EUROPEAN COMMISSION Brussels, 30.11.2022 SWD(2022) 686 final COMMISSION STAFF WORKING DOCUMENT Analysis of the recovery and resilience plan of Hungary Accompanying the document Proposal for a Council implementing Decision on the approval of the assessment of the recovery and resilience plan for Hungary {COM(2022) 686 final}



Table of contents 1. Executive summary 2. Recovery and resilience challenges: scene-setter 2.1. Macroeconomic outlook 2.2. Challenges related to sustainable growth, cohesion, resilience and policies for the next generation 2.3. Challenges related to the green and digital transition 3. Objectives, structure and governance of the plan 3.1. Overall strategy of the plan 3.2. Implementation aspects of the plan 4. Summary of the assessment of the plan 4.1. Comprehensive and adequately balanced response to the economic and social situation 4.2. Link with country-specific recommendations and the European Semester 4.3. Growth potential, job creation, economic, institutional and social resilience, European Pillar of Social Rights, mitigating the impact of the crisis, and social territorial cohesion and convergence 4.4. The principle of ‘do no significant harm’ 4.5. Green transition 4.6. Digital transition 4.7. Lasting impact of the plan 4.8. Milestones, targets, monitoring and implementation

4.9. Costing 4.10. Controls and audit 4.11. Coherence



1.Executive summary Hungary’s recovery and resilience plan contains a significant number of reforms and investments, worth EUR 5.8 billion (3.8% of 2021 GDP), which are important for the economy. In the years before COVID-19, the Hungarian economy was growing rapidly, by 4.6% in 2019, supported by stimulative fiscal and monetary policies. Employment indicators were also improving, in line with the good economic situation, with the employment rate reaching 75.3% in 2019. The pandemic led to a sharp fall of economic activity in spring 2020, but the economy rebounded quickly once sanitary measures were eased. While the pandemic halted the positive trend of employment indicators, the employment rate remained above the EU average and the low unemployment rate only increased slightly. The budget deficit increased significantly in 2020, reaching 8.1% of the GDP, as a result of measures mitigating the impact of the crisis on the economy. The high deficit and a depreciating currency contributed to the substantial increase in the public debt, from 65.5% of GDP in 2019 to 79.3% in 2020. Hungary’s economy and society face a number of long-term challenges, which have been reflected in EU country-specific recommendations. The economy has caught up with the EU average over the years, but ensuring sustainable productivity growth will require sustained reforms and investments in education, skills, healthcare and the quality of public institutions. In particular, a more skilled workforce and a more robust institutional framework are essential to move away from a model based on low labour costs, towards a more knowledge-based, sustainable economy producing advanced products. Strengthening the research and innovation capacity of domestic firms is also key to secure long-term growth and competitiveness. While the overall poverty situation has improved markedly in the last years, there is still room to address material deprivation and related challenges by improving social assistance, facilitating access to the labour market for disadvantaged groups and providing equal access to quality education and healthcare for all. Hungary also faces important challenges related to the green and digital transition, in areas such as energy efficiency, sustainable transport, water and waste management, and digitalisation in both the public and private sectors. The plan pursues the general objective of the Recovery and Resilience Facility to promote the Union’s economic, social and territorial cohesion and is balanced in its response to the six policy pillars referred to in Article 3 of the Regulation. The plan includes a broad mix of reforms and investments, with a particular focus on the green transition, digital transformation, building economic, social and institutional resilience, and on policies for the future generations. The plan also includes measures to support sustainable and inclusive growth, as well as social and territorial cohesion. The plan primarily addresses the green transition with measures promoting low-carbon public transport, energy grid developments, renewable energy generation, water management and the circular economy. The pillars linked to the digital transformation and to smart, sustainable and inclusive growth are addressed across various components, and the plan includes several measures to promote the digitalisation of public administration, education, healthcare and transport. The pillar on resilience is addressed through a significant number of measures, in particular through a comprehensive reform and investment package to modernise the healthcare sector, as well as to improve its efficiency and access for all. Institutional reforms are also expected to improve the resilience of the economy through strengthening the fight against corruption, competition in public procurement and the independence of the justice system. Policies for the next generation are notably covered by measures in the component on demography and public education and the component on disadvantaged settlements, notably through measures promoting digital education and improved access to quality education and childcare. Long-term growth challenges are mainly addressed through measures in the field of education, healthcare and research and development. Measures promoting the development of a qualified and competitive workforce and supporting disadvantaged settlements provide the main contributions to the pillar on social and territorial cohesion. The plan is expected to contribute to effectively addressing a significant subset of the structural challenges identified in the country-specific recommendations addressed to Hungary in 2019, 2020 and 2022. The plan contains important measures addressing the challenges related to ensuring a swift and smooth green and digital transition. In particular, a series of actions promote the clean and efficient production and use of energy, sustainable transport, water management and the transition to the circular economy. In addition, various measures aim at improving digital infrastructure and skills, as well as the reinforcement of digital public administration. The plan includes a number of measures in the area of education, which contribute to addressing important challenges. It places emphasis mainly on the digitalisation of education, the improvement of digital skills, the modernisation of vocational education and training institutions, as well as on improving the attractiveness of the teaching profession by a reform foreseeing steady increases in the wages of teachers. The plan also includes measures to increase the quality of learning environments in higher education and to improve the ecosystem for research and development. The plan includes measures that contribute to addressing the challenges related to poverty and social exclusion by strengthening basic services and providing comprehensive support for those living in the 300 most disadvantaged settlements, including measures to promote employment and skills development. The creation of additional childcare places will facilitate the labour market participation of parents. The plan sets out an ambitious agenda to address key challenges of the healthcare system such as unequal access to health services, a high prevalence of gratuity payments, excessive reliance on hospital-level care and regional disparities stemming from staff shortages and an uneven distribution of active health workforce across the country. The Hungarian plan also includes a comprehensive range of measures in many areas related to rule of law issues, aiming to overhaul existing practices and lead to structural improvements. These measures also contribute to addressing a significant subset of the structural challenges identified in the country-specific recommendations. The plan includes a number of measures to reinforce the anti-corruption framework and to strengthen the legislative, institutional and practical arrangements to more effectively prevent, detect and correct fraud, corruption, conflict of interest and other risks in the use of Union support in Hungary. Such measures include, among others, the establishment of an Integrity Authority and enabling a judicial review of decisions by the prosecution service or the investigating authority to dismiss a crime report or terminate criminal proceedings. A number of reforms aim to strengthen judicial independence in particular by eliminating undue influences and making sure that the position of the judges in terms of appointments, secondments and in other decisions is secured against arbitrary decisions. To this end, the plan includes measures in particular on significantly strengthening the role and powers of the National Judicial Council, reforming the functioning of the Supreme Court, removing the possibility for public authorities to challenge final judicial decisions before the Constitutional Court, and removing obstacles to preliminary references to the Court of Justice of the European Union. The plan includes an ambitious set of measures aiming to improve competition in public procurement, with targets to significantly decrease the currently high share of public procurements resulting in single bids. To achieve this, Hungary plans to set up a comprehensive performance measurement framework and enhance the participation of small and medium-sized companies in tenders. The plan also includes reforms to improve the quality and transparency of the decision-making process and to ensure a more systematic involvement of social partners and stakeholders. The plan also includes reform steps to tackle the risks of aggressive tax planning and to simplify the tax system. Finally, the plan includes a reform of the pension system, which aims to address challenges related to fiscal sustainability and population ageing, and envisages a number of spending reviews to improve the quality of public finances. The green transition is a key priority of the plan, with 48.1% of its allocation dedicated to climate-related measures. The measures included in the plan are expected to contribute to the decarbonisation and energy objectives as identified in the National Energy and Climate Plan 2021-2030, and they are important steps to move towards the 2030 and 2050 climate targets, in the context of the European Green Deal. Investments in residential solar power systems and in the strengthening of the electricity grid, combined with comprehensive reforms aimed at facilitating the development and connection of renewable energy sources, including wind power generation, are expected to contribute to Hungary achieving its 2030 renewable energy production target. Renovations of buildings will decrease their impact on greenhouse gas emissions and improve air quality. Measures to make transport more sustainable, such as railways investments, the deployment of electric buses and a reform of the tariff system, are expected to result in a cleaner, smarter, safer and more efficient transport sector. The plan also includes reforms and investments on water management systems, as well as measures supporting the transition to a circular economy by supporting the use of secondary raw materials. None of the measures are expected to cause significant harm to the environment. With 29.8% of its allocation dedicated to digital measures, the plan includes a comprehensive package to promote the digital transformation of the economy and society. Most components contain measures relating to the digital transition. In particular, significant measures are foreseen to improve the digital equipment and skills in primary, vocational and higher education. The plan also contains measures relating to the digitalisation of public administration as well as of the health, transport and energy sectors. The plan envisages changes to a number of institutions and policies, which can be expected to address root causes of existing challenges, and have a lasting impact. The plan aims to achieve structural changes and efficiency gains in particular in the healthcare and energy sectors and in public procurement. The far-reaching reform in the field of healthcare aims to modernise the sector and eradicate the practice of gratuity payments, which hampers access of the low-income population to quality care and creates inefficiencies in the treatment pathways. The elimination of gratuity payments could be also expected to contribute to reducing low-level corruption. These reforms are supported by investments in e-health. Reforms in the energy sector aim to create a more effective administrative and legal framework to support the deployment of renewable energy projects and their connection to the electricity system, which is important for the green transition, as well as for improving the energy independence of the country. Measures to increase competition in public procurement and for the digitalisation of certain procedures are expected to increase the efficiency of public administration. More generally, the plan is expected to make a significant contribution to strengthening the institutional resilience of Hungary, by reinforcing the anti-corruption framework, strengthening judicial independence, and improving the quality and transparency of the decision-making process. Hungary has established an adequate structure to implement the plan as well as to monitor and report on progress. The central coordinating body will be the Deputy State Secretariat for the Implementation of the Recovery and Resilience Plan in the ministry responsible for the implementation of Union support (the ‘National Authority’). The National Authority will be responsible for the overall coordination of the implementation of the plan, for monitoring progress on milestones and targets, for drawing up payment requests and for signing the accompanying management declarations. It will also coordinate the reporting of milestones and targets, relevant indicators, as well as the provision of data, such as on final recipients, based on information in a monitoring information system developed to fit the purposes of the plan. The milestones and targets of the plan constitute an appropriate system for monitoring its implementation: the proposed milestones and targets are clear and seem realistic, and the proposed indicators are relevant, acceptable and robust, allowing for proper monitoring during the implementation. The monitoring indicators are in general sufficiently clear and comprehensive to ensure that their completion can be traced and verified. The milestones and targets chosen represent key steps of the measures and concrete achievements directly linked to the implementation of the measures and under the control of Hungary. Overall, the milestones and targets reflect adequately the overall level of ambition of the plan and are considered relevant for its implementation. Hungary has provided detailed breakdowns of individual cost estimates for investments and reforms with an associated cost included in the plan. Cost breakdowns and supporting documents show that most of the costs are sufficiently justified, reasonable, plausible, in line with the principle of cost efficiency, and commensurate to the expected national economic and social impact. Hungary provided sufficient information and evidence that the amount of the estimated total costs is not covered by existing or planned Union financing. The arrangements in place to audit and control the implementation of the plan are adequate to contribute to prevent, detect and correct corruption, fraud and conflicts of interests, provided that specific measures contained in the proposal for the Council implementing decision are put in place. Taking into account the systemic irregularities, deficiencies and weaknesses identified for Hungary in the procedure under Article 6 of Regulation (EU, Euratom) 2020/2092 on a general regime of conditionality for the protection of the Union budget (‘the Conditionality Regulation’), a significant number of measures to be fulfilled prior to the submission of the first payment request under the plan have been identified, in order to strengthen the arrangements related to audit and control. These are in line with the remedial measures which Hungary committed to undertake under the Conditionality Regulation process. Taking into account that effective judicial independence is a prerequisite for the functioning of an internal control system, reforms to strengthen judicial independence are also included. The correct, full and effective implementation of all these measures will be essential for ensuring that the financial interests of the Union are adequately protected during the implementation of the plan. As regards the specific arrangements for the plan, Hungary has committed to adopt a government decree to set out the precise legal mandates, roles and responsibilities of different bodies involved in the implementation, audit and control of the plan. Targeted audits by the authorities are expected to confirm that arrangements concerning the use of the Arachne system to effectively prevent and detect fraud, corruption, conflict of interest and double funding are appropriate, that the arrangements to prevent, detect and correct conflict of interest at any level are effective, and that the necessary functionalities of the monitoring information system, which will be crucial for the regular implementation and control of the plan, are fully functioning and operational as well as tailored to the requirements of the Recovery and Resilience Facility. Finally, the Hungarian audit authority will be expected to put in place an effective audit strategy, in line with the approach described in the plan and internationally accepted audit standards, to allow for effective audits to be carried out in time for the audit summary to be submitted together with the first payment request. Overall, the plan represents a consistent and comprehensive package of reforms and investments, mutually reinforcing each other. Synergies are ensured in thematic components as well as horizontally across a number of components. Table 1: Summary of the Hungarian recovery and resilience plan assessment for the 11 criteria set by the Recovery and Resilience Facility regulation

(1)

Balanced Response (2)

CSRs (3)

Growth, jobs… (4)

DNSH (5)

Green target (6)

Digital target (7)

Lasting impact (8)

M & T (9)

Costing (10)

Control Systems (11)

Coherence A A A A A A A A B A A 2.Recovery and resilience challenges: scene-setter 2.1.Macroeconomic outlook A period of high growth was interrupted by the pandemic. In the years before COVID-19, the Hungarian economy was growing rapidly, supported by stimulative fiscal and monetary policies. GDP grew by 4.9% in 2019 and capacity constraints and a shrinking working-age population were pointing towards a slowdown in the years ahead. These supply bottlenecks also manifested in high wage growth, rising inflation and rapid house price increases. Hungary’s economy bounced back from the COVID-19 crisis. The COVID-19 pandemic resulted in a 4.5% drop of GDP in 2020. The sharp fall of economic activity in spring 2020 was followed by a quick rebound as sanitary measures were eased. Real GDP grew by 7.1% in 2021 and surpassed its pre-pandemic level by 2.3%. While unemployment rose from 3.3% in 2019 to 4.1% in 2021, its increase was mitigated by various government programmes, also benefitting from EU financial support through the SURE scheme. Employment rose as the economy recovered, and the employment rate in the 15-64 age group reached 73.1% in 2021, above the EU average. GDP growth remained strong up to the first half of 2022, boosted by expansionary economic policies. The economy even showed signs of overheating again, including rising inflation and a widening current account deficit. The pandemic had a strong negative impact on public finances. The budget deficit increased significantly in 2020, reaching 8.1% of the GDP, as a result of spending on measures mitigating the impact of the crisis on the economy. The high deficit and a depreciating currency contributed to the substantial increase in the public debt, from 65.5% of GDP in 2019 to 79.3% in 2020, followed by a reduction to 76.8% in 2021. The difficult external environment in the wake of Russia’s war of aggression against Ukraine and the ensuing energy crisis created new challenges for Hungary. The external environment has become more challenging since spring 2022 due to tighter external financing conditions, as well as persistently increasing energy prices and the risk of supply disruptions. The Hungarian forint depreciated by some 11% relative to the euro since the beginning of 2022, while the 10-year government bond yield rose by some 300 basis points to 7.6% (on 22 November 2022). Overall, the Commission’s 2022 Autumn Economic Forecast projects a sharp slowdown of economic growth amid high inflation. Higher inflation and energy prices, as well as tighter financing conditions, are set to constrain economic activity in the coming years, with real GDP growth projected to slow down from 5.5% in 2022 to 0.1% in 2023 and recover only to 2.6% in 2024. Inflation is projected to remain high in 2022 and 2023, at 14.8% and 15.7% respectively, driven by increasing material, energy and wage costs for companies. After the higher production costs feed into consumer prices, inflation is projected to recede to 3.9% in 2024. The labour market remains tight despite the economic slowdown. The labour market was robust in the first half of 2022 with unemployment falling to 3.3% and nominal wages growing by 14.9% in Q2-2022. Shortages of skilled workers are expected to mitigate the rise in unemployment and to support the nominal wage growth in the coming years. The unemployment rate is expected to rise marginally from 3.6% in 2022 to 4.2% in 2023-2024. Public finances enter a challenging period. In 2022, the deficit is forecast to remain high at 6.2% of GDP despite robust revenue growth in the first half of the year. The introduction of several expansionary measures at the beginning of the year and increased spending in response to high energy prices are forecast to put pressure on the public finances in 2022 and beyond. The deficit is expected to narrow to 4.4% in 2023 (notably due to additional windfall profits and sectoral tax revenues) before rising again to 5.2% in 2024. Public debt is projected to decrease slightly from 76.8% of GDP in 2021 to 75.1% in 2024. Government gross financing needs are high and the share of government debt denominated in foreign currencies or held by non-residents is elevated. Sovereign bond yields have increased for all maturities especially since summer last year. Based on the Fiscal Sustainability Report 2021, fiscal sustainability risks are medium in the medium term and high in the long term, also due to population ageing. External sustainability risks have increased amid deteriorating external flows. The current account deficit widened to 4% of GDP in 2021, with a clear further widening underway in 2022. Hungary’s large net energy imports make the external balance sensitive to international energy price developments. Cost competitiveness concerns, which existed already before the COVID-19 pandemic, persist. Continued nominal depreciations of the forint have partially offset the large increases in nominal unit labour costs (ULCs) in recent years. ULCs increased again in 2021, in context of a tight labour market, and are forecast to increase strongly in 2022 and 2023. House prices have grown rapidly until recently. Nominal house price growth accelerated from 4.9% to 16.5% in 2021 and grew at one of the highest paces in the EU. Nominal year to year house price growth accelerated to 22.8% in the second quarter of 2022. House prices were estimated to be 20% overvalued in 2021. At the same time, dwelling investment was well below the EU average at 3.9% of GDP in 2021. The banking sector remains overall sound but faces challenges ahead. Profitability has recently been one of the highest in the EU, the Tier-1 capital ratio is close to the EU average and the share of non-performing loans has remained low. Yet a recently introduced windfall tax for 2022 and 2023 and a regulatory cap on flexible mortgage rates until mid-2023 are likely to significantly reduce banks’ profits. The holdings of government debt accounts for almost one fifth of bank assets. The private sector debt-to-GDP ratio is low but borrowing by households and corporations has increased strongly since 2020 and loans in foreign currency have significance, notably for commercial real estate. The macroeconomic scenario contained in Hungary’s Recovery and Resilience Plan expects robust economic activity in 2022-2023. This scenario is in line with Hungary’s 2022 Convergence Programme published in April 2022, which do not take into account economic developments since spring 2022. The forecast projects high real GDP growth of 4.3% in 2022, driven by a strong pick-up in private consumption. Growth is then expected to remain above 4% in 2023-2025. According to this scenario, inflation is set to fall from 8.9% in 2022 to 5.2% in 2023, before reverting to the central bank’s target of 3% in 2024. The forecast underpinning the plan is more favourable than the Commission’s forecast, as it does not fully include the implications of Russia’s war against Ukraine and the energy crisis. Table 2: Comparison of macroeconomic developments and forecasts

2019 2020 2021 2022 2023 2024 2025 2026 COM COM COM COM RRP COM RRP COM RRP RRP RRP Real GDP (% change) 4.9 -4.5 7.1 5.5 4.3 0.1 4.1 2.6 4.2 4.3 4.3 Employment (% change) 1.1 -1.0 1.0 1.9 0.7 0.0 0.3 0.4 0.2 0.1 0.1 Unemployment rate (%) 3.3 4.1 4.1 3.6 3.6 4.2 3.3 4.2 3.1 2.9 2.8 HICP inflation (%) 3.4 3.4 5.2 14.8 8.9 15.7 5.2 3.9 3.0 3.0 3.0 General government balance (% of GDP) -2.0 -7.5 -7.1 -6.2 -4.4 -5.2 Gross debt ratio (% of GDP) 65.3 79.3 76.8 76.4 75.2 75.1 Source: European Commission’s 2022 Autumn Economic Forecast and Hungary’s Recovery and Resilience Plan 2.2.Challenges related to sustainable growth, cohesion, resilience and policies for the next generation Smart, sustainable and inclusive growth The Hungarian growth model relies extensively on participation in global value chains. Economic policy has focused on attracting foreign direct investment in the tradable sector through comparatively low labour cost, flexible labour market legislation, large investment subsidies and a competitive corporate tax system. While Hungary achieved some income convergence to the EU average over the last decade, the decreasing availability of skilled labour, low investment in human capital and deteriorating institutional quality have become constraints for growth. In the years before the COVID-19 pandemic, the government aimed to speed up income convergence by administrative wage increases and pro-cyclical fiscal and monetary expansion. The supportive fiscal and monetary policy mix continued during the COVID-19 crisis. However, without productivity-improving structural reforms, this policy resulted in high inflation, rapid house price growth, currency depreciation and a deteriorating external balance. This created vulnerabilities before the significant increase of energy prices hit the economy in 2022. Hungary has significant room for catching up in productivity. While productivity growth has picked up since 2016, thanks to the strong cyclical upturn before the COVID-19 pandemic, the labour productivity gap compared to the EU has not decreased since 2010. A Hungarian worker produces on average 32% less value added than an average worker in the EU, after accounting for the lower price level and longer working hours in Hungary. While demand conditions were rather supportive in the last decade, there remain supply-side barriers to investment and productivity growth, especially for smaller firms. The development of the economy has so far relied on increasing labour supply and pursuing integration into the more cost-sensitive mid-stream activities of global value chains. Hungary’s future economic development depends on its capacity to implement structural and institutional reforms which effectively remove obstacles to sustainable productivity growth. In particular, a more skilled workforce and a more robust institutional framework are required to move away from a model based on low labour costs, towards a knowledge-based, sustainable economy producing advanced products. Strengthening academia-business linkages and the research and innovation capacity of domestic firms is key for long-term growth and competitiveness. Hungary is an “emerging innovator” and its performance relative to the EU has deteriorated in recent years according to the 2022 edition of the European Innovation Scoreboard. Spending on R&D is increasing slowly from 0.98% of GDP in 2008 to 1.6% of GDP in 2020. This value is high among Central Eastern European countries, but lower than the EU average of 2.31%. The increase over the years took place in the business sector, while R&D spending in the public sector decreased. The shortage of talent and skills limits the innovative activity of enterprises. Only 49% of Hungarians possess at least basic digital skills, against an EU average of 54% in 2021. Tertiary education attainment rates are among the lowest in the EU. The academia-business cooperation is mostly limited to large companies due to the lack of demand and capacity of smaller firms. Barriers to competition hinder productivity growth, especially in services. Manufacturing and services face different environments. The authorities tend to sign strategic agreements with large manufacturing firms and their investment projects benefit from significant government support. Service activities, however, face more barriers to competition. Frequent introduction and subsequent repeals of administrative measures have contributed to an unstable business environment in retail trade. Restrictions on large units hold back efficiency gains in the retail sector and raise consumer prices. The government can exempt business merger and acquisition transactions from the examination of the Competition Authority so that such an examination never takes place. The criteria for these exemptions are not laid out transparently in the legislation, and no formal procedure exists to contest the decision of the government on these exemptions. Moreover, the provision of several services is entrusted to state-owned or private firms specifically created for these purposes, which operate without competition. Moreover, Hungary has the highest number of regulated professions in the EU. Slow and costly insolvency procedures may also hinder the restructuring of failing businesses. The procurement market remains vulnerable to anticompetitive practices. The proportion of contracts awarded in procedures where there was just one bidder remains among the highest in the EU. The lack of competition in public procurement decreases incentives to innovate for companies which cannot enter the procurement market, as well as for companies benefitting from the situation. The authorities improved the supervision of the regularity of public procurement in response to the findings of the Commission’s successive audits in the field of EU funds management, which identified serious, systemic deficiencies and irregularities, in particular, related to the use of framework agreements. In February 2021, the government set itself an ambitious target of reducing the percentage of public procurement procedures with only a single bid to less than 15%. However, the recent apparent exclusion of public interest trusts from public procurement rules remains a concern. Social and territorial cohesion Employment recovered after the COVID-19 crisis but the situation of women and vulnerable groups, in particular low skilled and young people, is still to be improved. The employment and social situation improved in the last decade in line with the good economic situation. The COVID-19 pandemic halted this positive trend but the labour market regained its strength quickly after the peak of the crisis. The employment rate in the 20-64 age group rose from 62% in 2010 to 80.2% in Q2 2022, well above the EU average of 74.9%. However, not all groups benefited equally and employment rates remain low for various vulnerable groups. In particular, mothers with young children tend to stay out of work for a long time, partly due to the scarcity of childcare places in nurseries. Some other groups struggle to remain in the labour market: by design, the tax and benefit system provides limited cushion in difficult economic times and the unemployment benefit scheme is one of the least generous in the EU in terms of benefit and duration of support. Although the overall poverty situation has improved markedly, challenges remain. In 2021, the share of population at risk of poverty or social exclusion was lower in Hungary than the EU average. However, material and social deprivation rates remain among the highest in the EU, especially for children, and risks are concentrated in specific groups and territories. Based on national data, poverty rates are 3-4 times higher for Roma, a situation which reflects regional disparities in terms of access to the labour market and quality public services. Income inequality has increased over the past decade and inequalities in access to public services remain high. In 2021, the incomes of the richest 20% of the population were 4.4 times higher than those of the bottom 20%, up from 3.6 times higher in 2008. This increase has been one of the highest in the EU, although the ratio still remains below the EU average (5.2 in 2021). Similarly, the poverty gap increased significantly in recent years. Inequalities persist in access to public services, including basic services such as water supply and sanitation, and a high proportion of people experience difficult living conditions. The low and shrinking supply of social housing is becoming a challenge against the backdrop of high residential property prices. Disadvantaged groups face limitations in access to the labour market and quality education and healthcare. More inclusive education and healthcare systems are seen as key to improve social cohesion. Population ageing and the increase of public debt during the COVID-19 crisis intensified long-term fiscal sustainability challenges. The pension expenditure is projected to rise substantially, from around 8% in 2019 to above 12% of GDP in 2070. The fiscal sustainability indicators point to medium sustainability risks in the medium term and high risks in the long term. Recent policy measures exacerbate this sustainability challenge by increasing the government’s long-term pension liabilities. In particular, the reintroduction of the 13th-month pension in 2021 and 2022 increases expenditure on pensions. The system also faces challenges related to fairness: changes to tax and pension systems in the last decade are projected to increase expenditure on the pensions of high-wage retirees and amplify inequalities among pensioners. Those measures include the removal of the ceiling on pensionable income and pensions and the introduction of the flat personal income tax that boosts pensionable income of high earners. At the same time, the minimum pension has remained nominally unchanged since 2008, which affects the situation of those with interrupted employment history and low average earnings during their career. Regional disparities are significant in terms of economic development, labour market, education outcomes and demographic trends, as well as in terms of access to infrastructure and public services. Since 2008, GDP per capita has converged to the EU average in every region. However, this process was uneven between the regions and at county level, thus significant disparities between and within regions remain. The rate of households that have broadband access has significantly improved in the last five years, but there is still a gap between the best (Budapest) and worst (Dél-Alföld) connected regions. The more developed regions benefit from a concentration of skilled workers, good transport connections and proximity to main trade partners, which attracted significant foreign direct investment and created local agglomeration effects. Rural areas suffer from shortages and degradation of infrastructure and public services, including public education and health care. Health and economic, social and institutional resilience Health outcomes, although improving, remain worse than in most other EU countries, reflecting both lifestyles leading to health risks and the limited effectiveness of public health care. The life expectancy of Hungarians lags behind that of most other Europeans and differs significantly according to gender and levels of education. In particular, Hungary has one of the highest mortality rates from preventable causes in the EU. This is also correlated with an above-average prevalence of risk factors, low spending on prevention and a public share of health spending below the EU average, which all indicate substantial scope to strengthen public health interventions. In this context, individuals are increasingly pushed to turn to private care to access health services, with repercussions on social equity as well as health outcomes. At the same time, the health system remains excessively reliant on hospitals to provide care services, with insufficient focus on primary care and prevention, and a too limited role for general practitioners as gatekeepers to higher levels of care. The low number of practitioners, their age composition, geographical distribution, limited formal competencies, as well as the lack of performance incentives to avoid unnecessary referrals, also hinder the effectiveness of primary care and reduce the attractiveness of the profession. Recent reforms have encouraged general practitioners to cooperate more with each other, which could make primary care more efficient. The obsolete hospital payment system, together with low decision-making autonomy at institutional level, has contributed to rising hospital debt which continues to accumulate. Moreover, the hospital network is excessively fragmented, hindering efficiency and quality of care. In 2020, the reform of the hospital network started by centralising several care services and administrative functions at county level. Although authorities started addressing the issue of health workforce shortages, regional disparities remain. Compared to the EU average, Hungary has a lower number of doctors and nurses per 1 000 inhabitants. Large outflows of skilled health professionals seeking better working conditions abroad or in the fast-growing domestic private sector have exacerbated the issue of shortages of adequate staff in the public health care sector. To retain physicians, the government took steps to increase the salaries of doctors working in state and municipal healthcare facilities. Salary increases were also accompanied by provisions limiting doctors' capacity to simultaneously work in public and private facilities, and introducing stricter penalties for health workers accepting gratuity payments. Although wages remain low from an EU perspective, the recent increases may contribute to stemming or slowing down outflows of medical personnel. Sound public finances and quality public spending are crucial to address current and future challenges. While the inflow of EU funds is expected to decrease over time as Hungary catches up with the EU average income levels, the investment needs will remain sizable. In particular, Hungary will face high spending pressures to support the green transition and the move towards a more knowledge-based growth model. In the short and medium term, this warrants a systematic review of the expenditure side of the budget, with a view to identifying potential savings and efficiency gains, and scope for reallocation within the budget to promote growth-friendly spending, including on the green and digital transitions.

The tax system is highly competitive, but it might also facilitate aggressive tax planning. Hungarian companies can benefit from the lowest corporate tax rate in the EU and the tax burden on labour decreased significantly (while remaining high for low-income earners). However, sector-specific taxes and a large number of small taxes complicate the tax system and raise compliance costs, in particular for smaller firms. At the same time, Hungary is one of only two EU Member States that do not apply any withholding tax on royalty, dividend or interest payments to non-EU jurisdictions. Royalty and interest payments leaving the EU are not taxable in Hungary, even though they can be deducted from a company’s tax base. As a result, the outflows of royalty, interest and dividend payments from Hungary to offshore financial centres are well above the EU average. Reforms that tackle the risk of aggressive tax planning and increase the transparency of the tax system are expected to result in higher government revenues and stronger job creation, while ensuring that companies do not avoid paying their fair share of taxes in the EU. The introduction of rules aimed at ensuring that payments towards low- or no-tax jurisdictions are non-deductible, as well as stronger conditionality for companies on fiscal residence, are expected to contribute to these objectives. Weak quality of institutions, including an insufficient anti-corruption framework, holds back productivity growth. In recent years, institutional quality has been relatively weak and deteriorating in comparison with the EU average. Deficient independent control mechanisms and tight interconnections between politics and certain businesses are conducive to corruption. When serious allegations arise, there is a recurrent lack of determined action to investigate and prosecute corruption cases involving high-level officials or their immediate circle. Accountability for decisions to close investigations has been a matter of concern as there were no effective remedies against decisions of the prosecution service not to prosecute alleged criminal activities. Restrictions to media freedom, a hostile environment for civil society organisations and recurrent challenges in the application of the transparency and access to public information rules have also further weakened the anti-corruption framework. In December 2021, the government postponed the implementation of most measures in its anti-corruption strategy for the years 2020-2022. Low transparency of the policy-making process may affect the business environment. Hungary scores low among the Member States in social dialogue, stakeholder engagement in developing primary law, consultation with social partners, civil society, and the use of evidence-based instruments. National rules on the obligatory public consultation of draft legal acts and their impact assessments have been systematically disregarded. The number of laws subject to consultation has been very low in recent years. Concerns regarding judicial independence also exist. The National Judicial Council continues to face difficulties in counter-balancing the powers of the President of the National Office for the Judiciary. Concerns are also centered around the functioning of the Supreme Court. In particular, the rules on electing the President of the Supreme Court create risks of political influence over the top court of the country, including through the possibility for members of the Constitutional Court to be appointed as judges at the Supreme Court. Further, the lack of transparency of the case allocation scheme does not allow parties to verify whether any undue discretion has been applied. Questions have also been raised regarding the role of the Constitutional Court, composed of members elected by Parliament without the involvement of the judiciary, in reviewing judgments of the ordinary court. Concerns have also been raised by procedural rules allowing to challenge before the Supreme Court the necessity of a preliminary reference. Policies for the next generation, children and the youth Education can play a key role in unlocking the growth potential of the economy. According to the Social Scoreboard, educational outcomes are below the EU average and the impact of the socio-economic background of pupils on their educational outcomes is one of the strongest in the EU. Contrary to European trends, early school leaving increased in Hungary in the last decade to 12.0% in 2021, which is above the EU average of 9.7%. Early school leaving is higher in the least developed districts, and six times higher among the Roma population than the non-Roma. Performance-based selection into different education tracks starts at the age of 10 and this leads to the early separation of underachieving pupils from their high-achieving peers. Disadvantaged students have low chances of entering the higher educational tracks. Entrants to three-year vocational education and training (VET) programmes have scarce opportunities to improve their already low basic skills, due to the limited basic skills content of the curricula. Disadvantaged pupils are attracted to VET programmes by a generous VET scholarship scheme as from the 2020-2021 school year. The 2019 reform of vocational education and training removed the possibility for students in the three-year VET schools to obtain the upper-secondary-school leaving certificate in formal day-time education, which is needed for enrolling in higher education. The low effectiveness and equity of the school system are partly linked to the lack of socioeconomic diversity within schools, the low level of curricular autonomy and the low salaries of teachers. The latter also translates in a low attractiveness for the profession. While aggregate indicators, such as the teacher pupil ratio, do not signal acute shortages, a more detailed analysis shows that shortages exist for specific subjects such as mathematics, science and foreign languages. Teacher shortages are also linked to the fragmentation of the school system, as half of all primary and lower secondary schools have fewer than 150 pupils. Schools with a high proportion of disadvantaged pupils tend to suffer particularly from the lack of qualified teachers. More than half of the graduates from teacher education end up in other careers due to the high workload and low pay of the profession, especially at the beginning of their career. Moreover, the centralised management of schools leaves school heads with limited autonomy and tools to improve the quality of teaching. As regards higher education, the share of 25-34 year old people with a tertiary diploma has risen since 2010, but it remains among the lowest in the EU. The number of entrants in tertiary education has even been shrinking over the past decade, reflecting demographic trends, poor school outcomes and the reduction of state-funded places. Since 2022, all workers below the age of 25 have been exempted from personal income tax, a measure which may increase employment but could further reduce the pool of applicants to tertiary education. Against this backdrop, the gap between the basic skills level of high- and low-educated adults is one of the largest in the EU. At the same time, adult participation in lifelong learning is about half of the EU average. This results in skills shortages and a low innovation potential. 2.3.Challenges related to the green and digital transition Green dimension The recovery and resilience plan should contribute to the green transition and at least 37% of the financial allocation needs to contribute to climate objectives. According to the RRF Regulation, the measures in the plan are expected to contribute to achieving the 2050 climate neutrality objective, and the 2030 energy and climate targets, taking into account Hungary’s National Energy and Climate Plan (NECP), which was notified to the Commission on 22 January 2020. The measures should also contribute to meeting environmental targets for waste, pollution control, sustainable mobility, biodiversity protection and restoration, water resources, and support the transition to sustainable food systems as well as to a circular economy, while ensuring that nobody is left behind. Greenhouse gas emissions In its NECP, Hungary targets a modest reduction in greenhouse gas emissions by 2030. Hungary has a national economy-wide target of cutting greenhouse gas emissions by at least 40% by 2030 compared to 1990. Additional measures are needed to attain this target. Hungary’s NECP sets targets for renewable energy sources and energy efficiency for 2030 that show low ambition with regard to the attainment of the EU targets, and provides no information about an estimated trajectory of annual emission levels for 2020-2030. In its NECP, Hungary intends to contain emissions in the transport sector by 2030, while noting that energy demand in transport and industry cannot be constrained in a growing economy. Hungary’s NECP sets forth the objective of ensuring that the consumption of petroleum products in transport does not increase by more than 10% by 2030. Greenhouse gas emissions from transport have increased strongly over the last five years and emissions are projected to continue increasing under current policies. The government intends to address transport emissions by promoting electromobility, sustainable public transport and freight transport by rail. As regards the building sector, greenhouse gas emissions reductions would be achieved through energy efficiency measures and by taking up clean energy technology to replace gas for heating. The European Green Deal set out new ambitious targets for the EU to reach climate neutrality by 2050, with a reduction of emissions by at least 55% by 2030. Important pieces of legislation have been or are in the process of being approved by the EU legislator to reach these goals. Member States will be expected to present updated NECPs in 2023. Renewable sources of energy The 2020 Hungarian NECP aims at a renewable share of 21% in its gross energy consumption, which the Commission considers unambitious compared to the 23% resulting from the formula used by the Commission to assess proportionate efforts in light of EU targets. In 2020, the renewable share (13.9%) in gross final energy consumption slightly overachieved Hungary’s target (13%). According to its latest National Energy Strategy, presented in January 2020, Hungary aims to increase electricity generation from low-carbon sources to 90% of the total by 2030. In addition to nuclear, Hungary intends to rely more on renewable energy sources, mainly solar energy, while wind energy plays only a small role in the government’s plans. The share of renewables in heating is expected to be increased from 18.2% in 2020 to 28.7% by 2030. Energy efficiency Hungary’s energy efficiency target in its 2020 NECP is unambitious compared to the EU’s 2030 objective. It is set at maximum 18.8 Mtoe of final energy consumption, translating into 30.7 Mtoe for primary energy consumption. Moreover, the indicative trajectories and translation of the contribution into primary energy consumption are not clearly outlined. In 2020, the primary energy consumption indicator (23.9 Mtoe) was below the 2020 target (24.1 Mtoe), but the final energy consumption indicator (18 Mtoe) was above the 2020 target (14.4 Mtoe). There is still a large potential for renovating the existing housing stock, public buildings and district heating networks as well as for increasing energy efficiency of small firms. Housing deprivation is among the highest in the EU: it is estimated that 20.4% of the population lives in a dwelling with a leaking roof, damp walls, floors or foundation, or rot in window frames or floor, which points to the important wider benefits of building renovation. Until the amendment of the regulated energy prices in summer 2022, the price for energy, including for gas, has been among the lowest in the EU for several years, which did not create incentives for energy savings and for improvement of energy efficiency. The low energy efficiency of housing and polluting residential heating methods reduce air quality and there are large potential environmental and health gains to be achieved by stepping up renovation efforts. Investment in energy efficiency in residential housing, in particular in rural areas, would create local jobs, reduce air pollution, mitigate housing deprivation and contribute to reaching climate neutrality. However, financial incentives for households to upgrade the energy efficiency of their homes and decarbonise heating systems appear insufficient at this point in time to trigger a larger uptake, also given the low financial capacity of many affected households.

Sustainable transport In recent years, Hungary has experienced a strong increase in emissions in the transport sector. Hungary also remains one of the most traffic-congested EU Member States, with an increasing number of hours lost per driver per year, mainly in urban areas. A more attractive public transport system could further facilitate labour mobility and help mitigate the environmental impact of transport. Although public transport in Hungary accounts for a larger share of trips than the EU average, this comes mainly from a lower motorisation rate. As income growth makes personal cars more affordable, and rising demand is expected to put further pressure on the low quality of transport infrastructures and services, the attractiveness of public transport will need to improve. While progressing, electro-mobility is also well below the EU average. Water management Water management remains a concern. Hungary’s water-supply and sanitation system are still not fully compliant with the Drinking Water Directive, and water affordability remains an issue for the poorest part of the population. A large share of the water supply network is in poor state. Because of leaks, a quarter of the water entering the system generates no revenues. Regulated tariffs do not cover the maintenance costs of many water and wastewater companies. The utility tax, levied on companies’ pipelines, poses another barrier to investment. Hungary’s water bodies are exposed to pressures from human activities. With climate change expected to reduce flow levels in the country’s rivers, there are plans to substantially expand crop irrigation but these raise concerns about possible harms to water quantity, water quality and biodiversity. At the same time, there is only limited attention to the central issues of water retention, restoring natural hydrology, and adapting agricultural practices. Close to one quarter of Hungary’s territory is exposed to floods, and the country’s flood risk management plan does not sufficiently address this issue. Circular economy Progress towards a circular economy is at an early stage. Hungary’s circular material use rate is with 8.7% far below the EU average (12.8%) (according to the latest data for the year 2020). The recycling rate (municipal waste) is with 33% considerably less than the 2025 EU target of 55%. Hungary has recently started the development of a national circular economy strategy and of a related action plan. Resource efficiency is low in comparison with the EU average. Waste generation is modest, linked to the relatively low income level of Hungary, but landfilling remains predominant (around 50% of the total municipal waste) and conversely, recycling is limited. Waste management was reorganised by the government in recent years, limiting competition, which has resulted in declining efficiency. Air quality The low energy efficiency of housing and polluting residential heating methods, as well as road transport, deteriorate air quality. Hungary needs to undertake additional efforts to meet the targets set in the National Emissions Ceiling Directive for 2020-2029 and for any year from 2030. Although emissions of key air pollutants in Hungary have decreased in recent years, they are still well above the EU average. In 2020, no exceedances above the EU limit values set by the Ambient Air Quality Directive were registered in Hungary. However, the European Commission is monitoring an infringement procedure against Hungary for persistent breaches of air-quality standards with exceedances of fine particulate matter (PM10) and nitrogen dioxide (NO2) limit values in several air-quality zones. The table below gives an overview of Hungary objectives, targets and contributions under Regulation (EU) 2018/1999 of the European Parliament and of the Council of 11 December 2018 on the Governance of the Energy Union and Climate Action.



Table 3. Overview of Hungary’s objectives, targets and contributions under Regulation (EU) 2018/1999 National targets and contributions Latest available data 2020 2030 Assessment of 2030 ambition level Binding target for greenhouse gas emissions compared to 2005 under the Effort Sharing Regulation (%) -10% +10% -7% As in the Effort Sharing Regulation National target/contribution for renewable energy: Share of energy from renewable sources in gross final consumption of energy (%) 12.5% 13% 21% Unambitious (the result of RES formula is 23%) National contribution for energy efficiency: Primary energy consumption (Mtoe) 24.5 Mtoe 24.1 Mtoe No target set Very low Final energy consumption (Mtoe) 18.5 Mtoe 14.4 Mtoe 785 PJ (18.7 Mtoe) Very low Level of electricity interconnectivity (%) 50% 55% 60% n/a Source: Assessment of the final national energy and climate plan of Hungary, SWD (2020) 916 final. Digital dimension According to the RRF Regulation, the recovery and resilience plan should contribute to the digital transition and at least 20% of the financial allocation needs to contribute to digital objectives. The measures in the plan should, inter alia, contribute to the digital transformation of the economic and social sectors (including public administration, public services, and the justice and health systems). The objective of the measures in the plan should be to improve not only the competitiveness, but also the resilience, agility and security of companies and public actors, all while ensuring inclusiveness.



Figure 1. EU Digital Economy and Society Index (composite indicator) Note: EU aggregate corresponds to EU27, based on 2022 DESI report

Hungary ranked 22nd amongst Member States in the Digital Economy and Society Index (DESI) 2022, with performances below the EU average and objectives in several dimensions. In the past years, Hungary made some progress in some of the dimensions measured by the DESI index. Hungary performs best on broadband connectivity and worst on the integration of digital technology in enterprises’ activities. The COVID-19 pandemic highlighted existing weaknesses in the areas of digital skills, digitalisation of schools, digitalisation of enterprises and digital public services. In 2021, Hungary adopted a National Digitalisation Strategy 2021-2030 (NDS). The NDS is structured around four main pillars corresponding to the DESI dimensions: digital infrastructure, digital skills, digital economy and digital state. Its overarching objective is to identify and exploit the potential of digitalisation in the economy, education, research, development and innovation, and the public administration, thereby improving the country’s competitiveness and the well-being of its citizens. Hungary aims at exceeding the EU average in digital performance, as measures by DESI, by 2025, and be among the ten leading EU countries in terms of digitalisation by 2030. Connectivity Hungary ranked 13th in connectivity in the DESI 2022. According to most recent data (DESI 2022), 83% of households have a fixed broadband connection and more than half (61%) have at least 100 Mbps fixed broadband connection. It remains a leader in the take-up of very fast broadband (at least 1Gbps), with 22% of lines, which is far above the EU average (7.6%). Very High Capacity Network (VHCN) coverage is increasing steadily and is now above EU average. 4G coverage is close to 100%, 5G readiness is advanced, but 5G coverage is below EU average. Digital skills Digital skills remain below the EU average across almost skill indicators. Half of the population has at least basic digital skills and only 22% has ‘above basic digital skills’. There is a shortage of ICT specialists in the workforce and the proportion of female ICT specialists is low, while the percentage of ICT graduates also stands below the EU average. There is a clear and urgent need to improve the general digital skills of the population. The NDS recognises this and identifies digital skills in education and digital competence of citizens as key fields to be improved. Digitalisation of enterprises Hungary ranked 25th in the integration of digital technologies by enterprises. Despite some improvements, Hungarian enterprises continue to lag behind their EU peers. The country still performs poorly on technology adoption indicators. The use of planning software, of social media and of e-invoices notably are well below the EU average. Hungarian enterprises are also slow in integrating advanced digital technologies in their business models. Big data is used by 7% of them, cloud by 21% and Artificial Intelligence by 3%, much lower than the EU average. In a recovery context, as well as to succeed in the shift of the economic model towards higher end products, it is a particular concern that few fast-growing enterprises make digitalisation an explicit part of their growth strategies. The NDS recognises that more support is needed for the digital transformation of enterprises, in particular small and medium-sized enterprises. Digital public administration The digitalisation of public services shows a mixed picture. Practically all relevant public services are available online (more than 3 000) and they are widely used. However, the quality and completeness of the supply of services for both people and businesses remains relatively low, especially for cross-border service provision. One problematic area remains open data, where Hungary is among the weakest performers in the EU. Hungary needs to make public data more readily available and reinforce the transparency of how the public administration operates. Box 1: Progress towards the Sustainable Development Goals Sustainable Development Goals and the four dimensions underpinning the Annual Sustainable Growth Strategy The objectives of the Sustainable Development Goals are integrated in the European Semester since the 2020 cycle. This provides a strong commitment towards sustainability in coordination of economic and employment policies in the EU. In that context, this box outlines Hungary’s performance with respect to the SDGs and looks at the four dimensions underpinning the 2023 Annual Sustainable Growth Strategy and of relevance to the recovery and resilience plans: green transition, fairness, digital transition and productivity, and macroeconomic stability. It points at areas where further action could accelerate the progress on the SDGs. Green Transition Although Hungary is improving on several aspects related to environmental sustainability such as climate action and pollution (SDGs 2, 6, 11, 12 and 13), it still needs to progress on others, in particular clean energy (SDGs 7 and 9). Most indicators linked to the green transition remain below the EU average. Notably, while the recycling rate of municipal waste and the circular material use rate improved, they are still below the EU average. The share of renewable energy in total energy consumption decreased from 14.5% in 2015 to 13.9% in 2020, exceeding the target set for Hungary but remaining far below the EU average (22.09% in 2020). Energy productivity in the country only slightly increased between 2015 and 2020, leading to an increased gap with the EU average. The share of sustainable transport modes has declined in recent years, while still above the EU average. The share of forest area has increased from 25.2% to 26.1% between 2015 and 2018 but it remains significantly below the EU average (43.4% in 2018). The surface of terrestrial sites designated under Natura 2000 remained unchanged between 2014 and 2019 and was above the EU average. Fairness Hungary performs very well in some SDG indicators related to growth, employment and poverty reduction (SDGs 1 and 8). There has also been some improvement in health indicators (SDG 3), but the country still needs to catch up in several areas related to education and gender equality (SDGs 4, 5 and 10). Improvement has been particularly strong in the employment rate (from 73.7% in 2016 to 78.8% in 2021), the rate of severe material and social deprivation (from 24.1% in 2015 to 10.7% in 2020) and the rate of severe housing deprivation (from 15.5% in 2015 to 7.6% in 2020). The share of population unable to keep their homes adequately warm significantly decreased from 11.6% in 2014 to 5.4% in 2019, which is now below the EU average (8.2%). However, despite these improvements, Hungary still scores significantly below the EU average for the severe material and social deprivation rate (where the EU average is only 6.8%) and the severe housing-deprivation rate (where the EU average is 4.0%). Hungary also performs below the EU average in the area of education (SDG 4), with high and increasing rates of early school leaving (12.0% in Hungary compared to 9.7% in the EU) and low and decreasing tertiary education attainment (32.9% in Hungary against 41.2% in the EU) in 2021. Similarly, Hungary performs below than the EU average in gender equality (SDG 5), with worsening gender employment gap and gender pay gap, and low participation of women in national parliaments, governments and senior management.

Digital transition and productivity Hungary shows a mixed picture when compared to the EU average in targets related to digital transition and productivity, as reported under SDG 8 (Sustainable economic growth, employment and decent work) and SDG 9 (Industry, innovation and infrastructure). The share of households with high-speed internet connections (48.6%) has moved towards the EU average of 59.3% in 2020, which represents significant progress. Hungary’s gross domestic expenditure on R&D is well below the EU average (1.61% of GDP against 2.32% in the EU) and Hungary has not made significant progress on this area over time. Participation in adult learning and strengthening digital skills remain a challenge. In Hungary, with only 5.9% of adults participating in learning programmes, which is far below the EU average (10.8% in 2021). Only 49% of Hungarians possess at least basic digital skills, against an EU average of 54% in 2021. Macroeconomic stability Thanks to its favourable economic situation before the pandemic, Hungary performs relatively well in the indicators of SDG 8 (Sustainable economic growth, employment and decent work). Real GDP per capita in Hungary has been increasing over time, reaching EUR 13 660 in 2021 but it is still substantially below the EU average (EUR 27 810 in 2021), and economic convergence with the rest of the EU is slowing down. The investment share of GDP (26.8%) has increased since 2015 and is above the EU average. Hungary also outperforms the EU average on employment-related indicators (SDG 8). The long-term unemployment rate has fallen significantly since 2015 (from 2.3% in 2016 to 1.3% in 2020). However, Hungary is still below the EU average – and has a declining performance – on access to justice and trust in institutions (SDG 16). 3.Objectives, structure and governance of the plan 3.1.Overall strategy of the plan The recovery and resilience plan of Hungary is a comprehensive response to the consequences of the COVID-19 crisis, as well as to the main structural challenges identified for the Hungarian economy. The plan is structured around three strategic objectives: ·Establishing a smart, sustainable and inclusive growth path ·Safeguarding and creating jobs ·Competitiveness of enterprises and social convergence, covering all elements of the economic ecosystem and all groups of society. The plan comprises nine components addressing challenges in the areas of public education, higher education and vocational education and training, social inclusion in the most disadvantaged settlements, water management, sustainable green transport, green energy, circular economy, health, and governance and public administration. The plan covers all six pillars foreseen in the RRF Regulation and has a strong focus on promoting a green- and technology-driven economic development path. The nine components are the following: 1.Demography and public education, which focuses on increasing the attractiveness of the teaching profession, including wages of teachers; better access to quality and inclusive public education with a particular attention to disadvantaged pupils, students with special education needs and pupils in low-performing lower secondary schools; the digitalisation of public education and digital equipment for pupils and teachers; reinforcing the skillset of teachers and school managers; and increasing the availability of early childhood education and care facilities for children below 3 years old. The component also includes a reform to improve the medium and long-term fiscal sustainability and adequacy of the pension system. 2.Highly qualified, competitive workforce, which aims to strengthen the higher education system through digitalisation and infrastructure improvements; to increase the availability of skilled workers through investments in vocational education and training institutions; and to support the ecosystem for science, research, innovation and training. 3.Catching-up settlements, which aims to secure basic services in the 300 most disadvantaged settlements and offer additional support to their inhabitants in terms of employment, skills development, housing, energy renovation and heating. 4.Water management, which aims at providing water management solutions in agriculture through the upgrade of existing and the development of new water networks and systems, the establishment of nature-based water retention solutions, the strengthening of the monitoring system and the establishment of new sustainable water management communities. 5.Sustainable green transport, which aims to make public transport more attractive and the transport sector more sustainable through the creation of an integrated single tariff system, the improvement of the rail network, in particular in the capital region, as well as the replacement of old fossil fuel buses by electric ones. 6.Energy – green transition, which aims at the creation of additional energy production capacities based on renewable energy sources, at improving the electricity grid, and at the integration of energy production capacities from weather-dependent renewable energy sources into the electricity network in a secure and flexible way, as well as at improving energy efficiency of buildings. 7.Transition to the circular economy, which contributes to the uptake of innovative solutions such as chemical recycling. 8.Health, which aims to modernise hospital-level care, strengthen primary care, expand the use of digital tools in health and long-term care, and eradicate the practice of informal gratuity payments. 9.Governance and public administration, which aims to address the deficiencies and shortcomings in the anti-corruption framework, including through the establishment of new bodies to ensure independence oversight, as well as increased prosecutorial effort and means to enforce the inaction of prosecutorial or investigative bodies; to address the lack of competition in public procurement; to strengthen the independence of the judiciary; to strengthen public oversight through increased transparency of public data and means to access such data; to improve the quality and transparency of decision-making, including by a more systematic and effective involvement of social partners and stakeholders; to improve the efficiency of public expenditure through a set of spending reviews; and to simplify the tax system and reinforce it against the risk of aggressive tax planning.

1Table 4: Overview of components and associated costs Component Costs (EUR million) 1: Demography and public education 621 2: Highly qualified, competitive workforce 692 3: Catching-up settlements 225 4: Water management 145 5: Sustainable green transport 1 414 6: Energy – green transition 1 246 7: Circular economy 109 8: Health 1 306 9: Governance and public administration 66 Total 5 824



3.2.Implementation aspects of the plan Consistency with other programmes The relevant section of the plan describes in general how its measures are consistent with the main European strategic documents, in particular with the National Energy and Climate Plan (NECP) and relevant sectoral strategies. This is for instance the case for the measures aiming to increase energy efficiency and renewable energy consumption of, among others, schools and higher education institutions and social housing (in components 1 and 2), modernising the heating systems of residential houses and increasing the share of renewable energy sources for private homes through solar panels and the necessary upgrade of electricity network systems (in component 6), as well as installing solar power plants to benefit households of disadvantaged settlements (in component 3). Investments in low-emission/zero emission vehicles as well as in sustainable public transport (in component 5) will also have a positive effect on reaching the objectives of the NECP. Under the new EU-level programming period (2021-2027), the Just Transition Fund (JTF) will be a key tool to mitigate the negative impacts of the decarbonisation of the selected most affected regions, by financing the diversification and modernisation of the local economy. The plan briefly describes complementarities with the use of the JTF and how measures in the plan complement the efforts of the JTF in the most affected regions in realising their territorial just transition plans. Particular effort will need to be paid to ensure this complementarity and the mutually reinforcing synergies for the affected regions when implementing the related measures in the plan in parallel with the territorial just transition plans. The plan recognises the importance of continuing the Youth Guarantee in view of the situation of young people, which was aggravated by the COVID-19 pandemic. It generally reflects on ensuring consistency with such measures, which should be pursued mainly with funding under the cohesion policy programmes. The plan will help to implement a number of relevant measures to help the younger segment of the society, notably through its components on education, high-skilled workforce and catching up municipalities. The plan recognises the important synergies with cohesion policy and stresses that complementarities and potential overlaps will be systematically and continuously assessed at different levels of implementation (e.g. strategic, programme and project levels). This should be done, in particular, through close monitoring (including through monitoring committees and their thematic sub-committees), a joint IT system, a dedicated mechanism to check for synergies and avoidance of double funding, as well as through a coordination committee that should be tasked to explicitly review this aspect. Particular emphasis will need to be placed on ensuring complementarities, synergies and the prevention of double funding throughout the different phases and levels of implementation. The plan sets out detailed tables identifying the approach to build synergies and ensure complementarity with financing envisaged under the 2021-2027 Partnership Agreement and cohesion policy programmes at a strategic level. While these documents are still under finalisation, the approach presented, and the procedures described in the plan, suggest that arrangements are in place. These arrangements can ensure the necessary complementarities and the avoidance of double funding when implementing these programmes and the measures in the plan. Ensuring complementarities and synergies is also important when it comes to the implementation of ongoing cohesion policy programmes (2014-2020) and additional funding received from REACT-EU. The Technical Support Instrument (TSI) provides expertise in building capacities to implement the plan in a number of areas. These areas may concern the green and digital transformation, revenue administration and public financial management, governance and public administration, sustainable growth and business environment, labour market, education, health and social services, the financial sector and access to finance. Administrative organisation of the implementation of the RRP The plan sets out the administrative organisation for the implementation of the measures it contains. The Hungarian implementation structure largely builds on the management and control system applied for the implementation of cohesion policy funding. This is seen as an effective way to build on the experience acquired in the management of EU funds. This should ensure close coordination and complementarity between the two funding streams and to avoid the risks of overlaps and double funding. The main strategic decisions are taken by the government, which relies on its Development Policy Coordination Committee (a preparatory committee of relevant high-level officials responsible for the implementation of different types of Union support) to ensure the proper coordination of the programming and implementation of Union funding, including that under the RRP. The overall responsibility for the implementation of the RRP lies with the minister responsible for the implementation of Union support, who is also responsible for the implementation of cohesion policy funding. The minister will be responsible for coordinating and monitoring the implementation of the RRP as a whole and for informing the government on progress in implementation, as well as for ensuring the avoidance of double funding. The minister will be responsible for ensuring the effective implementation of the RRP, including for the effective protection of the financial interests of the Union, putting in place and implementing effective policies to prevent, detect and correct fraud, corruption, conflict of interest, double funding and other irregularities. The National Authority in charge of the day-to-day implementation of the RRP is the 71-staff strong office of the Deputy State Secretary in the ministry responsible for the implementation of Union support. The National Authority will be acting as the single contact point for the RRP and liaising with the European Commission. It will support the minister responsible for the implementation of Union support in its above tasks by monitoring the implementation of the plan, notably the fulfilment of milestones and targets, by ensuring sound financial management and performing controls on implementing bodies and final recipients, and by implementing effective policies to prevent, detect and correct serious irregularities like fraud, corruption, conflict of interest and double financing. The National Authority will be responsible for communicating with the European Commission on the implementation of the plan and for the drawing up and submission of payment requests and the accompanying management declarations. Implementation of investment measures will generally take place in the form of providing grants based on calls for proposals, in a similar manner as under the cohesion policy funds. These are either directly carried out by the National Authority or through implementing bodies (and in one case through a sub-granting body). In order to strengthen the effectiveness of the prevention and detection of conflict of interest, reinforced rules have been put in place and their application will be controlled regularly by a newly set-up Directorate for Internal Audit and Integrity, established within the ministry responsible for the implementation of Union support. The work of this Directorate will be supervised by a new Integrity Authority that Hungary committed to establish, and confirmed in the RRP. The work of this Directorate will be part of the internal control system and thus will be subject to audits from the audit authority of the RRP (see below). The implementation tasks of the National Authority will be supported by the work of sectoral ministries, which will ensure the alignment and consistency of the implementation of measures with sectoral policies and provide professional expertise in assessing their quality. Line ministers also have the responsibility of ensuring the complementarity of measures in the RRP with measures financed from other sources, as well as to ensure their consistency with the relevant Union and national strategies. All ministers will be supported by a dedicated staff dealing with RRP-related matters under their responsibility amounting to a total of 50 staff altogether. The National Authority will also be supported in the implementation and monitoring process of the plan by implementing bodies which operate under the supervision and responsibility of the National Authority. These bodies include for instance the Hungarian State Treasury, and the National Research, Development and Innovation Office. The National Authority will provide methodological support and guidance to implementing bodies. Implementing bodies need to have sufficient resources and adequate professional experience to effectively carry out the tasks assigned to them and they need to have effective internal control arrangements in place.

The Directorate General for the Audit of Union Support (EUTAF) will be the audit authority of the RRP. EUTAF has relevant audit experience from auditing cohesion policy programmes in Hungary. The independence of the EUTAF will be reinforced through legislative provisions to ensure that it has sufficient resources to effectively carry out its responsibilities in a timely manner. Moreover, the plan already envisages a number of dedicated audits to be carried out by EUTAF to confirm the adequate fulfilment of certain relevant measures. In addition, a dedicated measure aims to strengthen the cooperation with the European Anti-Fraud Office (OLAF) and to ensure that OLAF has all the means at its disposal to effectively conduct its investigations in Hungary. Independent oversight of the implementation of the RRP is envisaged through the setting up of a monitoring committee in which at least half of the members will be provided by independent civil society organisations that have sufficient and relevant expertise in the main areas relevant for the measures in the RRP. The committee will have strong oversight powers and the National Authority will be obliged by law to provide it with all data relevant for it to carry out its tasks. The detailed tasks and responsibilities of the different bodies involved in the coordination, implementation, monitoring, control and audit of the RRP are set out in a government decree. The necessary functionalities of the monitoring system ensuring the collection of and the reliability of data necessary for the implementation of the plan are expected to be fully functioning and operational at the latest before the submission of the first payment request. Gender equality and equal opportunities for all The RRP includes measures expected to help address challenges in the area of gender equality and equal opportunities for all. The plan contains a short chapter with reference to the European Pillar of Social Rights and its three pillars (equal opportunities, fair working conditions and social protection and social inclusion). The needs of disadvantaged groups, such as Roma, are specifically targeted in component 3. Other measures, such as in terms of access to education and skills, and the creation of new childcare places for the 0 to 3 age group (nurseries), are expected to contribute to gender equality and equal opportunities for all. Transport measures are also expected to facilitate access to services while new transport infrastructures and vehicles are expected to be accessible to persons with disabilities. The plan does not include references to data disaggregated by equality grounds, with the exception of the gender employment gap. Stakeholder consultation Hungary described a number of consultation activities in its plan. At the end of 2020, the first outline of the RRP was presented in press briefings, and a summary of the draft RRP was published on the government’s website. In January 2021, a media campaign with targeted ads and banners was launched to direct the public’s attention to the government website, inviting for comments from the general public on the development plans of Hungary to be financed from the RRF and cohesion policy funds. Draft components were published for comments in March 2021, and the entire draft RRP was published for comments on the website of the government in April 2021. The government also reached out directly to 461 organisations, such as municipalities, non-governmental organisations, higher education organisations, trade unions or science organisations to encourage them to provide their views and suggestions. Of those, 88 submitted input, with over 1 260 different proposals. Most comments concerned sustainable transport, energy, education, circular economy and healthcare. Certain comments led to amendments of the RRP, for instance to better focus the scope of the measure supporting sustainable heating systems for households. However, some stakeholders criticised the process, arguing that the detailed contents of the RRP was not made public early enough to allow for them to make meaningful comments and that their comments could not be taken into account. In addition to the formal consultation, several stakeholder conferences were held at regional and national levels, with different thematic focus, over the year 2021. Hungary published a new version of the draft RRP in August 2021, but did not make public any amended version since then, and did not engage in additional consultation processes to cover amendments made to the RRP in 2022. To ensure ownership by the relevant actors, success on the ground and a lasting impact, it is crucial to involve all public authorities and stakeholders, including social partners, in the design and implementation of the measures included in the RRP. To this end, the plan contains a measure to develop a strategy for ensuring the effective involvement of stakeholders in the implementation of the RRP, as well as the setting up a monitoring committee with strong participation from independent civil society organisations to closely follow the implementation of the RRP and provide recommendations to the National Authority. Hungary may also receive support from the Technical Support Instrument to strengthen this central aspect of the RRP delivery. Security self-assessment The Hungarian plan does not include a security self-assessment for investments in digital capacities and connectivity. Hungary intends to fund digital connectivity investments mostly from cohesion policy funds. However, a number of projects, in particular related to the digitalisation of critical infrastructures in healthcare, public administration and the energy sector, will have high requirements in terms of data and infrastructure security. The security-related provisions of the plan would therefore have to be closely monitored during the implementation of the plan. Cross-border and multi-country projects The RRP does not contain any cross-border or multi-country projects. The renovation of the railway sections Almásfüzitő-Komárom and Békéscsaba-Lőkösháza (Component 5 – Sustainable Green Transport) will have a cross-border dimension as it will allow for the removal of bottlenecks in the relevant TEN-T corridor and improve long-distance freight and passenger transport in the region. Communication strategy The communication related to the RRP aims to raise awareness on the objectives and added value of the RRF, demonstrating it through the reforms and investments implemented within the framework of the RRP. The RRP outlines the overall approach to communication, including as regards the preparation and implementation of the different measures. The RRP envisages communication to the wider public on the progress of implementation, fulfilment of milestones and targets, and achievements. Communication activities, essentially awareness-raising, have already been launched by the authorities during the preparatory phase of the RRP and in relation to certain already ongoing measures. Besides informing the general public on the measures of the RRP, there are also dedicated tools targeting the applicants to provide them with practical information, such as tutorial videos used for facilitating the application. Messages are placed on multiple channels so that communication activities are mutually reinforcing. A dedicated website for the RRP has been created on the platform used for Union support: palyazat.gov.hu. The website serves as the basic platform for all communications on the RRP. It contains information on the plan, measures, tenders and calls, and related results. Social media is also expected to be used to inform the general public on implementation. While electronic communication channels are gaining in importance, the traditional channels and tools such as paper-based publications or leaflets will still be used. Informative events, such as information days, workshops and conferences, will be organised. It is expected that public events presenting the results of the RRP will be organised at least once per year. The RRP sets out the general arrangements under which final recipients need to acknowledge the use of Union support and ensure the visibility of Union funding. Hungary aims to exploit joint communication efforts with cohesion policy which may result in increased visibility highlighting the benefit of Union support. To ensure a standardised and adequate presentation of the funding, a Communications Handbook and a Design Handbook for final recipients have been issued and are available on the website for EU development funds. The emblem of the Union and an appropriate funding statement that reads ‘funded by the European Union – NextGenerationEU’ is to appear on projects funded by the RRF, according to the handbooks. In order to support the final beneficiaries in their communication obligations, a “display maker” is available on the website, which is to help them prepare the sign displaying the Union funding. While Hungary acknowledges the source of Union support, it uses the branding of ‘Széchenyi Terv Plusz’ (Széchenyi Plan Plus – an umbrella term used by the government to cover all Union support in Hungary) to communicate on funding from the RRF as well as from cohesion policy funds. This branding prominently features in the logo, which also presents the Union flag with the funding statement and the Hungarian coat of arms are also presented. A detailed communication strategy is expected to be developed by Hungary with the involvement of experts’ support in the context of the Technical Support Instrument. State aid State aid and competition rules fully apply to the measures funded by the Recovery and Resilience Facility. Union funds channelled through the authorities of Member States, like the RRF funds, become State resources and can constitute State aid if all the other criteria of Article 107(1) TFEU are met. When this is the case and State aid is present, these measures must be notified and approved by the Commission before Member States can grant the aid, unless those measures are covered by an existing aid scheme or comply with the applicable conditions of a block exemption regulation, in particular the General Block Exemption Regulation (GBER) declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 TFEU. When State aid is present and it requires notification, it is the duty of the Member State to notify State aid measures to the Commission before granting them, in compliance with Article 108(3) TFEU. In this respect, the State aid analysis carried out by Hungary in the recovery and resilience plan cannot be deemed a State aid notification. In as far as Hungary considers that a specific measure contained in the recovery and resilience plan entails de minimis aid or aid exempted from the notification requirement, it is the responsibility of Hungary to ensure full compliance with the applicable rules. In addition to complying with EU’s State aid rules, measures taken under this framework should be compatible with the EU’s international obligations, in particular under World Trade Organization rules.

4.Summary of the assessment of the plan 4.1.Comprehensive and adequately balanced response to the economic and social situation The Hungarian recovery and resilience plan aims to provide a comprehensive and balanced response to the consequences of the pandemic crisis, while tackling important structural socio-economic challenges. It makes an explicit reference to the six pillars of the Recovery and Resilience Facility pursuant to Article 3 of the RRF Regulation, namely: (i) green transition, (ii) digital transformation, (iii) smart, sustainable and inclusive growth, (iv) social and territorial cohesion, (v) health and economic, social and institutional resilience, and (vi) policies for the next generation. The plan presents a global vision for an innovative and competitive economy, supporting economic growth through the green transition and digital transformation. All pillars are covered by at least one component and all components contribute to several pillars. The range of actions of the plan corresponds to those of the Facility with an appropriate overall balance between pillars. The coverage of the components compared to the six pillars of the RRF is summarised in Table 5. Table 5: Coverage of the six pillars of the Facility by the components of the Hungarian recovery and resilience plan Green transition Digital transition Smart, sustainable & inclusive growth Social and territorial cohesion Health, and economic, social and institutional resilience Policies for the next generation 1. Demography and public education ○ ● ○ ○ ○ ● 2. Highly qualified, competitive workforce ○ ○ ● ● ○ ○ 3. Catching-up settlements ○ ● ○ ○ 4. Water management ● ○ 5. Sustainable green transport ● ○ ○ 6. Energy - green transition ● ○ 7. Transition to the circular economy ● ○ 8. Health ○ ○ ○ ● 9. Governance and public administration ● ○ ● Key: ‘●’ investments and reforms of the component significantly contribute to the pillar ‘○’ the component partially contributes to the pillar Green transition The Hungarian recovery and resilience plan seeks to tackle key challenges of Hungary related to climate and environment. It underlines the contribution of reforms and investments contained in the plan to achieving the EU’s carbon neutrality target by 2050. This calls for measures aiming at additional renewable energy capacity and reduced greenhouse gas emissions. Hungary faces challenges with removing bottlenecks in grid capacities, making grid operation smarter and ensuring the flexible and secure integration of renewable energy capacities. Due to the lack of necessary network capacities and administrative barriers, there is a risk that investors may postpone investments in renewable electricity generation. Given the scale of green challenges in Hungary, the share of 48.1% of the plan’s total allocation attributed to climate-related actions appears appropriate. The plan features a number of measures in the energy sector. Hungary’s ambition is to increase the share of carbon-free electricity production, to decrease its dependence on fossil fuels and to increase the security of supply through actions both on the regulatory and on the investment side. The plan envisages a comprehensive set of reforms and investments to promote the green transition and to address the challenges of the energy crisis, in particular through a complete overhaul of legislation in the electricity sector, to ensure that very significant additional capacities of renewable energy production will be available in Hungary by the end of the RRF period. In order to promote the deployment of power plants relying on renewable energy sources, the plan includes measures to remove obstacles to the development of wind energy, to improve permitting procedures for renewable energy production, to simplify the grid connection of small renewable power plants, to increase transparency and predictability of the grid connection procedure, and to introduce separate accounting rules for the electricity fed into the grid and electricity consumed from the grid. These measures are complemented by significant investments into additional solar energy capacity, mainly in residential buildings and in disadvantaged settlements. Major investments into the electricity grid and storage facilities are expected to ensure the flexible and secure integration of additional electricity generated by renewable energy sources. Smart meters financed from the RRF are expected to contribute to the optimisation of electricity demand. With the support of these measures, the total capacity of renewables energy production authorised to be connected to the grid is expected to reach at least 10 000 MW by 2026. A reform and investments in renovation of public buildings, in particular in education and healthcare facilities, as well as of residential buildings, notably with the replacement of windows and the modernisation of residential heating, is expected to contribute to increasing energy efficiency and reducing greenhouse gas emissions. The plan includes substantial investments for the greening of the transport sector. Transport is one of the sectors with the highest growth in greenhouse gas emissions in Hungary. The measures in the plan are expected to lead to a reduction of emissions by encouraging the use of environmentally friendly modes of transport and more generally by strengthening alternatives to individual cars and road freight. The transport infrastructure networks should in particular benefit from an upgrade of railways and from new electric buses. In parallel, the use of public transport should be facilitated by the setting up of a single tariff, ticketing and passenger information system. The plan also comprises reforms and investments aiming at promoting sustainable water management. The proposed measures should contribute to restoring water supply and to improve water retention in the areas affected by water scarcity through the development of new water networks and the reconstruction of existing systems, as well as nature-based solutions for water retention. The development of an effective monitoring system at local and national levels should contribute to