Hungary to boost minimum wages, cut payroll taxes

Hungary will raise its minimum wage levels sharply but cut back on employers’ payroll taxes under a deal reached yesterday between government and employers designed to combat a severe labor shortage.

The state news agency MTI quoted Economy Minister Mihaly Varga as saying the minimum wage will increase by 15 percent in 2017 and another 8 percent in 2018. The payroll tax paid by employers will be cut by 5 and 2 percentage points at the same time. For skilled workers the guaranteed minimum wage, a higher wage category, will increase by 25 percent in 2017, and another 12 percent in 2018. The higher wages are designed to attract workers who have left the country back to Hungary. The government also wants to make it easier to bring in foreign workers from neighboring countries with Hungarian-speaking populations, such as Ukraine.

Peter Virovacz, analyst of ING Bank, said the move was a step in the right direction, but may have come too late. “This will not make many more people appear in the labour market,” he said. “For that, a modernisation of education and changes in public employment are needed.”

Wage growth has been fairly high in Hungary at a time of no inflation. The unemployment rate has plummeted with the economic recovery sucking up any available labour and workers leaving for higher wages in Western Europe.

In September, annual gross wage growth was 6.7 percent. Unemployment came in at 4.9 percent. If gross wage growth in the first nine months of next year exceeds 11 percent, another 0.5 percentage point reduction in payroll taxes kicks in, Varga said. He said there was no immediate need to modify the country’s 2017 budget because of the changing wage environment but that the ministry will reassess its macroeconomic forecasts in light of the agreement.

“This will not have an immediate impact on inflation, we still expect 2017 inflation to be 1.9 percent, maybe a few decimal points higher, as the VAT (value added tax) cut has a moderating effect,” Erste Bank analyst Orsolya Nyeste told Reuters. She added that labour shortage across the economy could boost inflation in the medium term, which could even exceed the central bank’s 3 percent target. Still, she said the central bank should stick to its record low 0.9 percent interest rate.

“It is possible that a higher growth and higher inflation environment may lead to a rate hike in 2019,” she said. The central bank has said repeatedly that it saw rates at the current level for its entire policy horizon.