Like all post-communist countries, the re-distributive function of the state is a significant part of the Hungarian economy. Generation after generation has grown accustomed to receiving freebies from the state, regardless of the state of the economy.

The tax policy of the Fidesz/Hungarian Civic Union government was designed to help a specific segment of society, the “national middle class.’’ Tax breaks, write-offs and other benefits were extended to those who had already enjoyed relatively higher levels of income, and not by those who most needed the support in the name of social solidarity.

But Fidesz’s moves were motivated by efforts to widen their voter base. They assumed that the middle class would be more grateful for the handouts than constituents who were lower on the social ladder. As we know, Fidesz lost the elections and governance was handed over to the Socialist/Free Democrat coalition.

But the coalition partners have had their own differences of opinion on many issues as well. Debate flares up and dies down, but we are really witnessing a clash of two different concepts or philosophies. The Socialists are much stronger and, as a result, the Free Democrats have less room to realise their ideas. In addition, decades of state socialism resulted in even liberal voters becoming fans of state-freebies themselves. People are slow to realise, however, that free is not free. After all, funds distributed from the state are derived from the citizens. Many socialist politicians were quick off the mark to verbalise the need for an increase in handouts, the logic being that such a move would be sure to generate higher popularity ratings.

The government program presumed, however, a more favourable economic climate and contained changes in tax policy beneficial to taxpayers. Among them was the further development of tax breaks for families, the elimination of tax on exchange rate profits as well as EVA, the entrepreneurial tax.

EVA is a simplified form of taxation designed for entrepreneurs with under HUF 15 million in annual income. The scheme, however, generated much higher revenue for the state than was estimated. The liberals claimed that the solution would benefit everybody. It would be good, they argued, for entrepreneurs in a much more transparent tax situation with a lightened burden of administration and less motivation for not declaring their income. It was also seen as positive for the central budget, because more money would flow into coffers than expected.

This is why the revenue limit for EVA is to be increased to HUF 25 million next year. Of course, this is still a far cry from the real solution, since the Finance Ministry predicts that only 20,000 more businesses will opt for the EVA scheme next year. In the meantime, state spending will not decrease and Hungary’s finance minister must come up with ways to increase revenue. One of the reasons behind the plummeting popularity of the Socialist Party this summer was that a number of these ideas were leaked to the press, such as property tax, assets tax and so on.

Among the planned austerity measures was one calling for a hike in personal income tax rates. Last year parliament approved a roughly 2 percent decrease in personal income tax rates. When it turned out that state revenues had to be increased, the Socialists immediately thought of retracting this benefit, even though it had been enacted in legislation.

Like all good liberals, the leadership of the Free Democrats believes people know what to spend their money on better than the government, and demanded that the approved decrease should stand. A coalition tug-of-war followed until finally the tax cuts were approved. The money, however, had to be secured, and one possible source of revenue was to maintain the 25 percent VAT (value-added tax) rate – which is drastically high in the European Union context. Various taxation benefits – deductions, write-offs – are also set to be eliminated.

This round of tax debates is more or less over, but we have to admit to ourselves that it failed to resolve anything. The biggest challenge is that the Hungarian economy will continue to be unpredictable as rules and regulations are modified every year. Similarly, it is increasingly easy to get lost in the maze of legal technicalities.

This is why the Free Democrats recommended that a tax charter be drawn up in which political parties would commit themselves to reducing taxes, simplifying administration and decreasing the re-distributive role of the state.

It already appears that the coalition parties will have a difficult time making advances in this area. In the very same week when the idea of a tax charter was floated, the Socialists also came up with the idea that the “rich should pay.” In other words, a new, higher tax rate bracket should be created for those who earn the most. The Free Democrats again said under no circumstances would they support such a motion.

During their first coalition tenure in 1994-1998, the partners learned the lesson that public coalition debates hurt their cause. But this did not bring their stands on economic policy closer to each other. At the same time, the Free Democrats did manage to score partial victory in the case of the tax table, but it seems that Socialist notions of a bigger and more expensive state and more taxation are gaining the upper hand. A piece of good news, hopefully acceptable to both parties, is that after a cabinet meeting, the caucuses of both governing parties came out in favour of extending the decrease in corporate tax beyond next year and announced subsequent decreases for the next two years as well – as this would make the country more attractive to prospective investors.

The Free Democrats also floated the idea that a decision should be made now on the tax table for 2005, as party chairman Gábor Kuncze saw “further possibilities for decreases.” The real debate is just starting with the state budget on the table. Whatever the outcome, people will be conscious of the fact that it is their own money politicians are spending and therefore they must watch the flow of money.