Реферат: Country Study, Hungary

Country Study, Hungary


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Introduction to Hungary’s political history

Hungaryhas had a long and volatile history of political and economic change.  Hungary as a organized society datesback  before 1000 AD and has been ruledby different monarchies and foreign regimes every since.  This brief introduction  will outline Hungary’s political and economichistory starting with Hungary’s “Post-1945 World War II era”. 

DuringWWII Hungary fell under German control until the end of the war.  After Germany’s defeat in WWII,  a commission was established among alliedforces (American, Soviet, and British) in which had ultimate sovereignty overthe country.  However, since the leaderof the commission was a member of Stalin’s inner circle, the Soviets exercisedabsolute control.(Wash. Post., 1)         TheGovernment that was provisionally instituted in Hungary after WWII was shortlydissolved and  the Hungarian CommunistParty replaced them in the 1945 elections. 

The(HCP)Socialist government had instituted radical land ownership reforms and hadmade many utilities, banks and heavy industries state ran.  Then in 1949 at the beginning of thePost-Cold war era the Soviet’s  gainedcontrol of Hungary and in 1949 Hungary adopted a Soviet-style constitution andformed the Hungarian People’s Republic. Hungary’s economic state up until the mid 1950’s was a  economy similar to that of a Soviet modeledCentrally Planned Economy.  However, theeconomy in the mid 1950’s had begun a rapid deterioration which led to morepolitical reforms for Hungary.(Wash. Post, 2) 

Inthe mid 1950’s Hungary  attempted towithdraw from the Soviet sponsored Warsaw Pact and announced their neutralityand sought backing from the UN.  However,the United Nations failed to respond, as they were preoccupied in other areasof the world. As a result of lack of UN support, Soviet troops invaded Hungaryand regained control, during the invasion many Hungarians fled to othercountries.  This new Soviet culture inHungary had a more liberal culture and economic path as did the Soviet regimesof the past.  This Soviet government hadbecome relatively complacent for the next two decades until about the early1980’s.

Start of Transition

Bythe 1980’s Hungary’s government had some lasting economic reforms and wasresponding to political pressure to encourage more trade with the west.   This new plan to trade more with the westfor economic stimuli led to huge foreign debt as a result of unprofitableindustries.  These new economic troublesas well as Hungary’s strong nationalism to control their own destiny wereHungary’s first steps to a Western style democracy.  By the late 1980’s radicals with the party aswell as intellectuals were calling for change. In 1988 civic activism had accelerated to an all time high and a ReformSocialist leader, Imre Pozsgaywas elected.  Along with a new leader,Hungary also adopted a, “democracy package”, which included:  trade union pluralism, freedom ofassociation, freedom of press,  freedomof assembly, a new electoral law, and radical revisions to theirconstitution.(Wash. Post,4)

Hungary’s steps to a market economy

Inthe following year the Hungarian parliament adopted legislation providing formultiparty elections and direct presidential elections.  Hungary now had a new vision of government,the government now was to focus on human and civil rights, and to ensure theseparation of powers among the executive, legislative and judicial branches.

Onemajor step for Hungary in asserting its move to a market economy was torestructure its national security.  Indoing this Hungary reduced it’s defense expenditure by 17% and reduced itsarmed forces by 30% between 1989 and 1992, thus dissolving their membership inthe Warsaw Pact .  Currently Hungary istrying to develop Western-style defense force to join NATO.(Wash. Post, 5)   

Current Political Structure

Thecurrent political conditions in Hungary are a system of many checks andbalances.  The Prime Minister whom iselected selects the ministers in the cabinet. Each of the cabinet members presides before four parliamentarycommittees in open hearings.  Thelegislative body in Hungary is a unicameral house and is the highest authorityin the state.

Current Political State

TheHungarian Socialist Party was re-elected in1994 in a multiparty election afterreceiving 54% of the popular votes. Although the (HSP) had taken back control of the government in the 1994elections, the party has announced its intentions to: “continue economicreform, privatization and to preserve political rights.”(Wash. Post, 6)

Economic Structure in Hungary

Hungary’shistory of economic vitality has predominately been agriculture.  In 1950, over 50% of Hungary’s work forceworked on the land.  Hungary’s percentageof workforce working on the land in 1993 was 7%.    Hungary’s agriculturaldecline is directly tied to lack of investment in the 1970’s and the1980’s.  Hungary’s decline is also aproduct of  large amounts of foreign debtthat were accumulated in the 1970’s and 1980’s.(6)  The net foreign debt in 1972 was about 1billion(U.S. dollars) and in 1993 Hungary’s net foreign debt was 15billion(U.S. dollars).  Although Hungaryhas the highest per-capita debt in central Europe their repayment record isstellar.(Wash. Post,7)  One of the majorfunctions to Hungary’s success to transition is their role in revenue policy.

Hungarian Tax Reform

Hungary's movement from acentrally planed economy to a market economy has lead to massive tax reforms inthe former soviet satellite country. These taxes basically fall into three major categories: Value Added Tax,Personal Income Tax, and Corporate Income Tax. In this section of the paper I will first examine the attributes anddisadvantages of the separate categories of the taxes and compare them to theformer means of revenue collection. Next, I will demonstrate the success (or as the case may be, failure) ofsuch taxes.  Finally,  I will write about what effects Hungary hasexperienced due to the tremendous changes in the tax system.

Value Added Tax

On January 1, 1988 Hungaryintroduced a Value Added Tax (VAT) as part of a ovementfrom a socialist centralized country to on with a market economy (Newbery 1).  This taxis similar to the tax currently operating in the European Union memberstates.  This tax is interesting becauseit is an inclusive tax.  That is a tax inwhich the base is included in the invoiced amount of the good or service.  In other words the tax is passed down to theend customer and in turn the seller is reimbursed the amount of taxes paid onthat particular good or service. 

The concept of a Value AddedTax (VAT) was something that was entirely different to managers that were usedto output based goals (in the old system) as opposed to budgets and costminimization as practiced by their western counterparts.  The Value Added Tax (VAT) has become avehicle to flush out businesses that are experiencing market failure thatdemonstrate no reasonable need to continue to operate (there are obviousexceptions to this such as utilities, etc....). It also cut down on over production of certain goods.

The Value Added Tax (VAT) isalso a way that a country such as Hungary can use to encourage (or as the casemay be discourage) certain types of businesses in their country.  According to Deloitte& Touche the standard rate for the Value AddedTax (VAT) is currently 25%. However,  many products andservices such as basic food products, medical instruments, and utilities arecharged 12% .  In addition,  various supplies qualify for completeexemption such as education,  culturalservices, sport events, health services, and services contributing toscientific research and development (D&T 8). 

Personal Income Tax

Along with the Value AddedTax (VAT) the Personal Income Tax (PIT) was also introduced to Hungary in1988.  The Hungarian Personal Income Tax(PIT) is a progressive tax with a universal additional tax for investment.  The tax is based on individual earnings fromall forms of work, though interest income is not taxed if certain conditionsare meet (D&TII, 1).    As shown infigure 1.1 the progressive tax rates on income earned at work range from 0-44%.

fig. 1.1

Personal Income Tax Rates

Level of Taxable Income HUF

Rate Applicable to Level (%)

Up to 110,000


100,001 — 150,000


150,001 — 220,000


220,001 — 380,000


380,001 — 550,000


Over 550,000


Source 1996 Deloitte & Touche LLP

The Hungarian PersonalIncome Tax (PIT) has several interesting features.  The first feature that is unique is that allHungarians  are taxed separately.  In other words, unlike the American Taxsystem where a family can jointly file the Hungarians prefer (for ideologicalreasons) to file individually.  However,this system is not with out it's flaws. The problem that tax administers run into is when one spouse stays athome to look after the children.  Thereason for this difficulty is the one wage earner is subject to heaviertaxation than two wage earners making the same total.  Tax administrators however are reluctant tochange the current system because of the administrative simplicity.

A second feature of theHungarian Personal Income Tax (PIT) that draws attention to itself is the factthat any income earned through deposits and securities are tax free if the interestrates are lower than that of the National Bank of Hungary.  According to D&T the National Bank ofHungary's interest rate in January was 25%. This means that all bank deposits that pay lower than 25% are taxfree.  However, If an individual were to make28% on investment he/she would be subject to a 20% tax on the additional 3% (asshown in figure 1.2).

fig. 1.2

                        Initial Investment                           100,000 HUF

                        Interest Paid onInvestment

                            in Bank X (28%)                      128,000 HUF

                        Interest Paid onInvestment

                            National Bank (25%)                 125,000 HUF

                        Taxable InterestIncome                     3,000 HUF

                        Taxes Due                                            600 HUF

This aspect of this taxallows for fair treatment to those who would otherwise lose their money puttingit in accounts that could not stay up with the tremendous inflation thatseveral countries in eastern Europe face due to their recent transition to amarket economy (Newbery, 6).

As was true with the ValueAdded Taxes (VAT) the Personal Income Tax (PIT) also has exemptions.  The following is a list of examples of itemsexempt from tax (Okno 2).

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Social Security allowances

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Gains of up to HUF 100,000 from the non commercialsale of moveable 


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Retirement gifts of up to HUF 10,000

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Compensation of defined working clothes


In addition as of January1995 tax credits against taxes owed were offered in several areas such associal security contributions by the employee, for individuals making under500,000 HUF, for installments on loans for dwellings, charitable contributions,and for special savings accounts.

Corporate Income Tax

The corporate tax is leviedon all businesses, no matter how large or small, the same way.  As of January of 1995 the corporate incometax has been reduced from 36% to 18% on undistributed profits before tax.  this is called either the additional tax orthe calculated tax.  After this tax hasbeen levied the profits are then distributed among the shareholders and anadditional 23% is taxed to the shareholders. To illustrate this tax figure 1.3 demonstrates how the tax is calculated.

fig 1.3

Calculation of AdditionalTax


Income before tax


Calculated at 18%


Income after tax to be distributed


Amount available for distribution after payment of additional tax (82/1.23)


Total Tax Paid


Effective Rate of the additional tax (% of income before tax


Source Deloitte& Touche LLP

In addition to the corporatetax employers must also make Social Security contributions.  Typically, employers must make a contributionat a rate of 44% of their gross salary. Employees are required to make a 10% contribution, however, it notunlikely to see individuals putting more than 10% away of retirement. 

Another tax that employersare subject to is the Unemployment Fund Contribution.  This is to continue to support the unemployedbetween work.  Employers must pay 4.2% oftheir employees gross salary and wages to the Unemployment Fund.  Employees are required to pay 1.5% of theirsalary.  However, employees'  contribution is tax deductible.

Training Fund Contributionsis yet another tax that corporations are subject to.  This tax is to provide for the cost oftraining employees.  This contribution iscurrently paid by the employer at 1.5% of the total payroll.  This tax is for corporate income tax purposes.

As with other Hungariantaxes exemptions are offered to certain kinds of business.  Hungary grants exemptions on a case by casebasis and either dose not grant an exemption or grants a 100%, or 60%exemption.  The figure below showshow  companies are allowed to use theirexemptions.

fig. 1.4

Percentage of Taxes dueunder specific exemption

18% subject to Corporations

23% subject to Shareholders

100% Exemption

100% reduction

No Reduction

60% Exemption

20% reduction

No Reduction

Businesses view this set oftaxes as equitable and do not squabble over the fairness of the taxes.  They seem to be more interested in how toreceive tax exemptions and want reform in the exemption granting side of thetax system (Newbery, 8).  This is good because of the infectious shadoweconomy in other former soviet countries. This means that businesses will be more willing to pay taxes that aredue to the government.

So What Does this mean for Hungary?

Newberyargues that the Hungarian tax system is at least as  egalitarian as any where else in the world asfar as an equal distribution of taxes. Especially since the method of redistribution is so good at keepingpoverty remarkably low.  While thetransition still will put a gap between the “havesand the have nots”, the government needs to keep itseye out for the most vulnerable such as the old and unskilled.  Many argue that because of the roughtransition people may become disillusioned with a market economy and neverrealize the gains that the countries leaders have fought so hard for.  However with vigilance and a little bit ofpatience Hungary will reach its goal.


In addition to using taxcollection as a source of raising revenue, Hungary has turned to privatizationto offset Hungary’s 31 billion USD national debt (Galai,1).  The sale of government controlledindustries such as natural gas, oil, and electric powered utilities has earnedthe government over 1.4 billion USD in the past year. 

Recently the HungarianGovernment decided to sale shares in eight of the fourteen nationally ownedelectrical power and distribution companies. A German consortium agreed to pay 180 billion HUF for the shares andcontrolling interest in the former government controlled utilities.

In addition to the sale of theutilities Hungary has had discussions about selling the National Bank ofBudapest to investors.  However analystpoint out the bank will have to spend the next year fixing up the bank beforethey can think about selling it. Government officials would expect a heavy return if the bank were to besold.

While some analyst applaudthe actions the government has taken others wonder who is really in control inHungary.  Is the government still callingthe shots or is it the foreign investor with the most money invested in amajority of Hungary's' industry.  Anotherkey step to Hungary’s transition to a market style economy is expenditurepolicy.

Expenditure Policy

Along with changing revenuepolicy expenditure policy is a crucial role of any government and especiallyimportant policy questions for governments in transition.  Hungary’s main policy stance on expendituresis to try to match in-kind efforts and expenditure policy to specificallyearmarked funds.

Defense spending   

As mentioned in theintroduction when Hungary decided to withdraw their membership with the WarsawPact they decided to drastically reduce their military expenditure.  Hungary’s reduction in defense spending was akey decrease in fiscal consolidation to help decrease their ever rising budget defict.  The graph inFig. 1.5 represents Hungary’s decrease in defense spending over the last tenyears.


Fig. 1.5        

<img src="/cache/referats/5889/image002.gif" v:shapes="_x0000_i1025">  SIPRI MilitaryExpenditure Database

Social Welfare Reform

Reforms to Hungary’s SocialWelfare systems have been plentiful. Decreases in Welfare systems have mainly been reallocation of subsideson a stricter criteria basis.  Hungaryhas made constant efforts to restructure social programs in which have provento be ineffective.  One example is thereform of the “Family Allowance System.” After a evaluation of the old program it was proven to be costineffective and replaced by a new “Family Support System”.   This new “Family Support System” targetfamilies in need based more on income criteria and targeted people in thegreatest need.  Another key socialexpenditure reform was that of pension and health programs.(CCET, 2)

Pension and Health Programs

Hungary experience greatabuse in the areas of health and pension programs, but have taken steps in theright direction to help correct the situation. One such of these decisions was that of increasing the number of daysemployers are liable for sick pay.  Thisreform travels in the right direction because the policy had reduced the SocialInsurance Fund and also created minimum incentives for abuse of thesystem.  Much more needs to be done  in the way of pension and health reformhowever this policy shows a step in the right direction..(CCET,2)

Expenditure Summary

The underlying tone ofHungary’s expenditure policy is that of reducing the budget deficit withoutcreating economic turbulence.  Hungaryfaces many obstacles in trying to reduce their budget deficit. Such obstaclesare rising inflation and high rates of unemployment  these problems lead to substantial socialproblems.  Regardless, Hungary is stilllooking the right “social safety net” but not at the expense of its economic viability and without effectingproduction and output ion a negative way.


Hungary has come a long waysince the initial transition from a centrally planed economy to a  market economy in 1988.  However, Hungary continues to strive toovercome the obstacles described in this paper. The transition has been difficult for the people of Hungary.  People accustom to a centrally plannedeconomy are not typically faced with subjects such as unemployment or costbudgeting.  Therefore, many Hungarianshave become disillusioned with the new market economy.  However, most (including socialist) haveinsisted that economic progress continue. In order for Hungary’s economy to continue its success it must remain tobe egalitarian in both the way it collects cash through taxes and the way itredistributes resources to the people of Hungary.  Hungary must be sensitive to the vulnerablesuch as the unemployed and the unskilled, during the sometimes unforgivingtransition to a market economy.


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CCET.“The Center For Co-Operation With TheEconomies in Transition.” OECD-OCDE. Http://www.oecd.org/sge/ccet/hun_fisc.htm.

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Sipri.  “Military Expenditure Database”. 

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WashingtonPost.“ Hungary: State Department Notes” WashingtonPost.Com. www.washingtonpost.com/wp-s…term/worldref/statedep/hungary.htm

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Deioitteand Touche LLp,“Taxation in Eastern Europe”.  Webmaster@dtomlinr.com.1996.

5. <span Times New Roman"">   

Galai,Andra’s.  “Saleof Eight Electric Co.’s Jolts Privitization Back toLife.” Http://www.iqsoft.hu/economy/page95_4/privat.html. 10/17/96.

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Galai,Andra’s. “Gathering momentum.” Http://www.iqsoft.hu/economy/page95_4/csaba.html.10/17/96

7. <span Times New Roman"">   

Langyel,Laszlo. “Towards a new model.” Http://www.iqsoft.hu/economy/page95_4/langyel.html. 10/17/96.

8. <span Times New Roman"">   

Newbery,David.  “An Analysis of the Hungarian taxReform.”  Center for Economic policyResearch. #558 May,1991.
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