Hungary once again grabbed attention with unorthodox policies

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Hungary once again grabbed attention with unorthodox
policies – it plans to introduce world’s first internet tax

Hungary once again surprised with unorthodox policies as economy minister Varga announced (already on Wednesday) the main planned changes of Hungarian taxation system in 2015. According to it the extra taxes levied on some sectors will remain in place, while some new elements may be introduced. Interestingly, the government plans to impose the world’s first tax on internet usage. This includes a charge of Ft150 (almost 50 EUR cents) for each gigabyte of internet data consumed, which should be paid by internet service providers. Together, some new revenues coming from levies on funds sales and the new internet tax should bring HUF30bn or 0.1% of GDP fresh budget revenues.

The main message is that the government would like to continue the previous years’ practice. For instance a positive signal is that the government would like to whiten further the economy. In order to it VAT levied on some meat will be reduced from 27% to 5%, while the online cash registers may be introduced in a wider area. Additionally a road monitoring system is planned to introduce as well to avoid mainly VAT evasion.

The government plans to introduce new tax reliefs as well, for example for corporates, which take part in education or for couples who had first marriages. But the tax levied on the fringe benefits is planned to be increased substantially. So all in all we don’t see any drop of average wedge of taxes, moreover in percent of GDP the tax revenues may increase further.

In our view a positive part of the story is that: 1) government may have more money to spend on the crucial systems like education and healthcare 2) the budget deficit may be easily below 2.8% of GDP in 2015. But so far we don’t see that the new system can substantially help the competitiveness of Hungary in 2015. A negative aspect of new measures might be, however, a new levy on internet usage, which might hurt a supply side of the economy.

The new taxes should have no effect on exchange rate or on government bond yields. Some of the new taxes may marginally increase the inflation, but the inflation target (2%) will absolutely not be endangered.