Hungary unveils HUF 397 bn adjustment, scraps cbank transactions tax

Budapest, October 5 (MTI) – The government will introduce a budget adjustment of 397 billion forints (EUR 1.4bn) in 2013 to secure a revised deficit target of 2.7 percent of GDP, and will scrap the tax on central bank transactions, Economy Minister Gyorgy Matolcsy said on Friday.

The forint jumped by around 1 percent on the announcement to around 281 to the euro before easing a touch and the cost of insuring Hungarian debt against default fell. The move to scrap the transactions tax on the central bank was seen by analysts as the removal of a major obstacle to the successful outcome of talks with international lenders.


IMF Resident Representative in Budapest Iryna Ivaschenko told MTI that the International Monetary Fund would analyse the fiscal plan. But no date had been set for the resumption of talks. “There are no dates yet for the mission in Budapest,” she said.


The National Bank of Hungary (NBH) on Friday welcomed the decision. The government “in keeping with the central bank’s position, will not impose on the NBH a financial transaction tax which would violate its institutional and financial independence, as well as the basic treaty of the European Union,” it said in a statement.


Emerging markets analysts at JP Morgan said “Hungarian macro realism means negotiations with the IMF/EU are still on track to resume in November”, and most of these measures are “sensible and surprisingly orthodox”.


Analysts at 4cast said that “overall, there are definitively a few good points in the plan that will take Hungary forward”.


Hungary’s gross domestic product is expected to grow by 1 percent next year as opposed to the earlier goal of 1.6 percent, Matolcsy said. After a contraction of 1.2 percent in the first half of this year, the economy is expected to stay level in the second half, he added.


The government will freeze 133 billion forints (EUR 470m) in next year’s budget in order to keep the deficit at 2.7 percent, Matolcsy said. The freeze will apply to allocations of government-run institutions among others, he added.


The financial transactions tax will no longer apply to the central bank, he said. The targeted amount generated from the financial transactions tax on the State Treasury will be raised by 30 billion forints to 40 billion forints while the tax on cash withdrawals will be set at 0.3 percent, he added.


The government is planning to collect 95 billion forints more in VAT revenue next year, the minister said. This extra revenue will flow into the coffers due to a new scheme to set up an online connection between retail outlets and the tax authority, he said.


The government will scrap the ceiling for social security contributions and a pay rise for teachers will be postponed from September next year to January 2014, Matolcsy said.


A ceiling will be introduced in 2013 on social benefits paid by local councils and the level of European Union co-financing will be cut from 15 percent to 5 percent, Matolcsy said. Childcare benefits will not be affected, he added.


In addition, the government will make public-sector staff cutbacks in certain fields by not replacing those who retire for three years, though this will not apply to doctors, he said. Because schools and hospitals have been transferred to the state the headcount can be cut by around 22,000, he added.


The opposition Socialist Party slammed the government’s “painful and brutal” measures, saying they were an “acknowledgement of the government’s ill-advised budget calculations”. Socialist MP Sandor Burany said that his party had indicated early on that the government’s deficit targets for 2012 and 2013 could not be met. “We have been proven right, though this hardly makes us happy,” Burany said.


Leftist opposition party DK welcomed that “the government has faced reality at last” but said that the expected revenues could not be realised and further adjustments would follow. DK leader Ferenc Gyurcsany said that neither efforts to whiten the economy nor scrapping the ceiling for social security contributions would yield as much as expected. “I would bet high stakes that this budget will not live to see the spring; with new adjustments, new freezes to follow,” Gyurcsany said.


In reaction to the announcement that a pay rise for teachers would be postponed to 2014, the Fidesz-ally Christian Democrats said the pay rise should be implemented in the autumn next year. Group leader Peter Harrach said that it was instrumental for introducing career models for teachers, a component of the government’s education reform.


The small opposition LMP party said the “austerity package” was the latest demonstration of the “fiasco” of the government’s economic policy pursued so far. “What they did under the heading of economic policy had nothing to do with reality,” LMP parliamentary leader Benedek Javor said. LMP deputy Gabor Vago said it was clear that the package had been put together in haste.