Реферат: Country Study, Hungary

Dmitri Maslitchenkodmitri@mailroom.com

Introduction to Hungary’s politicalhistory

Hungary has had a long andvolatile history of political and economic change.  Hungary as a organizedsociety dates back  before 1000 AD and has been ruled by different monarchiesand foreign regimes every since.  This brief introduction  will outlineHungary’s political and economic history starting with Hungary’s “Post-1945World War II era”. 

During WWII Hungary fellunder German control until the end of the war.  After Germany’s defeat inWWII,  a commission was established among allied forces (American, Soviet, andBritish) in which had ultimate sovereignty over the country.  However, sincethe leader of the commission was a member of Stalin’s inner circle, the Sovietsexercised absolute control.(Wash. Post., 1)         The Government that wasprovisionally instituted in Hungary after WWII was shortly dissolved and  theHungarian Communist Party replaced them in the 1945 elections. 

The (HCP)Socialist governmenthad instituted radical land ownership reforms and had made many utilities,banks and heavy industries state ran.  Then in 1949 at the beginning of thePost-Cold war era the Soviet’s  gained control of Hungary and in 1949 Hungaryadopted a Soviet-style constitution and formed the Hungarian People’sRepublic.  Hungary’s economic state up until the mid 1950’s was a  economysimilar to that of a Soviet modeled Centrally Planned Economy.  However, theeconomy in the mid 1950’s had begun a rapid deterioration which led to morepolitical reforms for Hungary.(Wash. Post, 2) 

In the mid 1950’s Hungary attempted to withdraw from the Soviet sponsored Warsaw Pact and announced theirneutrality and sought backing from the UN.  However, the United Nations failedto respond, as they were preoccupied in other areas of the world. As a resultof lack of UN support, Soviet troops invaded Hungary and regained control,during the invasion many Hungarians fled to other countries.  This new Sovietculture in Hungary had a more liberal culture and economic path as did theSoviet regimes of the past.  This Soviet government had become relativelycomplacent for the next two decades until about the early 1980’s.

Start of Transition

By the 1980’s Hungary’sgovernment had some lasting economic reforms and was responding to politicalpressure to encourage more trade with the west.   This new plan to trade morewith the west for economic stimuli led to huge foreign debt as a result ofunprofitable industries.  These new economic troubles as well as Hungary’sstrong nationalism to control their own destiny were Hungary’s first steps to aWestern style democracy.  By the late 1980’s radicals with the party as well asintellectuals were calling for change.  In 1988 civic activism had acceleratedto an all time high and a Reform Socialist leader, Imre Pozsgay was elected. Along with a new leader, Hungary also adopted a, “democracy package”, whichincluded:  trade union pluralism, freedom of association, freedom of press, freedom of assembly, a new electoral law, and radical revisions to theirconstitution.(Wash. Post,4)

Hungary’s steps to a market economy

In the following year theHungarian parliament adopted legislation providing for multiparty elections anddirect presidential elections.  Hungary now had a new vision of government, thegovernment now was to focus on human and civil rights, and to ensure theseparation of powers among the executive, legislative and judicial branches.

One major step for Hungaryin asserting its move to a market economy was to restructure its nationalsecurity.  In doing this Hungary reduced it’s defense expenditure by 17% andreduced its armed forces by 30% between 1989 and 1992, thus dissolving theirmembership in the Warsaw Pact .  Currently Hungary is trying to developWestern-style defense force to join NATO.(Wash. Post, 5)   

Current Political Structure

The current politicalconditions in Hungary are a system of many checks and balances.  The PrimeMinister whom is elected selects the ministers in the cabinet.  Each of thecabinet members presides before four parliamentary committees in openhearings.  The legislative body in Hungary is a unicameral house and is thehighest authority in the state.

Current Political State

The Hungarian SocialistParty was re-elected in1994 in a multiparty election after receiving 54% of thepopular votes.  Although the (HSP) had taken back control of the government inthe 1994 elections, the party has announced its intentions to: “continueeconomic reform, privatization and to preserve political rights.”(Wash. Post,6)

Economic Structure in Hungary

Hungary’s history ofeconomic vitality has predominately been agriculture.  In 1950, over 50% ofHungary’s work force worked on the land.  Hungary’s percentage of workforceworking on the land in 1993  was 7%.    Hungary’s agricultural decline isdirectly tied to lack of investment in the 1970’s and the 1980’s.  Hungary’sdecline is also a product of  large amounts of foreign debt that wereaccumulated in the 1970’s and 1980’s.(6)  The net foreign debt in 1972 wasabout 1 billion(U.S. dollars) and in 1993 Hungary’s net foreign debt was 15billion(U.S. dollars).  Although Hungary has the highest per-capita debt incentral Europe their repayment record is stellar.(Wash. Post,7)  One of themajor functions to Hungary’s success to transition is their role in revenuepolicy.

Hungarian TaxReform

Hungary's movement from a centrally planed economy toa market economy has lead to massive tax reforms in the former soviet satellitecountry.  These taxes basically fall into three major categories: Value AddedTax, Personal Income Tax, and Corporate Income Tax.  In this section of thepaper I will first examine the attributes and disadvantages of the separatecategories of the taxes and compare them to the former means of revenuecollection.  Next, I will demonstrate the success (or as the case may be,failure) of such 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 Hungary introduced a Value AddedTax (VAT) as part of a ovement from a socialist centralized country to on witha market economy (Newbery 1).  This tax is similar to the tax currentlyoperating in the European Union member states.  This tax is interesting becauseit is an inclusive tax.  That is a tax in which the base is included in theinvoiced amount of the good or service.  In other words the tax is passed downto the end customer and in turn the seller is reimbursed the amount of taxespaid on that particular good or service. 

The concept of a Value Added Tax (VAT) was somethingthat was entirely different to managers that were used to output based goals(in the old system) as opposed to budgets and cost minimization as practiced bytheir western counterparts.  The Value Added Tax (VAT) has become a vehicle toflush out businesses that are experiencing market failure that demonstrate noreasonable need to continue to operate (there are obvious exceptions to this suchas utilities, etc....).  It also cut down on over production of certain goods.

The Value Added Tax (VAT) is also a way that a countrysuch as Hungary can use to encourage (or as the case may be discourage) certaintypes of businesses in their country.  According to Deloitte & Touche thestandard rate for the Value Added Tax (VAT) is currently 25%.  However,  manyproducts and services such as basic food products, medical instruments, andutilities are charged 12% .  In addition,  various supplies qualify forcomplete exemption such as education,  cultural services, sport events, healthservices, and services contributing to scientific research and development(D&T 8). 

Personal Income Tax

Along with the Value Added Tax (VAT) the PersonalIncome Tax (PIT) was also introduced to Hungary in 1988.  The HungarianPersonal Income Tax (PIT) is a progressive tax with a universal additional taxfor investment.  The tax is based on individual earnings from all forms ofwork, though interest income is not taxed if certain conditions are meet(D&TII, 1).    As shown in figure 1.1 the progressive tax rates on incomeearned 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 20 150,001 — 220,000 25 220,001 — 380,000 35 380,001 — 550,000 40 Over 550,000 44

Source 1996 Deloitte & Touche LLP

The Hungarian Personal Income Tax (PIT) has severalinteresting features.  The first feature that is unique is that all Hungarians are taxed separately.  In other words, unlike the American Tax system where afamily can jointly file the Hungarians prefer (for ideological reasons) to fileindividually.  However, this system is not with out it's flaws.  The problemthat tax administers run into is when one spouse stays at home to look afterthe children.  The reason for this difficulty is the one wage earner is subjectto heavier taxation than two wage earners making the same total.  Taxadministrators however are reluctant to change the current system because ofthe administrative simplicity.

A second feature of the Hungarian Personal Income Tax(PIT) that draws attention to itself is the fact that any income earned throughdeposits and securities are tax free if the interest rates are lower than thatof 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 depositsthat pay lower than 25% are tax free.  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

                        InitialInvestment                           100,000 HUF

                        Interest Paid on Investment

                            in Bank X (28%)                       128,000 HUF

                        Interest Paid on Investment

                            National Bank(25%)                 125,000 HUF

                        Taxable InterestIncome                     3,000 HUF

                        TaxesDue                                             600 HUF

This aspect of this tax allows for fair treatment tothose who would otherwise lose their money putting it in accounts that couldnot stay up with the tremendous inflation that several countries in easternEurope face due to their recent transition to a market economy (Newbery, 6).

As was true with the Value Added Taxes (VAT) thePersonal Income Tax (PIT) also has exemptions.  The following is a list ofexamples of items exempt from tax (Okno 2).

·    Social Securityallowances

·    Gains of up to HUF100,000 from the non commercial sale of moveable 


·    Retirement gifts of upto HUF 10,000

·    Compensation of definedworking clothes


In addition as of January 1995 tax credits againsttaxes owed were offered in several areas such as social security contributionsby the employee, for individuals making under 500,000 HUF, for installments onloans for dwellings, charitable contributions, and for special savingsaccounts.

Corporate Income Tax

The corporate tax is levied on all businesses, nomatter how large or small, the same way.  As of January of 1995 the corporateincome tax has been reduced from 36% to 18% on undistributed profits beforetax.  this is called either the additional tax or the calculated tax.  Afterthis tax has been levied the profits are then distributed among theshareholders and an additional 23% is taxed to the shareholders.  To illustratethis tax figure 1.3 demonstrates how the tax is calculated.

fig 1.3

Calculation of Additional Tax

HUF Income before tax 100.00 Calculated at 18% (18.00) Income after tax to be distributed 82.00 Amount available for distribution after payment of additional tax (82/1.23) 66.67 Total Tax Paid 33.33 Effective Rate of the additional tax (% of income before tax 15.33%

Source Deloitte & Touche LLP

In addition to the corporate tax employers must alsomake Social Security contributions.  Typically, employers must make acontribution at a rate of 44% of their gross salary.  Employees are required tomake a 10% contribution, however, it not unlikely to see individuals puttingmore than 10% away of retirement. 

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

Training Fund Contributions is yet another tax thatcorporations are subject to.  This tax is to provide for the cost of trainingemployees.  This contribution is currently paid by the employer at 1.5% of thetotal payroll.  This tax is for corporate income tax purposes.

As with other Hungarian taxes exemptions are offeredto 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 shows how  companies are allowed to use theirexemptions.

fig. 1.4

Percentage of Taxes due under 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 of taxes as equitable and donot squabble over the fairness of the taxes.  They seem to be more interestedin how to receive tax exemptions and want reform in the exemption granting sideof the tax system (Newbery, 8).  This is good because of the infectious shadoweconomy in other former soviet countries.  This means that businesses will bemore willing to pay taxes that are due to the government.

So What Does this mean for Hungary?

Newbery argues that the Hungarian tax system is atleast as  egalitarian as any where else in the world as far as an equaldistribution of taxes.  Especially since the method of redistribution is sogood at keeping poverty remarkably low.  While the transition still will put agap between the “haves and the have nots”, the government needs to keep its eyeout for the most vulnerable such as the old and unskilled.  Many argue thatbecause of the rough transition people may become disillusioned with a marketeconomy and never realize the gains that the countries leaders have fought sohard for.  However with vigilance and a little bit of patience Hungary willreach its goal.


In addition to using tax collection as a source ofraising revenue, Hungary has turned to privatization to offset Hungary’s 31billion 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 Hungarian Government decided to saleshares in eight of the fourteen nationally owned electrical power anddistribution companies.  A German consortium agreed to pay 180 billion HUF forthe shares and controlling interest in the former government controlledutilities.

In addition to the sale of the utilities Hungary hashad discussions about selling the National Bank of Budapest to investors. However analyst point out the bank will have to spend the next year fixing upthe bank before they can think about selling it.  Government officials would expecta heavy return if the bank were to be sold.

While some analyst applaud the actions the governmenthas taken others wonder who is really in control in Hungary.  Is the governmentstill calling the shots or is it the foreign investor with the most moneyinvested in a majority of Hungary's' industry.  Another key step to Hungary’stransition to a market style economy is expenditure policy.

Expenditure Policy

Along with changing revenue policy expenditure policyis a crucial role of any government and especially important policy questionsfor governments in transition.  Hungary’s main policy stance on expenditures isto try to match in-kind efforts and expenditure policy to specificallyearmarked funds.

Defense spending   

As mentioned in the introduction when Hungary decidedto withdraw their membership with the Warsaw Pact they decided to drasticallyreduce their military expenditure.  Hungary’s reduction in defense spending wasa key decrease in fiscal consolidation to help decrease their ever rising budgetdefict.  The graph in Fig. 1.5 represents Hungary’s decrease in defensespending over the last ten years.


Fig. 1.5        

/>Source:  SIPRI MilitaryExpenditure Database

Social Welfare Reform

Reforms to Hungary’s Social Welfare systems have beenplentiful.  Decreases in Welfare systems have mainly been reallocation ofsubsides on a stricter criteria basis.  Hungary has made constant efforts torestructure social programs in which have proven to be ineffective.  Oneexample is the reform of the “Family Allowance System.”  After a evaluation ofthe old program it was proven to be cost ineffective and replaced by a new“Family Support System”.   This new “Family Support System” target families inneed based more on income criteria and targeted people in the greatest need. Another key social expenditure reform was that of pension and healthprograms.(CCET, 2)

Pension and Health Programs

Hungary experience great abuse in the areas of healthand pension programs, but have taken steps in the right direction to helpcorrect the situation.  One such of these decisions was that of increasing thenumber of days employers are liable for sick pay.  This reform travels in theright direction because the policy had reduced the Social Insurance Fund andalso created minimum incentives for abuse of the system.  Much more needs to bedone  in the way of pension and health reform however this policy shows a stepin the right direction..(CCET,2)

Expenditure Summary

The underlying tone of Hungary’s expenditure policy isthat of reducing the budget deficit without creating economic turbulence. Hungary faces many obstacles in trying to reduce their budget deficit. Suchobstacles are rising inflation and high rates of unemployment  these problemslead to substantial social problems.  Regardless, Hungary is still looking theright “social safety net”  but not at the expense of its economic viability andwithout effecting production and output ion a negative way.


Hungary has come a long way since the initialtransition from a centrally planed economy to a  market economy in 1988. However, Hungary continues to strive to overcome the obstacles described inthis paper.  The transition has been difficult for the people of Hungary. People accustom to a centrally planned economy are not typically faced withsubjects such as unemployment or cost budgeting.  Therefore, many Hungarianshave become disillusioned with the new market economy.  However, most(including socialist) have insisted that economic progress continue.  In orderfor Hungary’s economy to continue its success it must remain to be egalitarianin both the way it collects cash through taxes and the way it redistributesresources 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.


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

2.    Sipri.  “Military ExpenditureDatabase”. 

3.    Washington Post. “ Hungary: StateDepartment Notes” Washington Post.Com. http://www.washingtonpost.com/wp-s…term/worldref/statedep/hungary.htm

4.    Deioitte and Touche LLp, “Taxation in EasternEurope”.  Webmaster@dtomlinr.com.1996.

5.    Galai, Andra’s.  “Sale ofEight Electric Co.’s Jolts Privitization Back to Life.” Http://www.iqsoft.hu/economy/page95_4/privat.html. 10/17/96.

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

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

8.    Newbery, David.  “AnAnalysis of the Hungarian tax Reform.”  Center for Economic policy Research.#558 May,1991.

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