“Hungary has taken some positive steps. The budget this year is very ambitious. It includes a structural fiscal adjustment that is large by any country’s standards,” said Rosenberg.
He added that fiscal policy — currently marked by simultaneous tax rises and spending cuts — should be “less regressive and more growth friendly”.
With the introduction of the flat-tax came the elimination of the basic tax allowance, a sharp rise in the minimum wage with a complex system of wage compensation and a hike of the VAT rate to 27 percent and excise duties across the board, Rosenberg said.
“Our concern is that all this will lead to real income losses and reduced employment opportunities for lower-skilled workers. And it will make doing business in Hungary more complicated and less attractive,” he added.
He said temporal crisis taxes levied on the retail, energy, telecom and banking sectors and the government’s mortgage repayment scheme interfering with contracts were detrimental to the business climate.
“When it comes to attracting new investments into the economy, which is crucial for growth, Hungary has lagged behind regional peers and its own good performance earlier in the last decade,” he said.
In the long term, supply side measures taken under Hungary’s Szell Kalman Plan may have positive effects, but it will take time for those to take hold, Rosenberg added.
He called for better economic governance which primarily hinged on predictability and cited central bank independence as an example.
“The legislation passed at the end of 2011 has given the impression that the government is trying to exert influence on the decision making of the central bank,” he said, adding that the government should disperse that impression by changing the law.
It should be made clear that “monetary policy is conducted by those who are charged with it, not by the government,” he added.
Rosenberg called for restoring checks and balances in regard to the Fiscal Council, whose powers were weakened at the end of 2010.
As regards Hungary’s pending talks with the IMF on a safety net, Rosenberg said the IMF first needed “to see tangible steps that show the authorities’ strong commitment to engage on all the policy issues that are relevant to economic stability.”