At the same time, Minister of National Economy Mihály Varga announced that representatives of employer and employee associations agreed to a 15 percent minimum wage increase in 2017 and an additional 8 percent in 2018. Meanwhile, payroll taxes will be cut by 5 and 2 percent in the same periods.
Viewed together, we begin to see the contours of a new economic policy taking shape.
Late last week, Prime Minister Viktor Orbán unveiled a flat, 9 percent corporate tax, the lowest in Europe. The latest tax reforms build on the foundations that the Orbán Government began laying six years ago. They set out to change the tax regime to leave more money where it is made and to put greater emphasis on taxing consumption instead of income.
“Progressive taxation always cuts back performance,” said Prime Minister Orbán in a pre-recorded radio interview that aired Monday morning. Following the introduction of a flat personal income tax, now companies will benefit from the elimination of the extra tax on better performance. PM Orbán expressed his belief that many corporations will strive for higher rates of profit knowing they will not be penalized for those higher gains and the tax cut will allow more room for investment and higher wages to attract workers in an increasingly tight labor market.
The government has been able to put forth a never-before-seen increase in the minimum wage and has proposed a plan to cut taxes on small enterprises, and widen the tax benefits for families, all in addition to this latest reduction in the corporate tax because the economy is now building on solid foundations, he said.
In 2010, when the Orbán Government took over, Hungary was in worse economic condition than Greece. Only 1.8 million people were paying taxes, now there are 4.3 million. Debt was piling up rapidly, while the GDP was shrinking or stagnating. All of these have been turned around. “The basics are in order now. The budget is in order. The state debt is shrinking. Our financial situation has become stable. This is reflected in the opinions of the credit rating agencies,” the prime minister said, referring to Hungary being upgraded at all three credit rating agencies in 2016.
He cited two basic objectives of this new economic model, which have been developed over the past 6 years. One was getting rid of the country’s IMF debt burden because, as a Hungarian saying goes, whoever pays the musician gets to pick the music. So, “the IMF had to be sent home.”
The second point was that “we don’t want to live off of welfare checks,” so Hungary “had to create an economic policy that provides work instead of welfare.” On this front, with unemployment having dropped below 5 percent, Hungary is closer to full employment than ever.
“The labor-based economy is a success. We always believed in it. Now even the outside world recognizes it,” he said, announcing that the government is now laying the cornerstones of economic policy for the next six years.
However, there are limits to what a government can achieve.
“We are not communists and if we are not communists, we don’t think that the state will directly manage the economy. So we have to trust the entrepreneurs who do so,” Prime Minister Orbán said. “We can only regulate it, create good conditions, but not make good deals.”
“The most important thing is that people should not only get work, but they should feel it is worth it to work,” he said of the upcoming period. Having reduced bureaucracy for the everyday citizen and cut that person’s income tax to a flat rate, the government has similar plans for companies. “The government can help businesses with the reduction of bureaucracy and taxes,” he explained.
The plans are ambitious, as “we want to create the best business climate of the region in Hungary.” Similarly to the previous set of reforms, the prime minister expects the new tax regime to bear fruit over the next 2-3 years.
So here we are. In an exceptionally short period of time, over just the previous six years, Hungary has found its way back to financial stability, growth and low unemployment. Now we have the sweet challenge to shift it into the next gear.