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TAX NEWS - June 2010

Hungary Tax: IMF and EU May Reject Hungary Tax Cut Plan, Commerzbank Says

The International Monetary Fund and the European Union, which bailed Hungary out in 2008, may reject tax cuts proposed by the new cabinet, aimed at restoring investor confidence, Commerzbank AG said.

Prime Minister Viktor Orban said yesterday he plans to enact a new tax on banks, cut public spending, reduce personal income taxes and lower taxes for small businesses. He also pledged to stick with a creditor-approved budget-deficit target after government officials rattled world markets last week with talk of a potential default.

"We do not think it likely that such a plan will satisfy the EU, the rating agencies or financing institutions such as the IMF, as a credible fiscal consolidation package," Commerzbank AG said in a note today. "A plan of tax cuts is usually not an acceptable fiscal roadmap within an IMF program."

The forint rose and government bond yields fell when Orban announced the measures, hammered out after the currency dropped 4.8 percent in two days last week. Hungary needs to show sustained savings to investors, as well as the IMF and EU.

Orban was elected in April on a wave of discontent with the previous ruling party, which four years ago scrapped plans to cut taxes and reduced spending to narrow the budget deficit. He promised to end five years of austerity with his election.

His pledge to meet this year's deficit target of 3.8 percent of domestic product may be "lip service" as the budget plan announced "did not specify" the goal, Commerzbank said. Orban reiterated the target on M1 television yesterday.

"Neither the precise details of the plan nor the timing of implementation of the various measures are yet known," Commerzbank said."There is every chance that much of the plan will have to be abandoned in due course."
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