Bloomberg News

Bajnai Wants to Scrap Flat Tax, Sign Hungary Bank Pact

February 18, 2013

Gordon Bajnai, the Hungarian ex- premier seeking to unite opposition groups to challenge Prime Minister Viktor Orban in a 2014 election, wants to scrap the flat personal-income tax and sign a “growth pact” with banks.

The measures, along with steps to strengthen the rule of law, would be part of a plan to revive investments and ignite growth, Bajnai, 45, said in an interview. His fledgling movement has a sixth of the support of Orban’s ruling Fidesz.

Orban has relied on extraordinary industry taxes to close budget holes, including Europe’s highest bank levy, which helped plunge the economy into its second recession in four years. Bajnai’s policies focused on spending cuts during his yearlong stint as premier until 2010. By the end of his term, the economy was growing and the European Union’s most indebted eastern country returned to market financing after a 2008 bailout.

“We believe we can set off a positive spiral by rebuilding the trust of both domestic and foreign investors,” Bajnai said Feb. 15 in Budapest. “Hungary has to go the extra mile to regain investors’ confidence.”

The forint has gained 0.5 percent against the euro over the past month, the fourth-best performance among more than 20 emerging-market currencies tracked by Bloomberg. Hungary last week raised $3.25 billion in its first sale of foreign bonds in 21 months. The government said it received $12 billion in bids as investors disregarded the debt’s junk rating.

Investment Drop

While Orban’s focus on reducing the budget deficit and public debt helped attract buyers on financial markets, the policies he used to achieve that consolidation contributed to dwindling investment as Europe struggles with its debt crisis and the government restrains spending. Investment will be 17.6 percent of gross domestic product this year, the lowest since 1992, the International Monetary Fund estimates.

The “primary reason” for Hungary’s economic predicament is the “lack of an environment that ensures the security and profitability of investments and leads to a sustainable growth path,” the Joint Venture Association, an lobby group for investors in Hungary, said in a Dec. 11 statement.

Bajnai said his measures would include the introduction of a “moderately-progressive” personal-income levy and limiting tax changes to once a year to make policy more predictable. He said his administration would aim to boost the country’s potential growth rate to at least 2 percent after a first term, from the current zero.

“The flat personal income tax has been an utter failure,” Bajnai said, adding that it didn’t boost growth while widening social inequality.

Tax Effects

Orban introduced the flat tax in 2011 to simplify tax administration, boost growth and reward higher-income earners. The measure contributed to a decline in government revenue and forced the Cabinet to plug budget holes with industry levies that damaged investment and growth.

A pact with lenders would be aimed at a “gradual” reduction of the bank tax to the average European level in exchange for a boost in lending, he said. Any agreement would also be tied to strengthened consumer-protection laws for borrowers.

Extraordinary taxes levied on energy and telecommunication companies would also be reduced gradually to the European level as part of agreements with companies to boost investments, Bajnai said.

The government wants to provide “aggressive incentives” to commercial banks to boost lending, Gyula Pleschinger, an Economy Ministry state secretary, told state radio MR1 over the weekend. “Informal” talks with banks that are under way may end with a deal in the spring, he said.

Euro Adoption

Adopting the euro is “useful” only if the economy is competitive and if Hungary can join at a “competitive exchange rate,” Bajnai said, adding that he would adhere to keeping the budget gap below 3 percent of output.

Hungary, along with the other former communist countries of Europe, agreed to eventually adopt the euro when it joined the 27-nation bloc in 2004.

Slovenia, Slovakia and Estonia have switched currencies, while Latvia plans to join the euro area next year and Lithuania’s government on Jan. 25 pledged to seek entry in 2015. Polish President Bronislaw Komorowski will meet with government members tomorrow to discuss Poland’s currency path.

Bajnai is competing with Socialist Party President Attila Mesterhazy to unite disparate opposition parties to challenge Orban in elections scheduled for the second quarter of 2014.

Orban’s Fidesz party leads in polls, with 18 percent support, versus 13 percent for the Socialists, 8 percent for the radical Jobbik party and 3 percent for Bajnai’s Egyutt 2014 group, according to a February Ipsos poll, state-owned MTI news service reported today, without providing the sample size or the margin of error.

Bajnai, who joined the political fray in October, has said he is targeting undecided voters, an estimated 55 percent of eligible voters in the Ipsos poll.

To contact the reporters on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net; Edith Balazs in Budapest at ebalazs1@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; James M. Gomez at jagomez@bloomberg.net


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