Economy

Hungary’s tax system is an example the UK should follow

BY Jack Gilmore   /  4 September 2017

No politician in the UK dare run on a platform of drastic, universal tax reduction. It’s the quick and easy route to pillory from both sides.

But our politicians could learn valuable lessons by looking more closely at the latest economic figures out of Hungary. Their economy is booming, and that’s largely thanks to tax cuts.

Hungary has attracted international opprobrium on an industrial scale in recent years. Its media laws, migration policies, treatment of NGOs and attempts to shut down the popular Central European University have drawn comparisons with authoritarian leaders such as Vladimir Putin and Recep Erdogan.

This article offers no defense of the Government’s wider record which is already the subject of voluminous scrutiny and criticism, just as it should be. Rather, it focuses on the country’s economic record and, specifically, the Government’s attempts to kick-start growth by lowering tax rates for companies and individuals.

Civil liberties may well have been curtailed in other areas of life but, economically, Hungarians are beneficiaries of levels of freedom we Brits can only dream of.

Since 2011, the Hungarian Government has instituted a radical programme of economic reform coupled with deep tax reductions. Hungary’s corporation tax now stands at just 9%, the lowest in the EU.

Income Tax has also been cut. Former staggered income tax rates of between 17% and 32% have been reduced to a single, simple flat tax of 15% for all. It will fall again to 14% in 2018.

If you attempted such as thing in the UK right now, you’d be labeled insane. Why? Because here we have a misguided consensus that serious tax reduction is not just politically unpalatable, but also ineffective.

But this is simply not the case – tax cuts are universally popular and they end up helping everyone. The Hungarian petri-dish gives us the proof.

When Prime Minster Viktor Orban first introduced his economic programme, it was panned in the media. Commentators euphemistically called it “unorthodox” when actually they just thought it was useless. But roll on a few years and Orban’s critics aren’t so vocal now, at least on the economy.

The Hungarian economy has seen a spectacular turnaround. The level of public debt has fallen below 75% of GDP and the country enjoyed growth of 2.1% in 2016. This is predicted to rise to 2.6% in 2017 – much higher than the EU average.

The international consensus is starting to turn around too. All three of the main credit ratings agencies have upgraded their ratings to investment-grade. In July 2017 the state budget boasted a surplus of 94.4 Hungarian Forint – just shy of £3 billion – and the first six months of 2017 saw tax revenues $548 million higher than the previous year.

Indeed, after the flat tax was imposed in 2012, the level of tax collected rose by 7.6% in 12 months. Considering current estimates of the UK’s deficit stand at £17bn, there is much to learn from Hungary’s example.

Left-wing critics will say such tax cuts only benefit the rich. But this too is untrue as the Hungarian example also illustrates. Its tax-reduction policy has benefited all levels of society. Tax cuts have led to increased revenues rather than the opposite, meaning the Government has been able to invest in key public services that Hungarian citizens depend on. It has also given businesses the extra flexibility to pay a higher minimum wage.

The wider societal benefits are similarly impressive. In 2010, out of a population of ten million, only 3.6 million Hungarians were in employment, and only 1.8 million of these paid taxes. It’s miraculous the country survived. Today, 4.4 million Hungarians are in work and 4.4 million pay taxes. More conclusive proof of Arthur Laffer’s curve theory it would be hard to find.

The strength of Hungary’s economy has had other knock-on benefits. They are now able to host some of the world’s biggest sports events, such as the recent FINA World Championships, while the rest of mainland Europe continually tightens its belt.

Sadly, there seems little prospect of the UK following suit. Theresa May refuses to commit to tax cuts and Philip Hammond has hinted they could rise.

This isn’t surprising. Analysis of June’s general election result has focussed on the increase in the student vote and the parties’ respective attempts to appeal to younger people. As a recent student myself, I saw fellow students suckered into believing in the ‘higher taxes’ mantra. The rationale being: we don’t earn that much, so anyone who does obviously doesn’t deserve to keep it – and that means higher taxes.

But rather than give in to this misconception, the Conservative Party should rediscover its resolve to make the case for lower taxes. We should take up the challenge rather that shirk away just because it’s unpopular. It should be our goal to convince younger people of the benefits for lower taxes – not just for them but for everyone.

Regardless of what one might think about Hungary’s wider record, the economic data is clear and unequivocal. Only time will tell if our leaders can muster the courage to follow their lead. Will Britannia walk free from the EU fully open to new ideas and economic innovation, or will she remain as she is, shackled by the chains of tradition, misinformation and high taxation?

Jack Gilmore coordinates Generation Conservative