Hungary’s announcement on windfall taxes unsettles investors, sends markets in freefall

Hungary’s decision to levy extraordinary sectoral taxes is not the first time that Prime Minister Viktor Orbán resorts to unorthodox economic measures to prop up the budget. The announcement on Thursday triggered a selling wave on local financial markets, suggesting that investors are alarmed by the country’s return to economic unorthodoxy.

Hungary will impose USD 2.2 billion in annual windfall taxes on banks, energy firms, insurers and airlines among others, Economic Development Minister Márton Nagy announced on Thursday. The new levies will be in place this year and next, he said. Banks will have to contribute HUF 300 billion per year on top of existing taxes, the same amount as energy firms, with these two sectors bearing the brunt of the HUF 800 billion burden.
In a video published on Facebook, Prime Minister Viktor Orbán said that government would set up “a utility price cap protection fund” and a defense fund and banks, insurance companies, large distribution chains, energy and trading companies, telecommunications companies and airlines would be obliged to pay “a large part of their excess profits” into those two funds. “We are asking and expecting those that make excess profits in this situation of war to help people and contribute to the country’s defense spending,” Orbán said in the video.
The levy on excess profits “is fair since we’re not taking away all of the profit from anywhere, only a significant portion to meet our goals,” Cabinet Minister Gergely Gulyás said the following day.

Hole in the budget
The set of new taxes is aimed at reining in the country’s budget deficit, which ballooned on the back of lavish election spending. Generous financial handouts to the electorate by Prime Minister Viktor Orbán’s government, which won re-election in April, helped fight off the economic fallout of the pandemic while carving a hole in the country’s budget.
Revenue from the new windfall taxes is set to account for 40% of the planned fiscal consolidation, while the remaining 60% would come from savings and spending cuts, Márton Nagy said.
The announcement on the new levies comes hot on the heels of Orbán’s decision to declare a state of emergency on account of the war in Ukraine, allowing the government to rule by decree.
The windfall taxes, along with planned expenditure cuts, will help consolidate the budget at a time when the EU effectively froze funding for Hungary over accusations of rampant corruption and a disregard for democratic norms.
According to calculations by financial website Portfolio.hu, the fiscal adjustment planned for 2022 and 2023 may be one of the largest such packages since the change of regime.
Gergely Gulyás noted that the government is committed to meeting its budget deficit target of 4.9% of GDP this year, and plans to narrow it further to 3.5% next year. “We will keep deficit and debt in check, which is the government’s declared goal,” Gulyás said.

Markets fall
News of the windfall taxes sent Hungarian stocks down by the most in nearly three months and the forint approached the 400 level against the euro, which is a negative record set earlier this year.
Budapest’s BUX stock index was the world’s worst performer on Thursday after dropping as much as 9.8% during trading hours and closing 5.5% lower. Mol was the weakest performer in the BUX, sliding 9.1%, followed by the country’s largest lender, OTP Bank Nyrt., which declined 8.2%.
The forint lost as much as 1% against the euro before it gained 0.2%. The biggest weakening of the forint this year occurred on March 7, when the currency hit an all-time low of HUF 400 per euro.