Hungarian Government Considers Major Tax Cuts Amid Economic Concerns
Cabinet's recent proposals raise questions about fiscal sustainability and inflation
The Hungarian government, led by Prime Minister Viktor Orbán, is reportedly disregarding economic risks associated with proposed fiscal policies aimed at stimulating electoral success.
The government has previously adjusted its budgetary commitments, recently announcing what it termed 'Europe's largest tax reduction program' without prior consultation with the European Union.
This development has emerged against a backdrop of increasing economic uncertainty and rising inflation, contrasting sharply with the pre-election environment of 2022.
In its budget for 2025, passed at the end of last year, the government expressed intentions to reduce the budget deficit and align with EU convergence criteria, which include a medium-term goal of maintaining a GDP-related deficit of no more than 3%.
The revised medium-term budgetary plan, approved by the European Commission, commits to lowering the state budget deficit from 4.9% of GDP last year to 3.6% this year, and to 2.5% in 2026. The recent convergence program also promised significant improvements in the budget situation for the electoral year and for 2025.
Initial projections for this year anticipated a GDP growth of 3.4%; however, the revised budget now expects only 1.2% growth by 2025, a figure that is more pessimistic than the European Commission's forecast of 1.8%.
These revisions suggest a decline in tax revenues due to a slower growth trajectory.
Based on commitments made to the EU, the government not only has a responsibility to reconsider its proposed electoral financial distributions but also needs to focus on revenue-generating measures.
Despite this, during a recent state of the nation address, Orbán announced a substantial tax reduction program, immediately raising concerns regarding compliance with EU agreements.
In response to this unexpected announcement, S&P Global Ratings indicated its apprehensions regarding the long-term implications of the government's proposed tax reforms, particularly the lifetime income tax exemption for mothers of two or more children.
Analysts have flagged this move as potentially risky, asserting that it complicates deficit reduction efforts and could lead to an increase in national debt ceilings by 2026. The measures could further jeopardize the stability of the forint, which might depreciate as elections approach.
As of last October, S&P maintained Hungary's credit rating at BBB- with a stable outlook, just above junk status, reflecting ongoing vulnerabilities within the Hungarian economy.
The government has previously adjusted its budgetary commitments, recently announcing what it termed 'Europe's largest tax reduction program' without prior consultation with the European Union.
This development has emerged against a backdrop of increasing economic uncertainty and rising inflation, contrasting sharply with the pre-election environment of 2022.
In its budget for 2025, passed at the end of last year, the government expressed intentions to reduce the budget deficit and align with EU convergence criteria, which include a medium-term goal of maintaining a GDP-related deficit of no more than 3%.
The revised medium-term budgetary plan, approved by the European Commission, commits to lowering the state budget deficit from 4.9% of GDP last year to 3.6% this year, and to 2.5% in 2026. The recent convergence program also promised significant improvements in the budget situation for the electoral year and for 2025.
Initial projections for this year anticipated a GDP growth of 3.4%; however, the revised budget now expects only 1.2% growth by 2025, a figure that is more pessimistic than the European Commission's forecast of 1.8%.
These revisions suggest a decline in tax revenues due to a slower growth trajectory.
Based on commitments made to the EU, the government not only has a responsibility to reconsider its proposed electoral financial distributions but also needs to focus on revenue-generating measures.
Despite this, during a recent state of the nation address, Orbán announced a substantial tax reduction program, immediately raising concerns regarding compliance with EU agreements.
In response to this unexpected announcement, S&P Global Ratings indicated its apprehensions regarding the long-term implications of the government's proposed tax reforms, particularly the lifetime income tax exemption for mothers of two or more children.
Analysts have flagged this move as potentially risky, asserting that it complicates deficit reduction efforts and could lead to an increase in national debt ceilings by 2026. The measures could further jeopardize the stability of the forint, which might depreciate as elections approach.
As of last October, S&P maintained Hungary's credit rating at BBB- with a stable outlook, just above junk status, reflecting ongoing vulnerabilities within the Hungarian economy.
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