Country:

Hungary

Subject:

Tax reduction programme

Summary:

Last week, Ferenc Gyurcsány announced a 1000 billion Ft tax reduction programme for the next four years. However, a closer scrutiny of the ostensibly ambitious concept and the fate of similar initiatives of the government thus far would challenge the seriousness of the scheme.

Analysis:

A long-awaited exposé of Ferenc Gyurcsány as to how the party leader - prime minister conceptualises economic policy in the following years - appeared in the form of a supplement to one of the political dailies. In his essay, the prime minister ponders the possibility of a 1000-1200 billion forint tax reduction spread over four years, while ostensibly he does not intend to balance the loss of revenues by the reduction of expenses, but expects surplus revenue from the 'whitening' effects of the tax reduction on the economy.

The expectations from the drop in the grey- and black economy has shaken the credibility of the concept in the eyes of most observers, while the more optimistic could be happy at least about the intention to reduce taxes. However, it transpired from a press conference on the same day that the government endeavoured to finance a significant proportion (according to the calculations of the internet paper portfolio.hu approximately half) of the tax reduction announced for the first phase of 2009 from an increase in other taxes. Albeit, the compensation for the rest of the 145 billion forint is a reduction of expenditure, it is by no means along the lines of a particular concept, but following the loan-mower principle, namely, the constraint on the expenditure in every sphere. Moreover, this amount is so low that it would be naive to expect any kind of impact on economic policy.

The exposé of the prime minister recalls in the minds of observers the legally binding five-year tax reduction package of the first Gyurcsány-government. Evidently, it transpired that that programme was just a campaign trick and just under a year, the re-elected socialist-liberal government was forced to implement drastic tax increases to balance the budget. It is known of this package already that in the short term it is considerably more modest than the proclaimed amount and in the long term its chances of success are ostensibly very risky.

Thus, the prime minister's exposé cannot be viewed as an economic policy concept, yet it might have an objective, which would determine the trajectory of Hungarian domestic policy in the near future. The orientation of the measures contained in the exposé and the numbers within, are strongly reminiscent of the requirements, which particular leaders of the Liberal Democrats (SZDSZ) prescribed as conditions for their external support. It is evident that the minority socialist government is not able to endorse budget and the related tax laws single-handedly, while Ferenc Gyurcsány has promised to resign in case of a calamity. Consequently, the most important short-term objective of the prime minister is ostensibly to win the support of the liberals or at least of some of its deputies and the cited exposé is designed to serve this purpose.

By contrast, the SZDSZ strongly rejected the composition of Ferenc Gyurcsány at a weekend conference. Thus, numerous question marks remain from the point of view of domestic policy. On the one hand, the possibility cannot be excluded that the Hungarian Socialist Party would reach an agreement with the Liberal Democrats after prolonged consultations with respect to next year's budget, but if it cannot persuade the Liberals as a whole, it might win over a few of its deputies at the ballot (the Socialists need just 4-6 opposition votes to be in the majority)

These two scenarios are most likely to occur if the pollsters fail to produce promising indices for the liberals in connection with early elections. However, if the trend were to continue that shows a steady improvement in the popularity of the liberal chairman and his party, it is possible that a non-partisan government of experts would be installed soon in Hungary.

However, chance remains insignificant for the staging of early elections - supported by the population most - while the pollsters signal that only the opposition centre-right Fidesz would attain a satisfactory result. In short, the fact that 66% (!) of the population as indicated by the pollsters do not believe that the programme is about de facto tax reductions - amply mirrors the room for manoeuvre Prime Minister Gyurcsány has. There has not been a single prime minister since the regime change, which would have been so unpopular.

Conclusion:

It is not for the first time that the prime minister announced long-term ambitious economic policy programme packages. On the basis of initiatives hitherto, this one should not be viewed as being anything, but a political communication tool. However, there is chance that the liberals would grab the opportunity, 'believe' the professionally unsound set of ideas and cast their ballot for next year's budget.