Nov 02, 2016

Hungary plans to cut payroll taxes

The tax cuts should make Hungary's job market more competitive and bring the country in line with other European nations

Hungary plans to cut its average payroll taxes to match the levels of neighboring Slovakia and Czech Republic in five to six years to boost competitiveness, Mihály Varga, minister for National Economy, has said.

According to Reuters, Varga did not give a number for the cut the government was considering. Comparisons based on figures from the Organisation for Economic Co-operation and Development (OECD) suggested a reduction of about 7 percent.

Years of emigration to Western Europe have created labour shortages in countries on the European Union's eastern flank like Hungary, Poland and the Czech Republic, which make it tough for businesses of all kinds to recruit.

Hungary has the fourth-highest tax wedge - the total employer and employee tax burden as a share of pay - among the 34 member countries of the OECD.

In 2015, the tax wedge for the average unmarried worker in Hungary was 49 percent compared with a 36 percent OECD average.

"The objective of the Hungarian government is that the reduction in taxes should reach at least the average of neighboring countries," Varga said.

"It is my personal target to reach the levels of Slovakia or the Czech Republic as measured in OECD surveys on a five to six year horizon," he said, adding that the planned "significant" cut would probably have to exceed 1-2 percent to make sense.

The comparable tax levels were 41 percent in Slovakia and 43 percent in the Czech Republic based on OECD figures last year.

Varga said the tax cuts should make Hungary's job market more competitive, but did not go into detail. He said any reduction in the tax levels should not upset the balance of fiscal accounts.

The program would take its final shape in talks with employer and employee organisations, he added, and signalled the cuts may not take effect from the start of the year but only at a later stage.

Hungary is grappling with a labor shortage that is already driving up wages across the economy. Unemployment stood at 4.9 percent in June-August, and gross wages were up by an annual 6.9 percent in August, at a time of no inflation.