Hungary Socialists, liberals ink coalition pact

BUDAPEST, May 29 (Reuters) Hungary's Socialist Party and the smaller Alliance of Free Democrats signed a formal coalition pact today to enable the formation of a new government and immediately pledged reforms to tackle the grave budget deficit.

The coalition led by Prime Minister Ferenc Gyurcsany, which in April became the first government since communism ended in 1989 to win re-election, will formally take power on June 9.

The most urgent task facing the government is to cut the budget deficit, which was 6.1 per cent of gross domestic product (GDP) in 2005, the largest in the European Union relative to the size of the economy thanks to four years of overspending.

''The government of reform is coming... and in the very short term (it will) create a balance in the budget,'' Gyurcsany said at the signing of the coalition pact.

On Saturday he told Reuters there would be budget cuts and tax rises totalling 350-400 billion forints (1.7-1.9 billion dollars), more than expected, as a first step towards reducing the deficit to 4.7 per cent of GDP this year and to the 3 per cent of GDP target required by 2008 to allow adoption of the euro in 2010.

The top of the range of the adjustment measures is equivalent to 1.7 percent of GDP and while economists welcomed the proposals, they warned they might not be enough.

''This 350-400 billion forints could be enough to prevent an overshoot in the cash-flow based deficit target this year but the EU target still hinges on whether the motorway costs can be booked off budget,'' Zoltan Torok, analyst at Raiffeisen said.

Hungary is to spend 300 billion forints on motorways this year, or 1.3 per cent of GDP, and wants this to be recognised as a public-private partnership by the EU statistics office.

The world's biggest financial centres, London and New York were closed today, so market reaction to the budget cuts was muted and the forint traded at 261.30 to the euro at 0846 GMT, little changed from Friday.

REUTERS SHB PM1525