade unionists and public-sector workers – not to mention people who have foreign currency-denominated loans, given the forint’s recent collapse. At the same time, taxing banks and cutting bureaucracy may send a positive message to the majority of voters.

Most important measures

1. Enterprises and employees
   • Introducing a single-bracket personal income tax of 16%.
   • Slashing the corporate income tax rate to 10% from 19% for companies that earn annual profit less than HUF 500 million.
   • Flat personal income tax rate for families (to be introduced within two years).
   • Abolishing 10 minor tax categories
   • Introducing a tax on banks that will also affect insurers and financial-leasing companies. The 2010 budget originally planned to raise HUF 13 billion by taxing banks; the new government proposes to raise HUF 200 billion. There is a risk that this revenue may be overestimated.
2. Bureaucracy
   • A 15% wage cut at public institutions. The government expects savings of HUF 48.2 billion  (approximately EUR 169 million).
   • Severance payments at state companies will be limited to two months’ salary.
   • The gross monthly salaries at state companies will be capped at HUF 2 million (approximately EUR 7,000). This may be counterproductive, since it can fuel corruption. Orbán emphasized that the act includes the National Bank of Hungary, indicating that the fight between Fidesz and the NBH is not over.
   • Slashing the aggreagate number of seats on boards of directors at state companies to 60 from current 319.  The number of members on supervisory boards will drop to 450 from 636.
3. Other
   • Abolishing taxes and duties on inheritance between lineal relatives.
   • Reduction of budget support to political parties by 15%. This means wide-ranging reform of party and campaign finance will be delayed once again.

Hungarian Govt Plans Drastic Response to HUF Crisis