Orban’s new tax break

In a bid to counter a falling population and labour shortages without accepting immigrants, prime minister Viktor Orban announced that Hungarian women who have four children or more will be exempt from income tax for life. 

Background 

Hungary is a country in Central Europe, spanning  93,030 square kilometres (35,920 sq mi) in the Carpathian Basin. With about 10 million inhabitants, Hungary is a medium-sized member state of the European Union. The official language is Hungarian, which is the most widely spoken Uralic language in the world.

Hungary is an OECD high-income economy with a very high standard of living. It provided social security, universal health care and tuition-free university education. Hungary performs well in international rankings: it is 20th in quality of life, 24th in the Good Country Index, 28th in inequality-adjusted human development, 32nd in the Social Progress Index, 33rd in the Global Innovation Index and ranks as the 15th safest country in the world.

Victor Orban is a Hungarian politician serving as Prime Minister of Hungary since 2010. He also served as prime minister from 1998 to 2002. He is the present leader of the national conservative Fidesz party, a post he has held since 2003 and, previously, from 1993 to 2000.

Like most high-income European countries, Hungary’s population growth rate is expected to slow down drastically in the upcoming decade. Projections indicate that Hungary’s population could fall by 15% in 2030, down to 8.5 million residents from the present 10 million.

Analysis 

Prime Minister Victor Orban has suggested a new tax break for all Hungarian women. They will be exempt from Income tax for life if they have four or more children. 

The tax scheme was one of a number of initiatives the anti-immigration premier announced, including healthcare investments worth Ft700bn (£1.92bn); loans to newly-weds worth Ft10m that could be partially or fully written off if the couple bore two or three children; money for family car purchases; and increased capacity for childcare facilities. The government also promised mortgage assistance tied to childbirth and a kind of maternity or paternity leave for grandparents

Mr Orban, who himself has five children, did not elaborate on how the government would cover the costs of the announced measures and vowed to maintain levels of economic growth 2 per cent higher than the EU average.

The premier also mentioned the upcoming European Parliament elections, lambasting “pro-migration” forces in Brussels, calling European Commission vice-president Frans Timmermans “a socialist” appointed by Hungarian-born billionaire philanthropist George Soros to fill Europe with immigrants in support of a “new internationalism”.

Hungary, like its central and eastern European neighbours Slovenia, Croatia, Slovakia and Serbia, has some of the lowest fertility rates in the world, while many educated workers have sought higher salaries further west. According to the United Nations, almost all of the countries with the fastest shrinking populations are in eastern Europe. Hungary’s population is projected to decline from 15 per cent by 2050, from 9.7m in 2017 to 8.3m.

As Mr Orban spoke, several hundred people protested nearby, the latest in a string of demonstrations caused, at least indirectly, by Hungary’s demographic decline. They were ignited after the parliament passed a so-called “slave law” in December allowing employers to seek up to 400 hours of overtime, the equivalent of an extra working day per week.

Other countries in the region have also offered incentives to raise the birth rate. In Poland, the conservative Law and Justice party rose to power in 2015 with an expensive pledge giving 500 zlotys (£100) a month, about one-third of the net minimum wage, for every second and subsequent child. The initiative costs more than 1 per cent of Poland’s GDP

Assessment 

Our assessment is that this proposed tax break will have unintended consequences for Hungary’s treasury. Mr. Orban has proposed this tax plan but has not highlighted any funding sources for a primary education program for the children and also has not announced any method to cover the fall in revenue from the discounted income taxpayers.