Ferenc Gyurcsany, Hungary’s prime minister, has vowed to slash the country’s budget deficit by raising taxes and fighting waste in the public sector.
Corporate tax will be raised from 16 per cent to 20 per cent. Income tax, value added tax and social security contributions for employers and employees will also rise.
The austerity package is a two-and-a-half year plan to tackle a budget deficit that is forecast to reach 9.5 per cent of gross domestic product this year, overshooting the 4.7 per cent target.
Mr Gyurcsany, who launched the plan on Saturday, told the Financial Times that tax increases were a short-term measure that would be followed by more important efforts to rein in public spending that has spun out of control, partly as a result of election spending promises.
“The steps for this year are what I would call first aid,” he said. “We are not just cutting expenses but we are trying to reconstruct the system itself.” His long-term plans include increasing the role of the private sector and introducing co-payments in healthcare; cutting the number of teachers as part of a reorganisation of state education, and consolidating municipal administration.
He also aims to reduce ministry staff numbers by 23 per cent. Extra savings will be made by cutting subsidies on gas, electricity and medicines.
Mr Gyurcsany is under intense pressure from financial markets to re-establish order in the state finances.
This is the fifth straight year Hungary has missed its deficit target and it faces the prospect of downgrades to its sovereign debt ratings by Moody’s Investors Service and Standard & Poor’s, the ratings agencies.
“I know we have to rebuild the credibility of the state budget planning, and I know that after five years we have to provide new evidence [of credibility],” he said.
He aims to cut the budget deficit to 8 per cent of GDP this year, about 5 per cent next year and about 3 per cent in 2008. That would put Hungary on track to adopt the euro in 2011, a year later than its target.
The programme drew a mixed response from analysts, who predicted a neutral reaction from markets today. Some worried that the plan’s heavy reliance on higher taxes would discourage investment and job creation.
David Nemeth of ING Bank in Hungary said: “I don’t think this high tax ratio can be maintained in the long term, because it is really bad for the economy.”
Although Mr Gyurcsany has convinced observers he is committed to reform, there are doubts about whether he can implement them. The cabinet is expected to approve the programme today. It will also be presented to parliament.
But in a country where bipartisan legislation is almost unheard of, Mr Gyurcsany will have to seek a deal with the opposition Fidesz party to push through the restructuring of local government, because it requires a two-thirds app-roval in parliament.
The austerity package may also face stiff resistance from Mr Gyurcsany’s own Socialist party. Hungarian media have reported that the party has already balked at some of the cuts.
Mr Gyurcsany says the Socialists will deliver the reforms and is confident he can win public support for painful measures.
“If you are a leader and not just a public servant, if you are courageous enough to show where and how we have to go ahead, you can reshape the public’s attitude,” he adds.
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