Prime Minister Ferenc Gyurcsany on Monday said that the government calculated with a contraction in the economy in 2009 of three percent or more when planning budget amendments.

Speaking in parliament, Gyurcsany said the government proposed raising the lowest personal income tax bracket from 18 to 19 percent and raising the income ceiling for the lower tax bracket from 1.7 million forints (5,629 euros) to 3 million forints.

These measures are to offset a 5 percentage-point cut in payroll taxes from 32 to 27 percent.

The government targets a budget deficit of between 2.6 and 2.9 percent of gross domestic product this year.

Gyurcsany said that the new income tax brackets would place 85-90 percent of people in the lowest bracket from next year.

Company tax will be raised from 16 to 19 percent but the four percent wealth and corporate tax, otherwise known as the solidarity tax, will be scrapped.

He proposed raising VAT from 20 to 23 percent and excise duty on cigarettes, fuel and alcoholic beverages by 3-7 percentage points.

Gyurcsany said the government would cut spending by 200-220 billion forints. The tax reshuffle is worth 800-900 billion forints, he added.

Gyurcsany said that family benefits would be taxed on a sliding scale, as well as other childcare benefits, which are currently paid regardless of income.

The 13th month pension will be scrapped for new pensioners and gradually phased out for those already in the system by building it into their payments, Gyurcsany said.

He proposed linking pensions to economic growth; using an indexing method, real values would be retained. The pension age would be raised very gradually between 2016 and 2025, when it will rise to 65, he said.

Childcare benefits will tightened up. A parent will have to have worked to a period of 12 months before receiving the benefit, which will be based on the number years spent in work.

The government will negotiate with large retail chains to try to ensure that at least 80 percent of food and agricultural products on their shelves are produced in Hungary. He said an agreement on this could be sealed within two weeks.

In another proposal, the size of parliament and local governments would be reduced and election laws altered, Gyurcsany said. The government urges a decision soon on party financing and an anti-corruption package, he added.

Gyurcsany said the government will start submitting law amendments related these proposals within two weeks.