Hungary on Wednesday alarmed investors when it revealed plans to retain a series of special taxes on banks and other key sectors for at least two years after they expire in 2012 in order to boost government revenues.
The measures should allow the government to meet a 3.8 per cent budget deficit target this year and less than 3 per cent in 2011, whilst providing it with fiscal room to lower taxes on income and small businesses.
Until now it had been assumed that these crisis taxes would be phased out in 2012. But a budget document posted on parliament’s website caused consternation on Wednesday as it revealed that a variant of the levies would be retained until 2014.
The prime minister’s spokesman insisted that the “crisis-taxes” would still end as previously planned, but acknowledged that after 2012 a “new regulation” would bring in “about half of the revenues for the budget than the current proceeds from crisis taxes”.
Shares in OTP, Hungary’s biggest bank, fell by 5 per cent on Wednesday while energy company Mol’s shares declined by 6 per cent. Hungary’s main stock index fell 4.7 per cent, the biggest drop in six months.
Hungary’s financial sector is currently subject to a ft187bn ($94bn) levy, with telecom, retail and energy companies liable for an annual total of more than ft160bn until 2012
However, the government said it now expects to generate an annual ft93.5bn from the financial sector between 2012-14 and a combined ft85.5bn each year from the other three industries.
Viktor Orban, prime minister, acknowledged last month that the crisis tax regime sent a “bad message” to investors but said that it was “only fair that the strongest participants of the economy help those who are still in distress”.
He has repeatedly rejected the need for further austerity measures and in July broke off budgetary talks with the International Monetary Fund.
In spite of fiscal constraints the centre-right government is reluctant to renege on pre-election pledges to cut income and corporate taxes, believing these will help boost economic growth in the long term.
It will instead try to stem a revenue shortfall by suspending state transfers to the private pension system for 14 months and by encouraging policy holders to return to the state pillar.
However, analysts have described the crisis taxes as “distortive” and cast doubt on government predictions that the economy will expand at a rate of 5 per cent by 2013, not least because the crisis taxes may depress growth.
Meanwhile, the mainly-foreign owned companies affected by the taxes have warned that they may be forced to scale back investments in Hungary.
Erste Group’s Hungarian banking unit said on Wednesday that it would cut 9 per cent of its workforce before the end of this year, in part due to the “extremely high bank tax”.