Hungary pushes through controversial bank tax

(BUDAPEST) - Hungary pressed ahead with its plans for a controversial new bank tax Thursday despite criticism from the IMF and the EU it could hurt investment and growth in Hungary's still fragile economy.

The Hungarian parliament voted overwhelmingly in favour of the special financial sector levy, with 301 deputies voting favour, 12 against and one abstaining from voting.

Prior to the vote, Prime Minister Viktor Orban -- whose centre-right Fidesz party holds a two-thirds majority in the 386-seat house -- had insisted that the tax was "fair and necessary".

Orban, who swept to victory in elections in April, hopes it will raise 650 million euros (830 million dollars) in additional revenues to plug the gap in the public finances.

The levy is key to Orban's plans to keep Hungary's public deficit at 3.8 percent of gross domestic product as required by the International Monetary Fund and the European Union under the terms of a 20-billion-euro bailout package agreed in late 2008.

Under the plans, banks will have to pay a 0.45-percent tax on their total net assets while insurers pay a levy of 5.2 percent on total net premiums.

But the tax has come under fire not only from banks, but also the IMF and the EU which believe it will harm the investment climate and hit economic growth.

It was one of the main sticking points in talks between Budapest and the IMF and the EU at the weekend on a fresh credit line, which ended in no agreement.

"It was the banks that caused the global (financial) crisis, so it's normal that they should help resolve it," Orban told parliament ahead of the vote.

"Banks can't be treated as some sort of sacred cow. Taxing them is not a taboo."

The IMF and the EU, however, warn the positive effects of the tax would be only short term and it will have a negative impact on the investment climate and economic growth in due course.

Since the breakdown of talks at the weekend, Orban has said that Budapest is no longer interested in further financial aid from the IMF after the existing 20-billion-euro standby credit facility expires in October.

"Three years have passed (since then) and the agreement will expire in October. So there's no talk of suspending or breaking it. It is simply that the agreement will run out in October," Orban said.

The premier said Budapest would now focus on talks with the EU, "because like all other EU countries, Hungary has an obligation to keep its deficit below 3.0 percent."

Hungary would find it easier to hit this EU limit than some other member states whose deficit ratio currently stands at 7.0-8.0 percent or even higher, Orban said.