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Govt announces HUF 1,000 billion fiscal adjustment plan

Hungary's government said late Friday it is cautiously assuming 1.5% GDP growth for 2012 and plans a HUF 1,000 billion fiscal improvement to meet the deficit target.

"The growth rate goal of the government for 2012 remains 2%, in line with market expectations. However, having considered the prevailing risk factors as well as the impact of new measures, we assume GDP growth of 1.5% for the 2012 budget calculations," the National Economy Ministry said in a fresh macroeconomic outlook.

The government remains "firmly committed" to meeting the 2.5% of GDP deficit target for 2012 in the Szell Kalman Plan and the Convergence Programme and will take further measures to improve the fiscal balance by HUF 1,000 billion, the ministry said. Most of these measures will be achieved by cutting expenditures, it added.

The ministry said HUF 250 billion in the Stability Fund established earlier would be added the budget base, budget expenditures would be reduced by HUF 303 billion and budget revenue would raised by HUF 445 billion due to tax changes and other revenue side measures.

National Economy Minister György Matolcsy said on Friday the government would raise Hungary's VAT rate from 25% to 27%. HUF 150 billion in extra revenue from the increase will go into the National Protection Fund, he added.

The government will eliminate all personal income tax preferences from next year, Matolcsy said. At the same time it will stop the practice of taxing half of employer payroll tax contributions as personal income, resulting in a proportional 16% personal income tax system, he added.

Employers' health care contributions will be raised by 1.5 percentage point, Matolcsy said. The base for the tax will be employees' wages, but employers must pay the contribution on at least one-and-a-half times the minimum wage, he added.

Insurers will pay an accident tax next year and the tax on company cars will be raise by 40%, depending on their environmental rating, he said. The government will also introduce a tax on online gambling from 2012, he added.

The 2012 budget balance will improve by HUF 750 billion from 2012, he said. In the framework of the budget, the government envisions reserves of HUF 300 billion, he added.

The ministry said the 2012 budget was drawn up assuming average annual inflation of 4.2%, a 0.2% increase in household consumption, a 3.2% rise of investments, a 1.5% rise in payroll numbers and a one percentage point increase in the employment rate. The unemployment rate is set to fall under 11% in 2012.

The government aims to bring state debt down to 72% of GDP at the end of 2012 from 73.2% at the end of 2011, the ministry said. It expects interest payments on state debt to continue falling, edging down to 3.6% of GDP from 3.8%.

Although interest payments will fall by HUF 50 billion, the figure was not included in preliminary budget calculations, but it "will remain a bugger to address unforeseen future events", the ministry said.

Hungary's Convergence Program, updated in the spring, projected state debt would fall to 72.1% of GDP in 2012. It put GDP growth at 3%, but Matolcsy said earlier in September the government expects the economy to expand about 2pc in 2012.