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Contribution cut needed for improved competitiveness

Further reduction of contributions would be necessary for the competitiveness of Hungarian companies and wages to be able to improve. For the competitiveness of companies, the most important factors are the availability of properly qualified and sufficient employees and the evolution of the total cost of employment.

We are leaders in the region in terms of contribution burdens

The finding and keeping of proper workforce is a challenge regardless of the industry in which companies are active and the qualifications and skills required. The cost side of labour market competitiveness is well characterised by the evolution of the amount of the minimum and the average wage and the rate of public burdens on wages. Compared to the Visegrád countries, Hungarian companies are still in disadvantage in terms of the tax and contribution burden on employment and further reduction would be necessary. 

In the past 10 years, the minimum wage increased substantially in the region. Countries increased the amount of minimum wages at different rates. Slovakia almost doubled the minimum wage relative to 2006, Poland saw a 90 percent and Hungary a 60 percent growth in minimum wage while the Czech increased 31 percent during the same time. As a result, the ranking of wage levels in the region was transformed also. By the end of 2016 Poland became the leader with Slovakia following closely and Hungary moved to the last position. 

The level of public burdens on wages and the evolution of the tax wedge in the region clearly shows an unfavourable picture for Hungary. Also, the payment of the net wage means a much higher wage cost for a Hungarian employer than for its peers in the region. 

With the tax wedge level of 41.4 to be reached as a result of the 6-year Hungarian contribution cut plan (and if none of the Visedgrád countries introduce changes in the meantime) we will be just below the level of the Czech Republic but will still be 6 percentage points from the Polish level of burdens. More contribution cuts would be necessary to reduce the tax wedge further and to make Hungarian employer burdens more competitive. 

Country/Year

Minimum wage, 2006 (EUR)

Minimum wage, 2016 (EUR)

Change in minimum wage (%)

Tax wedge, 2016 (%)

Poland

222

417

+88

35.78

Slovakia

180

405

+125

41.49

Czech Republic

279

365

+31

42.97

Hungary

221

350

+59

48.25

A favourable change in budget revenues would provide coverage for further contribution cuts

The increase in wage levels is not only apparent in the level of minimum wage. With the shortage in labour, wage pressure is intensifying and causing difficulty precisely for the companies in Hungarian ownership. A reduced overall wage cost would allow them to offer higher net salaries to employees at the same level of wage cost or to spend their saving on investments improving competitiveness. 

A very relevant factor, of course, is whether there is coverage for this at national economy level. As the general government balance is improving (thanks to the increased tax revenues) and also seeing the volume of the extraordinary budget spending in December 2016, we could rightfully think that the budget would allow for a more substantial contribution cut if intended. However, if we would like to sink the level of employment burdens to that of Slovakia or the Czech Republic, this would represent an approximate overall burden of net HUF 600 billion. 

Labour waging is supported by beneficial taxation offered by cafeteria and security benefit programs

Companies are able to motivate and retain their employees in a cost-sensitive non-wage-related way offering cafeteria elements which can be provided under favourable tax conditions and fringe benefit programs that are becoming increasingly popular throughout the region. For employees working in key positions, an attractive and efficient means for this is the employee security benefit program, which can be customized based on company characteristics while also being cost efficient for companies due to the favourable tax conditions prescribed by legal regulations. Under a well-structured share benefit program, the employer can provide benefits to its employees in the same net amount subject to 40 percent lower total cost. 

Benefit programs may, of course, only be supplements to competitive wages. For employers, the most important question is therefore a reduction of the contribution burdens on wages representing permanent cost. From the perspective of employers, this item is more important than the reduction of the rate of personal income tax. 

Net and gross wage and total wage cost in 2017

Wage cost elements

For minimum wage

For average wage of February 2017

Gross income

HUF 127.500

HUF 274.300

Net income

HUF 84,788

HUF 182,410

Taxes and contributions paid to the state

HUF 72,675

HUF 156,351

Total cost of employer

HUF 157,463

HUF 338,761

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