Hungary's premier moves to reduce deficit, announces tax overhaul

Jun 8, 2010, 15:27 GMT

Budapest - Prime Minister Viktor Orban revealed on Tuesday an 'economic action plan' aimed at boosting growth while keeping to Hungary's budget deficit target of 3.8 per cent this year.

A new banking tax and a raft of spending cuts will be applied to prevent Hungary's budget deficit from widening.

The prime minister said that 200 billion forints (842 million dollars) could be raised this year through a temporary tax on banks, which would be levied for three years.

The first concrete package of economic measures since Orban's centre-right Fidesz party won elections in April came after a three- day emergency meeting amid fresh fears over Hungary's finances.

The government intends to introduce a new flat income tax of 16 per cent as part of a comprehensive tax overhaul over the next two years, Orban said. The current tax is a progressive one of 17 and 32 per cent.

Orban also announced the extension of a preferential 10-per-cent rate of corporate tax to companies with annual profits of up to 500 million forints (2.12 million dollars).

The government plans budget savings of 120 billion forints through spending reviews and restructuring at ministries, Orban said.

Wages at public institutions and state support to political parties will be cut by 15 per cent, and there will be a cap on public sector wages at 2 million forints.

This would apply 'even at the Hungarian National Bank,' Orban said in an apparent swipe at the central bank's governor, Andras Simor, whom Fidesz has called on to resign.

Orban spoke of a 'radical simplification' of the tax system, criticising a current situation in which, for Hungarians, it is 'not worthwhile being honourable.'

'An economy cannot be built on the basis of 2.5 million taxpayers supporting a population of 10 million', he said.

The prime minister repeated his government's pledge to create a million new jobs by the end of the decade.

The government was forced to move quickly after a prominent Fidesz politician on Thursday said Hungary had only a 'narrow chance of avoiding the situation of Greece.'

The Hungarian forint lost 4.8 per cent of its value against the euro by Friday, even as the euro itself was falling against other major world currencies.

However, on Saturday, the head of Fidesz's economic 'fact-finding' committee, Mihaly Varga, announced that the 3.8 per cent deficit target agreed with the IMF and the European Union by the former Socialist government was achievable 'if appropriate measures are taken.'