While currently it appears to be a success story from an economic and political point alike, the introduction of the bank tax presents significant risks already in the medium term. The scale of the Hungarian bank tax is the highest by far in all of Europe.
- Economic growth under threat
- In response to a lower profit outlook, banks will pursue more conservative policies and curtail lending: this in turn means that neither economic output nor internal consumption can grow at the expected rate.
- Moreover, since the majority of Hungarian banks are owned by foreign interests there is a danger that in response to poorer yield outlook parent banks will invest less in their Hungarian subsidiaries, reinforcing the impact described above.
- Consumers bearing the brunt of the costs, declining consumption. The longer the bank tax is left in the system, banks are the more likely to find a way to pass the burden to clients. In the current year this will be limited by the fact that, due to the weak forint exchange rate, banks already face the prospect of a drastic increase in loan defaults even as they make every effort to prevent the “collapse” of FX loans. At the same time, many banks have postponed the reduction of FX loan rates, clearly attributed to the introduction of the bank tax. The persistent high cost of credit may reduce purchasing power and slow economic growth.
- The banking sector's financial stability under threat. According to plans, the bank tax will remain in effect until 2013, in theory at a decreasing rate. For all that, without clarifying details the government has already codified that in 2011 as well it expects to collect HUF 200 billion through this extra tax, and it is highly questionable whether in the coming years the government will be ready to curtail the rate of its tax meant to be temporary. To implement its original program (radical tax cuts and the support of domestic businesses through government subsidies) Fidesz will need every resource it can get its hands on. However, if in the coming years (even in the short term) its economic policy will be driven by the desire to satisfy voter expectations, the taxation of banks will offer the easiest solution. This in turn could undermine the business community's confidence in the government and threaten the financial stability of the banking sector.
- The proliferation of extra taxes as a source of revenue in Hungary. The triumphalism felt over the bank tax will lead to the introduction of additional taxes. The government hopes to finance next year’s deficit target and acquire resources needed for tax cuts in part through the taxation of telecommunication and energy companies, and retail chains. At the same time, the government plans to maintain the current level of spending. The taxation of profitable sectors at this level creates uncertainty in the business community and undermines Hungary's ability to attract investors.
- If these extra taxes prove to be successful from a fiscal point, they may serve as a model for other countries as well. With its bank tax Hungary has already set some sort precedent in the region: Poland and Croatia plan to introduce similar taxes, Romania is contemplating the introduction of a bank tax and a few days ago Robert Fico submitted a bill in the Slovak Parliament calling for the taxation of financial institutions.
Bank taxes in Europe
In respect to the concept of the bank tax, Fidesz is not seen as a trailblazer: at the end of 2008 Sweden had already introduced a special tax imposed on banks, earlier this year the idea has been mooted in a number of countries and international forums, and it was one of the major items discussed at this summer’s G20 conference.
- The Hungarian bank tax is considered unique in Europe for two reasons: (1) the Hungarian tax is by far the highest in proportion to the GDP (2) to date Hungary is the only country in Europe to introduce the bank tax despite the fact that since the break of the crisis it never had to rescue a single financial institution using large government funds. The two factors described above and the feeble resistance of domestic banks are perhaps the best illustration of the strength of the Fidesz-government enjoying a two-thirds parliamentary majority.
- Europe’s dominant economies, primarily in Germany and France, hope to develop a EU solution where the bank tax (or possibly a transactional tax) would finance a fund used to support banks in distress in the future. However, following the meeting of EU finance ministers in early September it became clear that the issue will not be resolved in the short term.
- For the most part this is due to the fact that in a number of countries local bank taxes have already been or will be approved soon, and these show significant differences both in respect to their percentage of the GDP and method of utilization. In Great Britain for instance, similar to Hungary, the collected funds will be used to reduce the budget deficit. In Austria a similar solution is considered, although consultations are still under way. At the same time, Germany and Sweden are clearly committed to use special-tax revenues to establish bank-assistance funds.
The introduction of the bank tax in Hungary
While in Hungary the bank tax is needed to shore up the budget, its implementation has been clearly shaped by political considerations and in political terms the measure has been a resounding success.
- By the end of the spring it became patently clear that, at least this year, the government intends to adhere to the deficit target set by the Bajnai-cabinet. However, if the government is to keep its promises (e.g., significant tax cut) it has to find extra sources of revenue.
- The government declined to approve austerity measures directly affecting the population, fearful that such a move would lead to quick disappointment immediately after the election.
- The crisis with us since the end of 2008 originated in the American banking sector, and to this day the majority of the population blames the risky operation of financial institutions for the eruption of the crisis. According to a September survey conducted by Medián, 84% of the population believes that banks’ unfair lending practices have greatly contributed to the development of the current situation where today many are unable to finance their debts. This indicates that most people have come face-to-face with economic troubles through an increase in their loan instalments, i.e., instead of the government, the increasing burdens came from banks. Therefore, the taxation of financial institutions offered some comfort to voters and their support for the measure has never been in doubt.
- The government could all but rest assured that the introduction of the bank tax would not generate fierce attacks by the opposition. From the very start, Jobbik has pursued anti-capital and anti-bank policies, while MSZP, in search of its roots, would discredit itself by attacking a fundamentally leftist proposal.
- Based on evidence seen since its announcement, the bank tax may be considered as a success: financial institutions were unable to soften terms announced in advance and they failed to pressure the government through informal and public communication-channels alike. Hungary’s governing Fidesz party initiated an unprecedented effort October 26 to strip the Constitutional Court – Hungary’s final authority on legislative questions – of a number of powers, the Constitutional court will won’t have the power to abolish bank tax.
- At this point it appears that international organizations, demonstrating their strengths to the government in the past few months, have also acquiesced in the special tax imposed on financial institutions, which means that the government can count on an annual revenue of HUF 200 billion in the current and next year. Fidesz managed to adjust the budget without losing popular support, i.e., its original strategy has been accurate: the markets have been reassured and supporters have not abandoned the party.