Hungarian prime minister presents fiscal action plan to assuage market worries about debt

Hungary unveils fiscal plan to cut deficit

BUDAPEST, Hungary — Hungary’s prime minister on Tuesday proposed an overhaul of the tax system and cuts to the public sector, to reassure jittery markets that it can handle its debt.

In a speech to parliament, Viktor Orban said a new 29-point fiscal plan will introduce a six-year tax for financial institutions and reduce red tape for investors. He also suggested it would cut public sector wages and eliminate benefits such as free cars and cell phones. A ban on foreign exchange mortgages is also in the works.

Orban presented the plan after a three-day Cabinet meeting and is being closely watched internationally after some officials recently suggested the country’s economic situation is similar to that of Greece.

The comments shocked global markets and dragged down both the euro and the Hungarian forint on Friday and Monday. Hungary has since tried to backpedal, with Economy Minister Gyorgy Matolcsy saying Monday that his government would strive to meet the 2010 budget deficit target of 3.8 percent of gross domestic product set by the previous administration.

International Monetary Fund chief Dominique Strauss-Kahn has said he sees “no reason to be concerned” about the current situation in the Central European state. In fact, EU-member Hungary has already been saved from defaulting on its debts, having received a euro20 billion ($24 billion) loan in late 2008 from the IMF, World Bank and European Union.

Orban pledged to create one million new jobs over the next decade and said the “time has come to replace the country’s old economic system with a new one.”

While some opposition lawmakers praised the package, others were more critical.

The head of the Socialists, ousted from power during April elections, said the plan lacked specifics and that some of the points had already been suggested by the previous administration.

Some analysts appeared cautiously optimistic about the plan but stressed that what mattered now was follow-through.

“Now that we have these measures they’re likely to stabilize matters in the near term but the markets’ attention will now turn to implementation,” said Neil Shearing, analyst at the London-based Capital Economics Ltd.

Danske Bank’s Lars Christensen was more pessimistic.

“Overall, the fiscal side of the Hungarian government’s plan is to reshuffle expenditures and revenues for less than 2 percent of GDP over a two-year-period,” Christensen wrote in an analysis. “This can hardly be described as a major reform package and as such is disappointing.”

The measure is expected to pass since Orban’s party, the newly elected center-right Fidesz, holds a two-thirds majority. However, timing of the vote is unclear.

In a television interview later Tuesday, Orban said his government would do everything possible to achieve the targeted budget deficit of 3.8 percent of GDP this year. Acknowledging it could be difficult to do so, he proposed an additional 120 billion forint austerity package.

Orban added that, under the proposal presented in parliament, tax cuts for small and medium sized companies would be introduced September 1 and a 16 percent flat tax would be imposed at the start of next year.

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Associated Press Writer Veronika Oleksyn contributed to this report from Vienna.