(3)On 11 March 2020, the World Health Organization officially declared the COVID-19 outbreak a global pandemic. It is a severe public health emergency for citizens, societies and economies. It is putting national health systems under severe strain, disrupting global supply chains, causing volatility in financial markets, triggering consumer demand shocks and having negative effects across various sectors. It is threatening people’s jobs, their incomes and companies’ business. It has delivered a major economic shock that is already having serious repercussions in the European Union. On 13 March 2020, the Commission adopted a Communication calling for a coordinated economic response to the crisis, involving all actors at national and Union level.

(1)On 17 December 2019, the Commission adopted the Annual Sustainable Growth Strategy, marking the start of the 2020 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. On 17 December 2019, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it did not identify Hungary as one of the Member States for which an in-depth review would be carried out.

(4)Several Member States have declared a state of emergency or introduced emergency measures. Any emergency measures should be strictly proportionate, necessary, limited in time, and in line with European and international standards. They should be subject to democratic oversight and independent judicial review.

(5)On 20 March 2020, the Commission adopted a Communication on the activation of the general escape clause of the Stability and Growth Pact. The clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) 1466/97 and Articles 3(5) and 5(2) of Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe economic downturn. In its Communication, the Commission shared with the Council its view that, given the expected severe economic downturn resulting from the COVID-19 outbreak, the current conditions permit activation of the clause. On 23 March 2020, the Ministers of Finance of the Member States agreed with the assessment of the Commission. The activation of the general escape clause allows for a temporary departure from the adjustment path towards the medium-term budgetary objective, provided that this does not endanger fiscal sustainability in the medium term. For the corrective arm, the Council may also decide, on a recommendation from the Commission, to adopt a revised fiscal trajectory. The general escape clause does not suspend the procedures of the Stability and Growth Pact It allows Member States to depart from the budgetary requirements that would normally apply while enabling the Commission and the Council to undertake the necessary policy coordination measures within the framework of the Pact.

(6)Continued action is required to limit and control the spread of the pandemic, strengthen the resilience of the national health systems, mitigate the socio-economic consequences through supportive measures for business and households and to ensure adequate health and safety conditions at the workplace with a view to resuming economic activity. The Union should fully use the various tools at its disposal to support Member States’ efforts in those areas. In parallel, Member States and the Union should work together to prepare the measures necessary to get back to a normal functioning of our societies and economies and to sustainable growth, integrating inter alia the green transition and the digital transformation, and drawing all lessons from the crisis.

(7)The COVID-19 crisis has highlighted the flexibility that the single market offers to adapt to extraordinary situations. However, in order to ensure a swift and smooth transition to the recovery phase and the free movement of goods, services and workers, exceptional measures that prevent the single market from functioning normally must be removed as soon as they are no longer indispensable. The current crisis has shown the need for crisis preparedness plans in the health sector, which include in particular improved purchasing strategies, diversified supply chains and strategic reserves of essential supplies. They are key elements for developing broader crisis preparedness plans.

(8)The Union legislator has already amended the relevant legislative frameworks to allow Member States to mobilise all unused resources from the European Structural and Investment Funds so they can address the exceptional effects of the COVID-19 pandemic. Those amendments will provide additional flexibility, as well as simplified and streamlined procedures. To alleviate cash flow pressures, Member States can also benefit from a 100% co-financing rate from the Union budget in the 2020-2021 accounting year. Hungary is encouraged to make full use of those possibilities to help the individuals and sectors most affected by the challenges.

(9)The socio-economic consequences of the pandemic are likely to be unevenly distributed across territories due to different specialisation patterns in particular in regions lacking endowment in key assets or markedly relying on sectors depending on face-to-face business to consumers. This entails a substantial risk of widening territorial inequalities within Hungary, aggravating the already observed trend of widening disparities between urban and rural areas. Combined with the risk of a temporary unravelling of the convergence process between Member States, the current situation calls for targeted policy responses.

(10)On 5 May 2020, Hungary submitted its 2020 National Reform Programme and, on 4 May 2020, its 2020 Convergence Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(11)Hungary is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule.

(12)On 14 June 2019, the Council recommended Hungary to ensure that the nominal growth rate of net primary government expenditure does not exceed 3,3% in 2019, corresponding to an annual structural adjustment of 1,0% of GDP. The Commission’s overall assessment confirms a significant deviation from the recommended adjustment path towards the medium-term budgetary objective in 2019 and over 2018 and 2019 taken together. However, in light of the activation of the general escape clause, further steps under the Significant Deviation Procedure for Hungary are not warranted.

(13)In its 2020 Convergence Programme, the government plans the headline balance to deteriorate from a deficit of 2,0% of GDP in 2019 to a deficit of 3,8% of GDP in 2020. The deficit is projected to decline to 2,7% of GDP in 2021 and to gradually reach 1,0% of GDP by 2024. After decreasing to 66,3% of GDP in 2019, the general government debt-to-GDP ratio is expected to increase to 72,6% in 2020 according to the 2020 Convergence Programme. The macroeconomic and fiscal outlook is affected by high uncertainty due to the COVID-19 pandemic. There are country-specific risks underlying the budgetary projections, namely risks linked to higher-than-projected expenditures (in line with past trends on high end-of-year spending), as well as potentially lower-than-projected revenue as the projection seems to rely on some revenue buoyancy.

(14)In response to the COVID-19 pandemic, and as part of a coordinated Union approach, Hungary has adopted budgetary measures to increase the intensive care capacity of its health system, contain the pandemic, and provide relief to those individuals and sectors that have been particularly affected. According to the 2020 Convergence Programme, those budgetary measures amounted to 2,8% of GDP in 2020, and are entirely financed through reallocation of expenditures within the budget, reserves and new taxes. They include measures aimed at supporting the labour market, tax reliefs for businesses and costs related to the medical emergency. Additional measures to support the recovery (1,4% of GDP) and to support the labour market (0,4% of GDP) have been announced but have not yet been specified. In addition, Hungary has adopted measures that, while not having a direct budgetary impact, will contribute to supporting liquidity to businesses, which the 2020 Convergence Programme estimates at 1,5% of GDP. The authorities are working on additional measures for 0,3% of GDP. Those measures include credit guarantee programmes and government-guaranteed loans. The overall budgetary impact of the fiscal measures reported in the 2020 Convergence Programmes differs from that included in the Commission 2020 spring forecast since only those that were sufficiently specified were assessed and taken into account by the Commission. Overall, the measures adopted by Hungary are in line with the guidelines set out in the Commission Communication on a coordinated economic response to the COVID-19 outbreak. The full specification and adoption of all announced measures, followed by a refocusing of fiscal policies towards achieving prudent medium-term fiscal positions when economic conditions allow, will contribute to preserving fiscal sustainability in the medium term.

(15)Based on the Commission 2020 spring forecast under unchanged policies, Hungary’s general government balance is forecast at -5,2% of GDP in 2020 and -4,0% in 2021. The general government debt ratio is projected to reach 75,0% of GDP in 2020.

(16)On 14 June 2019, the Council decided in accordance with Article 121(4) of the Treaty on the Functioning of the European Union that a significant observed deviation from the medium-term budgetary objective occurred in Hungary in 2018. In view of the established significant deviation, on 14 June 2019 the Council recommended Hungary to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure would not exceed 3,3% in 2019 and 4,7% in 2020, corresponding to an annual structural adjustment of 1,0% and 0,75% of GDP. On 5 December 2019, the Council adopted Decision (EU) 2019/2172, establishing that Hungary had not taken effective action in response to its Recommendation of 14 June 2019, and issued a revised recommendation. In the Recommendation of 5 December 2019, the Council asked Hungary to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure would not exceed 4,7% in 2020, corresponding to an annual structural adjustment of 0,75% of GDP in 2020. Based on the Commission’s overall assessment and in light of the activation of the general escape clause for 2020, which allows for a temporary departure from the adjustment path towards the medium-term budgetary objective, Hungary is considered to have taken effective action in response to the Recommendation of 5 December 2019.

(17)On 20 May 2020, the Commission issued a report prepared in accordance with Article 126(3) of the Treaty due to Hungary’s planned breach of the 3% of GDP deficit threshold in 2020. Overall, the analysis suggests that the deficit criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 is not fulfilled.

(18)The government announced a state of danger on 11 March 2020. On 12 March, borders were closed for travellers, except for returning citizens and European Economic Area residents as well as regular cross-border commuters. Goods transit remained permitted. On 16 March 2020, early child education facilities, schools and universities were closed and teaching started to be given online. As of 17 March 2020, non-essential shops were obliged to close at 3pm and restaurants could remain open only for takeaway service. A partial curfew was introduced on 28 March 2020, meaning people could only leave their area of residence for duly justified reasons, and keeping a distance from other people. Before the COVID-19 outbreak, the Hungarian economy was on track for a gradual slowdown after several years of outstanding growth. Real GDP rose by 4,9% in 2019. After the outbreak of the virus, containment measures were implemented relatively quickly, and official case numbers have so far remained limited. However, the global recession is expected to hit exports particularly strongly due to the dominant role of highly cyclical industries, such as the automotive industry. It is also expected to hit tourism and transport services, which are affected by travel restrictions. Overall, a sharp recession is projected starting in March, then a gradual economic recovery is projected from the second half of the year as containment measures are assumed to be gradually lifted. Unemployment could rise rapidly due to the flexibility of the labour market. Economic performance in 2020 will be contingent on the length of the confinement period as well as on the economic policy response. The European Commission’s Spring Forecast projects a 7% decrease of real GDP in 2020, followed by a recovery of 6% in 2021.

(19)The government has announced several waves of measures since mid-March to mitigate the economic, social and economic impact of the COVID-19 crisis. The central bank has adopted measures to provide liquidity to the financial sector. Other liquidity-enhancing measures for households and businesses include (i) a payment moratorium until 31 December 2020 for loans and financial lease contracts for companies and households, and (ii) a capping of the interest rate on consumer credits. In the process of designing and implementing these measures the resilience of the banking sector needs to be taken into account. Further measures, mostly targeting the sectors hardest hit by the crisis, such as tourism and services include temporary tax reductions and exemptions, investment subsidies, infrastructure development, subsidised and guaranteed loans, and capital programmes. In order to preserve jobs, the government launched two types of short-time working arrangements. The general scheme covers up to 70% of lost wages for 3 months under certain conditions and a specific scheme targets research and development (R&D) personnel. The government advanced a previously planned cut in social security contributions by one quarter and announced a one-off wage supplement in the health care sector. Overall, while the fiscal measures aim at supporting businesses and preserving jobs, their scope and coverage remains limited compared to most Member States. Moreover, they are planned to be financed through reallocations across budget chapters and newly raised taxes, and are thus expected to have a limited effect from a macroeconomic stabilisation perspective.

(20)Various aspects of health outcomes remained worse than in most Member States, reflecting, among others, the high prevalence of risk factors in the population and the limited effectiveness of health care provision. The public share of health spending in Hungary was considerably lower than the EU average. An above-EU average number of Hungarians rely on out-of-pocket expenditure and are increasingly pushed to turn to private health services. This aggravates risks of financial hardship for Hungarian households, with repercussions for social equity and health outcomes. Additional investment and comprehensive reforms are necessary to rationalise the use of resources within the health system, reduce inequities in access and increase the quality of care. Preventive and primary care services are underfinanced and their potential to improve the quality, accessibility and cost-effectiveness of the health system remain underexploited. Although the authorities have started working towards alleviating Hungary's considerable shortage of health workers, regional disparities in the distribution of health personnel continue hindering access to care in some areas and for some vulnerable groups, such as marginalised Roma, but also people with disabilities face particular barriers. In the face of the demand shock for health systems generated by the COVID-19 pandemic, rapid action is required to start addressing these structural challenges and increase the resilience of the Hungarian health system.

(21)The socio-economic consequences of the outbreak may be significant and the impact of the government decree of 18 March 2020 permitting bilaterally agreed derogations from the Labour Code still needs to be assessed. According to the Commission forecast, unemployment is expected to rise to 7,0% in 2020 and recover to 6,1% in 2021. Sectors excessively hit by the crisis account for a large share of the Hungarian economy, employing low-to-medium-skilled workforce on highly flexible work contracts. Until early 2020, the overall employment rate continued to improve amid a strong economic expansion, but this did not benefit all groups equally. The gaps in employment between skills groups and between men and women remained wide in comparison with the EU average, the latter due partly to the limited supply of quality childcare. Despite being scaled down, the public works scheme, which was not effective in leading participants to jobs in the primary labour market, remained sizeable. There is scope for strengthening other policies to effectively help unemployed or inactive people find work or access training to improve their targeting. The duration of unemployment benefits is the shortest in the EU, at a maximum of three months, which even in favourable economic conditions was well below the average time needed to find a job. In line with the principles of the European Pillar of Social Rights, social protection schemes and measures need to protect those at risk of losing their employment, as well as the self-employed and unemployed. Short-time work schemes, where employees receive income support from the State for the hours not worked, are a good way to protect employment. During the pandemic, short-time work schemes are most efficient if their administration is simple and quick, and eligibility is not restricted to certain sectors or business types.

(22)While Hungary's overall poverty situation improved before the crisis, the trend can reverse quickly during the downturn. Income inequalities increased over the past decade, due in part to changes in the tax and benefit system. Even before the COVID-19 outbreak, both severe material deprivation and material and social deprivation were high, particularly among households with several children and among the Roma population. The shortage of municipal flats for social rental and a lack of financial support for renters hinders mobility. The minimum income benefit has remained nominally unchanged since 2012 and is one of the lowest in the EU. The pandemic is expected to hit hardest the vulnerable groups who lack access to care and essential services and who live in overcrowded households. Measures fostering their activation and integration in the labour market will be needed when economies recover. Already before the crisis, education outcomes were below the Union average and strongly influenced by the pupils' socio-economic background. Early school leaving rates were high, particularly among Roma pupils. The low participation of vulnerable groups in quality education is a missed opportunity to build human capital and social cohesion. Teachers’ salary is one of the lowest in the EU. The low number of students participating in higher education is not in line with the strong demand for highly skilled workers. The unexpected shift to distance learning is likely to further increase inequalities. Evidence from the yearly national competence tests suggests that it is difficult to reach many pupils through digital education because of the lack of digital tools. Learners from disadvantaged backgrounds experience negative effects of distance learning also due to overcrowded households and low education of parents. Recent and ongoing investments in digitalisation of education have been important and need to conitnue.

(23)In the context of the COVID-19 crisis, it is particularly important to ensure the functioning of critical infrastructure and the free circulation of goods throughout the Single Market and to monitor and ensure the correct functioning of supply chains in cooperation with neighbouring countries. Hungary is a small open economy with intensive cross-border transport of goods. In addition, many Hungarians work abroad and commute on a weekly basis. Hungary may also need seasonal frontier workers in agriculture. Currently imposed travel restrictions may delay the circulation of goods and workers but could be alleviated by ensuring the Green Lanes at borders.