bne IntelliNews – Hungarian government to use windfall taxes to contain deficit and preserve energy price cap for households

The Hungarian government will require companies from a wide range of sectors to contribute additional profits to two funds that will cover the cost of utility price subsidies as well as the development of the armed forces, Prime Minister Viktor Orban announced on Monday. May 25 after a cabinet meeting. .

Windfall taxes are designed to plug holes in the budget, where the deficit has soared due to the government’s spending spree ahead of the April election, where he won re-election as part of a faulty process.

“The war is dragging on, Brussels’ sanctions policy is not improving and together they will cause prices to rise drastically,” Orban pleaded for the measure. Meanwhile, banks and big multinationals are raking in bigger gains and extra profits from higher interest rates and prices, he said.

“The government has decided to create a public service protection fund and a defense fund. From these we will pay the costs of the regulated utility pricing system and the reinforcement of the armed forces,” the Prime Minister said in a Facebook post on Wednesday evening.

Banks, insurance companies, large retail chains, energy and trading companies, telecoms and airlines will have to pay a large part of their additional profits to these two funds. The measure will be temporary, limited to two years: 2022 and 2023.

The additional tax will not affect manufacturing companies, such as automakers, which account for a third of industrial production, or pharmaceutical companies.

The construction industry also seems likely to be spared the tax. The sector is dominated by companies close to the government. Hungary’s most powerful oligarch, Lorinc Meszaros, won’t have to worry about participating to save the government’s regulated energy price system.

Six weeks after winning the election, the government has yet to unveil a viable deficit reduction program. Earlier this week, the National Bank published a list of 144 recommendations to accelerate Hungary’s convergence and called for a rapid reduction in the deficit.

The cabinet revised the 2022 target from 1pp to 4.9% by postponing HUF 755 billion of public investment to the end of 2021, but analysts called for more aggressive measures to keep the budget deficit below. 5%.

Analysts predict a budget deficit of 7-8% without budget adjustments and a widening of the current account of the same clip in 2022, when Hungary’s energy bills are expected to worsen sharply.

Orban flatly ruled out the launch of austerity measures directly affecting households and hinted that he would target foreign companies making extra profits.

The latest announcement is both a confirmation and the government’s first open admission to the dismal state of public finances, according to the comments.

Introducing Marton Nagy, his new economic development minister, to parliament lawmakers on Tuesday, Orban said Hungary needs innovative economic policy measures that break with convention. Nagy, the former deputy governor of the National Bank, left his post in 2020 to become the prime minister’s chief economic adviser.

The price cap is also putting a lot of pressure on public finances and the government will probably have to intervene to cover the large losses expected from the mostly state-owned utilities, which currently bear the bulk of the cost of rising energy prices. The regulated retail price of energy, in place since 2013, is expected to widen the deficit by 1.2% of GDP, according to the European Commission’s latest country report.

Hungarian stocks ended the day in the red as rumors swirled about a one-off tax on large corporations. Investors were on edge all day, awaiting the Prime Minister’s announcement, which came hours later after the bell.

The benchmark index of the Budapest Stock Exchange lost 3.4% to 41,516 after falling 1.1% the day before. All four blue chips ended the day lower. OTP Bank fell 4.7% to HUF 9,812, oil and gas company MOL fell 4% to HUF 2,756. MTelekom and Richter lost 3.3% and 1.6% respectively.

As expected, investors were unhappy with the government’s new policy measure, the details of which will be revealed at a weekly press briefing on May 26. EUR/HUF quickly rose from 388 to 395 on the announcement. One euro was hovering near 381 HUF a day earlier.

The slowing pace of monetary tightening from May, signaled by MNB Deputy Governor Barnabas Virag on Tuesday, triggered a sell-off in the currency. The forint also weakened against the zloty after the announcement that the European Commission could adopt the Polish stimulus package within days.

Laura T. Thrasher