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BUDAPEST – Hungary’s government is offering significant tax cuts to families in an effort to reduce financial strain and combat declining birth rates. The new policy, which exempts mothers with three or more children from paying personal income tax, aims to provide much-needed relief. However, economists are warning that these tax breaks could exacerbate Hungary’s already high budget deficit. Here’s a look at how these changes might affect families and the country’s economy.
Context & Background – Why is this happening?
Hungary is facing several economic challenges, including high inflation (currently at 5.7%) and a decreasing birth rate. In response, the government introduced a policy last October to ease the financial burden on families. Mothers with three or more children are now exempt from personal income tax, a move designed to encourage larger families and retain citizens within the country. By 2026, this exemption will extend to mothers with two children.
In addition, the government plans to cap mortgage interest rates to further assist families struggling with home affordability.
Impact on Families:
For many families, the new tax exemption offers much-needed financial relief. Csenge Kádár-Petrik, a mother of three, shared that the policy had already made a noticeable difference in her household. “Money helps, and it’s really good to get some support from the government,” she said.
With her husband receiving a maternity allowance, combined with the tax break, the family can nearly cover their rent. The benefits also provide a buffer during difficult economic times, especially as Hungary grapples with one of Europe’s highest VAT rates of 27%.
For the Kádár-Petrik family, the tax exemptions and financial allowances have helped ease the pressure. Her husband, Bence Kádár, remarked, “Most people are having difficulties at the end of the month, and this allowance is making the last few days a bit more bearable.”
Economic Risks – Is the Deficit Sustainable?
Despite the positive impact for families, the new tax policy is raising concerns among economists. Hungary’s current budget deficit is hovering around 4 to 5 percent of GDP, a figure much higher than what is considered sustainable.
Economist Bod Péter Ákos warned that reducing taxable income through these tax exemptions could lead to a further increase in the deficit, forcing the government to raise taxes elsewhere. “It’s pretty high, much higher than what is healthy,” said Ákos.
Hungary’s high VAT rate, combined with the income tax exemptions, places additional strain on the country’s budget. Economists worry that this could lead to greater economic instability if other revenue sources are not found to offset the loss.
What’s Next?
As the Hungarian government moves forward with this plan, the long-term consequences remain uncertain. The policy’s success will depend on whether it encourages a higher birth rate and helps sustain the country’s population growth. If not, Hungary may face even larger budgetary challenges down the road.
Expert Reactions:
Some experts support the policy’s intention of bolstering the birth rate, but they emphasize that a more comprehensive fiscal strategy is needed. A reduction in Hungary’s VAT or other structural tax reforms might help alleviate some of the financial strain on families without further damaging the national budget.
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