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The country specific

recommendations for 2020

for Hungary

Country overview
A weak country growth potential related to a worsening business
environment, which is to a large extent driven by the lack of predictability and
distortive effects of government policies. These measures have contributed to a quick
pace of banking sector deleveraging and declining investment demand, resulting in a
historically low investment rate and reduced lending. Finally, Hungary was identified
by the Commission this year as experiencing macroeconomic imbalances.
After fiscal loosening in 2010 and 2011, the government made considerable
consolidation efforts and reached a deficit of 1.9% of GDP in 2012, well below the
target of 2.5%. While the Commission 2013 Spring Forecast projects a renewed
breach of the 3% of GDP by 2014, consolidation steps announced on 13 May for 2013
and 2014 should sustainably correct the excessive deficit.
However, Hungary faces serious challenges in the short- to medium term,
related to the business and legal environment and economic growth potential, which
could also undermine the success of fiscal consolidation.

European Commission's
recommendations for
Sustainable public finances
The financial sector
The taxation system
Labour market and poverty
Business environment
Energy and transport sectors

Sustainable public
Hungary has managed to keep its deficit below 3% in
2012. However, the corrective measures were mainly
concentrated on the revenue side, raising questions about the
sustainability of the consolidation efforts. Following the release
of the Commission 2013 spring forecast, the government
adopted an additional set of measures to close the fiscal gap for
2013 and 2014 so that it is projected to remain below the 3% of
GDP in both years. Strengthening the medium term budgetary
framework and widening the remit of the Fiscal Council would
also help to underpin recent reforms to the fiscal framework..

The financial sector

Restoring normal lending to the economy,

together with improving the business environment, is a
key challenge for the Hungarian economy. Decreased
taxation of the financial sector and managing the
deteriorating portfolio quality would help banks' internal
capital accumulation and therefore ease the flow of
lending. In case it needs to act to safeguard financial
stability, Hungary should ensure effective emergency
powers are given to the financial supervisor and establish
a resolution mechanism.

The taxation system

Frequent changes in the design of the tax system and

several surtaxes could have further distortive and dampening
effects on growth. Furthermore, the existence of several different
tax rates across corporate sectors hampers the effective
allocation of resources and affects investment and lending. The
complexity of the system is also a source of high compliance
costs for businesses. The tax wedge on low wage earners is still
high and a refining of the Job Protection Act to better target this
group is necessary. Hungary should effectively fight against tax
non-compliance to increase revenues and fairness.

Labour market and poverty

In Hungary a low employment rate is paired with one of the lowest

rate of labour market participation in the EU. Unemployment risks are
higher for low-skilled workers, youth, women, especially those with
children, and older workers. Hungary should enhance the Public
Employment Service and promote active labour market policies and
lifelong learning. The social situation continues to worsen with 31 % of
the population at risk of poverty or social exclusion and a high
percentage of people facing severe material deprivation. Poverty
continues to disproportionately affect disadvantaged territories and
communities, in particular the Roma and should be urgently addressed
through the National Social Inclusion Strategy.

Business environment

The business environment is one of the main

concerns in Hungary and has deteriorated due to a series
of measures, including restrictions on investors and an
unstable regulatory framework, particularly for services.
Businesses would benefit from reduced administrative
burden, less corruption and more competition in the
public procurement.


Although, Hungary had some success in lowering

the number of Early School Leavers in the last decade,
the trend was reversed in 2011. There is also a concern
about whether the on-going higher-education reform can
improve access for disadvantaged pupils. Hungary should
implement measures to tackle these issues.