The International Monetary Fund (IMF) has called on Hungary to adopt an ambitious and growth-friendly fiscal adjustment strategy to achieve a sustainable reduction in public debt and to build policy space. The strategy should rely on durable expenditure consolidation, a review of spending, and a gradual elimination of distortionary taxes, it said.
In its 2014 Article IV consultation report with Hungary, the IMF welcomed the authorities’ commitment to fiscal consolidation, but noted that current policies appear to be insufficient. With the deficit target increasing to 2.9 percent of gross domestic product (GDP), the structural deficit is set to widen by about one percent of gross domestic product this year, leaving public debt roughly unchanged at about 79 percent of GDP, the IMF said.
The report said that it is necessary for the Hungarian government to streamline the tax regime through a reduction of exemptions, special regimes, and elimination of distortionary sectoral taxes; reduce the high tax wedge for low-income workers; and decisively tackle value-added tax (VAT) fraud, particularly in relation to the sale of basic foodstuffs.
Presenting recommendations, the IMF said fiscal savings can be achieved by cutting the number of VAT rates from three to two. Likewise, it recommended eliminating selected corporate income tax exemptions (e.g. for sports and entertainment), and removing excise exemptions for diesel fuel and tobacco. Together, such measures would have a fiscal impact of about 0.9 percent of GDP.
However, the main contributor to deficit reduction efforts should be tackling VAT fraud, it said, noted that eliminating 75 percent of the estimated total VAT fraud would have a significantly greater impact, of about 1.3 percent of GDP.
Source: Tax News, Brussels

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