# EUR-Lex - 52012DC0317 - EN

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# 52012DC0317

**Recommendation for a COUNCIL RECOMMENDATION on Hungary’s 2012 national reform programme and delivering a Council opinion on Hungary’s convergence programme for 2012-2015 /* COM/2012/0317 final */**

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Recommendation for a

COUNCIL RECOMMENDATION

on Hungary’s 2012 national reform
programme
and delivering a Council opinion on Hungary’s convergence programme for
2012-2015

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 5(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 European Commission’s proposal to launch a new
strategy for jobs and growth, 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, 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 12 July 2011, the
Council adopted a recommendation on Hungary’s national reform programme for 2011
and delivered its opinion on Hungary’s updated convergence programme for
2011-2014.

(4)       On 23 November 2011, the
Commission adopted the second Annual Growth Survey, marking the start of the second
European semester of ex-ante and integrated policy coordination, which is
anchored in the Europe 2020 strategy. On 14 February 2012, the Commission, on
the basis of Regulation (EU) 1176/2011, adopted the Alert Mechanism Report[6], in which it identified Hungary
as one of the Member States for which an in-depth review would be carried out.

(5)       On 2 March 2012, 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.

(6)       On 29 February 2012, the
European Parliament and Hungary exchanged views under Article 2a of 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.

(7)       On
2 March 2012, the European Council also invited Member States participating in
the Euro Plus Pact to present their commitments in time for inclusion in their stability
or convergence programmes and their national reform programmes.

(8)       On 23 April 2012, Hungary
submitted its convergence programme covering the period 2012-2015 and its 2012 national
reform programme. In order to take account of their interlinkages, the two
programmes have been assessed at the same time. The Commission has also
assessed, in an in-depth review under Article 5 of Regulation (EU) No
1176/2011, whether Hungary is affected by macroeconomic imbalances. The
Commission concluded in its in-depth review[7] that Hungary
is experiencing external and internal Imbalances, although not excessive.

(9)       Based on the assessment of
the 2012 Convergence 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 optimistic. The Hungarian
authorities’ growth projections for 2012 and 2013 are higher by around half a
percentage point compared to the Commission's 2012 spring forecast on the
account of the more optimistic official assumptions regarding domestic demand,
particularly in 2013. The objective of the budgetary strategy outlined in the
programme is to ensure the sustainable correction of the excessive deficit by
the 2012 deadline set by the Council. The official deficit targets and the
planned fiscal efforts comply with the March 2012 Council recommendations based
on Article 126(7). The programme confirms the previous medium-term budgetary objective
(MTO) of 1.5% of GDP, which it plans to achieve by 2013. The MTO adequately
reflects the requirements of the Stability and Growth Pact. Based on the
(recalculated) structural budget balance[8],
progress towards the MTO does not appear to be adequate in 2013 against the
assessment of the Commission's 2012 spring forecast, which takes into account the
implementation risks related to selected saving measures and a less optimistic
macroeconomic scenario. The growth rate of government expenditure, taking into
account discretionary revenue measures, is in line with the expenditure
benchmark of the Stability and Growth Pact in 2013, but not in 2014 and in
2015. According to government plans, the public debt is continuously reduced
throughout the programme period to below 73% of GDP in 2015, but will remain
above the 60% of GDP reference value. Regarding the debt reduction benchmark,
Hungary will be in transition period in 2013-2014 and the programme would
ensure sufficient progress towards compliance with the benchmark. According to
the programme, the debt reduction benchmark would be met at the end of the
transition period, in 2015, and thereby should help to reduce the accumulated
external and internal indebtedness.

(10)     New regulations have been
adopted for the implementation of the constitutional fiscal governance
framework, but some of its features remain weak. The medium-term budgetary
planning is only indicative, the resources of the Fiscal Council are not
commensurate with its newly-granted strong veto power, and the availability of
budgetary information remains insufficient. Strengthening the medium-term
budgetary planning dimension and widening the analytical remit of the Fiscal
Council would help to ensure that the new constitutional fiscal governance
framework can play its role.

(11)     Policy responses to address
the impact of tax reform on low wage earners (minimum wage increase, wage
subsidy scheme) have not contributed to enhancing employment, whereas measures
to encourage women’s participation in the labour market are a small step in the
right direction. Making labour taxation more employment-friendly and further strengthening
measures to encourage the participation of women in the labour market,
particularly by expanding childcare and pre-school facilities, would help to improve
the employment rate.

(12)     The public employment service
has been reorganised resulting in an overall downsizing, pointing in the
opposite direction of what was recommended in 2011. In the field of active
labour market policies some measures aiming to provide tailor-made services for
disadvantaged groups, for instance, under ESF programmes, appear credible and
relevant. However, other measures aimed at disadvantaged groups (e.g. public
works) are unlikely to be effective in improving the placement of participants
in the open job market. Serious steps to strengthen the capacity of the public employment
service should be taken without delay, while keeping the right balance of
funding between public works and other active labour market policies, to help
to improve the functioning of the labour market and raise the participation rate.
Raising the growth potential through structural reform in the labour market would
also be important for a sustained reduction of the vulnerabilities stemming
from the large stock of external and internal debt. Furthermore, the national
Roma integration strategy has not been mainstreamed in other policies.

(13)     Measures to improve the
business environment largely go in the right direction, but there is
significant room for further progress. Efforts to improve access to non-bank
funding are also going in the right direction, but a comprehensive assessment
of SME policies is still missing. Hungary ranks very low on many indicators
measuring the transparency and quality of public administration, where progress
would also help in improving the stability of the institutional and policy
environment. This, in turn, could improve conditions for foreign direct
investment and would support the reduction of the significant imbalance in the
net international investment position: in particular, the ratio of reinvested
profits fell dramatically in 2009 and 2010 partly on account of the crisis but
also as a result of a number of controversial and unpredictable changes in the
policy and fiscal environment and in the legal and institutional system. The
recent trend in public funding for research and innovation (since mid-2010) is
not in line with the 2012 Annual Growth Survey priority of differentiated
growth-friendly fiscal consolidation.

(14)     The Hungarian government carried
out a higher education reform that introduced changes in the structure and
funding of higher education. In addition, elements of the new legislation on
school education risk increasing the number of early school leavers and
segregation in the Hungarian school system. The equally important issue of lifelong
learning is not sufficiently addressed. Improving education at all levels will be
important to raise the competitiveness of the Hungarian labour force.

(15)     The lack of progress in
restructuring public transport has been an important reason for budget
slippages in recent years. The vast majority of the rolling stock of public
transport companies have reached the limits of their utility. Increasing the
cross-border capacity of the electricity network could facilitate a potential
increase in trade with neighbouring countries. The national energy regulator is
not empowered to organise its structures autonomously and lacks exclusive
competence to set network tariffs including the rate of return that network
operators are allowed to earn. Regulated prices should only apply to vulnerable
customers.

(16)     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 has 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.

(17)     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.

(18)     In the light of the results
of the Commission’s in-depth review and this assessment, the Council has
examined Hungary’s 2012 national reform programme and Hungary’s convergence
programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011
are reflected in particular in recommendations (1), (3), (4) and (5) below;

HEREBY RECOMMENDS that Hungary should take action within the
period 2012-2013 to:

1.           Correct the excessive
deficit by 2012 in a durable manner, by implementing the 2012 budget and reducing
the reliance on one-off measures. Thereafter, specify all structural measures necessary
to ensure a durable correction of the excessive deficit and to make sufficient progress
towards the medium-term budgetary objective (MTO), including meeting the
expenditure benchmark, and ensure sufficient progress towards compliance with
the debt reduction benchmark. To mitigate the accumulated macroeconomic
imbalances put the public debt ratio on a firm downward path.

2.           Revise the cardinal law on
economic stability by putting the new numerical rules into a binding
medium-term budgetary framework. Continue to broaden the analytical remit of
the Fiscal Council, with a view to increasing the transparency of public
finances.

3.           Make the taxation of
labour more employment-friendly by alleviating the impact of the 2011 and 2012
tax changes on low earners in a sustainable, budget-neutral manner, for example
by shifting part of the tax burden to energy taxes and recurrent taxes on
property. Strengthen measures to encourage women’s participation in the labour
market, particularly by expanding childcare and pre-school facilities.

4.           Strengthen the capacity of
the Public Employment Service to increase the quality and effectiveness of
training, job search assistance and individualised services, with particular
regard for disadvantaged groups. Strengthen the activation element in the
public work scheme through effective training and job search assistance. Implement
the National Roma Integration Strategy, and mainstream it with other policies.

5.           Implement measures
envisaged to reduce the administrative burden. Ensure that public procurement
and the legislative process support market competition and ensure a stable
regulatory and business-friendly environment for financial and non-financial
enterprises, including foreign direct investors. Reduce
tax compliance costs and establish a stable, lawful and non-distortive
framework for corporate taxation. Remove unjustifiable restrictions
on the establishment of large-scale retail premises. Provide specific
well-targeted incentive schemes to support innovative SMEs in the new
innovation strategy.

6.           Prepare and implement a
national strategy on early school-leaving by ensuring adequate financing. Ensure
that the implementation of the higher education reform improves access to
education for disadvantaged groups.

7.           Reform the public
transport system to make it more cost efficient. Increase the cross-border
capacities of the electricity network, ensure the independence of the energy
regulator and gradually abolish regulated energy prices.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 209, 02.08.1997, p. 1

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

[3]               COM(2012)317 final

[4]               P7_TA(2012)0048 and P7_TA(2012)0047

[5]               Council Decision 2012/238/EU of 26 April 2012

[6]               COM(2012) 68 final

[7]               SWD(2012)157 final

[8]               Cyclically adjusted balance net of one-off and
temporary measures, recalculated by the Commission services on the basis of the information provided in the programme, using
the commonly agreed methodology.

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