Hungary plans to raise VAT rate, cuts spending

BUDAPEST: Hungary's government plans to improve next year's budget balance by cutting spending by 300 billion forint ($1.46 billion) and increasing revenues by 450 billion forint, Economy Minister Gyorgy Matolcsy said on Friday.

The planned measures include a 2 percentage point hike in the top value-added tax rate to 27 percent, Matolcsy told a news conference.

The forint eased slightly after the comments to 286.25 against the euro by 1525 GMT from 285.95 before the comments.

ZOLTAN AROKSZALLASI, ERSTE BANK, BUDAPEST

"My first impression is that the 750 billion forint savings earmarked may not be sufficient, given that economic growth prospects deteriorate at the pace that we have seen.

The other point is that the programme is shifting towards revenue-side measures from spending cuts, so the structure of the changes is becoming more unfavourable."

"It's positive that the revenue-side change is based on consumption taxes, but raising VAT to 27 percent may not fit EU rules. It's also good that apparently meeting the budget goal remains a policy priority, but more measures may be needed.

The 4.2 percent inflation forecast looks more or less realistic, while we may soon see question marks about the 1.5 percent GDP growth assumption which may prove optimistic in the end even though it has been cut."

"It has happened several times already in Hungary that the central bank had to look through the impacts of tax hikes and they may be able to do that again. Consumption will be quite weak again next year. Still a rate cut might come next year but the probability has decreased severely."

ZSOLT KONDRAT, MKB BANK, BUDAPEST

"I like it. The macro course is realistic and they want to be certain in the result, therefore they focus on revenues. A sustainable spending cut requires structural reforms and those cannot be done in haste.

There are risks to the (earlier) Kalman Szell Plan (of budget savings), but certainly they go on with that plan, only that it was not in the focus now. I think (the budget) next year will remain tense, but not hopeless. We will see only later how this year's base (budget figures) goes."

GERGELY SUPPAN, TAKAREKBANK, BUDAPEST

"It's disappointing that they want more savings from increasing taxes than from spending cuts.

I need to see more details, like personal income, value-added and other tax revenues for this year and next. The VAT rate hike to 27 percent was a surprise to me, I thought that there is a limit on that in the EU.

"The central bank will again not meet its inflation target for some time.

It can look through that again as it did several times in the past. If the government caps living costs as it has said that can partly offset the impact of the VAT hike, but again we would need more details.

"The lower growth forecast and the significant budget reserves, these are good tings, but I would like to see more details on the budget."

GABOR AMBRUS, 4CAST, SOFIA

"Pledges to cut expenditures by 300 billion forint and raise incomes by 450 billion forint and to keep budget reserves of 300 billion forint are very decent figures but would need a lot more detail to gain credence.

CPI is projected to average at 4.2 percent y/y boosted by the VAT rate rising to 27 percent from 25 percent currently - this should keep Hungary's traditional conflicts between fiscal and monetary policy track alive."

Copyright Reuters, 2011