* Transactions tax was stumbling block in talks with IMF/EU
* Raises chances of deal on financing backstop -analysts
* Govt cuts growth forecast, plans more deficit cuts
* Forint jumps 1 pct, bond yields fall 10-15 bps
By Gergely Szakacs and Krisztina Than
BUDAPEST, Oct 5 Hungary moved closer to a
financing deal with foreign lenders on Friday by scrapping a
disputed tax on its central bank and unveiling a swathe of new
measures to keep its deficit under control.
Since coming into office two years ago, Prime Minister
Viktor Orban has used his Fidesz party's two-thirds majority in
parliament to remove some checks on government powers, drawing
complaints from European partners and domestic opponents.
Moreover, the government's unconventional attempts to curb
the budget deficit have put it at odds with the European Union,
and left it needing a safety net to shore up investor confidence
and shield itself from the euro zone debt crisis on its
Economy Minister Gyorgy Matolcsy said the central bank would
now be exempt from a planned financial transaction tax, which
the International Monetary Fund and the EU had viewed as part of
an attempt by Budapest to exert a stronger influence over
"Hungary has eliminated potential threats for renewed
conflicts with the EU Commission and at the same time made
possible to further carry on the talks on an IMF programme,"
said analyst Zoltan Torok at Raiffeisen.
Both the IMF and EU said they would study the deficit
cutting proposals, adding it was too soon to say when aid talks
European Commission spokesman Olivier Bailly welcomed the
scrapping of the central bank tax and hoped the relevant law
would be modified quickly.
The volatile forint rallied over 1 percent to a
two-week high after the minister's remarks, while bond yields
fell by 10-15 basis points.
The government will make up for the lost revenue by raising
the amount collected by taxing the state treasury's own
transactions, and making Hungarians pay more each time they
withdraw money from their bank accounts.
Hungary also announced budget cuts worth 133 billion forints
($607 million) this year and another 397 billion worth of
adjustment in 2013 to keep the budget deficit under control.
Analysts said implementation risks of the plan, which also
targets 120 billion forints from improved tax collection, were
high but altogether they improved the quality of Hungarian
fiscal policy making.
NO EXOTIC TOUCH
Faced with weaker economic growth, seen at just 1 percent in
2013 after a recession this year, Budapest abandoned a planned
hike in teachers' wages, scrapped a ceiling on social security
payments and maximised social aid payments from next year.
Budapest will also axe thousands of jobs in its flabby
public sector by not replacing retiring workers.
The unpopular measures, which lack Orban's exotic touch that
investors have grown accustomed to over the past years, could
further dent backing for his government, which has already lost
about half of its supporters since a 2010 election landslide.
A recent survey by pollster Tarki showed more than half of
voters in the central European country of 10 million people,
which has endured a series of fiscal adjustment programmes and
high unemployment since 2006, had no party preference.
But further cuts were inevitable as the country, which has
been under EU surveillance for its failure to meet fiscal goals
since joining the 27-member bloc in 2004, faced the loss of
millions of euros of EU funds in case of renewed slippage.
That could dent growth further, complicate debt reduction
efforts and potentially push Orban's government into even deeper
budget cuts ahead of a 2014 election.
"We believe the EC and the IMF may question the ambitious
tax collection plans and potentially require further adjustment
to keep the deficit below 3 percent," said analyst Eszter
Gargyan at Citigroup.
"But basically the proposed package is a positive surprise
compared to earlier expectations and may provide basis for
further loan negotiations," she said.
The measures are needed for Hungary to keep its budget
deficit at 2.7 percent of economic output in both years,
slightly above earlier targets but below the EU's ceiling.