CONTENTS

Executive summary. 3

1............ Introduction. 5

2............ Economic situation. 6

3............ Challenges and assessment of policy measures. 7

3.1......... Fiscal policy and taxation. 7

3.2......... Financial sector 18

3.3......... Labour market, education and social policies. 21

3.4......... Structural measures promoting sustainable growth and competitiveness. 26

3.5......... Modernisation of public administration. 34

4............ Conclusions. 37

Overview table. 38

Annex... ... 46

Executive summary

After a GDP decline of 1.7 % in 2012, Hungary emerged from recession in 2013, with a moderate real GDP growth of 1.1 %. Domestic demand became the main driver of the economy helped by investment (5.9 % increase), thanks in part to a substantial inflow of EU funds, while household consumption remained almost stagnant. GDP growth is projected to increase to 2.3 % in 2014 and slow down to 2.1 % in 2015. Inflation declined to a historical low of 1.7 % in 2013 and is projected to decrease even further to 1 % this year, partly due to regulated price cuts and declining commodity prices, as well as a negative output gap. Employment increased by 1.6 % on account of an extension of the Public Work Scheme, an increasing number of frontier workers, and the whitening of the shadow economy. Despite increasing participation, unemployment decreased to 10.2 % in 2013.

Overall, Hungary has made limited progress in addressing the 2013 country-specific recommendations . Although the country overachieved its 2013 general government deficit target, the quality of fiscal consolidation has not improved. While there has been some progress in enhancing the fiscal governance framework, the mandatory remit of the Fiscal Council has not been broadened. Despite the central bank’s subsidy scheme for small and medium enterprises, normal (i.e. non-subsidised) lending in the economy has not yet returned. The regulatory burden on the financial sector has further increased contrary to last year's recommendation. Household portfolios have continued deteriorating, partly due to the government’s continuous communication on new foreign currency mortgage relief schemes that contributed to a weakening of the payment culture and increased moral hazard. There has been only limited progress in reducing the tax burden on low-income earners, despite an extension of the deduction of family tax credits, as this measure is only targeted at families with children. However, some progress could be observed with tax compliance. Overall, there was limited observable progress in improving the business environment. Although the government has addressed the recommendation on strengthening the judiciary and made strides to reduce administrative burdens, entry costs have further increased in several market segments, particularly in the service sector, where restrictions to competition have increased. Improvements have been made to encourage the participation of women in the labour market, through extended childcare facilities and regulatory amendments to facilitate the return to work after parental leave. Limited progress has been achieved towards education targets, the government’s strategies still being under development. No progress was achieved with respect to the energy recommendation; gas and electricity prices remain regulated and substantial price cuts were approved in the universal service provider’s segments, with possible negative spill-over effects on corporations in the open energy market.

The submitted national reform programme and convergence programme contain a detailed assessment of reform measures as well as macroeconomic and fiscal projections. As regards the projections, although the baseline path is broadly realistic, risk scenarios are narrowly focused. In particular, the adverse scenario does not contain the potential negative feedback effects that can be most important from a budgetary point of view.

Hungary’s weak growth potential could be strengthened in several ways. In specific terms, the country needs to make further progress on the following challenges:

• Fiscal policy: The budgetary strategy still relies on a high level of expenditure and on extensive taxation of few selected sectors, which affects the overall allocative efficiency of the economy. The effectiveness of the revamped fiscal framework is yet to be proved in terms of medium-term budgetary planning and the accountability of the Fiscal Council.

• Financial sector: Despite the increasing share of subsidised lending schemes, normal lending can only return if banks incentives to lend are set right. Currently, banks' lending activity is hindered by the high taxes imposed on the sector and by a large share of non-performing loans. A potential, new foreign currency mortgage relief scheme also carries some risks if it were to be applied in a not-targeted manner and without proper consultation of all stakeholders. Given an already deteriorated payment culture among borrowers, an important challenge is to improve the situation of insolvent borrowers without increasing moral hazard further.

• Taxation: Hungary has a number of sector-specific surtaxes which distort economic incentives and investment. The corporate tax system remains complicated. The tax burden on low-wage earners still weighs on job creation, while there is still room to shift the burden to environment taxes. Measures to improve tax compliance are still needed and have to be fully implemented yet.

• Labour market and social inclusion: The key labour market challenge continues to be increasing the participation rate and reducing unemployment by improving the skills of the labour force. At present, training opportunities in the country are not sufficient: quality is mixed and not targeted to the needs of different jobseekers, while a high share of the working-age population does not have the skills required by the labour market. In addition, there is a clear risk that the very short length of unemployment benefit deteriorates job prospects. The dominance of the public works scheme in active labour market policies is high and increasing. This reduces the resources available for high-quality trainings that are needed to equip low-skilled job seekers with qualifications relevant for the labour market. The social situation continues worsening and the social protection system is unable to provide adequate support and services to the most deprived, including Roma.

• Business environment: Competition in the service sector remains subdued because entry barriers have not been reduced or removed. In addition, the regulatory framework still lacks transparency and predictability: stakeholder consultations are not systematically carried out and evidence-based impact assessments are often pressurised.

• Education: Access to a quality, inclusive mainstream primary and secondary education to provide better general competences, as required by the labour market, is another key challenge, as well as encouraging participation by pupils from all backgrounds in tertiary education.

• Energy and transports: Energy prices continued being regulated and the current price system does not adequately reflects the cost of energy supply, with possible consequences on sustainability of energy provision. Autonomy of the energy regulator remains limited, while enhancing energy efficiency is an important challenge. Ensuring a sustainable and efficient public transport system, while providing a good quality service, remains a challenge.

1. Introduction

In May 2013, the Commission proposed a set of country-specific recommendations (CSRs) for economic and structural reform policies in Hungary. Based on these recommendations, the Council of the European Union adopted seven CSRs in the form of a Council Recommendation in July 2013. These CSRs concerned public finances, the financial sector, taxation, the labour market, the business environment, education and network industries. This staff working document (SWD) assesses the state of implementation of these recommendations in Hungary.

The staff woking document assesses policy measures in light of the findings of the Commission’s Annual Growth Survey 2014 (AGS)[1] and the third annual Alert Mechanism Report (AMR),[2] which were both published in November 2013. The AGS sets out the Commission’s proposals for building the necessary common understanding about the priorities for policy action at national and EU level in 2014. It identifies five priorities to guide Member States to renewed growth: pursuing differentiated, growth-friendly fiscal consolidation; restoring normal lending to the economy; promoting growth and competitiveness for today and tomorrow; reducing unemployment and the social consequences of the crisis; and modernising public administration. The AMR serves as an initial screening device to determine whether macroeconomic imbalances exist or risk emerging in Member States. The AMR found positive signs that macroeconomic imbalances in Europe are being corrected. To ensure that a complete and durable rebalancing is achieved, Hungary and 15 other Member States were selected for a review of developments in the accumulation and unwinding of imbalances. These in-depth reviews were published on 5 March 2014 along with a Commission communication.[3]

Against the background of the 2013 Council Recommendations, the AGS, the AMR and the in-depth review, Hungary presented updates of its national reform programme (NRP) and of its CP on 30 April 2014. These programmes provide detailed information on progress made since July 2013 and on the government’s plans specified in the NRP. The information contained in these programmes provides the basis for the assessment made in this staff working document.

The preparation of the 2014 convergence (CP) and national reform programmes (NRP) somewhat lacked genuine civil involvement and social partnership compared to last year's preparation process. The involvement of the national parliament was constrained by the national elections early April. One week before the submission of the final NRP to the European Commission, the National Economic and Social Council was informed about the European Semester process and received a 3-pages summary of the draft NRP under preparation. Representatives of trade unions and academia present called for an in-depth discussion of the NRP and the measures it contains once the document was adopted.

2. Economic situation

In 2013, the Hungarian economy emerged from recession and experienced real GDP growth of 1.1 % with domestic demand becoming the main driver of the economy. After unusually weak production growth in the agricultural sector in 2012, the year 2013 brought a positive correction. Overall investments increased, for the first time since 2008, by 5.9 %, mainly as a result of public investment supported by an inflow of EU funds, but corporate investment also started to accelerate. Nevertheless, the economy is still characterised by a de-leveraging of domestic sectors, and tight lending conditions, although the process slowed down in the second half of 2013. The sharp decline in inflation to 1.7 % has contributed to increasing households’ real disposable income. However, the elevated repayment burden and still high level of unemployment continued to weigh on households' consumption, which only grew by 0.2 %. In 2013 national employment increased by 1.6 % and reached its pre-crisis level, partly boosted by public works.

Since the crisis, potential output growth has been meagre, mostly on account of a low contribution from total factor productivity and capital accumulation. The weak total factor productivity contribution could stem from problems with financial de-leveraging and the low level of innovation. Capital accumulation is affected by ongoing de-leveraging in the private sector and also by an uncertain business environment.

Economic outlook

GDP growth is expected to accelerate to 2.3 % in 2014 but to slightly slow down to 2.1 % in 2015. In both years, domestic demand is set to be the main driver of growth. Overall, investment is forecast to pick up strongly to 7 % in 2014 but to decelerate to around 4.2 % in 2015, as the effect of increased EU fund absorption is expected to fade away by 2015 with the end of the 2007-2013 programming period. At the same time, private consumption is forecast to grow around 1.5 % in both years, reflecting increasing real disposable income and improving employment prospects. The unemployment rate is projected to decrease further below 9 % over the forecast horizon. Potential output growth is slightly improving towards 1 %, but it is expected to remain below the level of other countries in the region.

The growth projections in the convergence programme and in the Commission 2014 spring forecast are the same for 2014, while for 2015 the national projection is more optimistic by 0.4 pps. As regards the composition of growth, the convergence programme sees private consumption growing 0.4 pp more in both years than the Comission 2014 spring forecast. Government consumption expenditure is 0.4 pp higher for 2014 in the convergence programme, but 2.6 pps lower for 2015 which means that the convergence programme foresees it to decrease in real terms by 0.6 %. in the case of gross fixed capital formation the convergence programme projection is somewhat more conservative than the Commission 2014 spring forecast, but broadly similar for 2015. Exports and imports' projections are very close for 2014, but exports are projected to grow more in 2015 in the convergence programme than in the Commission 2014 spring forecast. the convergence programme projects inflation at 0.8 % and 2.9 %, compared to 1 % and 2.8 % in the Commission 2014 spring forecast for 2014 and 2015 respectively.

Overall it can be concluded that the convergence programme relies on a plausible macroeconomic outlook, which is a bit more optimistic for the year 2015 than the Commission 2014 spring forecast. The national reform programme is based on the same economic outlook as the convergence programme and contains the estimated macro impact of structural reforms. The impacts are quantified and the methodology used is described in detail in the convergence programme and in the decription of the model used by the Ministry for National Economy.

3. Challenges and assessment of policy measures 3.1. Fiscal policy and taxation

In 2013, Hungary received a CSR on fiscal policy and fiscal governance. The analysis in this staff woking document leads to the conclusion that Hungary has made some progress on measures taken to address this recommendation. (For the full CSR assessment, see the overview table in Section 4).

Budgetary developments and debt dynamics

The 2014 convergence programme aims at a nominal deficit trajectory below the Treaty reference value, which would bring down the general government deficit from 2.9% of GDP in 2014 to 1.9% by the end of the programme period in 2017. The programme confirms the medium-term objective of -1.7% of GDP, which reflects the objectives of the Stability and Growth Pact. According to the authorities, the foreseen deficit path ensures that the structural balance remains consistent with the medium-term objective throughout the programme period. However, the structural balance recalculated by the Commission[4] points to a risk of a significant and persistent deviation from the medium-term objective (with a structural balance ranging between -2.2% and -2.4% of GDP during the programme period).

In 2013, the general government deficit reached 2.2% of GDP, thus overachieving the deficit target of 2.7% of GDP set in the 2013 convergence programme. The better-than-expected budgetary outcome reflects the fact that the total expenditures turned out to be lower than planned by 0.5% GDP, while total revenues were broadly in line with the target. Nevertheless, there was a considerable shortfall in taxes and social contributions as a whole even after the mid-year tax-increasing measures, but these revenue slippages were compensated by the substantially higher-than-projected non-tax receipts. On the expenditure side, spending overruns occurred at the central government, inter alia, reflecting the launch of a new compensation scheme for teachers, other wage-related payments and higher-than-budgeted outlays on goods and services. However, these expenditure increases adding up to around 0.5% of GDP were more than offset by the total effect of 1% of GDP resulting from the activation of the remaining extraordinary reserve (a component of current expenditures), the extra one-off receipts from the sale of telecom frequency licences as well as from cost savings by local governments.

For 2014, the convergence programme projects a deficit of 2.9% of GDP implying a relaxation of the previously set target of 2.7% of GDP. This revision reflects both the fiscal effect of changed macroeconomic conditions and budgetary measures. Revenues are estimated to fall by 0.2% of GDP due to the slow-down in inflation and the unfavourable base effects. The extension of family tax allowances also increases the deficit. Moreover, the programme incorporates additional expenditures of about 0.9% of GDP, involving extra spending on health care, higher appropriations at line ministries as well as an increased level of domestic public investment. The above-mentioned adverse impacts of around 1.3% of GDP are largely counterbalanced by expenditure-decreasing adjustments amounting to 1.1% of GDP. The offsetting factors include (i) further one-offs related to the sale of telecommunication frequency rights, (ii) the reduction of the budgeted extraordinary reserves, (iii) decreased social transfer payments (partly stemming from the lower indexation of pensions), (iv) the introduction of the teachers' new wage system in a stepwise manner rather than in one shot and (v) the assumed persistence of local government savings.

|| Box 1: Main budgetary measures ||

|| Revenue || Expenditure ||

|| 2013 ||

|| · Phasing out of extraordinary sector levies on the telecom, retail and energy sectors (-0.55% of GDP) · Narrowing of tax base of PIT (-0.35% of GDP) · Introduction of a financial transaction duty, including the one-off charge to be paid in the last four months (0.8% of GDP) · Job Protection Act: targeted cuts in social contributions and introduction of two simplified taxation schcmes for SMEs (-0.5% of GDP) · Elimination of the cap for employees’ pension contributions (0.15% of GDP) · Lower wage compensation (from social contributions) in private sector (0.25% GDP) · Introduction of a distance-based road toll from 1 July 2013 (0.2% of GDP) · Other tax measures (hikes in sectoral levies; introduction of new corporate surcharges (e.g. public utility tax) (0.6% of GDP) || · Nominal wage freeze in most branches of the public sector (-0.35% of GDP) · Introduction of the first step (at 60% of the legislated renumeration) of the new wage system in public education from 1 September (0.15% of GDP) · Increased outlays related to the FX mortgage support schemes agreed with the banking sector (+0.15% of GDP) · Extension of the public work scheme (0.1% of GDP) · Sale of frequency rights (recorded as negative expenditure, -0.25% of GDP) ||

|| 2014 ||

|| · Extension of the deductability for family allowance (-0.15% of GDP) · Additional take-up for targeted SSC cuts and for simplified taxation schemes (-0.1% of GDP) · Full phasing out of the wage compensation (from social contributions) in the private sector (+0.15% of GDP) · Full-year effect of the distance-based road toll (0.2% of GDP) · Increase in the efficiency of tax collection, mainly through the establishment of on-line links to cash registers (0.5% of GDP, serious implementation risks) || · Nominal wage freeze in most branches of the public sector (-0.2% of GDP) · Full-year impact and additional step (10 pps) of the new wage system in public education (0.35% of GDP) · Sale of frequency rights (recorded as negative expenditure, -0.4% of GDP) ||

|| 2015 ||

|| · Additional take-up for the two simplified taxation schemes (-0.05% of GDP) || · Nominal wage freeze in most branches of the public sector and operational costs are foreseen to increase below the inflation rate (net impact: -0.3% of GDP, imlementation risks) · Additional step (10 pps) of the new wage system in public education (0.15% of GDP) ||

|| 2016 ||

|| · Additional take-up for the two simplified taxation schemes (-0.05% of GDP) || · Nominal wage freeze in most branches of the public sector and operational costs are foreseen to increase below the inflation rate (net impact: -0.35% of GDP, imlementation risks) · Additional step (10 pps) of the new wage system in public education (0.15% of GDP) ||

|| Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the national authorities. A positive sign implies that revenue / expenditure increases as a consequence of this measure. ||

The Commission 2014 spring forecast projects a deficit of 2.9% of GDP for 2014, which is identical to the official target. However, this similarity masks significant differences regarding the estimation of the underlying budgetary processes. Compared to the 2014 convergence programme the spring forecast factors in a slippage of 0.3% of GDP in tax receipts. This is partly related to a more pessimistic evaluation of base effects and to the somewhat weaker projected nominal growth of tax bases, but also reflects a more cautious assessment of measures aiming to enhance tax administration. The revenue shortfalls are expected to be offset by the assumed cancellation of the extraordinary reserve (0.3% of GDP). By contrast, the deficit target of the convergence programme is based on the inclusion of the extraordinary reserve on the expenditure side.

The envisaged medium-term consolidation path of the convergence programme is heavily back-loaded. The deficit is expected to decrease only slightly to 2.8% of GDP in 2015, and then with an accelerating pace of adjustment it would be reduced to 2.5% of GDP in 2016 and further to 1.9% of GDP in 2017. In 2015, the Commission 2014 spring forecast, following the no-policy-change assumption, estimates a marginal deficit improvement, which coincides again with the target. Unlike the convergence programme however, the forecast is also based on the assumption that the extraordinary reserve will not be spent.

Compared to the previous convergence programme, the deficit trajectory has significantly shifted upwards. This results in a cumulative medium-term deviation of 1.2% of GDP, with the deficit currently set at 2.5% of GDP for 2016 as opposed to the target of 1.3% of GDP in the same year of the 2013 convergence programme. This gap appears to stem from both the modified macroeconomic scenario (i.e. the reduced nominal GDP path and the lower growth elasticity of major tax bases) and the effect of measures[5].

The medium-term fiscal consolidation plan of the convergence programme is based on the policy of general expenditure containment, which is envisaged to be achieved without any further structural measures or institutional changes. Accordingly, the total expenditure-to-GDP ratio would drop from 50.1% in 2014 to 44.8% in 2017. Within this, the corrected primary expenditure-to-GDP ratio (filtering out the balance-neutral impact of declining EU funds) would decrease by 3.5% of GDP over the same period (by 1% in 2015 and by a further 2.5% between 2015 and 2017). The convergence programme anticipates this significant reduction against the backdrop of an average nominal GDP growth of 5.5% and on the basis of instituting nominal freezes or setting increases below the rate of inflation for most of the discretionary spending items (including the salaries of public employees and the operational costs of governmental institutions). Social transfers also feature strongly in the shrinking expenditure ratio due to the inflation-based indexation rule of pensions, the already enacted legal restrictions on early retirement as well as the nominal freezing of all other cash benefits. At the same time, total revenues will also go down in terms of GDP, but to a smaller extent. The corrected revenue-to-GDP ratio is projected to fall by 2.6% (by 1% in 2015 and by a further 1.6% between 2015 and 2017). This pattern does not stem from revenue-cutting measures, but rather reflects the indirect budgetary effects of the contracting expenditure ratio (i.e. the tax content of gross public spending) as well as the foreseen lower-than-unitary growth elasticity of tax bases.

Both upside and downside risks could be identified to the convergence programme deficit trajectory. On the deficit-improving side, the officially requested change for the calculation of national co-payments for EU funds from public to total cost may result in significant one-off revenues (possibly up to ½% of GDP) in the year when it is approved by the Commission. On the deficit-increasing side, it should be stressed that the bulk of the expenditure reduction is foreseen to be achieved through a nominal freeze for the wages for most branches in the public sector (in place since 2008) and a stringent expenditure restraint for the operational costs of budgetary institutions. Given that these areas have already been targeted by successive cuts and freezes over the last 7-8 years, both measures carry increasing implementation risks. Finally, the acceleration in the deficit reduction in 2017 is the result of the projected hike-up in growth, which is a rather optimistic scenario.

Further uncertainties stem from the revenue effects of the protracted introduction of online cash registers and from the balance of local governments. The new system of on-line links, if appropriately implemented and backed-up by targeted tax audits, could even result in higher revenues than currently estimated by the Commission (0.2% of GDP), although the government’s expectation of a 0.5% of GDP sustained increase in VAT receipts seems to be on the high side. The balance of local governments could continue delivering positive surprises, provided that recent surpluses were due to a permanent adjustment to a lower expenditure trajectory following a wide-ranging reorganisation. However, it could imply negative risks as well if the better-than-expected outcomes were rather the result of delayed spending (such overruns could be financed from the accumulated deposits of municipalities, amounting to 1.7% of GDP at end-2013).

Box 2: Hungary's status vis-à-vis the Stability and Growth Pact

Hungary is subject to the preventive arm of the Pact and it is not expected to reach its medium-term objective over the programme horizon. Therefore, it should ensure sufficient progress towards its medium-term objective.

As the debt ratio was at 79.8% of GDP in 2012, exceeding the 60% of GDP reference value, during the three years following the correction of the excessive deficit Hungary is also subject to the transitional arrangements as regards compliance with the debt criterion. In this period it should ensure sufficient progress towards compliance.

For the 2013 budgetary outcome, the (recalculated) structural balance of -0.7% of GDP is significantly above the medium-term objective of -1.7% of GDP. In 2014, the (recalculated) structural balance would deteriorate by 1.5 pps to -2.2% of GDP resulting in a significant deviation from the medium-term objective. The structural balance is expected to stabilize at -2.2% of GDP in 2015, whereas the sufficient adjustment path towards the medium-term objective would require an improvement of 0.5 pps. The Commission 2014 forecast reinforces this assessment with an estimated structural balance similar to that of the convergence programme. Moreover, the programme does not foresee progress towards achievement of the medium-term objective by the end of the program horizon as the (recalculated) structural balance would deteriorate further by an additional 0.1 pp. in both 2016 and 2017.

According to the information provided in the convergence programme, the growth rate of government expenditure over 2014, net of discretionary revenue measures, will exceed the reference medium-term rate of potential GDP growth of 0.1%. Furthermore, the corresponding growth rate of expenditure over 2015 is not expected to contribute to an annual structural adjustment towards the medium-term objective by 0.5% of GDP, as expenditure growth rate is above -1.1%, i.e. the lower rate allowed under the expenditure benchmark. The deviation from the expenditure benchmark has a negative impact on the structural balance (above 0.5% of GDP in both 2014 and 2015). This conclusion is also supported by the similar assessment based on the Commission 2014 spring forecast.

Following an overall assessment of Hungary's budgetary development, with the structural balance as a reference, including an analysis of expenditure net of discretionary revenue measures, a significant deviation from the adjustment path towards the medium-term objective is to be expected in 2014 and 2015.

The 2014 convergence programme envisages a gradual decrease in the government debt-to GDP ratio, from 79.2% in 2013 to 74.7% in 2017. Although the foreseen primary surpluses could have allowed a faster debt reduction throughout the programme horizon, the snow-ball effect is anticipated to turn into deficit-reducing only in the outer years. The programme’s debt trajectory is higher than projected in the 2013 convergence programme, where the government debt was projected to decrease to 73.4% of GDP already in 2016. This primarily reflects a lower nominal GDP path, but the higher primary deficit targets as well as the development of the stock-flow adjustments in selected years (notably in 2015, when the pre-financing of EU projects in the closing phase is projected in the convergence programme to have an important debt-increasing impact) also contributes to the upward shift in the debt path. The Commission 2014 spring forecast projects an increase in the debt ratio in 2014 to over 80% of GDP, mainly on account of the revaluation of the foreign exchange component in public debt. Thereafter, it is projected to decrease to 79.5% of GDP in 2015. Overall, the difference in the projections for 2015 appears to be moderate.

As of 2013, Hungary is in the three-year transitory period regarding the debt reduction benchmark. Despite the planned deterioration in the (recalculated) structural balance for 2014, Hungary would comply - thanks to the allowed annual deviation of 0.25 pp. of GDP - with the minimum linear structural adjustment required for the debt reduction benchmark over the transition period that, based on the convergence programme debt projections, would permit a deterioration of 1.3 % of GDP in 2014 and 1.2 % in 2015. However, according to the Commission 2014 spring forecast, which is based on a no-policy-change assumption, the transition towards compliance with the debt criterion will not be respected in 2014, nor in 2015 (with a forecast change of the structural balance of -1.4% of GDP against the minimal requirement of -0.5% in 2014, and the projected no improvement against the required adjustment of 0.5% in 2015). This would imply a significant breach of the debt-reduction requirement to be assessed in 2015, based on the validated 2014 budgetary outcome, unless further structural efforts are made.

Hungary has preserved its sound fiscal position in line with the 2013 country-specific recommendation, but has made limited progress in pursuing a growth-friendly fiscal policy focusing on expenditure savings and in putting the general government debt ratio on a firm downward path. The official deficit target and the country’s MTO were overachieved in 2013 by a considerable margin, but the composition of the fiscal consolidation effort has been far from optimal. This is reflected in the sustained increase in the primary expenditure ratio (filtering out the deficit-neutral increase due to the higher absorption of EU funds) both in 2013 and 2014, each year by around 0.75 pps. These developments are partly compensated by additional non-tax revenues, while the tax burden slightly exceeds the elevated 2012 level in both of the concerned years (at around 39.2 %-39.5 %). Overall, recent fiscal policy developments, including the structure of the 2014 budget, do not indicate a significant progress towards a more credible growth-friendly fiscal strategy. Moreover, only a very gradual decrease in the debt ratio can be expected over the medium-run.

Fiscal framework

In the context of the transposition of Council Directive 2011/85/EU on requirements for national budgetary frameworks, a number of amendments to the fiscal framework legislation were approved in December 2013. These cover notably the regular publication of fiscal data at both the central and local government levels, the accessibility of planning documents, the introduction of new numerical rules and the enhancement of the medium-term budgetary framework. The government has thereby made some progress in responding to the country-specific recommendation. The authorities did not seize this opportunity, however, to further reinforce the Fiscal Council by broadening its mandatory remit.

New numerical rules have been introduced to ensure consistency with the requirements of the Stability and Growth Pact, but existing design flaws have not been corrected. Beyond the constitutionally defined requirement to have a declining debt path (until the debt-to-GDP ratio reaches 50 %), the deficit target of the projected budget must now be in accordance with both the 3 % of GDP deficit threshold and with Hungary’s medium-term objective. However, in case of an officially projected negative GDP growth rate, the escape clause would exempt the country from fulfilling the 3 % threshold, while the structural balance must still be in line, ex ante, with the medium-term objective. Moreover, with the debt growth rule to be in place from 2016, the previously identified design weaknesses are not yet addressed, namely the effectiveness of this set of fiscal rules is reduced by the absence of ex post monitoring and by the lack of a maximum level of allowed deviation, or a correction mechanism in the event of a deviation from both domestic and European numerical rules.

The long overdue strengthening of the medium-term budgetary framework should help to improve the future planning horizon, so far narrowly focused on the actual budget year. The new provisions prescribe that three-year expenditure and revenue plans (split into a baseline of no change in policy and the estimated impact of new discretionary measures) would be defined in a government resolution by 30 April each year (the issuance of this for the fist time has been delayed linked to the formation of the new government). Changing the plans would require an official justification by the government in the relevant resolution. Differences between the medium-term budgetary framework and the draft budget bill for any given year must be fully justified by changes in the macroeconomic scenario or other events falling outside the scope of the government. This ‘comply or explain’ type of rule would exercise constraint on the government only when introducing its draft budget, but it falls short of ensuring that the final budget law, as approved by the Parliament, is also in line with the medium-term budgetary framework.

No change was adopted to the mandatory tasks of the Fiscal Council. Its analytical underpinnings, therefore, are still not commensurate with its unprecedented veto right. Despite the existing broad optional mandate to comment on any relevant public finance issues, the Council has not sufficiently used this possibility over the last 30 months. Indeed, it did not publish any own analysis or opinion beyond what was strictly required by law. Broadening its mandatory remit would ensure that its work and decisions are based on publicly accessible detailed calculations and not only on qualitative risk assessments, as it has been the case so far. Doing so would enhance the accountability of this institution, and would greatly facilitate enhancing transparency of public finances; albeit there are other important aspects which could be improved on this front (e.g. publishing regularly the authorities’ mid-year quarterly cash-flow forecasts, or making available the government’s obligatory mid-year review on budgetary execution).

Long-term sustainability

Government debt (79.2% of GDP in 2013 and expected to slightly increase to 79.5% in 2015) is currently above the 60% of GDP Treaty threshold and the Commission debt sustainability model projects it to fall by 2030 below the 60%. The full implementation of the convergence programme would put debt on a further decreasing path by 2030.

Hungary appears to face low fiscal sustainability risks in the medium-term. The medium-term sustainability gap[6], showing the adjustment effort up to 2020 required to bring debt ratios to 60 % of GDP in 2030, is at -0.8% of GDP, primarily related to the projected reduction in the ageing costs (contributing with -1.3 pp. of GDP) until 2030 that more than offsets the debt requirement due to the high level of government debt (79.5% of GDP in 2015). In the long-term, Hungary appears to face low fiscal sustainability risks. The long-term sustainability gap[7] shows the adjustment effort needed to ensure that the debt-to-GDP ratio is not on an ever-increasing path, is at 0.6% of GDP.

The structural primary balance is expected to deteriorate substantially (by 2.0 pp. of GDP between 2013 and 2015), entailing high sustainability gaps compared with the 2013 scenario (i.e. maintaining the 2013 structural balance for the entire period). Risks would be higher in the event of the structural primary balance reverting to lower values observed in the past, such as the average for the period 2004-2013. It is therefore appropriate for Hungary to continue to implement measures to ensure the reduction in the government debt.

Tax system

In 2013, Hungary received a recommendation on taxation, covering its stability and predictability, sector-specific taxes, tax wedge on low-income earners and measures to improve tax compliance. The analysis in this staff woking document leads to the conclusion that Hungary has made limited progress on measures taken to address this recommendation. (For the full CSR assessment, see the overview table in Section 4).

Hungary’s tax burden ranks as the 10th highest in the EU and as the highest among countries in the region, with a total tax-to-GDP ratio, excluding imputed social contributions, of 39.3 %. The tax burden on low-wage earners (particularly on single wage earners without a family) is still very high in the regional context and impedes job creation.[8] According to the World Bank’s Paying Taxes 2014 report, the time needed to comply with tax obligations for Hungarian businesses is the 4th longest in the EU. The multitude of corporate tax regimes and rates in force also adds to the complexity of business taxation. Hungary still suffers from widespread tax non-compliance with an elevated level of undeclared work (the size of the shadow economy is 22.1% of GDP, among the highest ones and undeclared work is between 15 % and 20 %). With the standard VAT rate at 27 %, i.e. the highest in the EU, the exposure of Hungary to non-compliance in the VAT area is particularly high. The VAT compliance gap (i.e. revenue shortfall compared to the theoretical tax liability) is estimated at around 3% of GDP over the 2000-2011 period (one of the highest in the EU).[9] According to the IMF, VAT fraud amounts to 1.75 % of GDP.[10]

The 2013 recommendation called for a stable corporate tax system and for minimising distortions caused by sector-specific taxes. Although few new measures were introduced last year, corporate surtax rates have further increased. The Commission has critically assessed the extra taxes levied on specific industries (see box 3) on account of the unpredictability of their introduction, the harmful choice of tax bases and the arbitrary way surtaxes affect the allocation of resources across industries. Given a large revenue shortfall compared with the budgeted figures, in part due to over-optimistic budgetary planning, the financial transaction duty (FTD) rates were increased with effect from August 2013 from 0.3 % to 0.6 % (for cash withdrawal) and from 0.2 % to 0.3 % (for other kinds of transaction). Moreover, the government also levied an additional one-off FTD charge on banks (amounting to 0.25 % of GDP) and granted two free cash withdrawals per month to each customer at the expense of banks, starting from February 2014. The combination of these extra burdens has contributed to a pick-up in the cash usage of the economy, which entails greater risk of tax avoidance than the use of electronic payments. While cash in circulation in real terms increased by around 4% in 2012, it has increased by 6.5 % in 2013 and by 20.5% in Q1 2014, in year on year terms. Finally, as of August 2013, the rate of mining tax was increased by about one third, the tax rate on interest revenue by 6 pps (excluding government securities) and the itemised tax on telecommunication services by 50 % for corporate users. According to the 2014 convergence programme, alleviating the extra burden from sector specific taxation is not a government priority, even under a favourable fiscal scenario.

Taxation of labour and potential for tax shifting

The 2014 AGS priority of pursuing differentiated, growth-friendly fiscal consolidation explicitly recommends inter alia shifting the tax burden away from labour. In Hungary, this is also a pressing priority as the tax burden on labour is high by international comparison,[11] in particular for low wage earners.

Graph 1: The development of the labour tax wedge for selected low-wage categories

Source: OECD data and Commission calculations

Despite the recommendation on refining the eligibility criteria for the Job Protection Act, the system has remained substantially unchanged.[12] The tax burden on high-income earners and employees with three or more children declined significantly, with full abolition of the employment tax credit in 2011-12. However, the labour tax wedge on single low-income earners (i.e. at 67 % of the average wage) went up from 43.8 % in 2010 to 47.6 % in 2012, the second highest rate in the EU. In fact, the low-income tax wedge in general (i.e. for someone not eligible for the Job Protection Act) is estimated to increase further to 49 % in 2013 and 2014. For low-income earners covered by the Job Protection Act, the overall tax burden is lowered to 45.2 %, but still above the level seen in 2010 (see Graph 1). Moreover, beneficiaries include some highly employable and well-paid people, but not all vulnerable workers (e.g. middle-aged, relatively low-skilled ones). By December 2013, the Job Protection Act had 735 000 beneficiaries out of a work force of about four million. Nevertheless, according to the 2014 convergence programme, only some 40 % of all low-income earners are beneficiaries.

A new tax relief measure has been adopted: an extension of the family tax credit benefitting households with dependent children, but that only indirectly affects low-wage earners. The government widened the family tax credit, which as of 2014 can also be deducted from employees’ social security contributions besides the personal income tax. However, the impact chiefly depends on the number of children, with a significant tax burden reduction effect only for families with three or more children, even at relatively high wage levels.[13] Even though a part of low-wage earners are also indirectly affected via the family tax credit, a specific measure targeting especially this group is lacking. The 2014 convergence program has indicated that in the medium term, Hungary foresees further reduction in the labour tax burden in case of a favourable fiscal situation.

Shifting taxation away from labour, especially from low-income earners, towards less distortive forms of taxes remains a challenge. VAT is already at the highest level in the EU. Environmental tax revenues are already around the EU average. The existing energy sector surtaxes (i.e. levied on the stock of pipelines and the special extra corporate tax on energy providers) have distortive effects and do not provide incentives to reduce the high domestic energy consumption. Hence, a sustainable tax shift could affect the latter, also because there has been no energy excise duty increase since 2012 and given that the implicit tax rate on energy is among the lowest in the EU.[14] Recent environmental measures, such as the introduction of a distance-based, electronic toll system on heavy duty vehicles and the waste deposit fee, are steps in the right direction. These can provide considerable additional revenues, while internalising negative externalities. Revenues from recurrent taxes on immovable property in Hungary are well below the EU average (0.4 % of GDP compared to 1.5 %). However, given the depressed state of the housing market and the high share of distressed mortgage borrowers, resulting in wide-ranging negative effects on the economy, a cautious approach is warranted.

Tax compliance

According to the government, all tax-related elements included in the ‘Cutting Red Tape Programme’ launched in 2011, inter alia to reduce the complexity of the Hungarian tax system, have been implemented with an estimated annual effect of some HUF 60 billion. These include a simpler electronic filing for tax returns and the reduction in the number of documents required and extending online services for taxpayers. However, there is no methodologically sound, publicly available assessment on the impacts of these measures and a continuing perception by businesses of high administrative burden. See also section 3.5.

Within the context of fighting tax fraud, one of the AGS 2014 priorities, Hungary has indicated that it had introduced the VAT reverse charge mechanism in some of the most affected industries. However, the reverse charge mechanism is not a long-term solution, notably in the case of goods subject to final consumption. As a result, there is still scope for improvement in the functioning of the tax administration in particular by enhancing conventional control and collection processes. It is against this background that the Commission recently rejected two requests by Hungary to introduce the reverse charge mechanism (in the pig-farming and animal fodder industry and for supplies of sugar) as it concluded that the problem of VAT fraud in Hungary is of a more structural nature. In addition, administrative cooperation with other Member States’ revenue authorities, especially those of neighbouring countries, could be improved in order to tackle cross-border VAT fraud. According to a recent report on VAT administrative cooperation in the EU, Hungary tends to reply late to requests for information coming from other Member States.[15]

In late 2012, the government prescribed the mandatory online connection to the tax authority of all retail and service sector cash registers. This aimed at reducing the size of the shadow economy. This is a commendable initiative: international experiences show its important revenue-generating potential for the budget. The electronic connection should enable the tax authority to monitor the daily turnover of each cash register, which may significantly reduce the possibility of fraud and increase the effectiveness of tax authority audits. However, the establishment of online links has suffered repeated delays, partly owing to an unrealistic original timetable. The initial deadline for the complete switch-over was set for 1 April 2013, while by early April 2014 only around 65 000 registers were reported to be online by the Tax Authority. The remaining, approximately 110 000, machines will be operational by September 2014, according to the National Retail Association.

3.2. Financial sector

As assessed in the 2014 in-depth review, financial de-leveraging has been ongoing in Hungary since the start of the financial crisis. On the demand side, this is due to a high level of household and, to some extent, corporate debt accumulated before the crisis. On the supply side, decreasing risk tolerance, a high level of external financing and deterioration in the operating environment of banks could be mentioned. Although the sector seems adequately capitalised and its liquidity position relatively strong, the combination of a high level of tax and regulatory burdens, and a high share of problematic loans, does not seem to provide incentives for banks to increase lending. 79 % of mortgage non-performing loans are based on foreign exchange, but the non-performing loan rate for the non-subsidised HUF segment is equally high at around 20 %. While the authorities' endeavour to revive lending with a series of policy initiatives (the central bank’s subsidised lending scheme ‘Funding for Growth’, different programmes financed by the EXIM bank and the Hungarian Development Bank) is commendable, the challenge to improve normal (i.e. non-subsidised) lending in a sustainable manner remains.

In 2013, Hungary received a CSR concerning the financial sector with specific focus on restoring normal lending, improving portfolio quality and enhancing financial regulation and supervision. After reviewing the 2014 national reform programme, the analysis in this staff woking document leads to the conclusion that Hungary has made limited progress on measures taken to address this recommendation. (For the full assessment, see the overview table in Section 4).

Restoring normal lending

The aggregated balance sheet of the Hungarian commercial banking sector had been shrinking since mid-2010, but the process ended by the close of 2013. This reflects on the one hand the allocation of the Funding for Growth scheme,[16] but possibly also the effect of more structural factors: with a loan to deposit ratio around 110 % (down from 160 % in early 2009) banks could naturally slow down their de-leveraging. However, the aggregate picture masks huge differences in the characteristics of individual banks: a decreasing market share and low profitability for most foreign-owned big banks, compared with an increasing market share and better rates of return for the rest of the sector. Nevertheless, foreign-owned big banks still have a dominant market share in private sector lending (at 62 % in Q1 2013).

Net lending flows in the corporate sector moved temporarily into a positive territory in Q3 2013 following the first allocation of the Funding for Growth scheme, but returned to negative values thereafter. Tightening credit supply contributed primarily to a fall in corporate lending and particularly in the SME sector since Q4 2008. In addition to decreasing risk tolerance, the combination of a high share of regulatory burdens and an increasing share of problematic portfolio are hindering a return to normal lending. [17] As highlighted in the 2014 in-depth review, although the central bank’s Funding for Growth scheme has eased credit conditions to SMEs, this could only bring temporary relief and it does not substitute usual financial intermediation on a permanent basis (see box 5). Moreover, the scheme has certain risk elements, especially if applied on an extended scale. These include the fiscal costs related to the zero-cost financing provided to banks, and the capped interest rate margin, which is set at a level much lower than the average lending margin for the SME sector. In parallel to the central bank’s Funding for Growth scheme, the government has continued several subsidised lending programmes targeted toward SMEs.[18]

Despite the extension of housing subsidy schemes and a low interest rate environment, lending to households continued to shrink without interruption. The loan stock of households stood at 24 % of its pre-crisis level in Q4 2013. As opposed to the corporate sector, the declining lending stock primarily reflects a low level of credit demand due to the high share of distressed borrowers, a still high repayment burden and a depressed housing market.

Capital accumulation, non-performing assets and moral hazard of relief schemes

Portfolio quality has declined in both the corporate and household segments since the start of the financial crisis. Close to 20 % of corporate loans are classified as ‘delinquent’ and although the stock reached a standstill in Q2 2012, it is not expected to decrease visibly until 2015. In the case of households, non-performing credit increased further in 2013 and currently, if shorter maturity delinquencies (below 90 days) are included, more than one third of the banking sector’s household portfolio presents some problems. On a positive note, the coverage ratio of non-performing loans is relatively high (close to 60%) in international comparison. Nevertheless the high share of restructured loans (at 16% of the total portfolio in Q4 2013) raises some questions regarding the true quality of the loan portfolio, especially given that 24,6% of restructured loan became non-performing again. Given that provisioning rules are relatively loose[19] the coverage ratio behind restructured loans is relatively low (at 20%). In general, portfolio cleaning is also hindered by the weak efficiency of in-court and out-of-court resolution proceedings: the average time to settle disputes is high in international comparison, while the expected recovery is relatively low.[20] As a response to the high share of problematic loans in the corporate sector, the central bank has opened the possibility in the Funding for Growth Scheme to buy commercial real estates that served as collateral of non-performing loans.

Although household indebtedness and the share of foreign exchange debt have declined, foreign exchange indebtedness of households is still the major reason behind the continued increase in non-performing loans. This reflects on the one hand the weak economic situation of the country since the start of the financial crisis, and the fact that most of the foreign exchange relief schemes adopted so far have not been targeted towards distressed borrowers. At the same time, the practice of repeated introduction of new foreign exchange relief schemes has deteriorated the payment culture.[21] One programme targeted to distressed borrowers is the set-up of the National Asset Management Company, which could purchase around 25 000 flats owned by distressed borrowers. However this falls short of the number of flats owned by problematic borrowers; in the magnitude of 150 000. In November 2013, the government extended the exchange rate cap scheme to delinquent borrowers. In addition, it communicated the need for a final solution of the foreign exchange problem, but has been waiting for a clear legal picture before adopting any new package. Depending on the coverage or possible retroactive nature, a new scheme could endanger financial stability, especially if not consulted with relevant stakeholders.[22] In May 2014, the foreclosure moratorium was extended until a new, comprehensive FX relief scheme is adopted by the government.

The capital accumulation environment for the banking sector deteriorated due to further regulatory burdens and increasing non-performing loans. New measures include the increase in the financial transaction duty and the request to banks to allow two free monthly cash withdrawals. After negative values in 2011 and 2012, the return on equity of banks re-entered positive territory (i.e. around 2 % in 2013), however this improvement largely reflects the effect of one specific transaction.[23] Without one-off effects, the banking sector would have produced a slightly negative return on equity.

Financial supervision

There has been some progress in regulatory changes to the supervisory environment; preparatory work for a bank resolution regime has started. The Hungarian Financial Supervisory Authority was integrated into the central bank structure on 1 October; this may lead to positive synergies. The Hungarian National Bank has been equipped with the right to use macro-prudential tools and is now responsible for macro-prudential oversight. As one of the major reasons behind the widespread increase in foreign exchange lending was an inefficient macro-prudential set-up,[24] this seems a step in the right direction.[25] Moreover, the preparatory work for a swift and accurate implementation of the Directive on bank resolution and recovery has already started and is expected to be completed by 2014 (submission to the Parliament in 2014, taking effect from January 2015).

3.3. Labour market[26], education and social policies

Hungary faces significant labour market challenges due to a number of structural problems and low economic growth. In particular, despite visible improvements in recent years, the overall employment rate is still well below the EU average (63.2 % against 68.3 %) and far from the Europe 2020 target of 75%. Major challenges remain concerning the employment rate of: young career starters (i.e. 20-29 years old; 52.3 % in Hungary against an EU average of 59.5%); low skilled (38.2 % vs. 51.4% in the EU); Roma (29 %); women with young children (37.1% vs. 61.6%) and the share of long-term unemployed (i.e. 12 months or more) among unemployed people is 48.6%. In recent years, Hungary introduced a number of reforms to address the persistently low activity rate, including: increasing retirement age and restricting early retirement, a review of the disability pension and benefit system, changes in unemployment and social assistance system, widened public work and easing return from parental leave. Thanks to the measures, the activity rate has been rising and this is expected to continue. While many of these reforms go in the right direction, there have been few attempts to assess their actual effects on labour market outcomes and poverty. The education system does not prepare people for continuous improvement of their skills or for future labour market transitions. Low achievements in basic competences hinder participation in higher education and training. A considerable mismatch still exists between the offer of the education and training system and labour market needs. Participation in lifelong learning is low, contributing to a poor quality supply to the labour market. Since the start of the crisis, the social situation has continued worsening with an increasing number of people living at risk of poverty and social exclusion; this affects children and the Roma in particular.

In 2013, Hungary received CSRs concerning the labour market, training, the public works scheme, social policies and education. The analysis in this staff woking document leads to the conclusion that Hungary has made some progress on measures taken to address the CSR on labour, while it only made limited progress on the education and social issues CSR. (For the full assessment, see the overview table in Section 4).

Labour Market

Hungary still faces significant labour market challenges because of a number of structural problems. Labour taxation that is not employment-friendly for certain employee categories constitutes an important barrier, particularly for low-wage earners (see section on taxation). The short length of unemployment benefit (at three months) is in contrast with the average time required to find employment for job seekers (over one year). While lowering the level of unemployment benefit can enhance job search, such a short period of the entitlement could result in a low-income trap as well as labour market mismatches. It is because the unemployed, facing the limited benefit duration and not having adequate financial savings, may be forced as a last resort to join the public works scheme. As the outflow from this scheme to the open labour market is limited, the unemployed easily find themselves outside of the open labour market for long periods. To avoid this outcome, some of the unemployed may be forced to accept job offers which do not fit their qualifications, which results in inferior labour-market matching, or could be left without any social assistance.

The youth unemployment rate has decreased, also thanks to a number of government measures, but is still above the EU average, while the rate of youth NEET (young people not in employment, education or training) increased. In 2013, youth unemployment decreased to 27.2 % from 28.1 % in 2012, while the NEET rate of the relevant population increased to 15.4 % from 14.7 % in 2012. This is at least partially due to the decreasing number of students enrolled in tertiary education and to a simultaneous increase in the number of early school leavers. As described in the 2014 NRP, some measures have been undertaken in the last years to promote labour market integration of young people: such as retargeting Active Labour Market Policy resources to young job seekers, support schemes for young entrepreneurs or a new type of wage subsidy for career starters below 25 years-old within the framework of the First Job Guarantee Programme. Previously launched apprenticeship programmes were reformed in 2013 to better respond to employers' needs. Moreover in 2013 Hungary presented a Youth Guarantee Implementation Plan.

Box 4: The delivery of a Youth Guarantee in Hungary

Important challenges to deliver a Youth Guarantee (YG)[27] in Hungary are:

- Limited capacity of the Public Employment Service, foreseen as the main Youth Guarantee service provider, in particular to set up a profiling system for steering the provision of individualised services and the immediate implementation of the planned capacity development of youth mentor network;

- Efficient coordination of Public Employment Service branch offices -serving as only Youth Guarantee entry point- with educational institutions and youth NGOs active at local level to reach out to NEETs the furthest away from the labour market;

- Improvement of the quality and preventive mechanism in education and training particularly to the very low skilled, including a large share of Roma people;

The bulk of the national budget available for employment measures is still used for the public works scheme, while according to the NRP, EU resources have been used for financing other types of active labour market policies and adult training programmes to improve lifelong learning participation of both employed and unemployed people, particularly low skilled. However, the up-skilling and re-skilling measures would need to be rigorously assessed to improve efficiency of active labour market policies and lifelong programmes and to reduce existing mismatches.

As a targeted measure to decrease entry costs in the labour market, the government prepared the assessment of the whole Hungarian secondary vocational qualification system. As a result of the Action Plan approved in December 2013, 43 qualification requirements are planned to be eliminated and 90 more simplified by August 2014.

The capacity building in the public employment service is ongoing and the introduction of a profiling system has been postponed. An IT system is under preparation, but a client profiling system will only be available as from 2016. An accelerated launch could ease the administrative burden of public employment service caseworkers and improve the personalised service provision to achieve better results and target resources on active labour market policies more efficiently.

Despite last year’s recommendation calling for a reduction in the dominance of the public works scheme, its size has further increased. Its budget allocation has increased[28] and the scheme has continued providing temporary work-related income for almost 390 000 people in 2013 (9.6 % of the workforce), compared with 316 262 in 2012, with some 30 % of them working for one year or more. Labour Market research indicates that the outflow from public work to market employment stood around 5%, while close to 60% remained in the scheme, 30% returned to inactivity and 7% returned to registered unemployment.[29] The authorities own data, which could be subject to a potential multiple accounting, shows that in 2013, 13.3% of fostered workers who had left the PWS could find a job on the private market within 180 days after leaving the scheme. Even this higher figure demonstrates that the scheme cannot improve significantly the employability of enrolled workers. In 2013, the activation element has been strengthened mainly through a one-off measure providing training opportunities for 100 000 participants during the winter months.[30] While this can be considered as a positive development, such short-term, non-personalised training opportunities do not fill the skills gap of participants and have little long-term impact on their employability outside the public work scheme.

The labour market in Hungary is marked by low employment levels of women, particularly with young children. Given the long parental leave scheme still represents a disincentive for young mothers to return to the labour market, the government has taken steps to improve the flexibility of the paid parental leave system. As presented in the 2014 NRP, modification of the childcare benefit (GYED) allows mothers (or fathers) of young children to work and to receive the allowance at the same time while their child is between 1 and 2 year-old. The capacity of crèches and family day care centres has been gradually increased in the last few years[31] and it is set to expand further in 2014-20, according to the NRP. However, at present family support is still more focused on cash benefits, while a relatively low share of spending is devoted to in-kind benefits (e.g. childcare).

Education and Training

Tackling early school-leaving is a challenge, as shown by an increasing share of students leaving school early (from 10.5 % in 2010 to 11.9 % in 2013), being particularly high in vocational schools. Since the reduction of the school-leaving age from 18, pupils are now allowed to leave the education system at 16, while the new, shorter three-year vocational training model normally provides a qualification only at the age of 17. The announced early school-leaving strategy is still under preparation.

The government is implementing a far-reaching reform, while basic skills attainment is declining. The 2012 OECD Programme for International Student Assessment shows that Hungary performs below the EU average in achievements on basic skills and that the correlation between socio-economic status and performance appears very strong.[32]The poor performance of disadvantaged pupils in primary and secondary education thus also explains their low rate of application to higher education. In order to ensure early childhood education, the government plans to introduce obligatory pre-school attendance from the age of three, which is a positive step, but its implementation has been postponed to 2015. The government is implementing an ambitious and contested reform concerning the governance of the education and training system, which addresses: financing, quality evaluation, curriculum regulation (including limited choice for textbooks), human resources management and teachers’ career paths. The impact of all these measures, including developments for the textbook market (see section 3.4), needs close monitoring.

The segregation of Roma pupils increased during the last decade and access to inclusive mainstream education has not improved. In Hungary, 45 % of Roma children attend segregated classes (where all or most classmates are Roma). At present, the drop-out rate for Roma pupils is more than seven times higher than that for the non-Roma and less than one in five completes secondary education, whether general or vocational, while a mere 0.5 % completes tertiary education.[33] A major challenge is to improve effective and equal access to quality, inclusive, mainstream education and to foster continued education for disadvantaged students, in particular for the Roma. The National Social Inclusion Strategy identifies a number of positive measures for desegregation, but their outreach remains limited and a systematic approach is missing. As stated in the 2014 NRP, the application of “the equal opportunities of public education institutions programme" has been available for every public education institution from kindergarten to secondary school since 2003. The programme supports integrated education in those institutions educating at least 15 % children with multiple disadvantages; 25 % of schools were participating.

To improve labour market skills, the government enacted a new law on vocational education in September 2013 by introducing a shift to a 'dual model' accompanied by a reform of the qualification system. This is a positive development. However, while focus on training related to the labour market is important to acquire job-related skills, the reduced curriculum content and the shorter time devoted to basic competences (such as mathematics and languages) in the shortened school models hinders students' chances for further education and future jobs. This is particularly the cause of concern for disadvantaged students, who are over-represented in these schools. The implementation of the 'dual model' thus deserves close monitoring.

Participation rates in higher education show a significant increase in the past 13 years but the level of tertiary educational attainment is still substantially below the EU average. Changes in higher education introduced since 2012 focus on cost-effectiveness, accompanied by an approach supporting mainly the most talented students (competence-oriented approach). As a consequence, government expenditures on education decreased in real terms in 2012 by 6.1 %, while in the EU overall by only 1.1 %. [34] The number of students applying to Hungarian universities has dropped by 6% in 2012/2013,[35] which is related to the uncertain policy environment and, to a certain extent, to demographic changes. The results of the scholarships priority setting for certain disciplines, such as science, engineering and informatics, have also contributed to a reduction in the number of students and the introduction of a new student loan system has not curbed this development either. [36]

The rate of disadvantaged pupils applying to higher education is very low. This is mainly due to their poor performance in the primary and secondary education, showing that mainstream education is not able to compensate disadvantages stemming from family background. In the NRP 2014 it is stated that the support of disadvantaged students has priority in order to increase the share of the people with tertiary or equivalent educational qualifications. However the documents states also that the institutions can only reach 3% of the students with multiple disadvantages. It is important to monitor carefully the impact of measures on vulnerable groups and to adapt policy as needed.

Social polices

The overall social situation continues deteriorating for various reasons. People living at risk of poverty and social exclusion already represents one third of the population, affecting in particular children and the Roma.[37] Those people affected by severe material deprivation are the fastest growing sub-group. In 2013, it affected more than a quarter of all Hungarian residents (more than a third of all children). Housing deprivation among children is growing and despite some improvement in 2013 the share of children living in low work intensity households is still higher than EU average. The stagnating economy is one cause. The other main causes were: the inability of the social protection system to respond to social needs; a persistent level of unemployment; frozen social transfers since 2008; reduced amount of employment substitute benefit (HUF 22 800 per month) with tightened eligibility criteria; and a reduction in the maximum duration of unemployment benefit to three months (the shortest in the EU). Social assistance benefits are among the lowest in the EU, while the capacity of the social safety net to alleviate poverty decreased significantly between 2007 and 2012.[38] This is reflected in increasing relative poverty rates after cash transfers are accounted for, despite decreasing relative poverty rates before cash transfers.

Poverty continues to affect disadvantaged regions and communities disproportionately, in particular the Roma. There are considerable sub-regional socio-economic disparities in Hungary, not only in terms of GDP per capita, but also in terms of access to public services (e.g. healthcare, early childhood education, etc.). Roma are particularly affected by unemployment, discrimination in the labour market and poor living and health conditions, with 60 % living without basic amenities. Since 2011, the government has taken a number of measures in order to improve social inclusion under the guidance of the Hungarian National Social Inclusion Strategy, but results have been insufficient to date. The strategy and its action plan have been recently revised.

In the meantime, the government has not taken steps to mainstream the objectives of the National Social Inclusion Strategy into all policy fields to reduce poverty, as recommended last year. In particular, the previous steps taken by the government in recent years on social transfers and allowances, fail to meet the objectives set out in the Strategy, and were not repealed.

Healthcare

Despite an improving trend, Hungary ranks systematically low in terms of headline health status indicators, such as life expectancy at birth. Also, the capacity of the health system to improve the health status of the population is suboptimal, as can be derived from indicators such as early life health outcomes,[39] which are less related to population lifestyle factors. Although estimates of healthcare spending efficiency are subject to considerable uncertainty, Hungary was singled out amongst the five countries where margins for improving health outcomes without increasing spending are the largest.[40] Evaluations of the recent comprehensive reform of the healthcare sector are not available yet.

The disproportionately high level of out-of-pocket payments, coupled with widespread informal payments,[41] is a particular cause of concern, especially from an access to care point of view. This translates in health inequalities affecting especially vulnerable groups. Moreover, the role of primary and outpatient secondary care seems to be under-developed and to suffer from a suboptimal geographic distribution of doctors (including GPs) and nurses.

3.4. Structural measures promoting sustainable growth and competitiveness

Hungary is currently experiencing a relatively low growth potential. This is partly a consequence of debt overhang and de-leveraging, reflecting a very low rate of total factor productivity growth but also a weak business environment, which contributed to tightening credit supply and reduced investment in sectors burdened by excessive and distortive taxation. A number of regulatory steps were taken in the last years, but usually without consultation of affected stakeholders. In several instances, these have reduced competition in the service sector. Hungary is a ‘moderate innovator’ according to the Innovation Union Scoreboard 2014 and its companies are generally poorly integrated in the value chain of big multinational ones active in the country. Inefficient public transport weighs on the budget and reforms have been delayed.

In 2013, Hungary received CSRs concerning the business environment, energy and state- owned enterprises in transport. The analysis contained in this staff working document leads to the conclusion that the country has made limited progress on measures taken to address these recommendations. (For the full assessment, see the overview table in Section 4).

Overall, the business environment in Hungary has not improved. In addition to increased sector-surtaxes, no barrier in the service sector has been removed, whereas new ones were introduced and competition in previously open markets has been cut back. Examples include: household waste treatment, pharmacies, mobile payment services, retail tobacco, savings banks sector and publication of school textbooks. Coupled with previously introduced (e.g. retail, meal vouchers) measures, these steps have artificially limited the presence of economic actors in the service sector, thus substantially restraining competition.

The deterioration in the business environment partially explains why, despite a substantial inflow of EU funds (at 3% of Gross National Income per year), the Hungarian investment rate declined in the 2007-12 period. Although investment picked up again in 2013, partly thanks to an increasing absorption of EU funds, so far the investment rate is still well below pre-crisis levels (at 17.5 % of GDP as opposed to around 23-24 %).

As explained in the 2014 in-depth review, a major challenge for Hungary is to attract foreign direct investment (FDI) and to boost the number of domestic SMEs incorporated into the supply chain of large foreign investors, thereby increasing their capacity to innovate and to internationalise. Although the level of the FDI stock in Hungary is already relatively high in international comparison, in the last decade the country has lagged behind in terms of FDI inflows and has also been performing worse than other Visegrád countries in terms of the depth of the value chain. [42]

Although inward FDI flows increased in 2011-2013, these to a large extent reflected the effect of capital in transit and the recapitalisation needs of the banking sector. Correcting for these effects, and for another one-off factor,[43] FDI inflows stood at around 2.5 % and 1.7 % of GDP in 2012 and 2013, which is well below pre-crisis levels. Moreover, a substantial part of this increase was due to investment in the automobile industry, whose decisions were already made around 2008-2010.

Overall investment has declined particularly strongly in those sectors where sector-specific surtaxes have been imposed in recent years. Between 2010 and 2013, nominal investment declined by 44 % in energy, 28 % in finance and 18 % in the communication sectors, while increasing by 3.4 % overall.[44]

Market competition and the stability of the regulatory framework

Frequent legislative changes have led to legal uncertainty. Policy instability, together with taxes and government over-regulation, is cited as one of the most prominent obstacles to doing business in Hungary.[45] In several cases, stakeholders had little time to react to legislative changes. Many of the affected investors are foreigners, with possible further repercussions on country attractiveness to foreign direct investment.[46] An empirical analysis based on the QUEST model indicates that closing half of the competition difference in the service sector compared to the level of the most performing EU Member States could add as much as 1 % of GDP in the next ten years (see box 6).

Box 5: Conclusions from the March 2014 In-Depth Review of Hungary (IDR) The third in-depth review on Hungary under the Macroeconomic Imbalance Procedure was published on 5 March 2014.[47] Based on this review, the Commission concluded that Hungary continues to experience macroeconomic imbalances that require monitoring and decisive policy action. In particular, the ongoing adjustment of the highly negative net international investment position (NIIP), the high level of public and private debt in the context of a fragile financial sector and deteriorating export performance deserve close attention to reduce the risks of adverse effects on the economy. The IDR found that: · Despite a lacklustre export performance (a cumulative 16 % fall in market share in the 2008-13 period), the NIIP has been improving and is expected to continue. In the past, this mainly reflected private sector de-leveraging. Looking ahead, as the output gap closes, improvements in the structural balance compared to its pre-crisis levels are expected to further support the process. Nevertheless, despite recent encouraging signs in the automobile industry, export performance is predicted to remain rather weak. Therefore, a NIIP improvement is expected on account of contained domestic demand rather than strong external competitiveness. · A high government debt is a primary source of concern. Despite substantial one-off capital transfers at 7 % of GDP used for debt reduction in the 2011-2013 period and improvements in the structural fiscal balance, the debt has remained broadly constant because of a weakened exchange rate, poor growth potential and elevated financing costs. In the baseline scenario, the debt is forecast to decline slowly; in case of a more negative external environment or a negative shock to domestic confidence, it will start increasing again. · The imbalance and risks related to private sector indebtedness still persist. Although the level of debt has declined, a high share of distressed borrowers, a depressed housing market, a fragile financial sector, a substantial share of loans in foreign currency and prevailing business uncertainty all contribute to fragilities. · The situation in the financial sector continues to raise concerns. Although the sector seems adequately capitalised and its liquidity position is relatively strong, the combination of a high level of burdens and problematic loans does not provide the right incentives to banks to increase their lending activity. While the central bank’s subsidised lending scheme gave some temporary relief in access to credit for SMEs, financial intermediation conditions have not improved on a sustainable basis. The IDR also discusses possible policy responses: · Improving export performance would require more foreign direct investment inflows as well as a broadening of the value chain in the export sector. · Continued fiscal consolidation efforts combined with a more growth-friendly structure of the adjustment would also be warranted. · The negative feedback loop between households, banks and the housing market could possibly be tackled by a final debt relief scheme targeted to insolvent borrowers, while mitigating risks of moral hazard and limiting the additional tax burden on the financial sector. · Improving capital accumulation possibilities and giving incentives to portfolio cleaning are essential to ease supply-side conditions in bank lending. In addition to a better operating environment for the financial sector, a more predictable and competitiveness-oriented policy and regulatory framework would be warranted.

Hungary continues restricting the establishment of new, large-scale retail stores, having introduced a general prohibition lasting at least until the end of 2014. [48] Such restrictive regulation can also impede an efficient allocation of resources in the economy, and the allocative efficiency indicator (measuring the extent to which the most productive firms have the largest market shares) for wholesale and retail trade in Hungary is among the lowest in the EU.[49] While the size of mark-ups in the retail sector were among the highest in the OECD even before the crisis[50], barriers to entry in the sector increased continuously between 2008 and 2013 as evidenced by the OECD's Product Market Indicator's for the service sector.

In July 2013, a law was adopted which restructured the savings cooperative sector. The state has obtained a majority stake in Takarékbank, the central bank of the savings banks sector and set-up a new unified institutional fund with state support. These measures has been criticised by local stakeholders claiming that they were stripped from ownership rights. Lawsuits are currently in the court process. In January 2014, the government launched a tender to sell its majority stake, although legal disputes have delayed the deal.

Other market segments have also been restricted and several new market entry barriers have been introduced in the service sector in recent years, usually with short notice. Strict shareholding requirements for pharmacies have been introduced as from 2014, requiring incumbents to sell a significant portion of their investments. A licensing system for tobacco sales was introduced in July 2013, thereby artificially reducing and redistributing market positions, with no compensation paid to those who ceased business. Companies operating in the household waste management sector had to sell the majority of their shares to the state or to local government or to continue as sub-contractors. The government decided in September 2013 to switch to a centralised system of textbook development, publishing and distribution thereby limiting the number of authorised textbooks used in public schools to two per subject.

In November 2013, amendments to the Hungarian competition law were adopted. These include a provision according to which mergers regarded as of ‘strategic national interest’ are exempt from scrutiny by the Hungarian competition authority.[51] The government can declare merger as of "strategic national interest" and relieve the competition authority of its supervisory competence. In 2014, the government declared three mergers (in the energy, financial and IT sectors) to be of strategic national interest, thereby bypassing competition analysis, which may negatively affect competition and the functioning of the internal market.

While some steps have been taken to increase the use of regulatory impact assessments (RIA) and public consultations in the regulatory process, these can be circumvented. The RIA system that has been introduced in 2011 is operational, but assessments are often carried out rapidly and without incorporating evidence-based supporting documents. RIAs and public consultations are often pressurised because of very rapid legislation procedures, hence their quality varies widely.[52]Research, development and innovation

R&D activities are highly concentrated regionally[53] and into large foreign companies active in high-tech and medium-tech sectors. Hungary could profit more from the presence of multinationals to promote an effective national R&D ecosystem. The country has just started preparing a ‘smart specialisation’ strategy to improve research capacities in all regions.

The rather modest level of innovation in the business sector, particularly among SMEs, remains an obstacle to increased competitiveness. The innovation capacity of SMEs is limited[54] and the repeal of the state’s contribution to the Innovation Fund two years ago has reduced incentives for R&D activities. As from January 2014, Hungary reintroduced some forms of financial support, namely deductibility of R&D carried out by linked enterprises and an increase of tax relief applicable on SMEs investment loans. Two strategies adopted in 2013-2014 plan to stimulate R&D demand and support measures, including for SMEs. However, the Smart Specialisation Strategy, a pre-requisite to obtain EU Structural funds in 2014-20, has not been approved yet.

Box 6: Potential impact of structural reforms on growth – a benchmarking exercise

Structural reforms are crucial for boosting growth. It is therefore important to know the potential benefits of these reforms. Benefits of structural reforms can be assessed with the help of economic models. The Commission uses its QUEST model to determine how structural reforms in a given Member State would affect growth if the Member State narrowed its gap vis-à-vis the average of the three best EU performers on key indicators such as labour market participation or the degree of competition in the economy. Improvements on these indicators could raise Hungary's GDP by about 5 % in a 10-year period. Some reforms could have an effect even within a relatively short time horizon. The model simulations corroborate the analysis of Sections 3.3 and 3.4, according to which the largest gains would likely stem from increasing the participation rates of women and the elderly. This outcome supports the priority placed by the authorities on labour market reforms such as the Job Protection Action Plan and the new Labour Code. The growth impact of measures to reduce final goods mark-ups (e.g. via increased competition on product markets) is also significant. In the very long run, moreover, improving education could also have a noticeable impact on GDP, yielding a potential benefit of 6.5% over a 50-year horizon (see note).

Table: Structural indicators, targets, and potential GDP effects[55]

Source: Commission services. Note: Simulations assume that all Member States undertake reforms which close their structural gaps by half. The table shows the contribution of each reform to total GDP after five and ten years. If the country is above the benchmark for a given indicator, we do not simulate the impact of reform measures in that area; however, the Member State in question can still benefit from measures taken by other Member States.[56] *The long-run effect of increasing the share of high-skilled labour in the population could be 4 % of GDP and of decreasing the share of low-skilled labour could be 2.5 %. **EU average is set as the benchmark.

The emergence of an effective national R&D environment requires a strong public research system, but public R&D decreased from 0.48 % in 2009 to 0.43 % in 2012 — below the level of most Central and Eastern European countries. This threatens an already weak supply of human resources for science and technology, and the quality of the science base.[57] Moreover, the allocation of institutional funding to higher education institutions and research organisations has until now not been based on performance.[58]

Energy

Energy price regulation was maintained over the last year, contrary to the 2013 recommendation. During 2013, the government implemented two rounds of price reductions in final retail prices of electricity and gas for households, while other customers also benefited from the reductions forced on network tariffs. In February 2014, the Parliament adopted a third legislative package for utility price cuts.[59]

Retail end-user price cuts, in combination with the high tax burdens, have had a severely negative impact on companies’ capacity to recover costs. Already ahead of the 2013 price cuts, corporations operating in the ‘universal service provider’ consumer segment produced severe losses, especially in the gas sector.[60] Most companies used to recover losses under public service obligations on their distribution system operations (DSO), but given that most of the recent government-mandated price cuts have directly affected DSO tariffs, this kind of cross-subsidisation is becoming less possible.

Repeated regulatory steps have worsened the overall investment climate in Hungary with repercussions on the corporate sector’s competitiveness in general. Energy companies in the regulated energy provision markets can no longer rely on distribution tariffs to generate profits. This has resulted in relatively higher industrial prices compared to household prices than in most of the EU, pointing to a cross-subsidisation from industries to households. The ratio of industrial to household prices for medium-level gas consumers is the 2nd highest in the EU (and 44 % above the EU28 average). For the same segment in electricity, it is the 5th highest (24 % above the EU28 average), whereas it was 10th at the end of 2012.[61]

Regulatory independence has not improved as the national energy regulator cannot autonomously set tariffs. No amendment to the law adopted in March 2013 on the national energy regulator was introduced to reinforce the independence of the authority. Therefore, decision on setting network access conditions and key parameters of network tariffs is still subject to ministerial approval.

Further challenges — energy efficiency and renewables

Energy intensity remains high by EU standards, especially for households. The country's final energy consumption in 2012 was already lower than the Europe 2020 target, but the "business as usual" scenario used in the 2014 NRP by the government would actually project an abnormal 53% increase in consumption to 22.5 Mtoe by 2020. Government-imposed reductions of energy bills are a potential further disincentive for energy efficiency. Households have a share of 35 % of all energy consumption — among the highest in the EU — mainly due to inefficient buildings and transports, which have one of the highest (and still increasing) energy intensity rates in the EU. Combined heat and power generation is not supported as required by EU legislation. Also because of these factors, the energy dependency of the country and the deficit in Hungary’s energy trade balance are high. Several key actions announced in the 2011 National Energy Efficiency Action Plan are still delayed and the new plan, required by the Energy Efficiency directive, has not been approved yet.

Hungary has reached its interim renewable energy target, but the level of consumption from renewable energy decreased. The proportion of renewable energy sources in energy consumption fulfilled the 2011-12 interim target and has reached 9.6 %. However, this was achieved only by a decrease in the overall energy consumption, as this was 10% lower in 2012 than in 2011 (down from 16.8 Mtoe to 15.4 Mtoe), while consumption of renewable energy sources (in the electricity and transport sectors) in 2011-12 contracted. Although Hungary plans to substantially increase its financial support in this field, so far a consistent and comprehensive programme to support energy efficiency and renewables is lacking.

Transport

Reform of state-owned enterprises in transport has started but the tariff system has not substantially changed. Steps have been taken to streamline the organisation of MÁV (state railways) and Volán (interurban bus) groups. The year 2013 was the first when there was no need to provide additional state financing to MÁV, and its debt stock is now on a downward path. The current 24 Volán companies will be consolidated into seven regional ones in 2015. No substantial changes have been adopted to the tariff system, although a systematic review was announced in the Széll Kálmán Plan and the NRP acknowledges that revenues can be increased by increasing the number of paying passengers. The express train supplements introduced in 2013 do not appear to be the appropriate substitute for a tariff reform.

Sustaining an adequate level of public service continues to be a challenge. Annual operational costs of the Budapest transport company (BKV) are expected to increase by 5.6 %, mostly due to the launch of the new metro line (March 2014). In this context, the 10 % reduction in the price of monthly tickets from January 2014 does not seem to be well justified. For 2013, BKV’s financing need from the central state budget was HUF 24 billion, that is broadly the same as in previous years. Their own revenue-generating capacity is expected to be reinforced only after the introduction of a new electronic ticketing system in 2017. At the same time, although preparatory works have been completed, the decision on the introduction of congestion charging is still being delayed. The fact that, in Budapest, a third of commuters travel more than an hour to work[62] emphasises the need for efficient (public) transport, if the city is to preserve its competitiveness. While the NRP gives no indication on plans for local transport, government decision on Budapest public transport (1164/2014) may be linked to the preparation of revenue increasing measures. For rail, the direct award of public service contracts for the entire network will de facto prevent competition in the sector for the next decade. [63]

The maintenance of transport infrastructure and rolling stock, causing high operating costs and pollution, is an issue of increasing concern. The state of the rail and waterway infrastructure continues to be a barrier to competitiveness and the implementation of EU programmes supporting them are considerably delayed. Furthermore, Hungary intends to reduce drastically the support to urban transport in the next programme phase. An important step to raise revenues was the introduction of distance-based charging of heavy goods vehicles, but it does not provide incentives for fleet renewal. The draft Hungarian National Transport Strategy identifies an increase of navigable days among measures offering outstanding utility; there seem to be no plans to ensure stable fairway dimensions for the Danube throughout the year, resulting in significantly reduced transport volumes.

Environment

Recycling is not adequately developed in Hungary. In 2012, Hungary landfilled as much as 65 % of its municipal waste and recycled only 21 %; this latter figure is below the EU average.[64] Managing waste efficiently and fulfilling the obligations under the EU Directives on waste remains a challenge.[65]

Environmental protection can substantially reduce public contributions. Between 2002 and 2013, the total direct costs recorded for the 10 major floods were at least € 1 400 million. Air pollution in Hungary is responsible for 11 400 premature deaths a year with total external costs in the range of € 5-17 billion/year and a substantial part of this is attributable to road traffic.[66] While the details of the electro-mobility plan announced in the NRP are not known yet, it may only be considered as part of a possible long-term solution to the problem.

3.5. Modernisation of public administration

Low levels of government effectiveness and high administrative burden have been long-standing problems in Hungary. As assessed in the 2014 in-depth review, Hungary's position in international competitiveness rankings continues to deteriorate over time and the institutional set up plays a role in this.[67] As from 2011, the government has been tackling some of these challenges by implementing the Magyary programme in the area of public administration modernisation and the Cutting Red Tape programme. Corruption is perceived as a widespread problem, while public procurement lacks transparency and competition. Moreover, Hungary was called by the Council to strengthen its judiciary.

In 2013, Hungary received a CSR concerning public administration, competition in public procurement, corruption and the judiciary. The analysis in this staff woking document leads to the conclusion that Hungary has fully addressed the recommendation on judiciary, made some progress on measures taken to address the administrative burden reduction and limited progress on the other elements of this recommendation.

Administrative burden

The Magyary programme brought about significant improvements in the responsiveness of public administration and further improvements are planned in the 2014 NRP which announced a tenfold extension of the one-stop shops (“government windows”). On the other hand, administrative capacities, especially human resources skills, could be further improved to increase public administration effectiveness. The development of the public service career model, the continuation of which is announced in the 2014 NRP, is a key element in this area[68]. The NRP also announces the development of a ne