Agreement reached on wages, social security tax

HUNGARY - In Brief 23 Nov 2016 by Istvan Racz

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The government reached an agreement with representative organizations of employers and with trade unions on the next two years' measures regarding the social contribution tax (SCT) and minimum wages. According to this, the SCT - which employers pay on top of gross wages - will be cut to 22% from 27% in 2017, and further to 20% in 2018. In addition, the statutory minimum wage will rise by 15/25% in 2017 (the latter figure refers to the minimum wage set for jobs requiring secondary level education or higher) and by an additional 8/12% in 2018. Should gross wages rise by more than 11% yoy (!) in the first nine months of 2017, the government would cut the SCT by 2.5 percentage points, rather than by 2% points, in 2018. Finally, the corporate tax will be cut to a flat 9% in 2017, from the current 10-19% (the former rate set for corporate profit up to HUF500m p.a., practically the tax rate for SMEs).The Economy Ministry expects the net fiscal cost of these measures at 1.1% of GDP in 2017 and 1.3% of GDP (compared to the current fiscal trend) in 2018. Cutting the SCT is particularly costly, but the government hopes to earn big amounts from the extra taxes collected on sharply higher minimum wages. From the fiscal equilibrium point of view, the government can afford the package, as against a targeted deficit of 2.4% of GDP in 2017, the net financing balance (normally very close to the ESA2010 balance) was exactly zero in Q1-Q3 2016. Apparently, this package represents a key way of the intended fiscal loosening in 2017, which is an election campaign year (the vote itself will be held in April 2018). Economy minister Varga expects these measures to push real GDP growth to the 3-...