Hungary abandoned a plan on Friday to tax financial transactions by its central bank, removing a stumbling block in credit talks with the International Monetary Fund and European Union.
The plan had drawn strong criticism from abroad, where institutions and policymakers viewed it as part of an attempt by Budapest to exert a stronger influence over monetary policy.
Economy Minister Gyorgy Matolcsy said the central bank would now be exempt from the new tax, which will be levied on financial transactions by commercial banks and the state treasury from 2013.
"Our partners raised objections against this (tax on the central bank), what's more the European Commission flagged a possible infringement procedure against Hungary," Matolcsy said.
"Therefore, in the budget we no longer reckon with the transaction tax levied on the central bank."
The volatile forint rallied over 1 percent after the minister's remarks.
"This looks to be a significant concession on the part of the government, as it goes the extra mile to finally cut a deal
with the IMF," said Timothy Ash at Standard Bank Plc.
After months of delays, Hungary held an initial round of talks with lenders about a financing backstop in July, and negotiations are expected to resume in coming weeks.
The IMF and EU have not yet set a date for the talks.
To compensate for the central bank exemption as well as an economy set to perform less well than expected, the minister announced new measures for this year and next to keep the budget gap below the European Union's 3 percent of GDP ceiling and avert the loss of EU funding.
Having cut its growth outlook for both this year and next, Matolcsy said the government would freeze 133 billion forints (375 million pounds) in spending in 2012 and cut the deficit by another 397 billion forints in 2013.
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 ceiling.
He said the government would increase a tax on state treasury transactions and cash withdrawals from banks, cut back on co-financing of EU projects and delay a planned hike in teachers' wages.
Budapest also expected 120 billion forints of extra revenues as a result of tightening tax collection, and 51 billion from abolishing a ceiling on social security contributions that will affect higher income earners.
(Reporting by Gergely Szakacs and Krisztina Than; Editing by John Stonestreet)