(5)The General Escape Clause has been active since March 2020. In its Communication of 3 March 2021, the Commission set out its view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the EU or euro area compared to pre-crisis levels (end-2019) as a key quantitative criterion. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Europe, unprecedented energy price hikes and continued supply chain disturbances warrant the extension of the general escape clause of the Stability and Growth Pact through 2023.

(4)Taking account of the rapidly changing economic and geopolitical situation, the European Semester resumes its broad economic and employment policy coordination in 2022, while evolving in line with the implementation requirements of the Recovery and Resilience Facility, as outlined in the 2022 Annual Sustainable Growth Survey. The implementation of the adopted recovery and resilience plans is essential for the delivery of the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in the 2019 and 2020 Semester cycles. The 2019 and 2020 country-specific recommendations remain equally relevant also for recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241, in addition to any country-specific recommendations issued up to the date of submission of the modified plan.

(3)Russia’s invasion of Ukraine, in the wake of the global pandemic, has significantly altered the geopolitical and economic context. The impact of the invasion on Member States’ economies has been felt for example through higher energy and food prices and weaker growth prospects. The higher energy prices weigh particularly on the most vulnerable households experiencing or at risk of energy poverty. The EU is also seeing an unprecedented inflow of people fleeing Ukraine. In this context, on 4 March 2022, the Temporary Protection Directive was triggered for the first time, granting displaced persons from Ukraine the right to legally stay in the EU, as well as access to education and training, labour market, healthcare, housing and social welfare. Exceptional support is made available to Hungary under the Cohesion’s Action for Refugees in Europe (CARE) initiative and through the additional pre-financing under the Recovery Assistance for Cohesion and the Territories of Europe (REACT-EU) programme to urgently address reception and integration needs for those fleeing Ukraine.

(2)On 24 November 2021, the Commission adopted the Annual Sustainable Growth Survey, marking the start of the 2022 European Semester for economic policy coordination. It took due account of the reaffirmed joint commitment of the Porto Social Summit of May 2021 to further implement the European Pillar of Social Rights proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The European Council endorsed the priorities of the 2022 Annual Sustainable Growth Survey on 25 March 2022. On 24 November 2021, 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 needed. On the same date, the Commission also adopted the proposal for the 2022 Joint Employment Report analysing the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights, which was adopted by the Council on 14 March 2022.

(1)Regulation (EU) 2021/241 of the European Parliament and of the Council, which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It contributes to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transition, while strengthening the resilience and potential growth of the Member States’ economies. It also helps strengthen sustainable public finances and boost growth and job creation in the medium and long term. The maximum financial contribution per Member State under the Recovery and Resilience Facility [was] updated on [XX] June 2022, in line with Article 11(2) of Regulation (EU) 2021/241.

(6)Following the approach in the Council opinion of 18 June 2021 on the 2021 Convergence Programme, the fiscal stance is currently best measured as the change in primary expenditure (net of discretionary revenue measures), excluding COVID-19 crisis-related temporary emergency measures but including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other EU funds, relative to medium-term potential growth. Going beyond the overall fiscal stance, in order to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions, attention is also paid to the evolution of nationally financed primary current expenditure (net of discretionary revenue measures and excluding COVID-19 crisis-related temporary emergency measures) and investment.

(7)On 2 March 2022, the Commission adopted a Communication providing broad guidance for fiscal policy in 2023, aiming at supporting the preparation of Member States’ Stability and Convergence Programmes and thereby strengthening policy coordination. The Commission noted that, based on the macroeconomic outlook of the 2022 winter forecast, transitioning from an aggregate supportive fiscal stance in 2020-2022 to a broadly neutral aggregate fiscal stance would appear appropriate in 2023, while standing ready to react to the evolving economic situation. The Commission announced that the fiscal recommendations for 2023 should continue to differentiate across Member States and take into account possible cross-country spillovers. The Commission invited the Member States to reflect the guidance in their Stability and Convergence Programmes. The Commission committed to closely monitor the economic developments and adjust its policy guidance as needed and at the latest in its Semester spring package of late May 2022.

(8)With respect to the fiscal guidance provided on 2 March 2022, the fiscal recommendations for 2023 take into account the worsened economic outlook, the heightened uncertainty and further downside risks, and the higher inflation compared to the winter forecast. Against these considerations, the fiscal response has to expand public investment for the green and digital transition and energy security, and sustain the purchasing power of the most vulnerable households so as to cushion the impact of the energy price hike and help limit inflationary pressures from second round effects via targeted and temporary measures; fiscal policy has to remain agile so as to adjust to the rapidly evolving circumstances, and be differentiated across countries depending on their fiscal and economic situation, including as regards the exposure to the crisis and the inflow of displaced persons from Ukraine.

(9)On 29 April 2022, Hungary submitted its 2022 National Reform Programme and its 2022 Convergence Programme. To take account of their interlinkages, the two programmes have been assessed together.

(10)The Commission published the 2022 country report for Hungary on 23 May 2022. It assessed Hungary’s progress in addressing the relevant country-specific recommendations adopted by the Council in 2019, 2020 and 2021. It also assessed Hungary's progress on implementing the European Pillar of Social Rights and on achieving the EU headline targets on employment, skills and poverty reduction, as well as progress in achieving the UN’s Sustainable Development Goals.

(11)On 29 April 2022, Hungary submitted its 2022 Convergence Programme, in line with the deadline established in Article 4 of Regulation (EC) No 1466/97.

(12)On 23 May 2022, the Commission issued a report under Article 126(3) TFEU. This report discussed the budgetary situation of Hungary, as its general government deficit in 2021 exceeded the 3% of GDP Treaty reference value, while its general government debt exceeded the 60% of GDP Treaty reference value and did not respect the debt reduction benchmark. The report concluded that the deficit and debt criteria were not fulfilled. In line with the Communication of 2 March 2022, the Commission considered, within its assessment of all relevant factors, that compliance with the debt reduction benchmark would imply a too demanding frontloaded fiscal effort that risks to jeopardise growth. Therefore, in the view of the Commission, compliance with the debt reduction benchmark is not warranted under the current exceptional economic conditions. As announced, the Commission did not propose to open new excessive deficit procedures in spring 2022 and it will re-assess the possible opening of excessive deficit procedures in autumn 2022.

(13)On 20 July 2020, the Council recommended Hungary to take in 2020 and 2021 all necessary measures, in line with the general escape clause, to effectively address the pandemic, sustain the economy and support the ensuing recovery. It also recommended Hungary to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. In 2021, based on data validated by Eurostat, Hungary’s general government deficit fell from 7.8% of GDP in 2020 to 6.8% in 2021. The fiscal policy response by Hungary supported the economic recovery in 2021, while temporary emergency support measures declined from 4.0% of GDP in 2020 to 0.8% in 2021. The measures taken by Hungary in 2021 have been in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 were mostly temporary or matched by offsetting measures. At the same time, some of the discretionary measures adopted by the government over the period 2020 to 2021 were not temporary or matched by offsetting measures, mainly consisting of a reduction of employers’ social security contributions, an abolition of the training levy, an exemption of employees under the age of 25 from personal income tax, a reintroduction of 13th monthly pension, and an increase in doctors’ wages. Based on data validated by Eurostat, general government debt stood at 76.8 % of GDP in 2021.

(14)The macroeconomic scenario underpinning the budgetary projections in the 2022 Convergence Programme is favourable. The government projects real GDP to grow by 4.3% in 2022 and 4.1% in 2023. By comparison, the Commission’s 2022 spring forecast projects a lower real GDP growth of 3.6% in 2022 and 2.6% in 2023, mainly due to the assumption about more persistent macroeconomic impact of the Russia’s war of aggression in Ukraine. The Commission’s forecast projects a weaker growth of private consumption, especially in 2023, and a slower investment growth both in 2022 and 2023. In its 2022 Convergence Programme, the Government expects that the headline deficit will decrease to 4.9% of GDP in 2022 and to 3.5% in 2023. The decrease in 2022 mainly reflects continued dynamic growth in nominal GDP. According to the Programme, the general government debt-to-GDP ratio is expected to decrease to 76.1% in 2022, and to decline to 73.8% in 2023. Based on policy measures known at the cut-off date of the forecast, the Commission 2022 spring forecast projects a government deficit for 2022 and 2023 of 6.0% of GDP and 4.9% respectively. This is higher than the deficit projected in the 2022 Convergence Programme, mainly due to the projected less favourable macroeconomic outlook, especially in 2023, and higher growth of expenditure, which incorporates capital injections to utility companies amounting to 1.1% of GDP in 2022 and a further 0.7% in 2023. The Commission 2022 spring forecast projects a higher general government debt-to-GDP ratio, of 76.4% in 2022 and 76.1% in 2023. The difference is due to higher primary balance and less favourable nominal GDP dynamics.

Based on the Commission spring 2022 forecast, the medium-term (10-year average) potential output growth is estimated at 3.2%. However, this estimate does not include the impact of the reforms that are part of the Recovery and Resilience Plan and can boost Hungary’s potential growth.

(15)In 2022, the government phased out the measures taken in response to the COVID-19 crisis, such that the temporary emergency support measures are projected to decline from 0.8% of GDP in 2021 to 0.0% in 2022. The government deficit is impacted by the measures adopted to counter the economic and social impact of the increase in energy prices, which in the Commission spring 2022 forecast are estimated at 1.2% of GDP in 2022 and 0.7% of GDP in 2023. These measures consist of compensations to utility companies by the government with capital transfers for expected losses resulting from regulated energy prices, a temporary cut in excise duties on fuels and compensations for small petrol stations. All measures other than the permanent price caps on retail gas and electricity prices have been announced as temporary. However, in case energy prices remain elevated also in 2023, some of these measures could be continued. Some of these measures are not targeted in nature, notably the general price caps on retail prices of energy and the cut in excise duties. The government deficit is also impacted by the costs to offer temporary protection to displaced persons from Ukraine, which in the Commission 2022 spring forecast are projected at 0.2% of GDP in 2022 and 0.3% in 2023.

(16)On 18 June 2021, the Council recommended that in 2022 Hungary maintain a supportive fiscal stance, including from the impulse provided by the Recovery and Resilience Facility, and preserves nationally-financed investment. It also recommended Hungary to pursue, when economic conditions allow, a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term, and at the same time, to enhance investment to boost growth potential.

(17)In 2022, based on the Commission’s 2022 spring forecast and including the information incorporated in Hungary’s 2022 Convergence Programme, the fiscal stance is projected to be broadly neutral at -0.1% of GDP, while the Council recommended a supportive fiscal stance. Hungary plans to provide continued support to the recovery by making use of the Recovery and Resilience Facility to finance additional investment as recommended by the Council. The positive contribution to economic activity of expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to decrease by 1.0 percentage point of GDP compared to 2021 due to expected slowdown in the EU funds absorption. Nationally-financed investment is projected to provide an expansionary contribution to the fiscal stance of 0.2 percentage points in 2022. Therefore, Hungary plans to preserve nationally financed investment, as recommended by the Council. At the same time, the growth in nationally-financed primary current expenditure (net of new revenue measures) in 2022 is projected to provide an expansionary contribution of 0.4 percentage points to the overall fiscal stance. This includes the additional impact of the measures to address the economic and social impact of the increase in energy prices (0.1% of GDP) as well as the costs to offer temporary protection to displaced persons from Ukraine (0.2% of GDP). Several discretionary measures also contribute to the growth in nationally-financed primary current expenditure (net of new revenue measures), such as the reintroduction of the 13th monthly pension, wage benefits for law enforcement and military officers, a reduction of employers’ social security contributions and training levy.

(18)In 2023, the fiscal stance is projected in the Commission 2022 spring forecast at 1.9% of GDP on a no-policy change assumption. Hungary is projected to continue using the grants from the Recovery and Resilience Facility in 2023 to finance additional investment in support of the recovery. The positive contribution to economic activity of expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to increase by 0.3 percentage points of GDP in 2023. Nationally financed investment is projected to provide an expansionary contribution to the fiscal stance of 0.4 percentage points in 2023. At the same time, the growth in nationally-financed primary current expenditure (net of new revenue measures) in 2023 is projected to provide a contractionary contribution of 1.9 percentage points to the overall fiscal stance. This includes the impact from the phasing out of the measures addressing the increased energy prices (0.1% of GDP) and additional costs to offer temporary protection to displaced persons from Ukraine (0.1% of GDP).

(19)In the 2022 Convergence Programme, the general government deficit is expected to gradually decline to 2.5% of GDP in 2024 and to 1.5% by 2025. Therefore, the general government deficit is planned to go below 3% of GDP by 2024. According to the Programme, the general government debt-to-GDP ratio is expected to decrease by 2025, specifically with a decrease to 70.4% in 2024, and a decline to 66.9% in 2025. Based on the Commission’s analysis, debt sustainability risks appear medium over the medium term.

(20)The impact of population ageing and the increase of public debt during the COVID-19 crisis are set to intensify the long-term fiscal sustainability challenges in Hungary. 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 the sustainability challenge by increasing government’s long-term pension liabilities. The 13th month pension reintroduced in 2021 and 2022 is expected to increase the expenditure on pensions. 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. 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.

(21)Hungary submitted the cohesion policy programming documents - Partnership agreement on 30 December 2021 and the Economic Development and Innovation Programme Plus on 26 January 2022 [add more OPs if submitted until the publication of the Spring Package]. In line with Regulation (EU) 2021/1060 of the European Parliament and of the Council of 24 June 2021, Hungary shall take into account the relevant country-specific recommendations in the programming of the 2021-2027 cohesion policy funds. This is a prerequisite for improving the effectiveness and maximising the added value of the financial support to be received from cohesion policy funds, while promoting the coordination, complementarity and coherence between these funds and other Union instruments and funds. The successful implementation of the cohesion policy programmes also depends on the removal of bottlenecks to investment to support the green and digital transition and balanced territorial development.

(22)Hungary’s labour market is overall in a good shape, however, challenges remain in relation to the low employment rate of women and of disadvantaged groups. Mothers with young children tend to stay away from work for a long time, partly due to the scarcity of childcare places for children under the age of three. The number of childcare places is gradually increasing thanks to dedicated programmes, but these institutions also face staff shortages. There is significant room to increase the employment rate of certain disadvantaged groups, such as the low-skilled, long term unemployed, persons with disabilities and Roma. These groups could be better mobilised by equipping them with skills and actively helping them to find jobs. Assistance during the job search is limited, and only half of the registered unemployed receive financial benefits. The duration of the unemployment benefit is among the shortest in the EU. Joblessness is concentrated in the less developed regions and in rural areas.

(23)The risk of poverty has decreased markedly, but many people are still unable to afford basic necessities. Material and social deprivation rates remain among the highest in the EU, especially for children. Poverty and social exclusion are concentrated in specific groups and territories. Poverty rates are three to four times higher for the Roma, related to their more limited access to the labour market and public services. The social safety net has weakened for families without stable employment over the last decade and poverty gap widened recently. The tax system disproportionately burdens the lower-paid workers. Low-income families are also less likely to benefit from the income tax allowance per child. Their major sources of income, such as the public works wage, the minimum income and the family allowance did not keep up with the cost of living. Regulated prices for residential energy have remained unchanged, thus partly shielding households from recent commodity price increases. However, this does not help poor rural households using solid fuels for heating. Rising house prices pose further challenge to low-income families, which have difficulty accessing public housing support schemes. Meanwhile, social housing has become scarce and often run-down.

(24)Education outcomes in Hungary are below the EU average. By the age of 15, basic skills are significantly below the EU and regional averages and have decreased over the last decade. Contrary to European trends, early school leaving increased in the last decade to 12.0% in 2021, above the EU average of 9.7%. Early school leaving is higher in the least developed districts, and six times higher among the Roma than the non-Roma. The share of 25-34 year old people with a tertiary diploma rose since 2010, but remains among the lowest in the EU. Participation in adult learning is just over half of the EU average. Digital skills are lacking, especially among poorer people. In the lowest two income quartiles, only 13% and 18% of Hungarians have at least basic digital skills, which are among the lowest percentage in the EU. Disadvantaged students have low chances of entering the higher educational tracks. Inequality in education narrows the possibility for social mobility. The low effectiveness and equity in the school system are likely to be linked to the low level of curricular autonomy, the lack of socioeconomic diversity within schools and low teacher salaries. The shortage of teachers is increasingly a problem. While aggregate indicators, such as the teacher-pupil ratio, do not signal acute shortages, 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 teachers, especially at the beginning of their career. Moreover, the centralised management of schools leaves school heads with limited autonomy and tools to improve teaching quality.