Hungary PM flags tax cuts as IMF arrives

Hungarian Prime Minister Viktor Orban grabbed the opportunity presented by the launch of credit talks with the IMF this week to signal new moves to bolster growth at the expense of looser public finances.
The long-awaited start of negotiations with the Fund on a vital financing backstop have prompted a rally in Hungarian government bonds and boosted hopes for a cut in official interest rates – offering Orban more room to manoeuvre on spending.
The negotiations are expected to be difficult, however, and could drag on for several months due to the conservative government's determination to retain its unorthodox economic policies.
Orban has flagged a possible extension of social tax cuts for employers to protect jobs in coming years and said he would fight for the measure if needed.
He said tax cuts for employers and small firms, designed to save jobs in a slowing economy, could rise from an announced 300 bln forints ($1.27 bln) to 450-500 bln in later years, depending on the success of the programme.
The tax cuts pose a risk to the 2013 budget deficit target of 2.2% of economic output and the financing of the cuts — which the government said would partly come from a new tax on financial transactions — will be a thorny issue during talks with lenders.
Loaded with central Europe's highest debt and its export-driven economy headed into recession, junk-rated Hungary needs outside help to cut borrowing costs and avert a market blowout as a prolonged debt crisis engulfs the neighbouring euro zone.
For Orban, entering talks on a multi billion-euro loan with the IMF and EU is a major political climbdown and he is not likely to give in easily to lenders' demands.
With one eye on an election due in 2014, Orban has already pushed the key parameters of the draft 2013 budget through parliament, earmarking social tax cuts for employers and small firms to save jobs and bolster public support.
He wants to preserve a flagship flat tax policy to help families and would be reluctant to impose a wealth or property tax that could hit large swathes of the population ahead of the election, a key test of his handling of the economy.