Hungary's government raised taxes on the mostly foreign-owned financial and telecoms sectors on Monday to plug budget holes but also rattling investors who have already experienced three years of unpredictable policies.
The new set of fiscal measures were a surprise. They included lifting the current financial transaction tax and raising existing charges on telephone calls and mining royalties for what some analysts said was around 100 billion forints ($459.68 million).
The government said the moves were needed to make up a shortfall in the budget brought about because low inflation is hitting revenue.
They will help Prime Minister Viktor Orban keep the deficit below the European Union's 3 percent of GDP ceiling. Analysts said they may also create room for him to spend ahead of parliamentary elections next year.
Since he won in 2010 elections, Orban's policies have included the nationalisation of private pension funds and taxes on banks and selected business sectors. These have helped his government avoid outright austerity and still cut the deficit, while also retaining a lead over the opposition.
"The early summer austerity measures are … making room for late summer fiscal loosening measures in order to sweeten voters ahead of elections in April 2014 while keeping the budget deficit still below 3 percent," said Zoltan Torok, an analyst at Raiffeisen.
Many economists believe Orban's policies may consign Hungary to years of bumping along with very low growth after a recession last year, as they say he has scared off some of the foreign direct investors whose cash is badly needed to fund a stronger recovery in the export-driven economy.
Economy Minister Mihaly Varga said measures implemented earlier this year to cut state spending may not be enough to fully avert the threat of fiscal sanctions from Brussels because 38-year-low inflation levels cut tax revenues,
"One of the main causes of the measures is to ensure that Hungary gets out (from the EU's excessive deficit procedure) once and for all, and avert the threat that we get back into it in a short time," Varga told a news conference.
The EU said it planned to end its excessive deficit procedure against Hungary last month, lifting it off the budget blacklist and acknowledging government efforts to cut the deficit below 3 percent of economic output.
It did this despite earlier criticism over the imposition of big windfall taxes on mostly foreign companies. The EU is expected to make the final decision on ending Hungary's deficit blacklisting later this week.
BANKS HIT
Even though the government formally taxes the financial sector, blaming Brussels, banks have passed on most of the costs from the financial transaction tax, which was introduced last year, to their clients – households and firms.
Varga said the country's Banking Association had accepted the government's proposals for the tax hikes. The group did not immediately comment on the announcement.
In a separate draft bill submitted to parliament, the government also said commercial banks, which already pay Europe's highest bank tax, will have to pay a 7 percent charge on troubled municipal debt that the government will take over this year.
This measure alone will put at least 43 billion forints into government coffers, as the state will assume 612 billion forints worth of debt, much of it denominated in foreign currency, from municipalities.
Banks must pay the 7 percent charge in forints by December 20 this year. If they want to get rid of the remaining stock of around 500 billion forints worth of municipal debt, they can do that by indicating a willingness to pay the levy on this additional chunk as well, according to the bill.
Hungarian stocks fell on the announcements. The Budapest Stock Exchange's main index fell one percent with Hungary's biggest bank OTP shedding 2.3 percent while telecoms firm Magyar Telekom lost 3 percent by 1232 GMT. The forint was largely unfazed while bonds firmed slightly.
