Hungary to cut corporate tax rate below Ireland’s to lowest in EU

New 9% rate will boost growth and ‘poses no danger to fiscal discipline’, says ING Bank

Viktor Orban: The Hungarian prime minister wants to accelerate economic growth from about 2.1% this year. Photograph: AP

Viktor Orban: The Hungarian prime minister wants to accelerate economic growth from about 2.1% this year. Photograph: AP

 

Hungary will cut its corporate income tax to the lowest in the European Union, reducing the levy by more than half in some cases, as prime minister Viktor Orban turns to budget steps to boost growth ahead of parliamentary elections.

The eastern European nation will use a single rate of 9 per cent next year, according to a statement published on the government website. That compares with the two current brackets of 10 per cent for profits up to 500 million Hungarian forint (€1.6 million) and 19 per cent above that.

The move will push the rate below the Republic’s 12.5 per cent, which is shared by Cyprus, to become the lowest in the EU.

Hungary is joining a global shift toward budget stimulus, as record-low central bank rates exhausting most of the room to boost growth through monetary policy.

Mr Orban, who will face elections in 2018, is seeking to accelerate economic growth from an estimated 2.1 per cent this year, the slowest pace since 2013.

“Lowering the corporate tax will boost growth, enable companies to cover the costs of much-needed wage raises and will also help investments,” said Peter Virovacz, an economist at ING Bank in Budapest. “The move poses no danger to fiscal discipline as there’s ample room in the budget to make up for the loss in revenue.”

Stocks rise

Hungary’s benchmark BUX stock index reversed declines after the announcement and rose as much as 1.2 per cent, before trading 0.6 per cent higher at 30,145 points by mid-afternoon in Budapest, near a record high.

Magyar Telekom Nyrt, the nation’s former phone monopoly controlled by Deutsche Telekom, led gains with a 1.5 per cent jump to the highest in a week, while OTP Bank, the country’s largest lender, rose 0.5 per cent.

The forint strengthened 0.3 per cent to 309.35 per euro, rebounding from a three-month low on Wednesday.

Mr Orban is making use of his increased fiscal wiggle room after he narrowed the budget gap to the smallest in 20 years in 2015. The corporate tax cut will lower revenue by 145 billion forint each year, economy minister Mihaly Varga told the MTI state news service.

While Hungary has used targeted industry levies to shore up the budget, general taxes have gradually fallen across the economy since right-wing Orban rose to power in 2010. The country has one of the lowest personal income taxes in Europe, at 15 per cent, while payroll taxes will fall by four percentage points next year.

The latter, along with a 15 per cent increase in the minimum wage, is part of a plan to counter a labour shortage exacerbated by an exodus of skilled workers to more affluent European countries.

Tax breaks

The outlook for the country’s largest listed companies is muddled by an array of tax breaks and special industry levies, according to analysts at Equilor in Budapest.

“It’s difficult to assess the exact impact on listed companies, as many have already relied on special breaks to cut their tax burden,” said Monika Kiss, the head of research at Equilor.

“For the overall economy’s competitiveness, it’s certainly a very important step.”