Hungary Still Lacks A Coherent Economic Policy

“Hungary […] is in dire need of [a coherent economic] policy. The country reasoned its decision in mid-July to get rid of the International Monetary Fund with a desire for “economic policy sovereignty”–a wish to pursue an economic policy on its own.

As a result, Hungary is left to its own devices to ensure its financing from markets. A credible and sustainable economic policy would be key to convince investors to put their money into Hungarian assets. […]

Now Hungary wants to boost growth with cutting personal income taxes and corporate taxes for small and medium-size companies. And plug the resulting revenue holes in the budget with hefty extraordinary taxes to be levied on energy companies, telecommunications firms and large supermarket chains–most of which are foreign-owned–for three years, on top of a massive bank tax already approved earlier this year.

The levies, which will are scheduled to pass parliament Monday, will wipe out half of the sectors’ profits each year. They are a “bad message” to investors, Mr. Orban agreed. But necessary to aim at an economic growth of 4% to 6% in three years, Mr. Orban added.

However, most investment bank economists are of the view that the taxes, which could raise constitutional concerns as well as EU disapproval, will backlash and dampen growth, reduce employment and boost inflation as the companies will try to pass the higher costs on to consumers. Morgan Stanley economist Pasquale Diana even said that Hungary is “squaring the circle with the one-off taxes,” which neither the credit-rating agencies nor the central bank will like.

While the extra tax revenues make the 2010 and 2011 budget deficit targets attainable, concerns remain how Hungary plans to fund the personal income and corporate tax cuts beyond 2012, when the temporary tax increases are to end, if the spending side of the budget is not reformed until then.

Thus, markets’ hopes were also high that the Prime Minister will reveal Monday budget reform plans and spending cuts as the speech was titled an economic action plan. But Mr. Orban only said that the tax increases will provide an opportunity to reform the health, education and public sectors in the years to come.

How much disappointment markets can take for how long from Hungary is the key question left.”