2nd UPDATE: Hungary PM Unveils Econ Package To Weather Storm

2nd UPDATE: Hungary PM Unveils Econ Package To Weather Storm
 (Recasts throughout, adds analyst comments.)  

BUDAPEST (Dow Jones)--Hungarian Prime Minister Ferenc Gyurcsany has unveiled an economic package aimed at helping Hungary through the current crisis and paving the way for the adoption of the euro.

The premier pledged Monday his cabinet will work to cut government spending in the years ahead and will launch several structural reforms in a bid to maintain the country's solvency and boost economic competitiveness.

"The planned expenditure cuts will more or less cover the loss of revenues...the worry is that they do as much as the IMF and the E.U. want but don't want to do anything more drastic," said David Nemeth, analyst at ING Bank in Budapest.

The fiscal and social measures revealed Monday could make the setting of a euro zone entry target date of 2012/2013 possible for Hungary, a person close to the government told the press Monday.

The country has no official euro target date but the government would like an agreement on a deadline by Sept. 30, the person added.

Euro zone entry in 2012/2013 seems feasible, ING economist Adam Keszeg said, adding that the government's potential upward revision of the 2009 budget deficit target won't have a market impact since the cabinet seems committed to keeping the deficit under the 3% of gross domestic product mark.

The government is currently in talks with the International Monetary Fund, the European Union and the central bank regarding the exact size of the budget shortfall target for 2009. The goal will be set between 2.7% of GDP and 2.9% of GDP.

Hungary's original 2009 budget deficit target was 2.6% of GDP but lower-than-expected inflation and budget revenues in wake of the global economic crisis have put that in doubt.

Gyurcsany said his cabinet is also calculating with a worse-case scenario of 3.5% GDP drop in 2009 should households cut spending further.

Gyurcsany's minority government is looking to lower budgetary spending by up to 220 billion forints ($953 million) in 2009.

Expenses will have to be lowered by HUF550 billion in 2010 and by HUF650 billion in 2011, he added.

"Hungary is in a double bind: we must maintain our solvency and also launch structural reforms and improve our competitiveness...this is like dancing in a sack," Gyurcsany said.

The premier pledged that his government will launch reforms in the areas of taxes, social benefits, pensions, economic policy and reducing and modernizing political representation and administration.

On taxes, the premier revealed a series of changes that won't reduce the overall tax revenue proposed in the budget, but will reshuffle between HUF8 billion and HUF900 billion of tax revenue per year.

The cabinet will abolish the 4% extra tax levied in 2006 on businesses and private individuals, it will cut payroll tax by five percentage points, it will hike the lower rate of the personal income tax to 19% from 18% and the higher rate to 38% from 36%.

At the same time, the upper limits of the personal income tax bracket will be raised, meaning that more people will be able to take advantage of the lower rate.

The government plans to hike the value-added tax rate to 23% from 20% and to increase excise taxes by between three and seven percentage points.

The cabinet will streamline social benefits and tax allowances in a bid to lower spending.

-By Edith Balazs and Margit Feher, Dow Jones Newswires; +361-267-0623; edith.balazs@dowjones.com

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(END) Dow Jones Newswires

February 16, 2009 09:36 ET (14:36 GMT)

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