TAX NEWS - JUNE 2010

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Hungary Tax: Hungary Plans Bank Tax, Budget Cuts

Hungary's populist new leader said he will trim state spending and levy a hefty new tax on banks to help close the government's budget gap, in a speech aimed largely at reassuring jittery international markets that the country's finances are sound.

"It's plain to see that our debt must be reduced," Prime Minister Viktor Orban, who took office at the end of May, told parliament Tuesday. If the nation's fiscal policies aren't responsible, he warned, "investors and lenders will turn away from Hungary."

Mr. Orban's fledgling administration last week got a taste of the consequences when markets lose confidence. After aides said Hungary could significantly exceed budget-deficit limits set by its lenders and follow in the footsteps of Greece, the country's currency and stock market plummeted.

The government in Budapest has been in damage-control mode since then, with officials coming out over the weekend to insist that Hungary would stick to its agreements with the International Monetary Fund and the European Union, which stepped in to bail out the heavily indebted country in 2008.

Mr. Orban's Fidesz party won an overwhelming victory in April elections after a campaign calling for tax cuts to spark economic growth. Fidesz politicians also said austerity measures imposed by the previous government were unnecessary. Mr. Orban said Hungary deserved better terms from lenders.

But Mr. Orban's address Tuesday indicated that he had reformulated his plans for fiscal easing in the face of opposition from EU leaders, the IMF and unforgiving markets already spooked by the situation in Greece and fearing contagion effects.

After deficit spending over the past eight years under previous administrations, Mr. Orban said, "Hungary is not standing on its own feet, but is living off loans."

Standing in the ornate meeting chamber of the parliament house built during the Reform Era heyday of the Austro-Hungarian Empire, he said the government had to decrease its reliance on borrowing. He also said the country wouldn't seek to "renegotiate" the terms of its debt.

Instead of the immediate, broad changes to the tax system the Fidesz party had suggested during the election campaign, Mr. Orban Tuesday put forward a plan to shift toward a flat tax on incomes, starting in about two years. He called for an immediate cut in the corporate-income tax, but only for smaller companies.

He also said he plans to significantly — but temporarily — increase the amount of taxes paid by banks. Mr. Orban said he expected to raise 200 billion forint, or nearly $840 million, from levies on financial institutions. Those banks now pay about 13 billion forint in taxes, he said. He said the banking tax would stay in place for three years. Details of how the new tax would be assessed are still being discussed, he said.

In addition, Mr. Orban said the government would look to cut government spending by about 120 billion forint, or about 1.3% of the planned 2010 budget.

Mr. Orban's remarks were applauded by investors. The Hungarian currency, the forint, strengthened sharply after his remarks.
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