Hungary PM keeps his head as all about him lose theirs

By bne IntelliNews February 20, 2009

Kester Eddy in Budapest -

For a man trailing desperately in the opinion polls, Ferenc Gyurcsany, while deadly serious about his leadership task, appears remarkably relaxed, even whimsical at times. At least that was the Hungarian prime minister's demeanour when speaking to foreign journalists in Budapest on February 18.

"Governments come and go; sometimes you're up, sometimes you're down - that's politics," he mused towards the end of the Q&A session. Such philosophical meanderings would never pass the lips of his arch-rival, Fidesz leader Viktor Orban; or certainly, not in public.

Gyurcsany was promoting his latest economic and tax package, designed to kick in in stages from July and rescue the economy from its downward spiral caused by the global financial crisis. "The main target is to improve the business environment, boosting growth, creating a sustainable macro-path and increasing the potential GDP by 1.5-2.0 percentage points. We are reducing the burden on salaries on both sides, [personal income tax] and social contributions, and simultaneously increasing VAT and property tax," he said.

By adhering to this path, the PM believes Hungary would be able to adopt the euro "not earlier than 2011, but not later than 2014."

Sin taxes

While the headline element, a reduction in employer social security contributions from 32% to 27%, is touted as a major boost to corporate competitiveness, the package also includes supporting adjustments to company and personal income tax rates, the reduction of a host of tax-free 'perks', and the taxation of family allowance for higher-income earners. "This programme decreases the taxes on average wages of HUF200-220,000, say €700 per month, by about HUF10,000, per month," Gyurcsany said.

To offset the loss in budget revenues, VAT will rise from 20% to 23%, and excise tax on alcohol, fuels and tobacco will also increase. Nonetheless, factoring in the taxation on family allowance and the cost of the other tax hikes, the outcome on the average income still "remains positive" in terms of cash in the pocket, he insisted.

The package includes a flurry of credit schemes for small and medium-sized enterprises, public works programmes to boost employment and, longer term, a sharp reduction in the number of MPs and gradual reform of the pension system, including an increase in the pensionable age to 65 by the year 2024.

On the fiscal spending side, the plan calls for reductions in state spending of 1% this year and 2% in each of the next two years.

Non-partisan observers have generally given a cautious welcome to the package, but questioned the viability - given the sharply-divided state of Hungarian politics - of those elements which will require a two-thirds majority in parliament, such as the slimmed-down house. "I think it was a mistake to reduce VAT [from 25% to 20%] in 2006; they should have reduced payroll taxes instead, so they are at least rectifying this," says Laszlo Nemethy, CEO of Europhoenix, a home-grown boutique investment bank.

Provided the proposals are fully implemented, and further developed, then competitiveness should indeed improve, reckons Mariann Trippon, an economist with CIB Bank.

However others, including former mid-1990s finance minister Lajos Bokros, has for some time advocated a far more radical shake up of state spending - a route that Gyurcsany eschews as socially unacceptable. "I like these guys that propose such reforms. But people are already asking about [potential] social conflicts from current plans. Closing 50 universities in Hungary out of 75 [as suggested by Bokros], that's not a programme, it's a war!"

Lasting reform, Gyurcsany said, is a question of making the country accept changes willingly while preserving social peace. "As a leader, you have to be brave, but you cannot be blind [to the peoples' sensitivities]," he said.

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Hungary PM keeps his head as all about him lose theirs

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