UPDATE 2-Hungary passes 2010 tax law, key test for govt

* PM Bajnai’s government passes key test in parlt

* Tax changes to cut taxes on labour from 2010

* Budget law seen next big challenge

(Adds comments, analyst, detail)

By Krisztina Than

BUDAPEST, June 29 (Reuters) - Hungary’s minority Socialist government passed a crucial test on Monday when parliament approved key 2010 tax changes to help the country recover from its worst recession in almost two decades.

The passing of the law averts the risk of early elections. Prime Minister Gordon Bajnai had said he would stay in his post as long as the Socialists and the Free Democrats support his programme, which is also the backbone of Hungary’s financing deal with the International Monetary Fund (IMF).

The tax law, which will cut personal income taxes and social contributions paid by employers to the government, was passed with 211 votes and 152 votes against, with backing from the Socialists’ former coalition allies, the Free Democrats.

Bajnai’s government, which took office in April, has cut spending and kept the budget deficit in check. This has helped the forint to firm from all-time lows hit versus the euro in March, and helped rebuild some investor trust in Hungary.

“This confidence is still very fragile,” Bajnai told parliament ahead of the tax vote.

“The measures on which we vote today, and the ones the government will propose over the summer and in the autumn, are needed for this confidence to be lasting,” he added.

Parliament also passed a law which will provide for a “wealth tax” on real estate and luxury items next year.

The government will cut personal income tax rates and raise the lower income bracket to ensure that average incomes are taxed at a 17 percent rate, and will reduce the employment tax to encourage employers to save and create jobs.

Unemployment in Hungary was 9.8 percent in March-May, up from 7.7 percent a year ago. The country’s export-led economy is expected to shrink by 6.7 percent this year.

Centre-right opposition party Fidesz, which based on current poll readings is expected to win next year’s parliamentary elections by a landslide, said the government’s measures did not shelter Hungary from the global crisis.

Fidesz has repeatedly urged early elections.

“You have not saved a single job,” Fidesz parliamentary group leader Tibor Navracsics told parliament. “Jobs are being cut, and the population is getting poorer.”


The next test for the government will be passing the 2010 budget, which will have to reduce the budget deficit to 3.8 percent of gross domestic product from 3.9 percent this year at a time when tax revenues are falling due to the recession.

For this, the government will have to tighten the budget of local governments and cut spending at state railway firm MAV.

“The government ... delivered on structural fiscal reforms, including a shift in taxation from labour to consumption taxes, a reduction of subsidies and pension reform,” Barclays said in a note, adding that this has helped improve financial stability.

“However, the fundamental challenges remain significant.”

A defeat in European elections early this month, in which the Socialists scored just over 17 percent, caused divisions in the party and has also sent the Free Democrats into disarray.

Analysts said these divisions would maintain uncertainty in coming months and increase pressure on the government to loosen spending ahead of general elections due in April or May 2010.

“The next challenge will be the vote on the budget,” said Attila Gyulai, analyst at think tank Political Capital.

Gyulai said neither the Socialists nor the Free Democrats were prepared to face early elections yet which increases the stability of Bajnai’s government for the time being. For factbox on 2010 tax measures, click [LT719191]