Bloomberg News

Hungary Plans to Increase Taxes on Banks to Protect EU Funds

October 17, 2012

Hungary backtracked on a promise to cut a special bank tax in half and will raise a planned transaction levy to avoid a freeze of development fund after the European Union said previous measures were insufficient.

The EU estimates Hungary’s budget gap will widen to as much as 3.9 percent of economic output in 2013 from the government’s goal of 2.7 percent for this year and next even after measures announced this month, Economy Minister Gyorgy Matolcsy said at a news conference in Budapest today, announcing steps improving next year’s balance by 367 billion forint ($1.7 billion).

The government disagrees with the EU’s analysis, which is “baseless and mistaken from an economic and a professional point of view,” Matolcsy said. Still, “Hungary can’t take the risk that the EU will strip us of development funds that we’re entitled to just because of mistaken calculations.”

Hungary, in its second recession in four years, has been in talks with the EU and the International Monetary Fund to obtain a credit line since November. The country risks losing EU development funds if it fails to keep the budget shortfall below the bloc’s limit of 3 percent of gross domestic product.

The announced budget measures have a negative impact on lending and the government should be cutting banks’ tax burden to prop up lending and boost the economy, the central bank told state news agency MTI today.

Weak Forint

The forint weakened 0.5 percent to 279.04 per euro as of 12:54 p.m. in Budapest, falling from a seven-week high. OTP Bank (OTP), the country’s largest lender, plunged 5.5 percent to 4,149 forint, dropping the most since April.

The Cabinet this month froze 133 billion forint in this year’s budget and unveiled austerity measures totaling 397 billion forint in savings in 2013. Today’s measures are “additional sticking plasters,” Peter Attard Montalto, an economist at Nomura International Plc in London, said in an e- mail today.

“None of this is structural and none will satisfy the IMF or EU and hence we are no closer to a backstop at all,” Montalto said.

Hungary withdrew a pledge to halve a special tax on lenders next year and will increase the tax on bank transactions to 0.2 percent from 0.1 percent, Matolcsy said, adding that revenue from the two levies will total 454 billion forint next year.

Additional Measures

Other measures include a tax on utility companies’ infrastructure, a reduction in local business tax benefits mainly for wholesalers and energy companies, and higher taxes on employee benefits, Matolcsy said.

Hungary’s Bank Association is “shocked” that the government reneged on its pledge to cut the bank tax in half, it said today in an e-mailed statement. The measures endanger banks’ lending capacity, the “predictable financing” of the economy, and a recovery from a recession, it said.

Hungary, the EU’s most-indebted eastern member, is in talks for an international loan of about 15 billion euros ($19.7 billion). Negotiations were delayed multiple times because of Prime Minister Viktor Orban’s resistance to adhere to legal and economic conditions set by the IMF and the EU.

“In terms of growth, needless to say, Orban’s government continues to cripple any prospects of medium-term growth rebound in Hungary,” Luis Costa, an emerging-market strategist at Citigroup Inc. (C:US) in London, said in an e-mail today. “They just don’t get it.”

GDP Outlook

Hungary expects the economy to expand 0.9 percent in 2013 while the EU will lower its 1 percent growth forecast, Matolcsy said. The government on Oct. 5 cut its estimate for GDP to a contraction of 1.2 percent in 2012 versus a previously estimated 0.1 percent growth and to a 1 percent expansion in 2013 from an initial projection of 1.6 percent.

Hungary is committed to obtaining a safety net from the IMF, Mihaly Varga, chief negotiator for an international loan said yesterday. The government knows it’s “far” from a position where it can do without IMF help, Varga said.

To contact the reporters on this story: Edith Balazs in Budapest at ebalazs1@bloomberg.net; Andras Gergely in Budapest at agergely@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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