In his state of the nation address on 22 February 2025, Prime Minister Viktor Orbán announced two important welfare measures to boost childbearing and reduce food inflation for pensioners. Under these measures, mothers with three children will be exempted from personal income tax from October 2025, while mothers with two children will be gradually exempted over the next four years, depending on their age. In addition, GYED (childcare benefit) and CSED (infant care benefit) recipients will also be exempt from tax. The total number of people affected by the tax reform (including mothers with at least 4 children exempted since 2020 and employees under 25) exceeds 1.4 million.
The government estimates that the fiscal impact of the exemptions could reach HUF 1,240 billion in 2026, which is almost 25 percent of the VAT revenue appropriations in this year’s budget (the indicative revenue amount for next year’s budget is not yet known; the fiscal impact of the tax reform is expected to be lower than this). The VAT refund scheme for some 2.4 million people covered by pension benefits is expected to start in the second half of the year. To ensure fairness and to avoid abuse, the government will cap the amount of tax that can be reclaimed on basic foodstuffs at between HUF 10,000 and 15,000 per month. As a result, the scheme will reduce the budget’s VAT revenue by HUF 432 billion at most, which is almost 5 percent of the total 2025 allocation. A huge literature is available on the impact of cutting VAT on price levels. The main conclusion of most studies and research is that while the increase in sales tax has an almost full impact on price levels, almost half of a VAT cut is swallowed by retailers. We published an analysis on the subject on our website three years ago. However, the VAT rebate allows the state to directly support the retired consumer by bypassing the retailer.
The figure can be referenced here: https://infogram.com/copy-szja-mentesseg-1hnp27exo3mqy4g?live
