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Hungary Prepares to Slash Income Tax, Prepares Ground for Pay Rises

BUDAPEST, Nov 11 (Reuters) – Hungary’s government is proposing a six-year programme of private sector wage hikes and payroll tax cuts to boost competitiveness and lift local salaries closer to those in richer European Union members, Economy Minister Mihaly Varga said on Friday.

Following years of heavy emigration to western Europe, Prime Minister Viktor Orban’s government is grappling with a record labour shortage that is making it hard for all types of companies to recruit, driving up wages across the economy.

One analyst said the proposed measures could cost the government revenues worth up to 1.3 percent of gross domestic product but would not destabilise the budget as in the election-year spending binges seen over the past decade.

“The government’s view is that a situation has occurred in the Hungarian economy, when we can plan a bit more boldly,” Varga told a news conference after a meeting with private sector employers and workers’ representatives.

Varga said wages should rise by about 40 percent in real terms over the next six years as a result of the programme, which also foresees several rounds of cuts in payroll tax payable by employers.

“This should not jeopardise the resilience of the economy. Therefore we have made a proposal that would link the wage hike cycles with further improvements in efficiency and competitiveness,” Varga said.

In the World Economic Forum’s 2015-2016 Global Competitiveness Report, Hungary ranked 63rd behind nearby Poland, the Czech Republic and Romania.

Hungary has the fourth-highest tax wedge – the total employer and employee tax burden as a share of pay – of the 34 member countries of the OECD.

To bring that closer to levels elsewhere in central Europe, Hungary’s government is proposing a 4 percentage point cut in the payroll tax next year and another 2 percentage points in 2018 – when the government will be seeking re-election.

Varga said that would be followed by cuts worth 2 percentage points per year over the following four years if real wages grow by at least 6 percent year-on-year.

The government has also proposed lifting the minimum wage by 15 percent next year from a monthly 111,000 forints ($390) in 2016, he said, while the minimum wage for jobs requiring at least a secondary education would rise by 25 percent.

In 2018 the two wage types would rise further, Varga said, adding that talks would continue over the coming days.

“The 6 percentage point cut in the next two years can lead to a revenue shortfall of about 350 to 400 billion forints,” said analyst Peter Virovacz at ING Bank in Budapest.

“But we must also take into account that the minimum wage hike can add to government revenues by whitening the economy,” he said, reducing the size of the “grey” where wages go undeclared.

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