National wage agreement reached for 2010

The annual national wage negotiation ended in an agreement as early as 1 December 2009. This followed the early conclusion of tax legislation changes. The agreement stipulates that the minimum wage be increased and the guaranteed minimal wage for skilled workers be maintained. The impact of changes in taxation on net wages, however, depends on actual wage levels; thus, in order to orient lower level wage negotiations, the agreement indicates the necessary nominal rises to maintain the real value of wages.

Changes in taxation

Having broken the customary practice of changing taxation rules in the autumn, to coincide with the debates on the budget for the following year, Hungary’s tax law amendments in 2009 were passed by the parliament as early as June. This legislation includes a number of key changes as follows.

‘Supergrossing’ of taxable earnings

The measure of ‘supergrossing’ taxable earnings was implemented partly to make the system of wage levies more transparent and partly to reduce the number of taxes imposed. Until 2009, taxable personal income did not contain levies paid by employers. However, from 2010, the taxable so-called ‘supergross’ earnings contains all taxes and duties paid for the net income earned. Simultaneously, the levies imposed on employees have been reduced from 32% to 27% in two steps: from 1 July 2009, the 5% tax cut was applied only to salaries up to double the minimum wage; as of 1 January 2010, this will apply to all wages. This means that the new taxable base is 127% of the previous year’s gross earnings.

The social partners, however, have been critical of the new tax regulation. The employers complained that the measure not only fails to make taxation more transparent, but also makes it more complicated. For their part, the trade unions referred to the measure as a communication exercise. Furthermore, the Ombudsman for Civil Rights, Máté Szabó, submitted the regulation to the Constitutional Court (Alkotmánybíróság) for evaluation. In its ruling, the court approved the new taxation law, claiming that it does not breach relevant parts of the Constitution prescribing a just and proportional distribution of common charges.

Changes in personal income tax rates

As a complementary measure to increasing the taxable base of salaries, the government has also re-set the progressive personal income tax table or brackets. Before 2010, the lower tier of the personal income tax – of 18% – was applicable to annual incomes up to HUF 1.9 million (about €7,128 as at 12 April 2010), while incomes exceeding HUF 1.9 million were taxed at a rate of 36%. Since 2010, the lower tax rate has been set at 17%, which is applicable to ‘super-gross’ salaries up to HUF 5 million (€18,772), while the higher tax rate has been set at 32%. At the same time, the permitted maximum level of tax deduction for employees has also been redefined.

Through these three measures, the government intends to remedy some of the inadequacies of the Hungarian tax system. Firstly, the government has tried to ease the intolerably high tax wedges on earnings which amounted to 51% – which is the third highest among the countries of the Organisation for Economic Co-operation and Development (OECD). Secondly, it has sought to clearly indicate that preference will be given to those earning medium-level salaries. This represents a particularly important measure, as previous tax wedges on different levels of incomes were most burdensome in the case of average earnings.

Taxing of non-wage benefits

Unlike the abovementioned measures, which aimed to reshape the distribution of the tax burden among different earning clusters, the increase in levies on the majority of non-wage benefits has the sole aim of expanding the government’s tax revenue.

The system of non-wage benefits – commonly referred to as the ‘cafeteria system’ as the company systems unite a great variety of optional in-kind and monetary benefits provided by the employer for the employees – has become extremely popular in recent years because, up to a predetermined level, each type of non-wage benefit had been free of tax levies. For example, hot food vouchers used to be tax free up to HUF 12,000 (€45) a month, while the school starting allowance for each child was tax free up to HUF 21,450 (€80) a year. Since 1 January 2010, a three-level taxation system has been put in place. The only allowance which has remained tax free is internet access at home. Many allowances – such as hot food vouchers, school starting assistance allowances, local transport tickets and holiday vouchers – are charged with a preferential rate of 25%. Others, on the other hand, such as the cold food vouchers or the culture vouchers, are now taxed at a rate of 54%.

Annual wage negotiations

The 2010 annual wage negotiation round, held at the National Interest Reconciliation Council (Országos Érdekegyeztető Tanács, OÉT), took place between 18 September and 1 December 2009. As in previous years, it provided the framework for the social partners to set the national minimum wage and the guaranteed minimum wage for skilled workers, together with the recommendations on the private sector wage rise for 2010. Following the agreement, a new government ordinance on the obligatory minimum wage was published by the cabinet. In the shadow of the global economic crisis, the social partners had to overcome several stalemates and nine rounds of negotiations until they finally reached an agreement. The first three meetings sought to predominantly address the issue of the minimum wage. From the fourth session to the eighth round, the guaranteed minimum wage was debated, while during the last two negotiation rounds the salary hike recommendation for 2010 was on the agenda.

Position of social partners

The first stage of the debate examined the possibility or necessity of the minimum wage rise. The trade unions representing employees at OÉT opened the debate by demanding that the monthly minimum wage be increased from HUF 71,500 (€271) to HUF 80,000 (€303). They argued that while the subsistence minimum was around HUF 75,000 (€284), the net value of the minimum wage was no more than HUF 59,008 (€224). On the other hand, the employers argued that, in light of falling gross domestic product (GDP), any increase in the minimum wage could trigger mass bankruptcy in the private sector. This first deadlock was overcome after the social partners met with the President of the Hungarian National Bank (Magyar Nemzeti Bank, MNB), András Simor. Although details of the meeting, which was organised by the employer side, were not made public, it prompted both sides to move on with the negotiations. So too did the open letter of the President of the National Association of Trade Unions (Magyar Szakszervezetek Országos Szövetsége, MSZOSZ), Péter Pataky, which was addressed to Hungary’s Prime Minister, Gordon Bajnai, asking for his help in facilitating compromise.

During the second phase of the negotiations, proposals for the minimum wage started to converge. At this stage, the employers proposed a monthly minimum wage of HUF 73,000 (€277), while the employee representatives demanded HUF 76,000 (€288). Meanwhile, the government elaborated various possible schemes for the new three-tier agreement and calculated that, with a forecast 4.1% annual inflation rate for 2010, the minimum wage could maintain its real value at HUF 73,400 (€278).

Debate over guaranteed wage minimum

During this time, the employers also launched a concerted attack on the guaranteed wage minimum for skilled workers. Not only did they demand a 22% decrease in the premium for skilled workers, they also indicated that they would not mind if agreement was only reached on the minimum wage and salary rise recommendations. The stalemate lasted until the trade union side accepted an eventual modification of the level of premium for skilled workers. From this point onwards, the debate revolved around the salary rise recommendations for 2010.

Agreement reached

On 27 November 2009, the government and social partners met again at OÉT with the aim of overcoming the remaining differences and signing an agreement. However, during the negotiations, which included bilateral talks between the social partners, positions turned so rigid that resolution became impossible. The subsequent meeting on 1 December saw some more distancing of the positions, although a new government prognosis for 2010 forecast better macroeconomic indicators than previously thought, with the inflation rate forecast at a lower level of 3.9%. Nevertheless, owing to the government vehemently pushing for an outcome, an agreement was eventually concluded with three clauses limiting the applicability of the wage recommendation but without veto. The agreement established a monthly minimum wage of HUF 73,500 (€279) and a single guaranteed wage minimum for skilled workers of HUF 89,500 (€339) as of 1 January 2010. It also recommended that the real value of salaries be maintained and urged a salary rise wherever company circumstances allowed for it. In addition, the agreement included an annex indicating the effect of the modifications of the personal income tax to be observed by the social partners.

Commentary

The principal outcome of last year’s wage negotiations and the preceding amendments to the tax system marked a shift in the government’s efforts: that is, to benefit those who earn a medium level of salary or around this level, as opposed to those on the minimum wage, even if the former constitute quite a large group. This preference is partly due to the fact that an unjustifiably high number of Hungarian employees earn, at least on paper, only a minimum wage, which the government seeks to change. It is worth noting that such a government policy implies a shift from the approach of previous years, when high minimum wages and a high premium for skilled workers were considered an instrument for fighting undeclared work; it is considered to be a widespread practice among employees in Hungary to report receiving the minimum wage and to complement it with ‘under the counter’ payments (HU0512104F).

However, the social partners did not share the government’s objective. The employers are naturally more interested in lower wages, particularly in light of the current economic crisis. On the other hand, the trade unions partly went along with the employers’ proposal, asserting that the government had made a big mistake in not giving preference to those who need it the most. In a final account, the employers only managed to achieve a very modest increase in the statutory minima, while trade unions managed to maintain the wage minima for skilled workers. The novel procedure of the negotiations – that is, amending the tax laws prior to the wage negotiations – proved to be a successful negotiation strategy from the government’s perspective, although it eventually impeded the formation of a tax deal coalition between the employers and trade unions.

Márk Edelényi and László Neumann, Institute for Political Science, Hungarian Academy of Sciences

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