Special Taxes as Part of 'Anti-War' Economic Strategy

Hungary's government has unveiled what it dubs an "anti-war" action plan. The ambitious strategy, announced on Monday, aims to shore up the country's finances through a series of special taxes on banks, energy companies, and multinational firms.

Prime Minister Viktor Orbán's administration is no stranger to unconventional economic measures. Once again, they've turned to their tried-and-true tactic of imposing special taxes on key industries to fill the gaps in the national budget. Cabinet Minister Gergely Gulyás revealed that current levels of windfall taxes on banks, energy companies, and foreign-owned businesses will remain in place, despite earlier promises of phasing them out.

While Hungary isn't directly involved in the Ukraine conflict, Gulyás justified the new measures by calling for a "defense fund" contribution from companies reaping extra profits in these "wartime" conditions. This isn't the first time Hungary has implemented such taxes, and the timing is no coincidence given the dire state of the state budget.

The numbers are significant: the new measures are expected to bring an additional HUF 400 billion (USD 1.1 billion) into state coffers. The financial sector alone is projected to contribute HUF 85 billion this year, with that figure potentially rising to HUF 200 billion in 2025.

The government has confirmed that the bank tax will remain in place through 2025. This decision indicates a longer-term commitment to this revenue source, despite potential criticism from the banking sector and international observers. The tax is currently calculated using pre-tax adjusted earnings from 2022. From 2025, the calculation will use pre-tax adjusted earnings from 2023.

The government is set to introduce a new levy on banks’ foreign exchange transactions, including currency swaps. Additionally, the existing transaction tax will be increased from the current rate of 0.3% to the new levy level, starting at the beginning of August.

The decision to increase certain corporate tax burdens comes against a backdrop of economic challenges. Hungary's budget deficit has been consistently above EU limits, averaging nearly 7% of GDP over the past four years. The country was recently among seven EU members reprimanded for excessive deficits. Hungary’s budget deficit amounted to a staggering HUF 2.66 trillion in the first half. That is more than the government had originally planned for the whole year.

The government's commitment to meeting its revised 2024 deficit target of 4.5% of GDP is clear, but the methods employed are raising questions. From tightening rules on bank tax deductions to introducing new levies on foreign exchange deals, the measures are comprehensive and far-reaching.

As Hungarian stocks and the forint weakened after the new measures were announced, analysts worry that Orbán’s "anti-war" economic strategy may antagonize investors and potentially further strain relations with the EU.