Budapest - The Hungarian parliament on Monday approved pension cuts and a hike in the rate of value-added taxes (VAT) as part of the government's package of measures to tackle a deep economic crisis.

The action was the first major test for the new interim government under Prime Minister Gordon Bajnai.

In a key spending cut in the government's crisis austerity package, a "thirteenth month" bonus payment received by all recipients of state pensions will be abolished as of July.

In addition, pensions are effectively frozen in real terms. The new law allows for increases only when Hungary's annual economic growth rises above 3.5 per cent.

The Bajnai government estimates that this level of growth will only be reached between 2012 and 2014.

The latest European Union and Hungarian government predictions suggest that the Hungarian economy will shrink by around 6 per cent this year.

In a bid to increase the level of participation in the labour market - currently one of the lowest in the EU - the statutory retirement age is to be gradually raised from 62 to 65.

On the tax side, VAT is to be hiked from 20 to 25 per cent, although for some sensitive categories, such as basic foodstuffs and home heating, it will be cut to 18 per cent.

The measures passed by parliament also include a cut from 32 per cent to 27 per cent in the level of payroll tax paid by employers on salaries up to double the minimum wage, a bid to stem job losses and attract foreign firms to Hungary.

Employees will see the threshold for the lower, 18 per cent personal income tax bracket increased from 1.7 to 1.9 million forints (8,270 to 9,243 dollars) annual salary. Salaries over this level are taxed at 36 per cent.

On the down side for employees, the package contained cuts in statutory sick pay.

The government's belt-tightening measures are designed to keep Hungary's budget within limits set by the International Monetary Fund as conditions of a huge rescue loan received last October. The country also has one eye on meeting the Maastricht criteria for adopting the euro as quickly as possible.

Bajnai became prime minister last month after his Socialist predecessor Ferenc Gyurcsany stepped down in the face of mounting public opposition and a deepening economic crisis.

Trade union organizations called a general strike last Friday to protest the government's planned public sector and social spending cuts. However, most unions chose not to participate and very little disruption was caused.

The government said last week that its next batch of tax legislation, including a broadening of payroll tax reductions and the introduction of a new property tax, will be put before parliament by the end of May.(dpa)