English collection of articles from Innotéka magazine appearing monthly in Hungary.

English collection of articles from Innotéka magazine appearing monthly in Hungary.

September 10, 2012

Imre Szegedi

More Predictable Economic Environment in Hungary

In the past two years, altogether 7,000 new jobs have been created and 15,000 have been retained by utilising the resources of the National Employment Fund. Starting next year, an action plan designed to save jobs allocates HUF 300 billion in additional funds to protect and create jobs – according to the press department of the Ministry of National Economy. The economic portfolio claims that family-friendly taxation, business support schemes and the reduction of public burden may contribute to the employment of 800,000 people.

Until 2010, Hungary had kept in place an extremely progressive system of taxation, which prevented the country from attracting jobs with higher added-value. It also hindered more intensive working, taking on second jobs and increasing overwork as the State levied a higher proportion off each unit of extra income, the press department of the Ministry added. By introducing the flat taxation system, the new government has managed to motivate employees to choose jobs with higher added-value, to render the deployment of such jobs in Hungary more profitable and to reduce the hardships associated with keeping trained labour in the country. Family tax benefit also favours entering employment: the larger the income of a family, the higher the tax benefit. Moreover, the gap between the tax on labour and capital gains has decreased and the rules of taxation have been simplified. In addition to the desire to essentially improve conditions for families, the introduction of a higher family tax benefit was also considerably motivated by the need to improve demographic conditions in Hungary.

As this country has one of the worst employment rates in Europe, the government set adding new employment as a high priority policy goal. To achieve that, several measures capable of underpinning substantial and sustained employment growth have been taken, on both the supply and demand sides of the labour market. Actions of particular importance include the transformation of Hungarian labour law regulations; the introduction of more efficient incentives for job creation; instead of subsidizing, strengthening motivation to work; improving the employment chances of people with labour market handicaps; and matching the structure of training with the demands of the labour market. For instance, the new Labour Code allows more flexible forms of employment, while several of its components grant employees extra rights and reduce the administrative burden of employers. The Government has increased the funds allocated to supporting job creation by businesses by a factor of five, to HUF 10 billion and has opened up development resources for employees in the SME sector by simplifying tender rules. In the spirit of the principle “work rather than aid”, emphasis has shifted from passive benefits to active labour market support in the arsenal of employment policy tools. The former provision system of seeking jobs worked frequently against employment, which is why the maximum monthly amount available in benefits as well as the duration of entitlement have been reduced. Social assistance type elements have been eliminated too. The government has replaced social aid with a new system of public employment to provide transitional job opportunities for the jobless. HUF 132.5 billion will be available for the purpose this year. Earmarked contribution allowances are kept in place in the framework of Start Programs to promote employment among people with handicaps, and high priority measures seek to support business start-ups by carrier starters. Moreover, the system of vocational training has been reconstructed to offer a better match with employer requirements and to become more practice-oriented. These measures have also helped increase the number of people at work in Hungary by 145,000 since the change of government. Altogether 7,000 new jobs have been created and around 15,000 have been retained by utilising the resources of the National Employment Fund in the past two years. Starting next year, an action plan designed to protect and create jobs allocates HUF 300 billion in additional funds.

A program of ten points announced by Prime Minister Viktor Orbán this summer involves a complex series of measures design­ed to save jobs. The first five points are configured to reduce the burden (social contribution tax and vocational training contribution) on employers related to groups of people with labour market handicaps. Taxes and contributions payable on employees below 25 and over 55 years and on workers employed in jobs for the unskilled dropped to 14%. The rate of taxes levied on the gross wages of mothers returning from childcare benefit and child care allowance, as well as on labour entering a job after long-term unemployment (over 6 months) is 0 percent in the first two years and 14 percent in the third year of employment. The program offers micro-businesses with income below HUF 6 million the option of a simple, yet impossible to evade type of tax. The specific tax of such small-scale taxpayers employed in a full or part time job is HUF 50,000 or HUF 25,000, respectively. The payment of these tax amounts replaces the company tax, personal income tax, contributions and social contribution tax of a small-scale taxpayer, who will still have to pay the taxes on employees, if any. The program also offers another new optional type of tax to small businesses with 1–25 employees. This Small Business Tax replaces taxes on profits and the wage-related ones, like contributions. The new type of tax motivates employment, as the burden on employers will remain unchanged after employing new labour. Around 200-300 thousand businesses may be interested in choosing this new type of tax, which may therefore promote jobs for 800 thousand employees.

Calculated by Policy Agenda, the Q2 results of the OTP SME boom index shows that the expectations of enterprises in Hungary’s small and medium-sized sector keep improving and company managers are less pessimistic. The Ministry hopes that the improvement of the boom index reflects a sustainable reversal of trends. General business and consumer confidence indices also recorded similar improvements in Q2 2012. Positive expectations are driven by the successful effort to stabilise the deficit of the central budget for 2012 at a sustainably low level and in a credible manner for the European Commission and investors. The ongoing elimination of the mountains of debt accumulated by general government, the public and enterprises also improves the confidence of businesses in a predictable Hungarian economic environment.

The lack of proper customer orders, high taxes and administrative burdens and hardships with financing set hurdles along the road to success for micro- and small enterprises. The tools available for the government tend to be helpful in dismantling the last two obstacles, yet it should aspire to find its role in providing governmental assistance on exploring new markets for small businesses. The new Government embarked on reducing the high tax and administrative burden when it took its initial steps announced as decisions in summer 2010: expanding the preferential 10% rate of corporate taxation and the elimination of 10 smaller tax types (including the poll tax on entrepreneurs). Several measures were taken in the wake of these steps, including the mitigation of the duty to replenish tax accounts by the end of the year and the withdrawal of the rule related to expected income (typical of the business). Announced in 2011, the Simple State Program seeks to reduce administrative costs incurred by entrepreneurs due to red tape by HUF 500 billion. The New Széchenyi Plan, the extended Széchenyi Card Program, revving up micro lending relying on funds provided by the European Union and venture capital programs as well as increasing government support for credit guarantees are means to help finance small businesses.

The innovation policy of the government plays a central role in setting the course of development for enterprises. Revised in 2012, the Innovation Fund can manage a predictable annual amount of HUF 45 billion, which naturally holds also for its budget submitted for 2013. In order to eradicate the serious abuses seen in the past around granting concessions and the ensuing tax evasion, companies subject to the liability to pay innovations tax may not qualify for tax relief with reference to R&D. Although Széll Kálmán Plan 2.0 has cancelled fiscal support from the central budget to the Innovation Fund, the level of Fund incomes and expenditures will remain unchanged with a new structure of incomes. Increasing corporate R&D expenditure to two thirds of the total R&D expenditure is another priority. Moreover, Hungary’s innovation system must be armed with the capacity to obtain as much external funding as possible during the 2014–2020 budgetary cycle of the EU. That hinges on considerably fortifying the domestic, particularly the corporate R&D base, including the addition of 15,000 new R&D jobs by 2020. Another condition entails the market entry of about 300 fast-growing R&D oriented small and medium-sized (gazelle) enterprises in Hungary by 2020 and the powering up of at least 10 leading scientific workshops that represent the global cutting-edge and claim active international cooperation ties. If we manage to achieve all of that, we will be able to brand Hungary’s economy as internationally competitive.•