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Hungary to Raise Taxes as Government Prepares for Vote

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June 17 (Bloomberg) -- Hungary’s government, which faces elections in a year, wants to raise taxes including on financial transactions and phone calls and wants banks to pay into the budget 7 percent of municipal loans the state assumed.

The government wants to boost the financial-transaction tax to 0.6 percent on cash withdrawals and to 0.3 percent on wire transfers, from 0.3 percent and 0.2 percent respectively, Economy Minister Mihaly Varga told reporters today in Budapest. It’s also seeking to raise the corporate phone tax to 3 forint per minute or per text message from 2 forint and increasing mining royalties to 16 percent from 12 percent, he said.

The government, set to exit European Union monitoring for budget offenders, said the measures are necessary because it miscalculated revenue after the inflation rate plunged to the lowest since 1974. The extra income, which according to the Economy Ministry may total as much as 100 billion forint ($460 million), will help Prime Minister Viktor Orban deliver on promises before next year’s elections, Erste Group Bank AG and Raiffeisen Bank International AG said.

“This is probably for some kind of additional government measure” that entails the loosening of the budget, “otherwise this would have been unnecessary,” Zoltan Arokszallasi, an economist at Erste in Budapest, said by phone today. The government’s plan to raise teachers’ wages is one such measure, he said.

Forint, Stocks

The forint gained for a fifth day, strengthening 0.2 percent to 290.17 per euro as of 5:24 p.m. in Budapest. OTP Bank Nyrt., Hungary’s largest lender, dropped 1.5 percent to 4,873 forint. Magyar Telekom Nyrt., the former phone monopoly controlled by Deutsche Telekom AG, plunged 4.7 percent to 343 forint, its biggest drop in more than a month. The benchmark BUX stock index fell 1.3 percent to 19,276.74.

The tax increases came unexpectedly after Varga last month announced a 92.9 billion-forint spending freeze for both this year and next, adding that the Cabinet is ready to save an additional 80 billion forint next year to convince the EU to remove Hungary form its list of fiscal offenders and to protect funding.

Varga and Orban then said the measures were unnecessary as the government was on track to keep the budget deficit below the EU limit of 3 percent of gross domestic product even without those measures. The 27-nation bloc’s finance ministers may give their final approval for lifting the excessive-deficit procedure this week.

Transaction Tax

Hungary is taking the additional measures to keep the country out of budget monitoring once the exit is granted, Varga said. The inflation rate, at 1.8 percent in May, resulted in a revenue shortfall on the value-added and financial-transaction taxes, he said.

Hungary is also abolishing the 6,000 forint upper limit on the tax for cash withdrawals, while keeping that threshold for wire transfers, Varga said. The government wants to raise the monthly upper limit on the phone tax for businesses to 5,000 forint from 2,500 forint, Varga said.

The government also wants introduce an additional 6 percent tax on interest income in the form of a social security levy, he said. The Cabinet would like the tax measures, which need the approval of parliament, where Orban controls a two-thirds majority, to take effect on August 1, Varga said, according to MTI state news service.

Economic Growth

The tax increases continue Orban’s policy of relying on extraordinary taxes, including Europe’s highest bank levy, to plug budget holes.

The measures contributed to a plunge in investment and shrinking industrial production, which hampered the economy’s recovery in the first quarter from a recession last year. GDP rose 0.7 percent from the previous three months in the first quarter, expanding for the first time since 2011.

Orban has sounded an optimistic tone on Hungary’s economic outlook, saying May 30 that it’s “one of the most promising in Europe.” Economic growth may reach 1 percent this year, according to the premier, whose forecast exceeds the government’s 0.7 percent projection and the European Union’s 0.2 percent estimate.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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