Employer organisations critical of tax increases

The government’s recent austere tax measures and reforms of public spending responded, to a certain extent, to the manifesto of the business community. Nevertheless, the actual content of the government package did not meet with the wholehearted approval of the employer organisations.

Immediately after the general elections in April 2006, an influential group of business associations issued a manifesto entitled ‘Agreement for our future’, seeking widespread reforms in order to restore competitiveness (HU0605019I). However, the Confederation of Hungarian Employers and Industrialists (Magyar Gyáriparosok és Munkáltatók Szövetsége, MGYOSZ) – arguably the largest employers’ confederation in the private sector – refused to join the manifesto and criticised its content. One of its comments was that it is inappropriate to call for tax reduction in times of budgetary crisis.

Main criticisms

The major concern of the employer organisations is that the government package (HU0607059I) primarily increases the tax burden on enterprises, especially in relation to employment, and contains only vague promises concerning cuts in budget spending. Therefore, in their opinion, the package represents a short-term revenue generating effort, and does not ensure a sustainable path for redressing the state budget and for meeting the Maastricht criteria for joining the European Economic and Monetary Union (EMU) within the planned timeframe.

Employers also warned that the current package would have negative implications for the competitiveness of Hungarian enterprises due to the tough competition in terms of tax regimes in other countries in the region, and that it would ultimately hinder job creation. The employers emphasised the need for increased cost cutting in the public sector and, in general, reduced expenditure in order to eliminate the budget deficit. Representatives of small and medium-sized enterprises (SMEs) complained that the package mostly increases taxes on businesses in this sector.

Calls for pension reform

Although employer organisations accepted reluctantly that short-term measures are necessary to redress budgetary imbalances, they called for a reform of the pension system. The employers argued that the relatively low retirement age and the lax regulation of early retirement make the system unsustainable. However, the Prime Minister, Ferenc Gyurcsány, underlined that the government does not plan to reform the pension system at present. It is worth noting that pensioners typically vote for the ruling Hungarian Socialist Party (Magyar Szocialista Párt, MSZP), and it is unlikely that the government would be willing to consider reforms in this area.

Social dialogue regarding package

At the series of discussions at the National Interest Reconciliation Council (Országos Érdekegyezteto Tanács, OÉT) – the national-level tripartite forum – employer organisations were only able to achieve a few minor changes on certain elements of the proposed tax measures. The National Association of Entrepreneurs and Employers (Vállalkozók és Munkáltatók Országos Szövetsége, VOSZ) – in its first announcement after the OÉT consultation had concluded – expressed its disappointment that the social dialogue had failed to lead to any meaningful results.

At the OÉT meeting, a conflict emerged between President of MGYOSZ, Gábor Széles, and Prime Minister Gyurcsány. Mr Széles warned the government that many companies would relocate their activities to neighbouring low-tax countries, like Slovakia, in response to the tax increases. Mr Gyurcsány rebuffed the MGYOSZ president’s claim sharply, arguing that his comment was unpatriotic, and criticised businesses for lacking solidarity with poor people and those in need in Hungary.

Temporary measures

During the consultation, employers requested a government declaration that the current tax increases are temporary measures and would be repealed once the public deficit reaches the 3% target level in 2008. The secretary of state representing János Veres, the Minister of Finance (Pénzügyminisztérium, PM), conceded to this request. At the same time, the junior coalition partner, the Alliance of Free Democrats (Szabad Demokraták Szövetsége, SZDSZ), made it clear that it had only accepted temporary tax burden increases, and that from 2009 onwards it would like to embark on a massive tax reduction programme, including the introduction of a flat tax system, likely to be set at a rate of 20%.

However, the introduction of a flat tax system would be a contentious issue within the coalition. Trade unions and the left wing of MSZP are unlikely to support the repeal of the progressive income tax system. The outcome of this debate will certainly be contingent on the future of Slovakia’s flat rate system, where the recently elected right-wing government is reported to be planning to reintroduce a progressive tax system.

Large-scale reforms

Minister of Social Affairs and Labour (Szociális és Munkaügyi Minisztérium, SZMM), Péter Kiss, outlined at the OÉT consultation that large-scale reforms were underway in public health, education, state administration and public transport. Following the consultations, the government stated that it plans to privatise the rural public transport company, Volán. At the same time, it was announced that the under-used section (12%) of railway lines of Hungarian State Railways (Magyar Államvasutak, MÁV) would be closed.

Re-negotiating minimum wage

Since employers were unable to achieve any significant changes to the tax increase package, they officially requested the re-negotiation of the three-year minimum wage agreement concluded in November 2005 (HU0512104F). They argued that the minimum wage agreement was concluded as an exchange for a five-year tax reduction plan. As the government has clearly revoked the tax reduction plan, employers requested that the negotiations on the minimum wage should begin on 1 September 2006 with a view to reaching an agreement by 31 December 2006.

VOSZ, representing SMEs, announced that it would file the case with the Constitutional Court (Alkotmánybíróság, AB), as the package treats small businesses as tax evaders and allows taxes to be determined based on presumed rather than actual revenues.

Commentary

Reportedly, the government package has divided the 16 organisations that had signed the April manifesto calling for immediate government measures. Some signatories of the agreement have accepted the government measures as a way out of the imminent budget crisis. Others have criticised the government package, claiming that it does not save enough state revenue while also failing to represent a comprehensive reform of the public sector.

Those disappointed organisations have proposed a new manifesto for a consensus-style social pact among all political parties, trade unions and employer organisations. The Hungarian Chamber of Commerce and Industry (Magyar Kereskedelmi és Iparkamara, MKIK) is said to be the main protagonist of such a new manifesto, while the chambers representing companies with foreign equity and VOSZ declined to participate in a new initiative.

The American Chamber of Commerce in Hungary (AmCham) has issued a separate statement concerning the austerity package, warning that it would weaken the competitiveness of Hungarian undertakings and would likely increase the size of the undeclared economy.

Meanwhile, MKIK has apparently changed its position again and accepted the necessity of tax increases, while expressing strong criticism that the tax reform mostly targets domestic SMEs.

András Tóth and László Neumann, Institute of Political Science, Hungarian Academy of Sciences

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