The government is proposing to make household bonds free of the income tax

HUNGARY - In Brief 13 Mar 2019 by Istvan Racz

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The finance minister yesterday handed in a proposal to the National Assembly, according to which the interest earned from household bonds, the special kind of government debt that is only available to domestic individuals, would be free of the flat 15% income tax, as regards any new series of such debt issued after June 1, 2019. This proposal fits to the existing policy line of doubling the outstanding stock of household bonds over the next five years. from HUF 7516bn or 26.2% of total central government debt at end-2018.Year end stock and structure of central government debt (in HUFbn)Source: ÁKKAs we wrote in an earlier note just a few days ago, we have serious doubts if the foregoing target is realistic at all (and even more doubts if the MNB's vision to put all government debt into domestic hands in six years is anything close to being possible). But the important point is the message that the government and the MNB intend to work hard to rapidly increase the share of holdings by domestic households (as well as of HUF-denominated papers) within total government debt.The specific impact of the newly proposed tax measure, either on debt sales to households or on the budget, is impossible to forecast, as no one knows how much of the prospective savings out of the forgone tax will be left in the pockets of investors. In other words, we do not know with what coupons the ÁKK will issue the new series of household bonds after June 1. Given that the target to double the stock in five years would also require the doubling of annual net sales of household bonds for the whole period, we expect most of the forgone tax to be left with investors. And whatever amount of extra dem...