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UPDATE 1-Hungary passes tax, pension changes in first vote

Published 05/04/2009, 01:53 PM
Updated 05/04/2009, 01:56 PM
TGT
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* Hungary parliament passes key tax, pension changes in vote

* New government passes first test of support in parliament

(Adds analyst, background)

By Krisztina Than

BUDAPEST, May 4 (Reuters) - Hungary's parliament passed key amendments to tax and pension laws on Monday in a preliminary vote seen as the first test of the new Socialist minority government which took office last month.

The measures, which include a rise in the main value added tax rate to 25 percent from 20 percent from July and pension cuts, were passed with a safe majority and are essential for keeping a grip on the budget deficit this year.

"The government's proposals have all been passed," a parliament press officer told Reuters.

The final vote will be held later this month.

Prime Minister Gordon Bajnai's government last month announced spending cuts worth about 400 billion forints ($1.84 billion) for this year to put the budget back on track and revive the economy which is suffering its biggest downturn in nearly two decades.

Bajnai, who is not a member of any political party, said he would stay in his job as long as the ruling Socialists did not attempt to water down his economic proposals.

Hungary's export-driven economy is expected to contract by 5.5-6.0 percent this year, according to the government, while the European Commission said in fresh forecasts on Monday growth could fall by 6.3 percent.

"The government which took office two weeks ago wants to significantly modernise the taxation system to improve competitiveness, and to preserve jobs," Finance Ministry State Secretary Tamas Katona said in a speech to parliament.

TESTING TIMES

Monday's vote was the first test of support for the Bajnai government, which replaced Ferenc Gyurcsany's cabinet after it collapsed amid the economic crisis in March.

Most Socialist and some opposition MPs supported the amendments put forward by the government, which wants parliament to vote on a new package of tax changes for 2010 before the end of June.

The government is striving to keep the budget deficit below 3 percent of gross domestic product (GDP) this year, a target some analysts said could be difficult to reach given the deep recession.

Analysts say even if it manages to keep the budget on track, it is unlikely to introduce meaningful structural reforms ahead of parliamentary elections due in the first half of 2010.

"In our view, this (spending cuts) may not be sufficient to keep the budget deficit below 3 percent of GDP but nevertheless, definitely enough to secure the problem-free payout of IMF loan," analysts at Raiffeisen said in a note.

Hungary resorted to a $25.1 billion IMF-led rescue package in October to avert financial meltdown and is drawing on these loans this year to finance its large debts.

An IMF delegation is due to arrive to Hungary on Wednesday to review completion of the programme. The government plans spending cuts worth 900 billion forints next year. (Reporting by Krisztina Than; Editing by Sophie Hares)

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