Hungary plans inflation-linked rises in some taxes from 2025

10:03 am Thursday, October 31st, 2024

BUDAPEST (Reuters) – Hungary has proposed to increase some taxes in line with the July headline inflation rate from 2025, part of wider efforts by Prime Minister Viktor Orban’s government to plug budget holes as the economy dips back into recession.

Hungary’s central bank, which was forced to pause interest rate cuts last week amid falls in the forint, has criticised a similar practice of price rises linked to the previous year’s inflation rate by telecommunications companies and banks, saying it hampered the fight against inflation.

Tax changes submitted to parliament this week showed Orban’s government proposing to link rises in excise taxes on fuel, alcohol and tobacco with the July annual headline inflation rate of the previous year from 2025.

The proposals include a similar mechanism for taxes on car registration and ownership.

Hungary’s headline inflation rate ran at 4.1% in July, down from a peak of 25.7% in January 2023, but still slightly above the National Bank of Hungary’s 3% medium-term target with a tolerance band of a percentage point on both sides.

“The issue is that in case there is another energy price shock and the inflation rate rises back into double digits, then this will have a knock-on effect on the inflation rate of the following year,” ING economist Peter Virovacz said.

However, he said the new mechanism could help stabilise revenues in the budget, strained by a much-weaker-than-expected recovery from last year’s downturn and a surge in inflation-linked spending, including on pensions and debt servicing.

Data published on Wednesday showed Hungary’s economy dipped back into a technical recession in the third quarter, weighed down by weakness in agriculture, industry and construction.

This has put pressure on the budget, forcing Orban to postpone public investments and raise some taxes, which the central bank has said could lift its closely-watched measure of underlying price trends above its 3% target next year.

The central bank did not immediately respond to emailed questions on the latest government proposal.

(Reporting by Gergely Szakacs; Editing by Ros Russell)