Hungary's Tax Proposal Amid Economic Struggles

BUDAPEST (Reuters) – Hungary has proposed increasing certain taxes starting in 2025, correlating with the July headline inflation rate. This move is part of Prime Minister Viktor Orban's government efforts to address budget deficits as the economy enters recession again.

The central bank has faced challenges, pausing interest rate cuts last week due to forint declines and criticizing price hikes linked to prior-year inflation by telecommunications and banking sectors, which complicate inflation control.

Proposed tax changes involve tying increases in excise taxes on fuel, alcohol, and tobacco to the previous year’s July inflation rate. Similar adjustments are suggested for car registration and ownership taxes.

Currently, Hungary's headline inflation rate stands at 4.1%, reduced from a peak of 25.7% in January 2023 but still exceeding the National Bank of Hungary's 3% target, which allows a one-percentage-point deviation.

ING economist Peter Virovacz warned that another energy price shock could elevate inflation back into double digits, affecting subsequent years. However, he noted that this new tax mechanism might stabilize strained budget revenues amid poor recovery from previous downturns and rising inflation-linked expenses for pensions and debt servicing.

Recent data indicates Hungary's economy is in a technical recession, impacted by sluggishness in agriculture, industry, and construction. This economic strain has compelled the Orban government to defer public investment and implement some tax increases, which might push underlying price trends beyond the central bank's target next year.

The central bank has not responded to inquiries regarding the government’s tax proposal.