Hungary govt plan to tax bank sector could have "frightening" implications

By bne IntelliNews June 21, 2010

Kester Eddy in Budapest -

The Hungarian government's plan to raise an additional HUF200bn (€715m) from banks and other financial companies this year has "quite frightening" implications and constitutes "a huge political risk," Peter Oszko, Hungarian finance minister in the previous Socialist-backed government, claimed on Friday, June 18.

"I've not had the chance to do an analysis on the effects of this, so I can't give precise figures, but of course HUF200bn is a majority of the banking [and financial] sector's profits from last year. If we considered it as a profit tax, it would be a tax of about 70%, which is quite frightening," Oszko told a meeting of foreign journalists.

Even without a detailed analysis, the tax will have "a dramatic effect" on the sector, he stressed. "I hear statements by politicians that they want to have a bank tax that raises HUF200bn for the budget [while] having no effect on the stability, interest or lending activity. This is clearly contradictory, it's simply impossible - somewhere, somehow this HUF200bn [will] have a very dramatic effect," he said.

Furthermore, given the time frame the whole plan is problematic, he said, since it is impossible to impose taxes retroactively, and the total profit of the banking sector in the fourth quarter - the earliest period that the tax could be applied - would be well below the HUF200bn targeted. Hungarian banks made pre-tax profits of some HUF309bn last year.

The new Hungarian government, however, is insistent. Gyorgy Matolcsy, minister for the economy, told the weekly Figyelo that the HUF200bn target was "carved in stone."

Part of a package

The new "bank tax" is one item on a list of 29 points that comprise a package of economic changes announced by Viktor Orban, who took over as Hungarian prime minister at the end of May following a sweeping election victory by his centre-right Fidesz party. Touted by Orban as the basis for "to create a new economic system", the package includes the introduction of a flat tax of 16% on personal income, a reduced rate of tax of 10% on company profits of below HUF500m, and a pledge to cut HUF120bn from the state wage bill. Orban said that the measures would create jobs and that "everyone" would benefit from the lower taxes.

The package came days after statements by senior Fidesz officials that the budgetary figures issued by the previous government were false and that Hungary was facing a "Greek-like" crisis. This had sparked turmoil on the financial markets, with the forint shedding 5% in one day. The government subsequently did a U-turn, insisting that the budget deficit target of 3.8% of GDP was "feasible" and that reports of the crisis were "exaggerated".

Former finance minister Oszko said the economic package was "very brave," but that it contains contradictory elements which can be interpreted to suit all parties involved, specifically domestic voters and financial markets. He praised the government's commitment to save HUF120bn in state spending, but noted that this, and many other of the 29 points, lacked details regarding implementation. "The main positive point is that even with the 29 points the government now wants to keep the deficit target, which is important for the IMF and European Union," he said, adding that the package in essence taxes the banks and financial players to make up for the reduced taxes on income and corporations. "This also means that if they [the government and financial institutions] can't agree on [the new tax] it carries huge political risk for the government, so I can see why they are so keen on it," he said.

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