Hungary's Premier Gyurcsany Proposes Tax-Cut Package

By Zoltan Simon

Aug. 27 (Bloomberg) -- Hungarian Prime Minister Ferenc Gyurcsany, fighting to lift his popularity from record lows, proposed cutting taxes to accelerate growth from the slowest pace in 14 years.

The government wants to cut taxes by as much as 1.2 trillion forint ($7.4 billion) over the next four years, Gyurcsany wrote in an article published in news daily Nepszabadsag. The proposal calls for cutting corporate and payroll taxes and making the lower of the two income tax brackets available for higher salaries.

Gyurcsany is reversing some of the tax increases he pushed through in 2006 as part of a plan to trim a record budget deficit and meet euro-adoption terms next year. The measures, which also included cutting state jobs and subsidies, stalled economic growth and sank the premier's popularity.

``We can create a better-functioning, stronger, more prosperous new Hungary,'' Gyurcsany wrote. ``The Hungarian model we are proposing can match the social and economic goals of competitiveness.''

The forint traded at 235.67 at 8:48 a.m. in Budapest, from 235.84 late yesterday.

Economic growth was 1.3 percent last year, matching the lowest rate since 1993. Gyurcsany, who faced riots after his deficit-cutting measures were announced, had a 22 percent approval rating in June after six months at a record low of 19 percent, the pollster Gallup said on July 11. The poll of 1,023 people had a margin of error of 3.1 percentage points.

Region's Laggard

Growth, at an annual 2.2 percent in the second quarter, is slower than in most other east European countries that joined the EU since 2004. The Czech economy grew an annual 4.5 percent in the second quarter and Slovak annual growth was 7.6 percent.

With the next parliamentary elections less than two years away, Gyurcsany is now under pressure to boost growth and his party's popularity.

The Socialists had 22 percent support in July, compared with 41 percent for the main opposition Fidesz party, according to an Aug. 8 to 12 poll by Marketing Centrum. The pollster surveyed 1,207 Hungarians and didn't give a margin of error.

Minority Government

The premier has governed in a parliamentary minority since May and needs opposition support to pass the proposed measures. As the opposition is calling for early elections, the government's fate hinges on its ability to pass the tax law and next year's budget, the premier said on May 7.

Gyurcsany is proposing cutting the corporate income tax rate next year to 18 percent from 20 percent, while raising the upper limit for the lower, 18 percent personal income tax to 2 million forint a year from 1.7 million forint a year. With lower payroll taxes, the net effect for next year would be about 300 billion forint, he wrote.

``Two-thirds of this considerable tax cut will go to businesses and one-third to individuals,'' Gyurcsany wrote.

The scope of tax cuts after next year hinges on the government's success in raising revenue by cracking down on the so-called gray and black economies, which Gyurcsany said make up 20 percent of the economy.

Budget Plan

The tax cuts ``can't threaten'' Hungary's plan to narrow the budget deficit to 3.8 percent of gross domestic product this year and 3.2 percent next year, Gyurcsany said. He has pledged to meet euro-adoption terms next year.

The shortfall was 9.2 percent in 2006, when pre-election spending helped the premier lead his Socialists to become the first Hungarian party to win consecutive terms since the country shed communism in 1990.

Economic recovery is limited by weak demand in the euro region, destination of 57 percent of Hungarian exports, the central bank said in a report on Monday. It forecast gross domestic product growing 2.4 percent this year and next and 3.4 percent in 2010.

Germany, Europe's largest economy and the buyer of more than a quarter of Hungarian exports, contracted for the first time in almost four years in the second quarter. German GDP fell 0.5 percent in the second quarter and the French economy, the second-largest in the euro area, contracted 0.3 percent.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net