With the new job-saving action plan the government placed a „double or nothing” bet: if the programme based on tax cuts and tax simplification does not boost economic growth enough, the government can force itself into another austerity cycle just like when it did with the flat rate income tax. Moreover, conflicts can be expected on the short run with the European Commission and the IMF. The programme itself includes steps  towards a favorable direction from a policy point of view, which may correct the shortcomings of the labour policy measures of the last two years.

 

Cutting back social security contributions, tax simplification – budget risks


 

  • The Prime Minister announced the ten points of the Job-saving Action Plan on the 2nd of July in Parliament. The plan mostly involves cuts in social security contributions and measures to help small businesses.
    1. According to the plan, the social security contribution rate that is to be paid by employers is halved in the case of workers below 25 or above 55 years of age, and in the case of unskilled workers as well. The contribution rates will sink to zero per cent in the first two years, and then to half of the previous rate for the persistently unemployed, and for mothers who are returning to the labour market from parental leave. The changes are effective from 2013.

       

    2.  

    3. The government introduces a single unified tax for individual entrepreneurs and small enterprises in instead of the numerous small taxes that were present previously.

       

    4.  

    5. Small enterprises will only have to pay value added tax for receipts that have already been paid off by their clients.

       

    6.  

    7. Accounting rules are changed such that for the years 2012 and2013,  capital losses that are due to changes in the exchange rate are not to be taken into account when enterprises are evaluated.
  • According to the details that are already known, the government has clearly made a good assessment of which subgroups in the labour market require direct support. This action plan does to some extent serve to  correct the labour policy of the first half of this election cycle: while in the first two years, it only extended labour supply by administrative measures, now it tries to build in incentives on the demand side as well. This might enhance not just the number of the labour force, but the employment level as well.

     

  •  

  • The biggest risk inherent in the programme is its funding. The around 300 billion HUF cost of the plan is covered by
    1. Extending the transaction tax to levy the financial transactions of the Hungarian Central Bank and the State Holding Company (around HUF 240 billion)
    2. Spending 100 billion from the budget reserve that was initially planned to be of a 300 billion amount next year.
    3. Getting a lower cost for financing the state debt after the agreement with the IMF has been made (HUF 150 billion)
  • Covering the cost of the Action Plan involves various risks:
    1. The surplus revenue from extending the transaction tax is overestimated by the government, while the question whether there would be a new loan contract with the IMF is still open.
    2. Taxing the Central Bank only buys time for the government, as all the Bank’s losses have to be covered by the government budget of the following year, hence the burden is just put off by a year
    3. András Simor, the governor of the Central Bank of Hungary deemed the extension of the tax to be against the law, and the ECB is already examining the situation. It is very likely that the latter institution will also find the tax illegal. This could lead to another conflict that goes as far as the Court of Justice of the European Union.
    4. The plan is clearly putting next year’s budget at risk, so it is very likely that neither the IMF nor the EU will support it. Furthermore, taxing the Central Bank jeopardizes its independence, so the proramme pushes the agreement with the IMF even further, which, as mentioned above, is an inherent element of the plan’s funding.
  • The programme sends the unambiguous message that the government still walks its own path and only meets the international requirements to the extent that is by all means necessary. This indicates that even if an agreement on the IMF loan is reached, the EU and the IMF will demand very stringent supervisory rights for themselves.
  • However, the focus of the criticism of international organizations will primarily not be on the expenditure side of the Job-saving Action Plan. The fate of the programme depends on the ability of the government to assign a secure and at least partly sustainable revenue flow to it.

 

It is 2010 all over again


 

  • The timing of the programme can be explained by two factors.
    1. The government wanted to wait for a positive decision of Ecofin before announcing something that would risk the stability of the budget.
    2. It is essential for Fidesz to maintain its position in the political horse-race, because its whole communication is based on the strong authority vested in the current administration by the landslide victory of 2010. The most important promise of Fidesz in 2010 was creating jobs, a field in which it has been hardly able to provide any success. MSZP overtaking the position of the frontrunner has become a realistic scenario recently, so Fidesz has to revert the trend by all means necessary. Although the elements of the Job-saving Action Plan will be probably quite popular themselves, their actual effects might linger in time, so the plan might as well turn out to be insufficient to stop the popularity loss.
  • With the current action plan, Fidesz tries to go back to its 2010 message, namely, that the crisis can be overcome not by austerity, but by boosting economic growth. Cutting social security contributions and improving the business environment for small businesses are more appropriate measures to achieve this goal than the flat rate personal income tax was. However, how this plan would be financed within the budget is at least as unclear as it was in the case of the 2010 tax cut.
  • With the new job-saving action plan, the government placed a „double or nothing” bet. This is supported by the fact that after the announcement, the growth outlook for 2013 was raised to 2% which is well over the expectations of independent organizations and analysts. If the programme fails to boost growth as much as it was supposed to, then new austerity measures will have to be carried out in the election year of 2014 in order to keep up with the deficit target. If the Job-saving Action Plan also fails to provide spectacular results over the course of the two years ahead of us, the electorate will consider the whole 2010-2014 cycle as a failure from an economic policy point of view.