A significant rate of cut back on the retail utility tariffs of gas and electricity supply is introduced as of 1 November. The governing parties refer to the Budget 2014 as the ‘budget of reduced overheads’ when commenting the reduction of the utility tariffs by 20% compared to the previous year. The Policy Agenda checked whether the decreasing energy tariffs were really counted with when budgeting.

Who incurs the Overhead Cost Reduction?

Several times was it heard in respect of the reduction of the overheads that the service providers lose the most on this, who are compelled to supply energy at a reduced tariff to the consumers although the purchase price is not at all decreased. It is often forgotten, even by the government, that decreasing overheads mean also less revenues. The most evident element of this is the VAT. The 20% VAT rate is also paid on gas and electricity consumption, just like on foods.

In accordance with the figures provided by the Hungarian Energy and Public Utility Regulatory Authority, in 2012, the electricity bill paid by the inhabitants of Hungary came to 470 billion forints, from which the VAT revenue was 100 billion forints. In the case of natural gas the same was 485 billion forints, with a tax content of approx. 103 billion forints. As a consequence of the 10% overhead tariff reduction in January the government lost approx. 20 billion forints of VAT revenue.

The latest reduction of 11.1% also has an effect on this year’s budget, but it burdens more rather the next year’s budget. This will cause a further loss of approx. 18-19 billion forints to the budget. That is, compared to 2012, the cut back on the overhead costs will shorten the state revenues in the case of electricity and natural gas with approx. 40 billion forints.

Additionally there are two more factors where the effects of reduced overhead rates are detectable. One is the corporate tax: due to less income the energy suppliers will have less tax payment liabilities. The same applies to the income tax of energy providers, where, compared to the budget 2013, the government plans with 19 billion forints less in the budget 2014. In the explanation of the budget it is said that this decrease is mainly caused by the reduced overhead charges.

Adding up the mentioned three items approx. 60 billion forints less will flow in to the state treasury as revenue due to the decreased overhead tariffs compared to 2012.

What did the Government count with?

If the budget of the overhead tariff reduction is the one for the following year, it should also appear apparently in the draft budget as well. The reduction of the overhead tariffs comes up 10 times in the bill, and in 6 cases out of the 10, in a context discussing the shortfalls it causes in revenues, which must by all means compensated. In the text of the bill it is referred to as a means to promote or boost consumers’ demands, and in further two cases the National Consumer Protection Authority argues for the need to control the reduction of overhead fees as a priority task.

Obviously, the cabinet failed to count with the shortfalls in the revenues from VAT as a result of lower overhead charges. They keep setting up unrealistic targets and count with revenues never realizing. Although the budget of 3,000 billion forints is merely 1.6% higher than this year’s budget, but compared to the realization predicted for this year, according to the calculations made by the Policy Agenda, it is 11% less. Knowing this letting any revenues not flow in the budget might seem to be recklessness.

Needless to say, that the government can count on the appearance of the savings in economy, after less overhead fees are paid. People will surely spend it on something else, which will also increase the tax revenues of the state. This idea might as well be realistic, but the figures show the contrary, namely that the consumer spending is not growing in other segments. Either people save more, or they spend their savings on expenses (e.g. on the monthly instalments of their loans) which cause no tax revenues at all.

The facts reflect that the budget of the following year is only said to be the budget of overhead tariff reduction but the figures fail to demonstrate the same. It is also apparent that the draft budget is less possible to be fulfilled if the overhead tariffs are further decreased. It might happen that austerity measures will become necessary just because of the overhead tariff reduction.