The International Monetary Fund may require Hungary to change its flat personal income tax as part of a bailout agreement, according to a person familiar with the Washington-based lender’s preparations for the talks.
The flat tax will be an important part in any program discussion, said the person, who declined to be identified because official talks haven’t started. The IMF is in general opposed to flat-tax systems and the Hungarian levy being regressive is the main issue, the person said.
Hungary is trying to revive bailout talks with the IMF and the European Union after negotiations broke down in December over Prime Minister Viktor Orban’s refusal to change a central bank law that the institutions said may undermine monetary- policy independence.
Orban introduced the flat tax last year to simplify tax administration, boost growth and reward higher-income earners. The measure contributed to a decline in government revenue and an increase in the structural budget deficit.
The flat tax is a cornerstone of Orban’s economic policy, which he sought to protect from future governments by including it in the country’s new constitution, requiring a two-thirds majority in parliament to change it.
The IMF may accept the government making the tax more progressive through exemptions, rather than requiring Orban to scrap it altogether, the person said.
“Before the fund can determine when and whether to start negotiations for a stand-by arrangement, it will need to see tangible steps that show the authorities’ strong commitment to engage on all the policy issues that are relevant to macroeconomic stability,” IMF Managing Director Christine Lagarde said on Jan. 12 after meeting Hungarian chief negotiator Tamas Fellegi in Washington.
The European Commission on Nov. 10 forecast that Hungary’s economy will expand 0.5 percent this year, the slowest pace in the eastern EU.
Without one-time revenue, the budget deficit was more than double the government’s target of 2.94 percent of gross domestic product in 2011.
Hungary didn’t take “effective action” to rein in its budget deficit as Orban’s measures weren’t of a “sustainable nature,” the European Commission said on Jan. 11. The government pledged to keep the budget deficit at below 3 percent of GDP this year and in 2013.
Hungary wants to start negotiations with the IMF and the EU “as soon as possible,” Economy Ministry State Secretary Zoltan Csefalvay said at a Euromoney conference in Vienna today.
European Commission President Jose Barroso said Orban is willing to cooperate to resolve the conflict over a new central- bank law.
“Prime Minister Orban addressed a letter to us showing his willingness to cooperate to find a solution,” Barroso told reporters today in Strasbourg, France. Afterward, he told lawmakers at the European Parliament that the commission “will not hesitate to take further steps if deemed appropriate.”
Orban told the same meeting of the European Parliament that he hopes for “swift results” from a meeting with Barroso next week.
“In the current situation, it’s extremely important for Hungary to have a new deal with the IMF and with the European community,” Gianni Papa, the head of UniCredit SpA (UCG)’s eastern European business, said in a Bloomberg News interview today in Vienna. “I do hope that the Hungarian government will find a solution and reach an agreement with those institutions.”
The European Commission regulatory arm yesterday threatened to sue Hungary for encroaching on the central bank’s independence and started infringement proceedings against Orban’s government for meddling with the judiciary and the data- protection authority.
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