Hungary will have to adopt flat tax-opposition

Orban, whose centre-right Fidesz party is just ahead in the polls ahead of a 2006 general election, also told the foreign press a change of government was vital if the country was to join the euro zone in 2010.

Orban, who has come under fire for passivity in the face of a Socialist government revival under the leadership of new media-savvy Prime Minister Ferenc Gyurcsany, said three years of budget overshoots had blown Hungary's economic credibility.

"It will be difficult to fulfil the (euro) requirements by 2010, but it is not impossible, but one precondition is to change the government," Orban said.

A poll lead of 12 points over the Socialists last summer has narrowed to just three points as 43-year old millionaire Gyurcsany, who has just celebrated 100 days in power, mounted a media offensive and started delivering clear, simple messages.

Orban said the new rhetoric should not disguise budget failings and that a deficit of 5.3 percent of gross domestic product in 2004 had been achieved by delaying VAT repayments.

"Sooner or later, not later than the beginning of April or the end of March, they must tell the truth," Orban said.

The continued budget overshoots mean Hungarian interest rates are 9.5 percent, the highest in the European Union.

Fidesz was in power between 1998-2002 and Orban said it steadily reduced the deficit and inflation and had wanted the euro in 2006, although financial analysts say it flattered the deficit by shifting a lot of spending off government books.

Nonetheless, it had a budget deficit of 3.2 percent in 2001, the last year of the Fidesz government, better than last year's 5.3 percent and inflation was five percent, lower than today.

Orban said spending priorities needed to be changed, but did not elaborate. He said he was not convinced the overall spending figure needed to be lower, but it did need to more "reasonable" and "transparent" and that balance was "necessary".


HUNGARY FORCED TO JOIN FLAT TAX REVOLUTION

Orban said the next government would likely have no choice but to introduce flat taxes, which have swept east Europe, if it wanted foreign investment which is going to neighbouring states.

A 19 percent flat tax rate in neighbouring Slovakia, which includes taxation of corporate profits, has resulted in an increase in revenues as more income has been declared and stimulated billions of dollars of foreign investment. Now Romania's new government has joined in.

Hungary's former finance minister Csaba Laszlo said in November that although Hungary had a low corporate tax rate of 16 percent, that was offset by local business tax and high social security taxes.

Laszlo, speaking in his new capacity as Tax Partner at accountanct firm KPMG, that the low corporate tax rate did not mean a lower effective tax burden for companies than in western Europe.

Foreign investors and financial analysts have been scared by Fidesz anti-privatisation rhetoric and some anti-market measures such as gas price controls, which cost MOL, Hungary's largest company tens of billions of forints a year under Fidesz.

Orban said some gas price controls were needed but anti-market fears had been overblown and a Fidesz government would sell airline Malev, but said with 92 percent of the economy already in private hands, the issue was not a huge one.

On foreign policy, Orban, who blasted by the Socialists as a nationalist, said he wanted closer cooperation with neighbouring states on getting concessions on free movement of labour from the European Union and he wanted Turkish talks to start.

He also stressed that defence arrangements should always place "NATO first" to ensure continued U.S. involvement, even if there were greater EU cooperation on military matters.

Source: Reuters