That is why the Hungarian budget was permanently overturned

As part of the imbalance procedure, the European Commission issues a report every year in which it evaluates Hungarian economic processes. One of the special topics of the 2024 “In Depth Review” is the change in the Hungarian tax burden and its causes. The topic is particularly interesting from the point of view that there have been problems with the budget balance for years. In such circumstances, the reduction of the tax burden is not really good news either, since if this causes a deficit, the state becomes indebted, and the increasing interest burden increases the budget’s need for income in the longer term.

Decreasing tax burden

In Hungary, in 2022, the state deducted 35.1% of the produced GDP in the form of taxes. (The total income centralization is much higher than this, around 42-43%, since the state not only collects money in the form of taxes, but the article specifically focuses on the tax burden.) Based on the indicator, the tax burden has decreased in recent years, since in 2017 there were still 39 stood at .1%. The material of the European Commission divides the reasons for the reduction of the tax burden in proportion to GDP into two main factors.

1. The discretionary factor is the more obvious component, primarily the government’s tax reduction measures, especially “changes in the implicit tax rates of taxes on consumption and labor.”
2. The other important effect comes from how the weight of the components of GDP subject to different tax burdens has changed.

Based on these factors, the most characteristic processes of the recent Hungarian tax history can be identified. The steps belonging to the first group are the more spectacular (and better known):

• In the early 2010s – in order to support the consolidation of the public finances and reduce labor tax burdens – Hungary increased the role of consumption taxes in the tax mix, most significantly by raising the general sales tax to 27% in 2012, improving the efficiency of VAT collection and introducing certain sector-specific taxes (such as those on financial transactions and telecommunications services). These steps increased the implicit tax rate on consumption by 4 percentage points between 2011 and 2022, thereby increasing tax revenues by 2.2% of GDP.
• since 2017 Hungary additional labor tax cuts implemented to stimulate employment. Employer social security contributions were gradually reduced from 27% to 13% of the gross salary. This reduced the implicit tax rate on labor by 5 percentage points and reduced tax revenues by 1.6% of GDP by 2022.
• In addition to the corporate tax rate for 2017 Its reduction to 9% reduced the tax burden relative to GDP by an additional 2.2 percentage points before It would have grown again in 2022 due to the introduction of temporary extra profits taxes imposed on companies in the energy, financial and retail sectors.

In addition to the above, however, the change in the composition of GDP also contributed to the reduction of the tax burden. Between 2012 and 2023, the share of the consumption tax base in GDP decreased by 4 percentage points, while the share of the labor tax base in GDP decreased by 5.3 percentage points. These trends can be explained by changes in Hungary’s economic structure:

• Export- and investment-driven economic growth reduced the weight of consumption in the GDP. Less taxed components of GDP – such as corporate investment and exports – which have grown strongly since 2009.
• A decrease in the wage rate inhibited the growth of labor tax revenues in the Hungarian economy. Between 2009 and 2021, wage growth lagged behind profit growth, so the profit share in GDP increased by 4 percentage points. This process was partly driven by capital accumulation, and partly by the reduction of social security contributions implemented since 2017, which were not fully passed on to workers in the form of higher wages. In recent times, the profit share continued to increase due to the shocks of the rise in raw materials and consumer prices.

Changes in the implicit tax rate and tax bases of consumption and labor taxes

The invisible effect

Overall, we can see that the tax burden reduction of the economy as a whole in recent years can be broken down as follows. An increase in taxes on consumption increased the burden, while taxes on labor and capital decreased it. The balance of these three direct effects is only slightly negative, but the “invisible” tax-reducing effect of the structural changes in GDP is significant. Simply put the weight of heavily taxed consumption decreased (it is worth comparing this with our decline in the ranking of consumption per capita in the EU), and this is actually overcompensated for the direct impact of the increase in consumption taxes.

Breakdown of changes in the tax burden in proportion to GDP

The persistent erosion of tax revenues limits fiscal policy – states the European Commission. The tax cuts adopted since 2017 partially reversed the budget consolidation efforts of the early 2010s and, together with the loss of tax revenue exacerbated by structural changes, permanently increased the deficit. All the more so since there was no adjustment on the expenditure side. The sectoral special taxes did improve the situation a little, but the price was an increase in the risks of market distortion. Based on this, the conclusion of the committee’s material is that the budget adjustment must be done in a sustainable manner either from the tax revenue side, or the expenditure side must be adjusted to the revenues.

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