Hungary ignores high-profile corruption as it boosts fight against grey economy

Hungary ignores high-profile corruption as it boosts fight against grey economy
Electronic tills are being introduced across the Visegrad countries. / Photo by CC
By bne IntelliNews December 6, 2016

Budapest is set to introduce new measures to reduce tax bureaucracy, promote electronic payments and increase the number of point-of-sale (POS) terminals in the country, Hungary’s minister for financial affairs said on December 5.

The measures are the latest in a series of reforms aimed at minimizing unreported cash transactions and contributing to the whitening of the Hungarian economy. Although the government can boast of increased tax revenues thanks to these partial reforms, critics point out it has failed to take a similar stance against high-level corruption that blights the economy.

Since Hungary’s ruling Fidesz party came to power in 2010, the estimated size of the shadow economy has decreased from 23.3% of annual GDP to 21.9%. The proportion remains higher, however, than both the EU average (18%) and that of the Czech Republic (15.1%) and Slovakia (14.1%). It is somewhat smaller than the size of the Polish shadow economy (23.3%).

Even so, the government has heralded its efforts to gradually shrink the grey economy. “Among all of our measures, the introduction of the online cash register system has had the biggest impact,” Minister of State for Financial Affairs Agnes Hornung boasted on M1 public television.

In a bid to crack down on tax evasion, Hungary made the use of electronic tills connected to the tax office mandatory for a broad range of businesses – including shops, fuel stations, pharmacies and hotels – in January 2014. According to the government’s latest data, 217,000 online cash registers were operating in Hungary in early 2016. Their number is expected to increase significantly as the range of businesses required to use electronic tills expands in January.

The use of electronic registers has become increasingly widespread across the Visegrad countries, which – similarly to Hungary – rely significantly on value added taxes for budget revenue. VAT revenues represented 21% of all tax revenues in Slovakia in 2014, and 22% in Poland and the Czech Republic. The figure is 24% in Hungary, compared with an OECD average of 20%.

Poland introduced the mandatory use of electronic cash registers in 2010. Slovakia followed suit in 2012; the Czech Republic’s scheme came online this month to a chorus of complaints from the opposition and smaller businesses.

VAT gap closes

Hungary’s partial introduction of online cash registers resulted in a HUF150bn (€478mn) rise in tax revenue in 2014, and a further HUF60bn increase the following year, Economy Minister Mihaly Varga has claimed. The European Commission also pointed out that VAT compliance in Hungary in 2014 “saw a significant improvement”.

The country’s VAT gap – the difference between the expected VAT receipts and actual volume collected – decreased from 22.24% in 2013 to 17.95% in 2014. That 4pp-plus drop was the third largest improvement of VAT compliance among EU member states, outperformed only by Greece and Estonia.

“The 2015 results will be even better,” the Hungarian government claimed confidently in a press release, arguing that last year another “important step in reducing VAT fraud… [was] the establishment of the Electronic Public Road Trade Control System (EKAER)”.

The purpose of the system is to make sure that all goods transported within Hungary are reported in advance to the tax administration. By the end of February, about 53,000 taxpayers and 6,000 transport operators had registered on EKAER, the government reported.

“The measures aimed at whitening the economy have reached their goals – even more tax revenues were collected than previously planned,” Tihamer Warvasovszky, deputy president of the State Audit Office, told MTI. He added that impressive budget surplus figures enabled the government to propose the reduction of corporate tax and employers’ social security contributions.

Impunity at the top

Nevertheless, critics point out that while increased tax revenues indicate that the Hungarian economy has somewhat whitened, structural issues allowing high-level corruption have yet to be addressed. The European Commission picks corruption and the shadow economy as prevailing problems in only seven member states: Hungary is one of that group.

“A comprehensive e-procurement strategy aiming at improving efficiency and transparency has not yet been developed and the risk of corruption remains high,” the Commission wrote in its country-specific recommendations for 2016-2017. “Changes would be needed to make the new National Anti-Corruption Action Programme 2015-2018 more effective in preventing corruption in public institutions and applying dissuasive sanctions.”

According to the Global Competitiveness Index (GCI) 2016-2017, one of the biggest drags on Hungarian competitiveness is corruption and the lack of transparency. At the same time, Transparency International’s (TI) Global Corruption Barometer showed that 56% of Hungarians are currently unhappy with government efforts to stamp out corruption, compared to 48% in 2013.

Although the government has repeatedly claimed that it is committed to fighting all types of fraudulent conduct, it has recently passed two new pieces of legislation that critics worry will increase the risk of corruption. A large number of alleged corruption cases involving senior Fidesz politicians, as well as a high-profile case focused on the governor of the central bank, have remained without consequences.

“It is very characteristic of Fidesz: the bigger the corruption scandal, the tighter the party will hold the hand of those involved," Robert Laszlo, an analyst at the Political Capital Institute explains to bne IntelliNews.

Opposition parties also point out that the corruption fight is a lucrative business for some. One of the biggest winners is Istvan Garancsi, a close friend of Prime Minister Viktor Orban.

Garancsi is the majority shareholder in Mobil Adat Kft, reportedly the only firm able to provide the required technology to connect cash registers to the servers of the tax office, according to Atlatszo. Garancsi recieved HUF220mn in dividends from the company in 2014 and HUF400mn in 2015.

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