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Deficit Overshoot Confirmed, Mid-income Tax to be ditched

Last week the government confirmed that the budget deficit overshot the year-end target in the first eight months of the year.

While the Finance Ministry did not publicly retreat from its 4.6% of GDP deficit target for 2004, market consensus forecasts are now pointing to a likely deficit of over 5%, and analysts say that pressure is, accordingly, mounting on Finance Minister Tibor Draskovics.

Hungary’s budget deficit widened in August to Ft 120 billion (€484 million), from Ft 32.2 billion in July, the Finance Ministry announced last week. The eight-month deficit thus totaled Ft 1.19 trillion, some Ft 7.6 billion over the total year’s projected deficit.

In response to the financial indicators, Prime Minister-designate Ferenc Gyurcsány said the Finance Ministry would assess this year’s budget processes this week, as well as the 2005 budget proposals, and take the appropriate fiscal tightening measures.

The premier also announced last Friday that the government will abolish the 26% middle personal income tax rate from next year. The 18% rate will be applied to taxpayers earning less than Ft 1.5 million a year, while the 38% rate will apply to earnings above that.

Gyurcsány said the plan is aimed at creating a fairer distribution of tax burdens.

Gyurcsány said the overall tax changes, which also include a five percentage point hike in the withholding tax to 25% and the abolition of certain social benefits, will leave Ft 100 billion in taxpayers’ pockets next year – once they take effect.

Along with a drop in income tax rates, income tax brackets moved up by approximately the rate of increase in wages in 2004.

Currently, there is an 18% tax on annual incomes under Ft 800,000, 26% on incomes in the Ft 800,000–Ft 1.5 million range, and 38% on incomes over Ft 1.5 million.

This compares to last year’s tax brackets of 20% for annual incomes under Ft 650,000, 30% for incomes of between Ft 650,000 and Ft 1.35 million, and 40% for incomes over Ft 1.35 million.

(BBJ 13.ix.04)

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