Among the new measures, the government will not halve the bank tax in 2013 as earlier promised and the financial transactions tax will be set at 0.2 percent rather than the earlier planned 0.1 percent, Matolcsy said.
Local business tax rules will be changed, generating 35 billion forints in additional revenue, and the government will introduce a utilities tax that will generate 30 billion forints more in budget revenue, he said.
Measures include an increase in the payroll tax on in-kind contributions from 10 percent to 27 percent, which trade unions were especially dissatisfied with, saying it would encourage employers to cut these kinds of pay elements.
Matolcsy noted that the European Commission forecast the budget deficit next year to come in the range of 3.7 and 3.9 percent of gross domestic product (GDP). Whereas the government does not agree with the Commission about these figures, it has decided to produce further measures to ensure that the target of 2.7 percent of GDP is achieved, he added.
Hungary faces the withdrawal of cohesion funding if the budget shortfall exceeds 3 percent of GDP.
Matolcsy announced that next year’s economic growth projection had been lowered from 1 percent to 0.9 percent.
He said the government trusted that the International Monetary Fund and the European Union would appreciate the significance of Hungary’s “outstandingly good financial performance” after the drawn-out preparations for talks for the last 11 months.
Financial analysts said the measures were more than necessary to achieve the deficit target and satisfy the European Union. But they could also end up further denting growth and would put upward pressure on inflation.
London-based emerging markets analysts said deficit targets in the new fiscal plan were realistic, or “went even too far”, but growth assumptions were “overly optimistic” and the content of the measures could even strain relations with the IMF.
The policy mix is “far from ideal” to the IMF, especially with respect to the bank levy and the “excessive focus” on revenues and taxes, economists at Morgan Stanley said.
The forint first weakened to 278.97 against the euro just after the announcement, from 277.59 on Tuesday evening, but it recovered to 277.92 by the evening. The shares of Hungarian bank OTP shed value, diving nearly 10 percent, but recovering somewhat to lose only 3 percent by the end of trading. Hungary’s CDS cost hit a new record low of 235.7 basis points on London markets. Yields on government bonds rose by 20-25 basis points.
The press office of the National Bank of Hungary said the measures would have a negative impact on economic growth. It said that as central bank governor Andras Simor had noted, reducing the burden on banks is a way of inducing growth and the government’s measures were going against this aim.
The Hungarian Banking Association said it was shocked to learn that the government would violate an earlier cooperation agreement and gave warning that predictable financing in the Hungarian economy would be put in jeopardy and banks’ lending capacity dampened. This would significantly hinder the growth potential of the real economy and slow down its recovery from the crisis, it added.
The IMF and the Commission declined to comment on the measures for the time being. The Commission had been scheduled to evaluate the package of measures on Nov. 7.
Earlier in the month the government unveiled a fiscal adjustment package worth 397 billion forints for next year in a bid to meet the shortfall target. The government earlier raised its target from 2.2 percent of GDP.
Matolcsy said the government’s “painful” measures were necessary to ensure that the excessive deficit procedure against the country is withdrawn. He insisted that the government had not introduced austerity measures, such as pension or wage cuts, that “these organisations traditionally demand”.
Orsolya Nyeste, an analyst with Erste Bank, said the latest measures would be more than enough to ensure the shortfall stays below 3 percent of economic output, but added that the measures affecting the banking sector would depress lending further and worsen the growth and investment outlooks.
Gergely Suppan, an analyst with Takarekbank, said the new package could end up reducing the fiscal gap to as low as 2 percent of GDP. He added, however, that the decision to delay halving the bank tax would make it harder to come to an agreement with the IMF, since the fund had already demanded that the tax be withdrawn.
The opposition Socialists urged the government to withdraw its 2013 budget bill, as it had lost credibility in light of multiple adjustments. They also called on the government to reduce the banking tax to the EU-average level and to phase out crisis taxes from 2014.
The small opposition LMP party said the government was introducing one austerity package after another, while banks and companies affected by them would transfer the burden on to consumers.
The radical nationalist Jobbik party said the measures announced on Wednesday mean that the government had “caved in to the EU”.
The leftist Democratic Coalition (DK) said the measures were detrimental for growth.