D.) FURTHER MODIFICATIONS OF LAWS

5. Legislation to Improve the State of the Environment,
Enrich Available Human Resources,
Streamline the Economy and Curb Black Economy

The key objective of the proposals in this chapter is to curb the black economy in Hungary. However, they also help to fight against environmental pollution and improve living conditions.

Also proposals in other chapters of the document have favourable impacts not only on the issues discussed in the relevant chapters but also on the black economy. Consumer and related types of taxes are more easily collected than the income tax or the social security tax, for instance. It is especially so in the case of energy resources and supplies (including fuels) because a relatively small number of taxpayers need to be checked upon only. The current system of taxation slows down economic restructuring, and also supports black economy.

However earnest and determined the government seems to be, the fight against the black economy can only be successful if the budget reflects that determination. However well intentioned, the government cannot succeed without actually imposing taxes on the black economy, and thus acquire additional income instead of granting indirect support. Therefore, we welcome the government’s efforts to collect several billions of forints in 1999, and the declaration of this intention in the 1999 state budget.

5.1. Improving the Interests of Customs and Finance Authorities, Police, Trade Licensing Institutions, Environment and Nature Protection Authorities, Healthcare Authorities and Consumer Protection Agencies

One of the most efficient ways to cut the size of the black economy and crime in any country is to make the organisations that are combating it more interested.

One of those organisations is the National Customs and Revenues Office (VPOP). The proposed measures could serve several purposes. First, they could ensure protection of the Hungarian economy in compliance with WTO directives. Second, net state expenses could be reduced since a portion of import revenues could finance wage rises for customs officers and establishing better working conditions for them. Thus, extra revenues of HUF 15 to 20 billion seem to be sufficient to create the interests of VPOP, whereas state funds (HUF 9 billion) currently spent directly on the operations of VPOP could be used for other purposes.

Wages need to be increased by an average of 50-100%, which could be covered entirely from taxes and fees on imported goods. The government should not save on this item since each forint spent shrinks the competitive advantage of imports and reinforces the national economy. Even after the rise, wages of customs officers would be far lower than those of their counterparts in the West, so this could not be regarded as discrimination against other countries.

The end result would be an organisation that is more efficient and interested enough in fighting the black economy, which would generate extra revenues of at least HUF 40 billion annually. (See also Appendix 2.)

We propose that the National Internal Revenues and Tax Authority (APEH), the police, export and import licensing authorities, environmental protection authorities, national healthcare institutions and consumer protection agencies should be restructured by developing and taking similar measures and actions. Restructuring is not only a means of modernisation but by doing so, the state budget may also reduce the expenses of public administration.

Managers as well as the staff of the institutions can expect benefits from the restructuring, therefore, it is in their best interest to back such efforts. The budget also benefits from restructuring. First, it reduces government expenses. Second, the state becomes enabled to collect more revenues as a result of improved efficiency against black economy; and third, illegal activities can be detected and curbed. All in all, a package of extra revenues worth HUF 100 billion is expected to be achieved a year.

Total arrears (due liabilities) of Social Security, VPOP and APEH are close to HUF 800 billion. Measures described above are also capable of preventing those arrears from growing further, moreover, a minimum of HUF 100 billion can be collected in 1999. Business owners who fail to meet their obligations break the laws. Therefore, when the state is unable to collect the debt from them, it supports the black economy. The amount lost this way is around HUF 1,500 billion (current prices) that could have been used to modernise education, healthcare, culture and other social areas. Instead, a privileged minority has spent a large part of this sum on consumption and imports of luxury goods, rather than on new investments.

5.2. Better Collection Efforts of VAT through Creating Interest in Collection

Methods used in several European countries could be adopted in Hungary as well to increase government revenues and curb the black economy.

Collection of VAT and other tax obligations from importers and other buyers in the black market should be encouraged through the legally operating sector. Western countries collect taxes from the black market by enabling legally operating sellers to withhold their taxes. Tax revenues exceeding 2% of the annual GDP (HUF 130 billion) could be collected in that way. If implemented in 2000, that method could secure extra revenues of HUF 20 billion for the government. (It would be a stricter and more integrated method than that described in the government’s proposal.)

5.3. Measures Against Corruption in Government Institutions

The measures proposed in the chapters above (e.g. on reducing social security taxes) make business owners consider to legalize their activities in the black or grey economy, and, by strict control, clear legal regulations and severe sanctions, the scope of the black economy will probably be limited. It is equally important to take decisions and actions against corruption, which hold back the development of a healthy economy. We propose that measures be initiated to discover corruption, privileges and other unfair practices in public administration. The government intends to submit a package of proposals on preventing corruption for a debate in parliament in the next twelve months (source: Népszabadság, a Hungarian daily, 21 January 1999.) Their proposals should include – among other considerations – the following recommendations from Transparency International.

Government revenues and spending might become less transparent and accountable since the Act on the General Rules of the State Budget was modified in various respects. It is opposite to the reasons the government gave when they abolished extrabudgetary funds. The following is an extract from an expert opinion prepared by the State Audit Office (No. T/321/1).

"§16 of the Act on Government Earnings and Spending has been revoked by the law. By the new law, ordinary and extraordinary items (revenues and expenses) are not required to show separately, therefore, actuality and impacts of budget forecasts are difficult to measure.

A proposed modification of § 18/C (10) would omit the requirement of data provision. The nature of the system would require data provision by all means.

The proposed modification of § 23 fails to comply with § 24 (1) that still lists items of accumulation expenses in detail (capital expenditure for start-up and renovation projects, and other items). By leaving out sub-groups of the accumulation expenses (as proposed in § 23), less information will be available on capital expenditure.

§s 27 and 30 have been revoked. The new law allows a restricted scope for the parliament to make decisions on proposed budget items and the balance. It is a measure that leaves out one of the most important link in the chain of budget economics."

The Act on the General Rules of the State Budget needs modifications (or rather, "re-modifications") that make the budget transparent and its economics more efficient.

5.4. Environmental and Natural Protection Insurance and Environmental Protection Provisioning

To fight against the black economy, crime and pollution, it is vital to introduce measures and regulations restricting business owners in starting up their business without securing property or taking insurance against health or environmental risks that the business may involve. (Environmental authorities should make specific decisions.) It would save several hundreds of millions of HUF for the budget that are now spent on removing damage caused by businesses that are unable to provide the necessary funds. At present generally the taxpayers have to pay for eliminating the damage harmful to their own health or environment. (Several billions of forints are lost each year this way, because a large part of the environmental damage remains, as the state lacks the necessary resources to pay for or remove the damages.)

The Ministry of Environmental Protection has already elaborated a proposal on the above. The sooner it goes through the system of legislation and enforcement, the sooner the objectives are met.

An example of this situation are the new petrol stations. Unfortunately, several of them disguise money laundry or techniques for illegal trade of fuels. Besides being illegal, they pose a threat to humans and their surroundings. Funds are often scarce to remove old stations out of use or clear up the damage they cause. We propose that new petrol stations could be set up only on condition that the owner deposits the funds for potential removal of the station.

5.5. General and Mandatory Use of Deposit Refund

The Ministry of Environmental Protection is elaborating a new concept of deposit refunds. If and when the system of refunding is widely introduced it will be a tool of

The positive impact on the inflation here could allow more room for increasing other environmental fees.

5.6. Higher Penalties

As matters stand now, penalties are not discouraging polluters, or rather, they are even encouraging them to violate regulations. Therefore, an increase of the penalties is necessary, especially those related to environmental and natural protection, consumer protection as well as land use and soil protection. Officials are revising the law on violations, which could be done hand in hand with revising and increasing the current amounts of imposable penalties.

The amount and scope of penalties should be set without delay to be proportional to the damage and to be able to prevent unlawful actions; in other words, to be efficient in preventing businesses from causing the damage. This is essential since current regulations and practices even boost the black economy. For instance, the ceiling of the penalty that the Customer Protection Agency is allowed to impose on a petrol station offering low quality fuel worth several millions of forints is HUF 30 thousand. Or, another example can be the HUF 50 thousand penalty imposed on using public land in resort areas near Lake Balaton where the market value of the concerning piece of land may well reach HUF 10 million.