Gyurcsány package?

Parliament met in extraordinary session, the prime minister spoke, and members of the Fidesz caucus didn't walk out. Gyurcsány made a forty-five-minute speech. Although we don't know the details of the plan, it seems that after consultation with leading economists, financiers, and businessmen, the government came up with a stimulus plan that aims to be revenue neutral. Two areas are off limits. First, the current structure of the pension plan will not change. Not only are oldsters an MSZP stronghold, but even in the population at large only about 10-15% of people surveyed suggested taking anything away from the pensioners. The government also doesn't want to touch the current practice of giving new mothers 70% of their earlier pay for two years. They are afraid of the criticism that they are not patriotic enough and aren't trying to increase the low birth rate. (Mind you, so far this program hasn't managed to boost the numbers of new little Hungarians.)

The focus of the plan is tax reform. The government will reduce personal income tax, business tax, payroll taxes, and social security. In addition, they will rescind an extraordinary tax paid by businesses and certain affluent individuals that was introduced a few years ago because of the sad state of the treasury. The government thinks that all these changes will amount to a loss of 1,000 billion forints in government revenue. So how can it offset this loss? The idea is to increase rates of certain categories of the value added tax and to try once again to introduce property tax. The introduction of a property tax is badly needed in Hungary because tax evaders often hide their wealth in real estate. There are all those tales about the "poor" entrepreneur who claims that he has such a modest income that he pays no taxes while he lives in a very expensive new house and also owns a fantastic summer place. The problem with introducing taxation on property is that it was about a month ago that the Constitutional Court deemed "luxury tax" (basically property tax) unconstitutional. According to the Constitutional Court the legislation provided no legal redress against the authorities' assessment. Moreover, it made no provisions for the current financial situation of the inhabitants. In plain language, let's assume that an older couple with two modest pensions are the owners of a valuable house they inherited from their parents. The property tax on a valuable piece of property might be as high as the couple's monthly income. Earlier the government tried to introduce a general property tax but it failed in parliament. I remember that Károly Herényi, leader of the MDF caucus, and he wasn't alone, proclaimed that the very idea of property tax is preposterous because it is effectively double taxation, and that's illegal. (A similar campaign has been waged against the capital gains tax in the U.S., so far to no avail.)

There would be one other change. Wealthier people would receive less child support, and in all instances the amount of child support would be added to people's taxable income. In addition, Gyurcsány mentioned a smaller parliament, a very popular suggestion, and fewer officials in fewer local governments. Of course, he knows as well as everybody else that without Fidesz's support these changes in parliament and administration will not materialize. If I were Gyurcsány, I would prepare proposals and submit them to parliament even knowing that Fidesz will not support them. At least this would make clear to the public which party refuses to spend less on running the country.

Fidesz's speaker, Tibor Navracsics, didn't really talk about the economic crisis and its possible remedies but kept repeating that Gyurcsány and the government should resign. Meanwhile Fidesz politicians refuse to reveal their own plans. Some people claim that in fact they have no plans. I disagree. I think that they have plans that are even more onerous than the ones the current government is planning to introduce. For example, I'm sure that Viktor Orbán and his team wouldn't hesitate to touch pensions. After all, his supporters are not the pensioners. Orbán made reference to that in his speech to young political scientists that leaked out a few months ago and that caused a serious erosion in Fidesz support. In it he made clear that he would include the thirteenth month pay in the amount received for twelve months and would peg pension increases only to inflation and not to the growth of real wages of the active population. Considering that between 1998 and 2002 when inflation was substantial the amount of child support didn't go up at all, I'm certain that Orbán and his team would not hesitate to save some money here too. So, all in all, Orbán doesn't want anyone to know the bitter truth. After Balatonőszöd he no longer can do what he did in 1998: promise the world and then not fulfill most of his promises. (The exception was the abolition of the ridiculously low tuition fees that Bokros introduced.) So it's best to be quiet. Very quiet as long as possible, and perhaps Fidesz supporters will believe in the magic touch of their leader who will be able to fix everything overnight. Unfortunately, Hungarians seem to believe in fairy godmothers–or in this case fairy godfathers.


  1. It is high time we get a property tax for many reasons. But I do think the Constitutional Court is right in saying that the state can’t just valuate a property and then leave owners without the possibility to challenge such a decision.
    Still, Hungary doesn’t have to re-invent the wheel. Real estate tax is very common in many EU countries (surely Mr. Herényi should know this) and several systems are operating there which can be copied/adjusted: valuation of basic value, a percentage of market value and a combination of both, done by a state instituation, independant and/or private institutions, estate agencies etc and any combination of these. Looks pretty straight forward to me, although it will cost money and time to prepare and introduce, and it takes some organization.

  2. While I agree completely with Ėva on the question of what FIDESZ intends, it seems to me that the Gyurcsány government is still confused.
    1. I don’t understand how, in Hungary’s current economic circumstances with declining private investment and consumption, and capital flight, how revenue-neutral economic stimulus is possible. If you’re going to have meaningful economic stimulus in current circumstances the state has to provide it. This, as has been clear before, requires that the EU and the ECB provide some form of financing package – with the prospect of long-term debt restructuring at the end, which will enable Hungary to finance this package. I don’t see therefore how this is going to slow the rate of GDP decline, let alone stop it.
    2. I really doubt as to whether anything will be achieved by tax cuts. To work the money has to be spent on goods and services produced or provided by Hungarian industry/commerce. If you look at the economic impact of the fiscal stimulus provided by debt-financed spending between 2002 and 2006, it becomes clear that there must be real doubts as to whether the private sector can respond to anything other than a carefully-focussed stimulus package. I, personally, would suggest that extra revenue go into upgrading infrastructure, that can be tied to programmes to promote energy conversation, or the modernization of transport. I’d also want to link these to job creation to mitigate the impact of unemployment. I think that cuts in personal income tax at the present moment are just a waste of money.
    3. Introducing a property tax may be necessary, and it is true that many other EU and North American countries have one. But, I doubt personally that it will enable the state to get their hands on money that they think people should be paying in other taxes (the real answer to this is to give the APEH greater powers, and to put more resources into enforcement). Furthermore, any examination of the politics of property taxation anywhere else suggests that the government will walk its way into the centre of a political nightmare. I’d mention California’s Proposition 13, and the sorry history of local government taxation reform in the UK if anyone wants to understand how politically explosive this might be. I’d go as far as to say that if FIDESZ really want rid of Gyurcsány before 2010, then their best bet is to hope that he is stupid enough to try and introduce a property tax now.

  3. Mark: “I’d go as far as to say that if FIDESZ really want rid of Gyurcsány before 2010, then their best bet is to hope that he is stupid enough to try and introduce a property tax now.”
    You might be right about this but if I understand it right the rate of taxation would be so low that most people wouldn’t even feel it. But then, why, one could ask.

  4. I don’t know who came up with the analogy, but it’s pretty good: Gyurcsany is playing jenga with the country. Every move will make the structure weaker and less stable.
    He wants the opposition to help him by holding their breath and not making any sudden movement. Unfortunately it will only delay the fall of the tower, so to avoid total collapse, Gyurcsany must be stopped before it’s too late. It should have been done in 2006, we could have averted the IMF disaster and would be in much better position to recover. Now, minus $30 billion later it looks a lot more difficult.

  5. Ėva: “the rate of taxation would be so low that most people wouldn’t even feel it”.
    Of course this is a sensible way of introducing it, but the real problem is the second problem you mention in connection with the constitutional court judgement – the affordability question.
    I think of my former neighbour – a single pensioner living in Budapest’s V district. She has on the face of it a very valuable property, but her income is low, and, however small the tax is she will be hit.
    I know the survey data for the UK (and I suspect I’d find similar things elsewhere). Property taxation is deeply unpopular because of its lack of a relationship to the ability to pay, and that it is seen as a tax on housing.
    Anyway, we’ll see …..

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