Hungary hikes VAT to highest EU rate at 27%

(BUDAPEST) - Hungary hiked Sunday its main value-added tax (VAT) rate to 27 percent from 25 percent, making it the highest in the European Union, in a government move to fill budget holes.

The hike, which was authorised by Brussels, only affects the country's top VAT rate, while reduced rates for basic food products remain at 18 percent and for books and newspapers, among other things, at five percent.

The rate increase, along with several other taxes introduced in 2011, "will entail a significiant increase in inflation" to five percent in 2012, according to the central bank's latest Report on Inflation published mid-December.

The bank expects inflation in 2011 to be 3.9 percent.

The tax hike was part of a series of austerity measures that the government introduced to keep the budget deficit at 2.5 percent of output in 2012.

Hungary was forced to seek a 15-20-billion-euro ($19.3-25.7-billion) credit line from the International Monetary Fund and the EU after the country had problems borrowing on the bond markets and its currency had fallen sharply in late 2011.