UPDATE 2-Go-it-alone Hungary flags finance transactions tax

Thu Apr 5, 2012 10:59am EDT

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* No details on timing, scale of tax

* Tax seen risky, would be at odds with EU

* EconMin also hints at new VAT structure (Adds Econ Ministry reaction)

By Gergely Szakacs

BUDAPEST, April 5 (Reuters) - Hungary signalled on Thursday it may introduce a levy on financial transactions and could eventually hike sales tax again, ploughing further down a lone and unorthodox furrow as it attempts to put its crumbling fiscal house in order.

"While we shift the balance of taxation towards turnover and consumption, we must introduce a financial transaction tax," Economy Minister Gyorgy Matolcsy wrote in a column in weekly magazine Heti Valasz.

Matolcsy, responsible over the past two years for Europe's highest bank tax and a foreign currency mortgage relief scheme that has inflicted heavy losses on banks, did not elaborate on the timing or scale of the transactions tax.

But the plan, floated as an initiative for a similar levy in the rest of the European Union looks close to running out of steam, could easily backfire.

"We have no details but I think it's more proof that the (Hungarian) banking crisis tax is permanent, even if its form changes somewhat," said analyst Peter Attard Montalto at Nomura.

"But this is really very dangerous in a country that is driving its own process of bank deleveraging given domestic policy, added to the wider euro zone deleveraging issue."

Hungary's mostly foreign-owned banks have been hit by deleveraging in Europe's financial sector - as banks repatriate funds to prop up their own finances rather than lend them out - and unorthodox government measures including the bank tax.

"We cannot give detailed information on the question of the fiancial transaction tax before the decision of the government," the Economy Ministry said in an emailed response to Reuters questions.

The Hungarian Banking Association was not available for comment.

OUT OF STEP AGAIN?

The European Commission has proposed an EU-wide tax on stock, bond and derivatives transactions from 2014 that could raise up to 57 billion euros ($74.8 billion).

But the idea has encountered stiff resistance, notably from Britain, and even a proposal from its main proponent Germany to water down the scheme to cover only stock trading has met with a cool response from other states.

The Hungarian economy minister's latest foray against the prevailing current casts the spotlight back on the country's efforts to secure a multibillion-euro international financing backstop.

That would help it to rein in unsustainable borrowing costs and prevent further cuts in its credit rating, already in "junk" status due to weak growth, high debt and unpredictable economic policies.

But progress towards the International Monetary Fund/European Union safety net that Budapest hopes will also shield its currency and bond markets from turmoil in the euro zone has been hampered by a row with Brussels over domestic legal reforms.

Hungary, which targets a budget deficit of 2.5 percent of economic output this year through a combination of tax hikes and spending cuts, must find ways to make up for lost revenue from ad hoc taxes first levied in 2010 and due to expire this year.

The government has promised to phase out taxes worth a combined 160 billion forints on telecommunications, energy and retail companies next year and halve the financial sector tax, which at about 200 billion forints a year is the highest in the EU.

VAT BACKSTOP?

Minister Matolcsy also signalled Hungary's already punishing sales tax rates - ranging in three bands from 5 percent to the highest level in the EU at 27 percent - could rise further.

He said he favoured five different rates - 5, 15, 20, 25 and 30 percent - but added EU authorities would not permit such a move for now.

The ministry added in an email that in connection with the 30 percent tax rate Matolcsy "was talking about a healthier taxation with five rates, not raising the current tax level."

"If we think of how budgetary trends can be kept under control next year and supplement a significant fall in revenues, the sales tax is the easiest to rev up, as it is relatively easy money," said analyst Zoltan Torok at Raiffeisen.

"It could be a good economic policy tool to cut the sales tax on goods and services that everybody consumes and raise it on others, but it would clearly be bad for inflation."

In the absence of the long-delayed financing backstop, Hungary's central bank left interest rates unchanged at 7 percent - central Europe's highest level - last month, also warning of growing risks to inflation due to tax increases and high oil prices.

($1 = 0.7623 euros) (Reporting by Gergely Szakacs; Editing by John Stonestreet)

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