Ferenc Gyurcsány, Prime Minister of Hungary released today his latest programme (with the title “Agreement”) as an article in Népszabadság, leading daily newspaper. The political debates of the next months are going to be concentrated around next year’s budget and the possible ways to cut taxes. The PM offers a tax cut deal in the following four years, but only in line with the convergence program and only if there is extra income deriving from a much more transparent taxation culture, that is, the cut is paid for by citizens and companies.
Analysis: Lack of support and cooperation
The government needs to convince the economic actors and parliamentary parties at a time to opt for Gyurcsány’s tax cut plan, but all of them are on the other side or they are not easily convinced.
- Parliamentary obstacles. The minority government does not currently have enough votes in the House to pass any bill, when all MPs (386-2) are present (two deputies will not vote). Although the socialists possess 190+1 seats, they have only 189 votes due to the permanent disability of the two aforementioned deputies (two other socialists MPs are ill too, but are expected to vote). To pass the bills, the government needs to persuade either the 20 liberal deputies (former coalition partner SZDSZ), or the 11 right-wing conservatives (MDF) to vote in favour of the tax cut plan and the budget.
- The programme is aimed rather at the SZDSZ. The Prime Minister’s programme concentrates rather on the former coalition partner. In the last few weeks, SZDSZ’ discourse opted for a 1000-1200 billion tax cut plan (in the form of a one-off payment). The PM’s plan is indeed a HUF 1000 -1200 billion tax cut plan, but in recurrent expenses, divided into 3 or 4 times HUF 300 billion. In spite of the fact that this tax cut plan is not exactly what the liberals wanted, they will have to face an enormous challenge if they want to run against the budget and this tax proposition. Moreover, an eventual stepping down of the PM could easily end up in premature elections that are not in interest of the liberals.
- Economic actors have no interest in accepting a 3 or 4 different HUF 300 billion tax cut plans. In recent weeks, several economic actors have presented HUF 1000 billion tax cut plans. For them, a multi-year tax cut plan is not enough, as HUF 300 billion would not have any real effect on their businesses. Secondly, they have no interest in accepting the government’s plan and it is in their interest to demonstrate that the economic actors’ plans are better.
- Social obstacles put back realisation. According to initial reactions, the public tends to see the tax cut part of the plan and forget the return part the government asks for. In short, the PM says: “we will cut taxes if you pay all the taxes you are obligated to”. But individual short term interest is against this logic, as actors tend to say: “I will not pay more, everyone else will”. Thus nobody will do so (see the chart below). There is an important risk that the plan will fail in the first year and the tax cut plan will not amount to anything other than a HUF 300 billion gift from the budgets of 2008 and 2009.
- The obstacle of credibility. It is hard to talk about policies because it is always considered in the context whether it benefits the government, the governing party and the PM or not. The programme targets an overall change in taxation morale, however the initiation is unlikely to be successful in the current political situation when confidence in the PM and the popularity of his party is very low. It is unlikely that Mr Gyurcsány can be accepted in the role of the educator in the present political climate.
- PM’s resignation. Ferenc Gyurcsány has made it clear that he would resign in case the budget and tax bill had no majority in the Parliament. SZDSZ has not yet decided on whether to support them or not.
Key points of the “Agreement”
- No change in the current pension system
- Integrated and simplified bureaucratic processes
- Creation of a “positive tax players’ list”
- Spend more on education and research solely
- Scholarship programme for trainees (in fields where there is not enough workforce)
- Job instead of aids: a vast public employment programme
- HUF 1000-1200 billion tax cut programme divided in 3 or 4 times HUF 300 billion
abolition of special tax, raising the corporate profit tax from 16 to 18%.
reduction of the employer’s contribution by an average of one-third
raising the tax brackets in two steps
exemption of employer’s contribution in the first three years in least developed regions when creating new jobs
- Tax Cut Fund in the budget of 2009
- Companies not participating, i.e. not paying taxes fairly would face more severe punishments (suspension or prohibition of economic activity)
- Some sort of amnesty for those who cooperate and want to end up with tax bypass behaviour.