# EUR-Lex - 52013DC0367 - EN

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# 52013DC0367

**Recommendation for a COUNCIL RECOMMENDATION on Hungary’s 2013 national reform programme and delivering a Council opinion on Hungary's convergence programme for 2012-2016 /* COM/2013/0367 final */**

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Recommendation for a

COUNCIL RECOMMENDATION

on Hungary’s 2013 national reform
programme
and delivering a Council opinion on Hungary's convergence programme for
2012-2016

Recommendation for a

COUNCIL RECOMMENDATION

on Hungary’s 2013 national reform
programme
and delivering a Council opinion on Hungary's convergence programme for 2012-2016

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the
Functioning of the European Union, and in particular Articles 121(2) and 148(4)
thereof,

Having regard to Council Regulation (EC) No
1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary
positions and the surveillance and coordination of economic policies[1], and in particular Article 9(2)
thereof,

Having regard to Regulation (EU) No
1176/2011 of the European Parliament and of the Council of 16 November 2011 on
the prevention and correction of macroeconomic imbalances[2], and in particular Article 6(1)
thereof,

Having regard to the recommendation of the
European Commission[3],

Having regard to the resolutions of the
European Parliament[4],

Having regard to the conclusions of the
European Council,

Having regard to the opinion of the
Employment Committee,

After consulting the Economic and Financial
Committee,

Whereas:

(1)       On 26 March 2010, the
European Council agreed to the Commission’s proposal to launch a new strategy
for growth and jobs, Europe 2020, based on enhanced coordination of economic
policies, which will focus on the key areas where action is needed to boost Europe’s potential for sustainable growth and competitiveness.

(2)       On 13 July 2010, on the
basis of the Commission's proposals, the Council adopted a recommendation on
the broad guidelines for the economic policies of the Member States and the
Union (2010 to 2014) and, on 21 October 2010, adopted a decision on guidelines
for the employment policies of the Member States[5],
which together form the ‘integrated guidelines’. Member States were invited to
take the integrated guidelines into account in their national economic and
employment policies.

(3)       On 29 June 2012, the Heads
of State and Government decided on a Compact for Growth and Jobs, providing a
coherent framework for action at national, EU and euro area levels using all
possible levers, instruments and policies. They decided on action to be taken
at the level of the Member States, in particular expressing full commitment to
achieving the objectives of the Europe 2020 Strategy and to implementing the
country-specific recommendations.

(4)       On 6 July 2012, the
Council adopted a recommendation on Hungary’s national reform programme for 2012
and delivered its opinion on Hungary’s updated convergence programme for 2011-2015.

(5)       On 28 November 2012, the
Commission adopted the Annual Growth Survey[6],
marking the start of the 2013 European Semester of economic policy
coordination. Also on 28 November 2012, the Commission, on the basis of
Regulation (EU) No 1176/2011, adopted the Alert Mechanism Report[7], in which it identified Hungary as one of the Member States for which an in-depth review would be carried out.

(6)       On 14 March 2013, the
European Council endorsed the priorities for ensuring financial stability,
fiscal consolidation and action to foster growth. It underscored the need to
pursue differentiated, growth-friendly fiscal consolidation, to restore normal
lending conditions to the economy, to promote growth and competitiveness, to
tackle unemployment and the social consequences of the crisis, and to modernise
public administration.

(7)       On 10 April 2013, the
Commission published the results of its in-depth review[8] for Hungary, under Article 5 of
Regulation (EU) No 1176/2011. The Commission’s analysis leads it to conclude
that Hungary is experiencing macroeconomic imbalances, which deserve monitoring
and require decisive policy action. In particular, the ongoing adjustment of
the highly negative net international investment position, largely driven by
private sector deleveraging in a context of high general government debt and a
weak business environment continues to deserve very close attention so as to
reduce the important risks of adverse effects on the functioning of the
economy.

(8)       On 24 April 2013, Hungary
submitted its 2013 convergence programme covering the period 2012-2016 and, on 22
April 2013, its 2013 national reform programme. In order to take account of
their interlinkages, the two programmes have been assessed at the same time.

(9)       Based on the assessment of
the 2013 convergence programme (the programme) pursuant to Council Regulation
(EC) No 1466/97, the Council is of the opinion that the macroeconomic scenario
underpinning the budgetary projections in the Programme is somewhat optimistic.
The Hungarian authorities’ growth projections for 2013 and 2014 of 0.7% and
1.9% are higher by around half a percentage point compared to the Commission
2013 spring forecast. The objective of the budgetary strategy outlined in the programme
is to ensure the sustainable correction of the excessive deficit by the 2012
deadline and the continued respect of the medium-term objective (MTO).
Hungary has undertaken significant fiscal efforts in 2012 and with a budget
deficit outcome of 1.9% of GDP overachieved the deficit target of 2.5% of GDP recommended
by the Council, partly on account of additional one-off revenues of 0.2% of GDP
on top of those which were acknowledged already at the time of the Council
recommendation. However, the corrective measures for 2012 and beyond, notably
those announced in the autumn of 2012 were mainly concentrated on the revenue
side, primarily focusing on selected sectors, raising questions about the
sustainability of the consolidation efforts. According to the Commission 2013 spring
forecast further efforts are needed for both 2013 and 2014 in order to correct
the excessive deficit in a sustainable manner. Following the publication of the
spring forecast the government adopted a new corrective package, and based on the
updated assessment of the Commission, the deficit is projected to remain below
the 3% of GDP threshold with the new measures in both 2013 and 2014. The
programme has changed the MTO from a structural balance of -1.5% to -1.7% of
GDP. The new MTO is in line with the requirements of the Stability and Growth
Pact. Hungary recorded a structural balance of -0.7% of GDP in 2012, i.e. well above
its revised MTO, and the Commission 2013 spring forecast foresees the
structural balance to stay in line with the MTO over the forecast horizon and
to stand at -1.1% in 2013 and -1.8% in 2014. Based on the measures adopted
after the Commission 2013 spring forecast the structural balance could remain above
the MTO in 2014 as well. The growth rate of government expenditure in 2013 and 2014,
net of discretionary revenue measures, will be broadly in line with the
reference medium-term rate of potential GDP growth, but is expected to significantly
exceed it in 2015 and 2016. Thus, the expenditure benchmark will not be met in
these two years. According to government plans, the public debt-to-GDP ratio
will continuously decrease throughout the programme period from 79.2% in 2012
to 77.2% in 2014 and further to 73.4% in 2016, i.e. it will remain above the
60% of GDP reference value. In contrast, the Commission 2013 spring forecast,
taking account of risks to the consolidation plans, expected only a marginal
decrease to 78.9% of GDP in 2014 which should be around 0.5 pps lower with the
new corrective measures. Hungary will be in a transition period from 2013
regarding compliance with the debt criterion, and according to the Commission
2013 spring forecast it is making sufficient progress towards compliance with
the debt criterion in 2013 and 2014.

(10)     The medium-term budgetary
framework is still merely indicative so the horizon of fiscal planning is
focusing only on the actual budget year. In addition, despite some recent
improvements, the mandatory tasks and the analytical resources of the Fiscal
Council are still not commensurate with its unprecedented veto power and the
need for the systematic ex-post assessment of compliance with numerical fiscal
rules. Strengthening the medium-term budgetary framework and widening the
mandatory remit of the Fiscal Council would help to improve the solidity and
credibility of the recently revamped fiscal governance framework.

(11)     The Hungarian financial
sector is deleveraging at a very quick pace, partly due to some policy measures
that have had a strong negative impact on the profitability of banks and
contribute to tight credit conditions. Managing the deteriorating portfolio
quality represents one of the biggest challenges for the financial sector,
associated with an increasing number of non-performing loans. In the last
years, the government adopted several measures to help foreign currency
borrowers, in several cases without a consultation of stakeholders in the
banking sector. However, these measures were not always targeted toward
distressed borrowers. The adoption of a series of measures in a short time
might increase moral hazard among borrowers due to the continuous expectation
of further government help. The global financial crisis demonstrated to which
extent the existing banking system may force national authorities to act to
safeguard financial stability. The first financial assistance programme to Hungary advocated the need for a state-of-the-art supervision including effective emergency
powers to the financial supervisor and the establishment of a resolution
mechanism. While over the past three years the powers of the Hungarian
Financial Supervisory Authority have been substantially increased, the
legislator has not equipped it with sufficient monitoring powers.

(12)     Hungary has not followed
the 2012 recommendation to establish a non-distortive and stable framework for the
taxation of corporations and has increased the tax burden on selected corporate
sectors by introducing further permanent sectoral surtaxes. While the new small
business tax introduced as part of the Job Protection Act has a favourable
design, the existence of several different tax rates across corporate sectors
hampers effective allocation of resources and affects investment and lending.
The introduction of reduced social security contribution rates under the Job
Protection Act is a step in the right direction to reduce the tax wedge on
labour. However, the tax wedge on low wage earners is still high and a refining
of the system to better target this group would be desirable. Hungary also plans to tackle tax non-compliance with several measures, such as the
compulsory connection of all cash registers with tax authorities. Regarding
energy taxation, measures taken do not provide incentives to reduce energy
consumption and have distortionary effects.

(13)     The low employment rate is
associated with a very low rate of labour-market participation. Youth
unemployment has increased from 11% in 2001 to 28.1% in 2012. The Public Work
Scheme uses the bulk of budgetary resources to provide the long-term unemployed
with work-related income instead of social benefits, while its long-term
benefits on employability are yet to be proven. Hungary has strengthened active
labour market policies but some disadvantaged people should have more access to
them and adult participation in lifelong learning is still one of the lowest in
the EU. In the last five years, the employment rate of women remained
approximately at the same low level. In order to encourage women to participate
in the labour market, the government expanded child-care facilities and
promoted flexible working arrangements. The social situation continues to
worsen: 31 % of the population is at risk of poverty or social exclusion
and a high percentage of people face severe material deprivation. Poverty
continues to disproportionately affect disadvantaged territories and communities,
in particular the Roma

(14)     The business environment in
  Hungary has constantly deteriorated in the last three years due to a series
of measures including restrictions on investors and an unstable regulatory
framework, in particular in the services sector. Recent restrictions which affect
disproportionately foreign investors are focussed mainly on the services sector,
including retail. The Simple State programme included 114 measures to reduce
the administrative burden on businesses by approximately HUF 500 billion but
its implementation has been somewhat delayed. Low levels of competition in public
procurement persist, although a new law entered into force on 1 January 2012.
The anti-corruption programme is a central element to the Magyary Programme.
However, the programme does not tackle either the issue of insufficient
law-enforcement in this area or the stricter checks on party financing, a key
area of concern. Moreover, most of the announced steps have not yet been
undertaken. Lack of monitoring of implemented measures also remains
problematic. The developments in Hungary in 2012 and 2013 have increased
concerns about the judiciary's independence. The Innovation Union Scoreboard
ranks Hungary as a moderate innovator. Business R&D investments are driven
primarily by foreign-owned enterprises.

(15)     Hungary succeeded in
reducing the number of early school leavers. Since there are still major
regional differences, the new elements of the centralised public-education
system, if not implemented carefully, might have a negative impact and increase
social inequalities and segregation. Although the number of students entering
higher education has grown significantly in recent years, further work is
needed to reach the EU average and the national Europe 2020 target. It is
doubtful whether the ongoing higher-education reform can improve access for
disadvantaged pupils.

(16)     Implementation of the
measures included in the Szell Kalman Plan, which is aimed at improving the
cost-efficiency and performance of public transport, is prone to considerable
delays and the lack of a comprehensive transport strategy hinders the financial
sustainability of the transport system. While Hungary has adequately increased power
grid interconnections with its neighbours as recommended in 2012, the lack of
independence of the energy regulator in setting energy tariffs and the high
share of regulated energy prices still raise concerns.

(17)     In the context of the
European Semester, the Commission has carried out a comprehensive analysis of Hungary’s economic policy. It has assessed the convergence programme and national reform
programme and presented an in-depth review. It has taken into account not only
their relevance for sustainable fiscal and socio-economic policy in Hungary but
also their compliance with EU rules and guidance, given the need to reinforce
the overall economic governance of the European Union by providing EU-level
input into future national decisions. Its recommendations under
the European Semester are reflected in recommendations (1) to (7) below.

(18)     In the light of this
assessment, the Council has examined Hungary’s convergence programme, and its
opinion[9]
is reflected in particular in recommendation (1) below.

(19)     In the light of the
Commission’s in-depth review and this assessment, the Council has examined the
national reform programme and the convergence programme. Its recommendations
under Article 6 of Regulation (EU) No 1176/2011 are reflected in
recommendations (1), (2), (3), (4), (5), (7) below,

HEREBY RECOMMENDS that Hungary should take action within the period 2013-2014 to:

1.           Implement a credible and
growth friendly fiscal strategy by specifying the necessary measures focusing
on expenditure savings and preserve a sound fiscal position in compliance with
the medium-term objective over the programme horizon. Building on the above
steps, put the general government debt ratio on a firm downward path, also with
a view to mitigating the accumulated macroeconomic imbalances. Enhance the
medium-term budgetary framework by making it more binding and by closely
linking it to numerical rules. Broaden the mandatory remit of the Fiscal
Council, including through systematic ex-post monitoring of compliance with
numerical fiscal rules as well as the preparation of regular macro-fiscal
forecasts and budgetary impact assessments of major policy proposals.

2.           Help restore normal
lending to the economy primarily by improving the capacity for capital
accumulation in the financial sector, inter alia by lowering the extra burden
currently imposed on it. Improve portfolio quality by removing bad assets from
banks' balance sheets, closely consult stakeholders on new policy initiatives
and make sure that new policy measures do not increase moral hazard among
borrowers. Enhance financial regulation and supervision, notably by giving more
effective emergency powers to the Hungarian Financial Supervisory Authority and
by establishing a bank resolution regime.

3.           Ensure a stable, more
balanced and predictable corporate tax system. Streamline corporate taxation
and minimise distortions of resource allocation created by sector-specific taxes,
so as to foster growth and employment. Continue making taxation of labour more
employment-friendly by alleviating the tax burden on low-wage earners, inter
alia by refining the eligibility criteria for the Job Protection Act, and by shifting
taxation away to environmental taxes. Fully implement and step up the already
announced measures to improve tax compliance and reduce the cost of tax
compliance.

4.           Address youth
unemployment, for example through a Youth Guarantee. Strengthen active labour
market policy measures and enhance the client profiling system of the Public
Employment Service. Reduce the dominance of the public works scheme within
employment measures and strengthen its activation elements. Reinforce training
programmes to boost participation in lifelong learning. Continue to expand
child-care facilities to encourage women's participation. Ensure that the
objective of the National Social Inclusion Strategy is mainstreamed in all
policy fields in order to reduce poverty, particularly among children and Roma.

5.           Create a supportive
business environment, in particular restore an attractive environment for
foreign direct investors, by making the regulatory framework more stable and by
fostering market competition. Ensure the prompt implementation of measures
envisaged to reduce the administrative burden, improve competition in public
procurement and take adequate measures to tackle corruption. Address concerns
about the independence of the judiciary. Remove recently introduced barriers in
the services sector, including in retail services. Provide targeted incentives
to support innovative enterprises.

6.           Implement a national
strategy on early school-leaving and ensure that the education system provides
all young people with labour-market-relevant skills, competences and
qualifications. Improve access to inclusive mainstream education, in particular
for Roma. Support the transition between different stages of education and
towards the labour market. Implement a higher-education reform that enables
greater tertiary attainment, particularly by disadvantaged students.

7.           Gradually
abolish regulated energy prices while ensuring the effective protection of
economically vulnerable consumers. Take further steps to ensure the
independence of the national regulator. Ensure the financial sustainability of state
owned enterprises in the transport sector by reducing operational costs and
increasing revenues.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 209, 2.8.1997, p. 1.

[2]               OJ L 306, 23.11.2011, p. 25.

[3]               COM(2013) 367 final .

[4]               P7_TA(2013)0052 and P7_TA(2013)0053.

[5]               Council Decision2013/208/EU of 22 April 2013.

[6]               COM(2012) 750 final.

[7]               COM(2012) 751 final.

[8]               SWD(2013) 119 final.

[9]               Under Article 9(2) of Council Regulation (EC) No
1466/97.