Country Study, Hungary
Country Study, Hungary
Dmitri Maslitchenko
dmitri@mailroom.com
Introduction to Hungary’s political history
Hungary has had a long and volatile
history of political and economic change. Hungary as a organized society dates
back before 1000 AD and has been ruled by different monarchies and foreign
regimes every since. This brief introduction will outline Hungary’s political
and economic history starting with Hungary’s “Post-1945 World War II era”.
During WWII Hungary fell under German
control until the end of the war. After Germany’s defeat in WWII, a
commission was established among allied forces (American, Soviet, and British)
in which had ultimate sovereignty over the country. However, since the leader
of the commission was a member of Stalin’s inner circle, the Soviets exercised
absolute control.(Wash. Post., 1) The Government that was
provisionally instituted in Hungary after WWII was shortly dissolved and the
Hungarian Communist Party replaced them in the 1945 elections.
The (HCP)Socialist government had
instituted radical land ownership reforms and had made many utilities, banks
and heavy industries state ran. Then in 1949 at the beginning of the Post-Cold
war era the Soviet’s gained control of Hungary and in 1949 Hungary adopted a
Soviet-style constitution and formed the Hungarian People’s Republic.
Hungary’s economic state up until the mid 1950’s was a economy similar to that
of a Soviet modeled Centrally Planned Economy. However, the economy in the mid
1950’s had begun a rapid deterioration which led to more political reforms for
Hungary.(Wash. Post, 2)
In the mid 1950’s Hungary attempted
to withdraw from the Soviet sponsored Warsaw Pact and announced their
neutrality and sought backing from the UN. However, the United Nations failed
to respond, as they were preoccupied in other areas of the world. As a result
of lack of UN support, Soviet troops invaded Hungary and regained control,
during the invasion many Hungarians fled to other countries. This new Soviet
culture in Hungary had a more liberal culture and economic path as did the
Soviet regimes of the past. This Soviet government had become relatively
complacent for the next two decades until about the early 1980’s.
Start of Transition
By the 1980’s Hungary’s government
had some lasting economic reforms and was responding to political pressure to
encourage more trade with the west. This new plan to trade more with the west
for economic stimuli led to huge foreign debt as a result of unprofitable
industries. These new economic troubles as well as Hungary’s strong
nationalism to control their own destiny were Hungary’s first steps to a
Western style democracy. By the late 1980’s radicals with the party as well as
intellectuals were calling for change. In 1988 civic activism had accelerated
to an all time high and a Reform Socialist leader, Imre Pozsgay was elected.
Along with a new leader, Hungary also adopted a, “democracy package”, which
included: trade union pluralism, freedom of association, freedom of press,
freedom of assembly, a new electoral law, and radical revisions to their
constitution.(Wash. Post,4)
Hungary’s steps to a market economy
In the following year the Hungarian
parliament adopted legislation providing for multiparty 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 the
separation of powers among the executive, legislative and judicial branches.
One major step for Hungary in
asserting its move to a market economy was to restructure its national
security. In doing this Hungary reduced it’s defense expenditure by 17% and
reduced its armed forces by 30% between 1989 and 1992, thus dissolving their
membership in the Warsaw Pact . Currently Hungary is trying to develop
Western-style defense force to join NATO.(Wash. Post, 5)
Current Political Structure
The current political conditions in
Hungary are a system of many checks and balances. The Prime Minister whom is
elected selects the ministers in the cabinet. Each of the cabinet members
presides before four parliamentary committees in open hearings. The
legislative body in Hungary is a unicameral house and is the highest authority
in the state.
Current Political State
The Hungarian Socialist Party was
re-elected in1994 in a multiparty election after receiving 54% of the popular
votes. Although the (HSP) had taken back control of the government in the 1994
elections, the party has announced its intentions to: “continue economic
reform, privatization and to preserve political rights.”(Wash. Post, 6)
Economic Structure in Hungary
Hungary’s history of economic
vitality has predominately been agriculture. In 1950 , over 50% of Hungary’s
work force worked on the land. Hungary’s percentage of workforce working on
the land in 1993 was 7%. Hungary’s agricultural decline is directly tied to
lack of investment in the 1970’s and the 1980’s. Hungary’s decline is also a
product of large amounts of foreign debt that were accumulated in the 1970’s
and 1980’s.(6) The net foreign debt in 1972 was about 1 billion(U.S. dollars)
and in 1993 Hungary’s net foreign debt was 15 billion(U.S. dollars). Although
Hungary has the highest per-capita debt in central Europe their repayment
record is stellar.(Wash. Post,7) One of the major functions to Hungary’s
success to transition is their role in revenue policy.
Hungarian Tax Reform
Hungary's movement from a centrally planed economy to a
market economy has lead to massive tax reforms in the 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 and disadvantages of the separate categories
of the taxes and compare them to the former means of revenue collection. Next,
I will demonstrate the success (or as the case may be, failure) of such taxes.
Finally, I will write about what effects Hungary has experienced due to the
tremendous changes in the tax system.
Value Added Tax
On January 1, 1988 Hungary introduced a Value Added Tax (VAT)
as part of a ovement from a socialist centralized country to on with a market
economy (Newbery 1). This tax is similar to the tax currently operating in the
European Union member states. This tax is interesting because it is an
inclusive tax. That is a tax in which the base is included in the invoiced
amount of the good or service. In other words the tax is passed down to the
end customer and in turn the seller is reimbursed the amount of taxes paid on
that particular good or service.
The concept of a Value Added Tax (VAT) was something that 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 by their
western counterparts. The Value Added Tax (VAT) has become a vehicle to flush
out businesses that are experiencing market failure that demonstrate no
reasonable need to continue to operate (there are obvious exceptions to this such
as utilities, etc....). It also cut down on over production of certain goods.
The Value Added Tax (VAT) is also a way that a country such
as Hungary can use to encourage (or as the case may be discourage) certain
types of businesses in their country. According to Deloitte & Touche the
standard rate for the Value Added Tax (VAT) is currently 25%. However, many
products and services such as basic food products, medical instruments, and
utilities are charged 12% . In addition, various supplies qualify for
complete exemption such as education, cultural services, sport events, health
services, and services contributing to scientific research and development
(D&T 8).
Personal Income Tax
Along with the Value Added Tax (VAT) the Personal Income Tax
(PIT) was also introduced to Hungary in 1988. The Hungarian Personal Income
Tax (PIT) is a progressive tax with a universal additional tax for investment.
The tax is based on individual earnings from all forms of work, 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 income earned at work range from
0-44%.
fig. 1.1
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