Corrects to reflect government wants to cut, not raise company tax.
By Sandor Peto and Krisztina Than
BUDAPEST (Reuters) - Hungary's new prime minister said on Tuesday he would cut public wages, overhaul the tax system and ban mortgage lending in foreign currencies as he strove to reassure nervous investors he can contain the budget deficit.
After sweeping an April election with a two-thirds majority, Victor Orban unveiled a programme dramatically departing from that of a previous caretaker Socialist cabinet that cut spending last year after narrowly avoiding economic meltdown in 2008.
The rightist Fidesz party has pledged to cut taxes and create jobs to tackle Hungary's large debt pile but analysts say that could threaten targets agreed under the country's 20 billion euro (16.6 billion pound) European Union/International Monetary Fund bailout.
Struggling to win back market confidence after Fidesz officials rattled investors by warning of a Greek-style debt crisis last week, Orban said he would introduce a flat 16 percent income tax.
He said his government would also cut taxes for small and medium sized companies and ban mortgage loans in foreign currencies. Foreign-denominated loans have been a crucial driver of Hungary's economy this decade amounting to around 70 percent of all retail loans.
He also signalled a new tariff on banking profits.
"We would like to start talks with the banks about what the base of this tax would be, how the burdens would be shared by banks, insurers and leasing companies, and we propose that we should introduce this for 3 years," he said in a speech, adding that it could raise 200 billion forints (585.5 million pounds) for budget income.
Orban said the economy needed to be based on higher production and jobs, but he also vowed to freeze costs at state institutions and introduce a ceiling in state wages for an overall 15 percent savings in wage costs.
"Debt must be obviously reduced over the coming years. To keep it under control and if possible reduce it," Orban said.
Analysts say Orban's plan to cut taxes and boost growth may be hard to square with fiscal targets agreed under a 20 billion euro, European Union and International Monetary Fund bailout that has underpinned the emerging economy of 10 million people.
Moody's investor service said on Monday that Fidesz's willingness to consider unorthodox pro-growth measures were credit negative.
But officials have said they would stick to the deficit target agreed with the EU and IMF of 3.8 percent of gross domestic product, and Economy Minister Gyorgy Matolcsy said spending cuts of 1.0-1.5 percent of GDP were needed.
MARKETS RALLY
The forint pared short-lived gains in volatile trade. It was 0.9 percent up on the day at 282.8 to the euro, virtually unchanged from levels seen when Orban began speaking.
The country's largest bank OTP held onto gains, trading up 2.8 percent at 1 p.m. British time, while the 5-year bond yield dropped around 15 basis points.
Analysts' early reactions were mixed. They said the bank tax and flat income tax looked as if they could generate enough funds for Budapest to meet the target, although they also said the ban on foreign currency lending could hit banks.
"These measures make clear (Orban) is committed to keeping the budget deficit at 3.8 percent," said Gyula Toth, emerging markets strategist at Unicredit in Vienna.
"I am missing a few details but it looks like the most significant funding part, the tax on the banking sector should be enough for this year."
Earlier, investors snapped up short-term treasury bills at a finance ministry auction and the euro, driven to a four-year low in part by Fidesz statements comparing Budapest to Athens, ticked higher against the dollar.
(Reporting by Krisztina Than; writing by Michael Winfrey)
