Hungary's government parties started sparring over next year's budget on Thursday when the junior coalition partner Free Democrats said they would not support tax hikes proposed by the Socialists.
Free Democrat Party (SZDSZ) President Gabor Kuncze told a news conference his party would not back Socialist plans for a new 48 percent top income tax rate - up from a current 38 percent - and the reintroduction of capital gains tax.
"Let me make it clear that the Free Democrats will not vote for tax hikes and the introduction of any new tax," Kuncze said.
"The 48 percent new personal income tax rate - we will simply not vote for that...and SZDSZ will not support the capital gains tax either."
The liberal SZDSZ, campaigning on the ticket of tax cuts, did much better than expected in recent European parliament election, winning two seats out of 24. The Socialists had nine, while the right-wing opposition got 13.
This year SZDSZ had already pushed through a small cut in personal income tax rates, but now they are also proposing a 30 percent flat tax for those who opt not to use any of the tax allowances offered by the state.
The Socialists, in a desperate bid to shore up support among their core voters, this week said they would propose bigger welfare transfers for the poor to be paid for by higher taxes in the 2005 budget, which will be presented to parliament in September. "I hope the Free Democrats will revise their position, I think it was just a first reaction from their part," Istvan Gondor, deputy faction leader of the Socialist Party said at a separate news conference on Thursday.
The Free Democrats say instead of handing out generous state benefits to all, social welfare should be going to those really in need, while those better off should be helped by lower taxes.
"If we want a strong, growing economy, we must reduce the crippling tax and social contribution burden," Kuncze said.
The Free Democrats want to cut the medium income tax rate to 24 percent from 26, and raise the income brackets to prevent average incomes falling under the highest tax rate.
This is supported by the Socialists as well.
Among the EU's new members Hungary has one of the highest tax on wages, eating into the competitiveness of Hungarian labour, in contrast to neighbouring Slovakia which has launched a flat 19 percent tax and has attracted big foreign direct investment flows, luring some away from Hungary.
Instead of putting up taxes and boosting revenues to pay for higher welfare spending, Hungary should start long-awaited economic reforms and reduce the size of the public sector which currently employs over 800,000 people, some one-fifth of the active work force, analysts say.
This would allow Hungary to cut its huge budget deficit further in the coming years to remain on track for adopting the euro in 2010, and retain the confidence of foreign investors who finance Hungary's bloated budget and current account deficits.