By Krisztina Than and Balazs Koranyi
Hungary will raise the main value-added tax rate to 23 percent from 20 from July to create room to cut taxes on labour, aiming to boost the ailing economy, Prime Minister Ferenc Gyurcsany told Reuters on Monday.
The measures, which also include significant changes in the social and pension system, could allow the country to aim for euro adoption between 2012 and 2014, he said in an interview.
The tax measures would raise annual average inflation to 3.9 percent this year, while the government now reckons with a 3 percent drop in GDP, although this could be deeper if domestic demand falls more than expected.
"We also reckon with the possibility that the drop in household consumption and a rise in their savings … will reduce domestic demand and this … could bring a bigger contraction than 3 percent," Gyurcsany said.
"In both cases, even if the economy contracts by 3.5 percent, the budget deficit can be kept below 3 percent … Today various budget scenarios reckon with a 2.7-2.9 percent deficit," he added.
In a Reuters poll last week analysts' median forecast was for a 3.2 percent contraction in the economy for 2009 but there are some analysts who forecast the economy could contract by around 5 percent.
Hungary, which relies heavily on foreign investors to finance its large debts, had to resort to a $25.1 billion rescue package from the International Monetary Fund and the European Union last October to avoid financial crisis.
Its export-led economy has been one of the hardest-hit by a collapse of demand in the euro zone and Hungary went into recession in the fourth quarter of last year.
Gyurcsany said that the government would by Sept. 30 make a proposal for a medium-term economic path, as part of a national agreement if possible, which would allow the introduction of the euro in the next 3 to 4 years.
"First we have to outline a path, and then set a date, rather than the other way around," he said. "The present measures and the resulting track will allow us to set a realistic, but credible and reliable (euro) target date."
"Today I think it cannot be earlier than in 2012, and there is no reason for it to be later than in 2014," he said.
Hungary has no official euro target date at the moment.