By Krisztina Than
BUDAPEST, March 22 (Reuters) - Hungary's economy could contract this year by more than the official forecast of 3.5 percent and bigger spending cuts are needed, Prime Minister Ferenc Gyurcsany said on Sunday.
Gyurcsany, who offered on Saturday to make way for a new leader and government to lead the country out of economic crisis, said his government's gross domestic product forecast had not changed and it had prepared proposals to tackle a deeper recession if things got worse.
He said that, irrespective of the change in government, his cabinet must be ready to cope with a worse scenario.
"There are ... proposals for what needs to be done if it becomes the official scenario that recession is even deeper," he told Reuters in an interview.
"This proposal takes into account how the budget deficit can be kept below 3 percent (of GDP) in case of a deeper recession," he said, adding that it would also create resources allowing the state to invest and create jobs.
The government and the central bank officially project Hungary's economy will contract by 3.5 percent this year, but according to a Reuters poll last week, analysts expect a 4.5 percent contraction with some saying it could be even deeper.
Hungary had to resort to a $25.1 billion International Monetary Fund-led rescue package last October to avert financial crisis. With its export-driven economy, it has been hard hit by a collapse of demand in Germany, its biggest export market.
On Thursday, the head of Germany's Ifo economic research institute said the German economy would contract by more than 4 percent this year as the world economic slowdown affected orders and exports.
"If Germany has minus 5 percent (growth) then Hungary will not stop at 3.5 (percent contraction)," Gyurcsany said.
"The government is working on such scenarios which can and must be used if the official forecasts for Hungary fall into line with today's analyst consensus which is 4-to-5 percent contraction."
Gyurcsany said he offered to step down because he wanted to show the country it could not avoid structural reforms.
"I think a clear message needed to be sent to Hungary, first of all, and to the Hungarian parliament and also to those who do not want change, that there is no such alternative," he said.
"My past three years had been about a struggle for Hungary to understand that a multitude of reforms are needed, and to prove that we can do this without being totally insensitive to social aspects ... My offer to step aside is about the fact that these changes cannot be escaped."
Gyurcsany wants to step down by organising a parliamentary vote of no confidence against him and his government by mid-April, which would allow a new leader and programme to win parliamentary approval without the risk of an early election.
He said a further significant reduction in spending was needed, as were measures to create and preserve jobs and healthcare and education reforms. (Reporting by Krisztina Than; editing by Andrew Dobbie)