UPDATE 1-Hungary to lean on taxes to meet deficit goals

Published 10/13/2010, 10:47 AM
Updated 10/13/2010, 10:52 AM

* PM outlines billions of forints in new taxes

* To hit energy, telecoms, retail sectors

* Telecoms, energy stocks fall, bond yields rise

* New action plan to go to parliament on Monday

(Adds quotes, analysts, market reaction)

BUDAPEST, Oct 13 (Reuters) - Hungary will impose taxes on the telecoms, retail and energy sectors and temporarily suspend payments to private pension funds to meet its targets on budget deficit cuts, Prime Minister Viktor Orban said on Wednesday.

Orban was outlining long-awaited details of how the government would meet targets which are seen as key to winning Hungary enough trust from financial markets to avoid returning to the International Monetary Fund for aid.

He said a full economic action plan would be sent to parliament on Monday as government bids to keep this year's shortfall to 3.8 percent of gross domestic product and cut next year's to 3.0 percent.

This year's deficit in September was already 1.089 trillion forints ($5.57 billion) or 125 percent of the full-year target.

Meeting deficit goals is essential for Hungary to maintain investor confidence and keep European Union funds flowing into an economy which contracted by 6.7 percent in 2009 and is seen growing by only about 0.9 percent this year .

The new centre-right administration has ruled out a new deal with the IMF, saying it is doing more than enough on austerity at a time when the economy is struggling and it also needs room to prop up growth.

"We need measures which stop an increase in state debt and at the same time enable the country to cover its funding needs from the market, not international authorities, and this requires the trust of markets," Orban said.

A controversial new tax on the financial sector [ID:nLDE69B123] brought 56 billion forints into state coffers in September, and is expected to bring a further 130 billion forints in the fourth quarter of 2010. Orban outlined similar "crisis" taxes for other sectors of business, which he said would be temporary and run for three years.

A telecommunications sector would generate 61 billion forints per year from this year as well as 70 billion forints per year from the energy sector and 30 billion from retail chains.

He did not specify whether the retail and energy taxes would apply already this year, but analysts had hoped the measures would focus on cutting back public sector flab left over from the communist era rather than taxing business.

Shares in Magyar Telekom and oil group MOL fell. Government bond yields rose by 5 basis points.

"Orban ...is refusing to take any austerity expenditure side measures and is instead undergoing revenue side contortions," Peter Attard Montalto, analyst with Nomura.

"This is not credible fiscal policy, it is anti-growth, but it will likely allow them to meet the deficit targets."

The prime minister also laid out plans to halt -- from Nov. 1 until Dec. 31, 2011 -- a monthly transfer of 30 billion forints from the state to private sector pension funds.

"The pension system cannot withstand it. We will suspend these transfers " he said. "We will also create a law this year creating the possibility of retuning into the state pension system," he said.

(Reporting by Gergely Szakacs; writing by Patrick Graham)

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