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Apr 18, 2016 - Zoltán Kovács

Hungary’s 2017 Budget: More Stability, Deeper Tax Cuts

The Hungarian Minister for National Economy Mihály Varga presented Hungary’s 2017 budget plan on Tuesday. The core message signals predictability and stability to investors, while maintaining the government’s popular “one step ahead” policy, especially for families. The budget plans for 3.1 percent GDP growth, a falling debt-to-GDP ratio and a deficit of 2.4 percent.

Investors will notice that this is the first budget since Hungary’s democratic transition of 1990 that forecasts a zero percent deficit related to operating costs. The planned budget deficit –well under the three percent threshold agreed under the Maastricht Treaty –covers investment and development. Without investment and development, the revenues and expenditures related to the state’s operation do not exceed its income.

In brief, the Hungarian state has planned to spend not a single borrowed forint on anything that does not qualify as an investment in Hungary’s future. This makes the 2017 budget the first step on the path to a real zero deficit budget policy, which Prime Minister Orbán announced earlier this year.

Early as it seems, this is the second budget to be voted on before Parliament’s summer break. Prime Minister Orbán decided on this measure in 2015 in order to improve Hungary’s economic predictability and stability.

Hungary’s economy has come a long way since 2010. Government measures proved to be the solution to structural problems exposed by the 2008 financial crisis. The numbers speak for themselves: by the end of 2015, Hungary has been among Europe’s top performers in GDP growth and debt-to-GDP reduction, while decreasing its unemployment rate to historic lows.

In 2008, Hungary’s then Socialist government turned to the IMF and the European Commission for a bailout, just like Greece. Last week, the last installment of this loan was paid back, while investors, regardless of the country’s credit rating, have learned to trust Hungary again: state bonds are being sold at a record low rate.

What’s next after these great results? Leaving more money in taxpayer pockets. Minister Varga said that the new budget makes a priority of tax cuts and housing programs for families.

As part of tax reductions for 2017, Hungary will lower the value-added tax on basic food products like milk, eggs and poultry to five percent after cutting VAT on pork back in January of this year. VAT is also to be reduced on Internet services to improve access to digital services. VAT on restaurant bills will also decrease from 27 percent to 18 percent and are expected to fall to five percent in 2018, the minister announced.

The other major focus of the budget will be to encourage families to have children and, at the same time, boost the construction sector by providing home building subsidies for young couples. According to the Ministry of National Economy’s projections, a large number of new construction projects are set to begin in 2017, thanks to the popularity of the Family Housing Allowance (CSOK), and therefore the amount of available subsidies will be raised by 100 billion HUF (320 million EUR).

Other fiscal measures in the budget proposal aim to increase real wages in the public sector, although wage talks with some sectors have yet to be concluded. By earmarking the necessary amount of funding in the budget, we aim to allow for the possibility of wage hikes.

Regarding tax policy, Hungary believes in collecting existing taxes more efficiently, not introducing new ones. Continuing a successful and proven program aimed at “whitening,” – that is, reducing the volume of black market transactions that go untaxed – the economy is expected to compensate for the loss of revenues due to tax cuts and the costs related to the home building subsidies.

With these plans and the early adoption of the 2017 budget, the Hungarian government  ensures further economic stability, fuels growth and encourages new investments. We’ve come a very long way since the IMF bailout in 2008.