The Country-specific Recommendations are documents prepared by the European Commission for each country, analysing its economic situation and providing recommendations on measures it should adopt over the coming 18 months. They are tailored to the particular issues the Member State is facing and cover a broad range of topics: the state of public finances, reforms of pension systems, measures to create jobs and to fight unemployment, education and innovation challenges, etc. The final adoption of Country-specific Recommendations prepared by the Commission is done at the highest level by national leaders in the European Council.
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.
2013 European Commission's recommendations for Hungary in brief
The Commission has issued seven country specific recommendations (CSRs) to Hungary to help it improve its economic performance. These are in the areas of:
- Sustainable public finances
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.
- Energy and transport sectors Long-delayed reforms in the energy and transport sectors are having a detrimental effect on public finances and growth in Hungary. Energy prices for certain groups of customers are still heavily regulated and should be gradually phased out, whilst protecting the economically vulnerable. Public transport should be made more cost efficient to improve sustainability.
See how Hungary compares with other EU Member States in key areas
European Semester Documents