BETTER THAN (CONSERVATIVELY) EXPECTED: FINANCE

C O N F I D E N T I A L BUDAPEST 000532

SIPDIS

SIPDIS

DEPARTMENT PLEASE PASS TO NSC FOR ADAM STERLING

E.O. 12958: DECL: 04/05/2012
TAGS: ECON EFIN HU
SUBJECT: BETTER THAN (CONSERVATIVELY) EXPECTED: FINANCE
MINISTER VERES ON REVENUE AND REFORM


Classified By: P/E COUNSELOR ERIC V. GAUDIOSI; REASONS 1.4 (B) AND (D)


1. (C) A relaxed and upbeat Finance Minister Veres told
Ambassador Foley April 4 that deficit reduction efforts are
exceeding the GoH's conservative projections, with the GoH
lowering the 2006 budget deficit to 9.2% of GDP rather than
the anticipated 10.1%. He noted that the GoH was cautiously
- and quietly - optimistic that 2007 figures would also be
better than forecast based on figures from the first quarter.


2. (C) Responding to Ambassador Foley's question regarding
his confidence in the Ministry's forecasting, Veres
laughingly admitted to a very "prudent" philosophy in the
Ministry's projections. However, he also cited improved
revenue collection efforts and stricter government spending
as contributing factors. He believes the positive trend will
continue in 2007 as the government reduces its spending,
suggesting that GDP growth will exceed the projected rate of
2.2%.


3. (C) Veres also sees minimal impact from the referenda
proposed by the opposition to challenge elements of the
government's reform agenda. Noting the law's prohibition on
referenda addressing budgetary issues, he believes only the
referenda on land sales, pharmaceuticals, and citizenship for
ethnic Hungarians will survive legal review. He also
predicted that the referendum would fail to receive the
requisite 50% turn-out required by law "if tuition and
doctor's fees" are not included."


4. (C) Turning to the contentious issue of replacing
Hungary's "expected tax," Veres rolled his eyes and noted
that the current debate did not reflect his understanding
with Minister of Economy (and now SZDSZ party president) Koka
last year. He believes the recent Court ruling overturning
the expected tax will cost the GoH HF 30 billion in revenue
this year, but observed that improved tax collection and
existing budgetary reserves should cover the shortfall. By
2008, he plans to have stricter corporate auditing measures
in place to recoup the revenue through improved collection.
Corporations reporting no profits will be the target of
increased tax audit efforts.


5. (C) Regarding the question of property tax, Veres
acknowledged Ambassador Foley's observation that the GoH
would do well to "get all the bad news over with in 1 year."
He noted consensus within the coalition regarding tax reform,
and predicted a government decision to move forward on the
real estate tax - and to eliminate other existing taxes -
this month. He indicated that the object of the move would
be to provide a uniform system of assessing value, but noted
that the primary object of the exercise would be to broaden
the tax base, not to assess market value.


6. (C) Veres closed with a brief aside regarding criticism
from the World Bank and IMF, suggesting that they are "never
satisfied." That said, he expressed his personal pride in
the GoH's commitment to doing the right - and unpopular -
thing. He believes the government's current efforts are at
"the edge of feasibility," and knows the public will judge
them based on their results.
FOLEY