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Hungary closer to aid deal after retreat on central bank tax

By Gergely Szakacs and Krisztina Than

BUDAPEST (Reuters) - 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 doorstep.

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 monetary policy.

"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 program," 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 could resume.

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 maximized 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 programs 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.

(Writing by Gergely Szakacs; Editing by John Stonestreet and Toby Chopra)

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