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Nov 18, 2016 - Zoltán Kovács

“Orbánomics” gives Hungary lowest corporate tax rate in Europe, with more tax cuts to come

Speaking at the Regional Digital Summit in Budapest on Thursday, Prime Minister Viktor Orbán announced that Hungary will lower its corporate profit tax rate to 9 percent, the lowest in Europe.

The prime minister had signaled that changes were coming in his recent address to the European Bank for Reconstruction and Development (EBRD), saying that Hungary’s improving economic stability should bring benefits to taxpayers, both employees and employers. In addition to cutting the corporate tax rate, the government also plans to lower personal income tax rates and payroll taxes and introduce reforms to higher education to boost competitiveness.

What Hungary has achieved in the past six years, “[a]ccording to the textbooks, is impossible,” he said, proudly citing many of the achievements. “Practice proves, however, that if we discard old habits and are brave enough to set out on new paths, growth, fiscal discipline, an increase in employment and debt reduction are indeed possible all at once – all at the same time.”

The prime minister underlined that over the course of the past six years, the number of people paying taxes has risen to 4.4 million from 1.8 million, that the debt-to-GDP level fell from 85 to 75 percent and that the annual budget deficit was cut from 7 percent to less than 3 percent.

The prime minister’s announcement follows the recent news that now all three major credit rating agencies have restored Hungary’s sovereign debt rating to investment grade. The credit rating upgrade together with the country’s record-breaking healthy budget and trade balance, makes it possible to shift gears in economic policy, but still keep the foundations sustainable and solid.

In announcing the reduction in the corporate tax rate, the prime minister also acknowledged that the age when Central Europe’s competitiveness was mostly based on cheaper work force has come to an end. For that reason, Hungary must find an answer to the “wage pressure” phenomenon in a way that competitiveness not be sacrificed. “Therefore,” Orbán said at the EBRD event, “a precondition of increased wages – a precondition, not a consequence – is that economic actors, businesses, should be competitive in the first place.”

That means tax cuts. First steps include reduction and simplification of the corporate tax system. After that, reforms will turn to cutting the personal income tax and payroll taxes, increasing R & D spending and reducing bureaucracy as well as improving competitiveness of the workforce through better training and education.

Minister of National Economy Mihály Varga has already submitted to Parliament the first laws to carry out the plan, keeping in mind that spending control still remains an important priority. In the coming weeks, Parliament is expected to pass the new regulations, focusing first on the tax cuts, so that Hungary enters this new era of economic strategy with improved competitiveness and reduced tax burdens on wage earners and companies.