Communication from the Commission to the Council - Assessment of the action taken by Latvia and Hungary in response to the Council Recommendations of 7 July 2009 with a view to bringing an end to the situation of excessive government deficit
Date: 2010-01-27
Institutions: European Commission
Subjects: Hungary, Latvia, budget deficit, budget policy, public expenditure, public finance, reflation, stability programme

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EUROPEAN COMMISSION 

Brussels, 27.1.2010 
COM(2010) 10 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

Assessment of the action taken by Latvia and Hungary in response to the Council 
Recommendations of 7 July 2009 with a view to bringing an end to the situation of 
excessive government deficit  

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1. 

THE APPLICATION OF THE STABILITY AND GROWTH PACT IN THE CURRENT CRISIS 
SITUATION 

Many  EU  countries  are  presently  facing  general  government  deficits  above  the  3%  of  GDP 
reference  value  set  in  the  Treaty  on  the  Functioning  of  the  European  Union  (TFEU).  The 
often  strong  deterioration  in  the  deficit  as  well  as  the  debt  positions  must  be  seen  in  the 
context  of  the  unprecedented  global  financial  crisis  and  economic  downturn  in  2008/09. 
Several factors are at play. First, the economic downturn brings about declining tax revenue 
and rising social benefit expenditure (e.g. unemployment benefits). Second, recognising that 
budgetary  policies  have  an  important  role  to  play  in  the  current  extraordinary  economic 
situation,  the  Commission  called  for  a  fiscal  stimulus  in  its  November  2008  European 
Economic Recovery Plan (EERP), endorsed by the European Council in December. The Plan 
explicated  that  the  stimulus  should  be  differentiated  across  Member  States  to  reflect  their 
different positions in terms of public finance sustainability and competitiveness. In the case of 
Latvia  and  Hungary,  there  was  no  room  for  such  fiscal  stimulus.  Finally,  several  countries 
have  taken  measures  to  stabilise  the  financial  sector,  some  of  which  have  impacted  on  the 
debt position or constitute a risk of higher deficits and debt in the future, although some of the 
costs of the government support could be recouped in the future. 

The  Stability  and  Growth  Pact  requires  the  Commission  to  initiate  the  excessive  deficit 
procedure (EDP) whenever the deficit of a Member State exceeds the 3% of GDP reference 
value.  The  amendments  to  the  Stability  and  Growth  Pact  in  2005  aimed  at  ensuring  that  in 
particular the economic and budgetary background was taken into account fully in all steps in 
the  EDP.  In  this  way,  the  Stability  and  Growth  Pact  provides  the  framework  supporting 
government  policies  for  a  prompt  return  to  sound  budgetary  positions taking  account  of  the 
economic situation, and thereby ensuring long-term sustainability of public finances. 

2. 

ASSESSING EFFECTIVE ACTION TAKEN 

On  7  July,  the  Council  addressed  recommendations  under  Article  104(7)  of  the  Treaty 
establishing the European Community (TEC) to Latvia and Hungary with a view to bringing 
the situation of an excessive deficit to an end. For Latvia, these recommendations were based 
on  a  Commission  services'  update  of  the  2009  spring  forecast,  specifically  prepared  in  the 
follow-up of the review of the multilateral Balance of Payment assistance provided to Latvia 
in  June  2009.  For  Hungary,  the  recommendations  were  based  on  the  economic  outlook 
presented in the Commission services' 2009 spring forecast. 

According to Regulation (EC) No 1467/971 and the revised Code of Conduct2 a Member State 
should  be  considered  to  have  taken  effective  action  if  it  has  acted  in  compliance  with  the 
Article  104(7)  TEC  recommendation.  The  Code  of  Conduct  states  that  the  assessment  of 
effective  action  should  in  particular  take  into  account  whether  the  Member  State  concerned 
has  achieved  the  annual  improvement  of  its  cyclically  adjusted  balance,  net  of  one-off  and 
other  temporary  measures,  initially  recommended  by  the  Council.  In  case  the  observed 

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2 

OJ L 209, 2.8.1997, p. 6. 
“Specifications  on  the  implementation  of  the  Stability  and  Growth  Pact  and  guidelines  on  the  format 
and  content  of  stability  and  convergence  programmes”,  endorsed  by  the  ECOFIN  Council  of  10 
November 2009, available at: http://ec.europa.eu/economy_finance/sgp/deficit/legal_texts/index_en.htm  

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adjustment  proves  to  be  lower  than  recommended,  a  careful  analysis  of  the  reasons  for  the 
shortfall should be made. In case of a multi-annual adjustment, the Code of Conduct specifies 
that the assessment should mainly focus on the measures taken in order to ensure an adequate 
fiscal adjustment in the year following the identification of the excessive deficit. 

In  the  following  country-specific  sections,  the  actions  taken  by  Latvia  and  Hungary  in 
response to the Council recommendations are assessed. 

3. 

LATVIA 

3.1. 

Excessive deficit procedure and most recent recommendations 

On 7 July 2009, the Council decided that an excessive deficit existed in Latvia in accordance 
with  Article  104(6)  TEC,  and  addressed  recommendations  to  Latvia  in  accordance  with 
Article  104(7)  TEC  with  a  view  to  bringing  an  end  to  the  situation  of  an  excessive 
government deficit. In its recommendations, the Council established a deadline of 7 January 
2010 for effective action to be taken. 

The Council recommended that Latvia put an end to the excessive deficit situation as rapidly 
as  possible  and  at  the  latest  by  2012,  by  ensuring  an  average  annual  fiscal  effort  of  at  least 
2¾%  of  GDP  over  the  period  2010-2012,  by  strengthening  fiscal  governance  and 
transparency  (improvement  of  the  budgetary  framework,  reinforcement  of  the  Ministry  of 
Finance's  spending  controls),  as  well  as  financial  market  regulation  and  supervision.  The 
Council established a deadline of 7 January 2010 for the Latvian government to take effective 
action to implement the measures associated with the 16 June 2009 supplementary budget, to 
adopt a fully articulated 2010 budget with high-quality consolidation measures consistent with 
the  envisaged  path  for  the  correction  of  the  excessive  deficit,  and  to  broadly  outline  the 
measures envisaged for 2011 and 2012.  

Latvia is receiving medium-term financial assistance from the EU in the form of a loan of up 
to  EUR  3.1  billion,  decided  on  20  January  2009.  This  assistance  -  provided  in  conjunction 
with  a  IMF  Stand-by  agreement3  -  is  subject  to  a  number  of  policy  conditions  including  on 
continued and enhanced fiscal consolidation, fiscal governance and structural reforms. They 
are consistent with the Council recommendations under the EDP. 

3.2. 

Assessment of effective action 

The June 2009 supplementary budget has been implemented broadly as planned. According to 
the  Commission  services'  autumn  2009  forecast,  the  general  government  deficit  in  ESA  95 
terms was expected to reach 9.0% of GDP in 2009 (compared to 10.0% of GDP reported by 
the Latvian authorities in their October 2009 EDP notification). Given a broadly unchanged 
macroeconomic  context  compared  to  the  Commission  forecast  underlying  the  July  2009 
Council's  recommendations,  revenues  developed  in  line  with  expectations  (turning  out  only 
slightly lower, possibly due to compliance issues). The positive cash developments reflect a 
better-than-expected  outturn  on  the  expenditure  side,  and  have  been  achieved  in  spite  of 

3 

The international assistance package of a total of EUR 7.5 billion includes contributions from the IMF 
worth EUR 1.7 billion, from Nordic countries worth EUR 1.9 billion, a World Bank loan of EUR 0.4 
billion, and other instalments from the European Bank of Reconstruction and Development, the Czech 
Republic and Poland totalling another EUR 0.4 billion.  

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expenditure increases of about 1% of GDP, decided in October-December 2009 with EC and 
IMF consent, in order  to accelerate  the  absorption of EU funds, and of additional financing 
provided  for  social  needs  (emergency  employment  programme,  increase  of  the  general 
minimum income, patient co-payments, housing and heating benefits). Overall, the significant 
expenditure  cuts  contained  in  the  2009  supplementary  budget  (4.1%  of  GDP)  have  been 
implemented,  the only notable exception being pension  cuts which will have to be  reversed 
following  a  recent  ruling  of  the  Constitutional  Court  (21  December  2009).  In  its  ruling,  the 
Constitutional  Court  stated  that  pension  cuts  introduced  with  the  June  2009  supplementary 
budget had been made in a manner inconsistent with the Latvian constitution and have to be 
repaid.  In  this  context,  a  higher  2009  deficit  is  to  be  expected  on  an  ESA  basis  by  around 
0.5% of GDP (while the cash repayments are expected to be made in the first half of 2010). 
All in all,  taking  into  account currently available information, the 2009 general  government 
deficit  is  forecast  to  be  close  but  below  10%  of  GDP,  hence  complying  with  the  Council’s 
recommendations under Article 104(7) TEC.  

The 2010 budget was adopted by Parliament on 1 December 2009. It is based on sustainable 
fiscal measures and entails a further discretionary improvement in the budget balance by LVL 
500  million  (over  4.2%  of  GDP),  which  should  be  sufficient  to  respect  the  8.5%  of  GDP 
deficit target set for 2010, despite the unexpected fiscal costs resulting from the Constitutional 
Court  ruling  on  pensions,  amounting  for  2010  to  around  1%  of  GDP.  The  adopted  2010 
budget is in line with the Council’s recommendations under Article 104(7) TEC4. 

On the revenue side, the 2010 budget includes revenue raising measures amounting to around 
LVL 275 million (2.3% of GDP). Among the measures, there are important reforms that make 
the personal income tax and social security contributions more neutral, by broadening the tax 
base to capital income (capital gains, dividends, and interest), removing special exemptions in 
tourism  and  agricultural  activities,  taxing  fringe  benefits-in-kind  and  gifts  (excluding  intra-
family  gifts),  and  increasing  the  self-employed  tax  rate  to  the  same  level  as  for  employees. 
These measures amount to almost LVL 100 million. Another key new measure is the increase 
of  the  personal  income  tax  rate  from  23%  to  26%,  which  should  raise  more  than  LVL  90 
million.  Taxation  of  wealth  has  been  strengthened,  notably  through  real  estate  taxes  which 
have been increased and broadened, to include a (very mildly) progressive residential property 
tax.  The  broadening  of  the  tax  base  to  residential  buildings  raises  only  LVL  8  million,  but 
other measures in the budget bring nevertheless the overall additional amount from real estate 
tax to LVL 30 million, notably an increase from 1% to 1.5% of the rate applying to land and 
business real estate, a broadening of the tax base to private-owned civil engineering structures 
and  an  increase  of  the  rate  to  3%  for  uncultivated  agricultural  lands.  In  addition,  the 
government has introduced further progressive car taxation measures (based on the stock of 
cars) that should raise almost LVL 20 million. Other revenue measures consist of additional 
excise  taxes  on  gas  and  tobacco,  worth  around  LVL  12  million,  and  additional  non-tax 
revenues worth almost LVL 20 million.  

On  the  expenditure  side,  the  2010  budget  includes  significant  expenditure  cuts  based  to  a 
large extent on structural reforms, notably the merger or abolition of agencies and institutions 
in the Ministries of Agriculture, Culture, Education, and Defence. These measures will bring 
savings in 2010 and in the longer term. Some other measures, with impact mainly on the short 
term have been taken in the welfare budget.  To improve the sustainability of the latter, during 

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The calculation of the structural balance is associated with considerable uncertainties especially for new 
Member States. 

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2010  a  review  of  social  insurance  benefits  and  pension  systems  will  be  undertaken  and 
proposals  for  these  systems'  medium-term  reform  will  be  adopted.  This  is  all  the  more 
necessary after the recent Constitutional Court ruling. Local governments still have to secure 
in their 2010 wage bill a reduction consistent with the projected savings. These seem realistic 
given  that  wage  cuts  at  the  local  level  only  began  with  the  adoption  of  the  corresponding 
supplementary budgets in October 2009. In this context, the unified public wage grid will be 
extended to local governments. 

Concerning  the  implementation  of  the  2010  budget,  the  authorities  will  take  measures  to 
increase the efficiency of the State Revenue Service (which received additional funding in the 
2010  budget)  and  to  combat  the  grey  economy.  Such  measures  and  the  monitoring  of  tax 
compliance will be important in ensuring that revenues develop in line with, or possible better 
than projected. 

 Given the extent of the adjustment undertaken by Latvia in 2009 and the adjustment in the 
2010 budget, it can be reasonably concluded that the structural effort has been restrictive, in 
line  with  the  Council's  July  2009  recommendations.  The  fact  that  the  Commission  services' 
forecasts do not show a structural budgetary improvement in 2009 and 2010 is explained by 
several  factors.  In  the  first  place,  concerning  2010,  the  Commission  services'  autumn  2009 
forecasts excluded the 2010 budget which was still under discussion at the time the forecasts 
were  published.  Moreover,  and  more  generally,  the  exceptionally  volatile  economic 
environment between 2008 and 2011 implies that the usual cyclical component of the deficit, 
using  standard  elasticities,  may  not  sufficiently  capture  the  impact  of  the  extreme  downturn 
experienced  by  Latvia  in  2009.  Hence  the  assessment  of  structural  effort  relies  on  more 
qualitative  aspects,  building  on  the  analysis  of  the  June  2009  supplementary  and  2010 
budgets.After 19.5% of GDP in 2008, general government gross debt is on a rapidly growing 
trend, reaching 33% of GDP in 2009 and 49% of GDP in 2010 according to the Commission 
services' autumn forecast (assuming full take-up of the international financial assistance being 
extended to Latvia during the period up to 2011).  

As  indicated  in  the  Council’s  recommendations,  a  significant  adjustment  is  needed  in  the 
coming  years.  Several  measures  expected  to  be  taken  in  2011  and  2012  budgets  have  been 
outlined  by  the  Latvian  authorities  in  the  context  of  the  stabilisation  programme  within  the 
balance of payment assistance. They include further measures on the revenue side, focusing 
on the taxation of wealth (a car tax reform based on environmental and wealth considerations 
and  a  comprehensive  reform  of  real  estate  taxation  allowing  means-tested  exemptions).  On 
the expenditure side, the Latvian authorities are expected to carry out a broad review of social 
insurance benefits and pension systems, as mentioned above. As regards pensions, the various 
regimes and retirement ages will be reviewed, the goal being to preserve future sustainability 
and adequacy of the three pillars  of  the system. A review of all public companies and their 
subsidiaries will also be carried out against the criteria set in the Latvian State Administration 
Law, with a view to a possible restructuring.  

The  2010  budget  preparation  process  showed  that  there  has  been  some  progress  in 
strengthening the power and analytical capacities of the Finance Ministry vis-à-vis other line 
ministries.  Further  progress  in  strengthening  the  budgetary  framework  is  expected  in  2010, 
through the adoption of measures related in particular to budgetary planning and monitoring.  

Financial sector supervision has been satisfactorily strengthened through increased credit risk 
analyses and close monitoring of banks' foreign currency exposure. Steps have been taken to 
ensure that banks are adequately capitalized and that losses are adequately provisioned.  

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3.3. 

Conclusions 

On current information it appears that Latvia has taken action representing adequate progress 
towards  the  correction  of  the  excessive  deficit  within  the  time  limits  set  by  the  Council.  In 
particular, Latvia:  

•  has  implemented  the  2009  budget  tightly,  which  allowed  to  cushion  the  impact  of 
complying with the December 2009 Constitutional Court ruling concerning pensions; the 
2009 deficit is therefore still expected to be in line with the 10% of GDP target set in the 
Council’s  recommendations  and  also  in  compliance  with  the  commitments  undertaken 
under the balance of payments programme; 

•  has adopted the 2010 budget on 1 December 2009, entailing a fiscal consolidation by LVL 
500 million (over 4.2% of GDP) in line with the Council’s recommendations and also in 
compliance with the commitments undertaken under the balance of payments programme. 
The  measures  in  the  budget,  even  taking  into account the impact  on  2010  of  compliance 
with the Court ruling, should allow Latvia to comply with the recommendation to achieve 
a  deficit  of  no  more  than  8.5%  of  GDP.  While  including  some  one-off  measures,  the 
budget implies a significant structural adjustment well above 2¾ pp of GDP (the average 
annual fiscal effort over the period 2010-12 recommended); 

•  the preparatory phase of the 2010 budget shows signs of improvement in the area of fiscal 
governance, and significant steps have been taken regarding the strengthening of financial 
markets regulation and supervision.  

Risks  to  the  budgetary  targets  relate  to  the  implementation  of  the  expenditure  cuts  at  local 
level, notably as concerns a reduction in the wage bill consistent with the projected savings in 
the fiscal consolidation package. On the revenue side, the monitoring of tax compliance and 
measures to combat the grey economy will be important in ensuring that revenues develop in 
line with, or possible better than projections. 

A significant adjustment is needed in the coming years in order to bring the deficit below 3% 
of GDP in 2012. Several measures expected to be taken in the 2011 and 2012 budgets have 
been  outlined  by  the  Latvian  authorities  in  the  context  of  the  stabilisation  programme 
undertaken as a condition of balance of payment assistance.  

In  view  of  the  above  assessment,  the  Commission  considers  that  no  further  steps  in  the 
excessive deficit procedure of Latvia are needed at present. The Commission will continue to 
closely monitor budgetary developments in Latvia in accordance with the Treaty and the SGP, 
and the criteria set out in the context of the Balance of Payment assistance, in particular in the 
light of the fragile situation of public finances. 

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Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 
Output gap1 
(% of potential GDP) 
General government balance 
(% of GDP) 
Primary balance 
(% of GDP) 
Cyclically-adjusted balance 
(% of GDP) 
Structural balance2 
(% of GDP) 

Government gross debt 
(% of GDP) 

COM autumn 2009 forecast 
National forecast 
COM autumn 2009 forecast 
National forecast 
COM autumn 2009 forecast 
National forecast 
COM autumn 2009 forecast 
National forecast 
COM autumn 2009 forecast 
National forecast 
COM autumn 2009 forecast 
National forecast 
COM autumn 2009 forecast 
National forecast 

2007 
10.0 
10.0 
16.3 
n.a. 
-0.3 
-0.3 
0.1 
0.1 
-4.8 
n.a. 
-4.8 
n.a. 
9.0 
9.0 

2008 
-4.6 
-4.6 
9.2 
n.a. 
-4.1 
-4.1 
-3.4 
-3.4 
-6.7 
n.a. 
-6.7 
n.a. 
19.5 
19.5 

2009 
-18.0 
-18.0 
-9.1 
n.a. 
-9.0 
-10.0 
-7.6 
-8.6 
-6.4 
n.a. 
-7.0 
n.a. 
33.2 
41.5 

2010 
-4.0 
-4.0 
-10.7 
n.a. 
-12.3 
-5.4 
-9.9 
-3.2 
-9.3 
n.a. 
-10.2 
n.a. 
48.6 
n.a. 

2011 
2.0 
n.a. 
-7.0 
n.a. 
-12.2 
n.a. 
-8.3 
n.a. 
-10.2 
n.a. 
-10.2 
n.a. 
60.4 
n.a. 

Source:  Latvian  Ministry  of  Finance,  Second  Notification  under  the  EDP  2009,  Commission  services'  2009 
autumn forecast 
1 The figures of the Commission services' 2009 autumn forecast are based on estimated potential growth of 4.5%, 
1.6%, -1.4%, -2.3% and -2.1% respectively in the period 2007-2011.  
2 Structural balance = cyclically adjusted balance excluding one-off and other temporary measures. 

Notes to the table: 
The Commission services' autumn forecasts for Latvia exclude the fiscal impact of the 2010 budget which was 
then still under discussion.  

National  forecasts  for  real  GDP  were  communicated  by  the  Latvian  authorities  in  January  2010;  national 
budgetary  forecasts  for  2009  are  those  of  the  autumn  2009  EDP  notification;  national  budgetary  forecasts  for 
2010 include the impact of the budget adopted on 1 December, but not the consequences of the 21 December 
Constitutional  Court  ruling  on  pension  cuts  mentioned  above;  moreover,  the  national  budgetary  forecasts  for 
2010 are only available in cash terms and not fully comparable with other forecasts which are on an ESA basis. 

The most recent national forecast of output gaps and corresponding balances are those from the January 2009 
convergence programme and are here omitted as being no longer relevant.  

Although  the  table  does  not  show  a  structural  budgetary  improvement  -  given  that  Commission  services’' 
forecasts exclude the 2010 budget and new national forecasts of the structural balance are lacking - the preceding 
analysis of the June 2009 supplementary and 2010 budgets shows that action taken is in line with the Council's 
July 2009 recommendations in that regard. Moreover, due to the exceptionally volatile economic environment 
between  2008  and  2011,  the  usual  cyclical  component  of  the  deficit,  using  standard  elasticities,  may  not 
sufficiently capture the impact of the downturn. 

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4. 

HUNGARY 

4.1. 

Excessive deficit procedure and recommendations 

On  5  July  2004  the  Council  decided  that  an  excessive  deficit  existed  in  Hungary  in 
accordance  with  Article  104(6)  TEC.  The  most  recent  Council  Recommendation  under 
Article 104(7) TEC was adopted on 7 July 2009, establishing a deadline for taking effective 
action by 7 January 2010. 

The  Council  recommended  to  Hungary  to  put  an  end  to  the  existing  excessive  deficit  as 
rapidly as possible and by 2011 at the latest. In particular, deficits in 2009 and 2010 should 
respect  the  limits  of  3.9%  of  GDP  and  3.8%  of  GDP,  respectively,  as  also  foreseen  in  the 
authorities'  EDP  progress  report  of  29  May  2009,  and  the  Council  established  a  deadline  to 
take  effective  action  in  this  respect.  Furthermore,  budgetary  measures  should  ensure  an 
improvement in the structural balance of at least a cumulative 0.5 percentage points over the 
two  years  of  2010  and  2011  taken  together.  The  recently  adopted  fiscal  responsibility  law 
should  be  fully  implemented.  Finally,  the  government  debt  to  GDP  ratio  should  be  brought 
onto a firm downward trajectory, if possible before 2011. 

4.2. 

Assessment of effective action 

The following analysis takes into account the sixth progress report under the excessive deficit 
procedure  submitted  by  the  Hungarian  authorities  on  24  September  20095,  as  well  as 
additional  information  that  has  become  available  since  then,  including  on  the  adoption  of 
additional measures and the publication of budgetary data.  

The  fiscal  stance  in  2009  and,  albeit  to  a  lesser  extent,  in  2010  continued  to  be  restrictive. 
Hungary did not have any room for budgetary stimulus measures and when the crisis reached 
its  first  peak  by  end-October  2008,  the  government  even  lost  access  to  market-based 
financing.  In  this  context,  it  received  medium-term  financial  assistance  from  the  EU  in  the 
form  of  a  loan  of  up  to  EUR  6.5  billion  decided  on  4  November  2008.  This  assistance  is 
subject  to  a  number  of  policy  conditions  including  on  continued  and  enhanced  fiscal 
consolidation, fiscal governance and structural reforms and provided in conjunction with EUR 
12.5  billion  provided  under  an  IMF  Stand-by  agreement6.  They  are  consistent  with  the 
Council recommendations under the EDP. 

Regarding  2009,  the  Commission  services’  autumn  forecast  foresaw  a  general  government 
deficit of 4.1% of GDP (based on all available information up to 22 October 2009, the cut-off 
date  of  the  forecast).  The  target  of  3.9%  of  GDP  is  now  likely  to  have  been  met,  based  on 
information  on  the  outcome  of  the  general  government  2009  cash  deficit  excluding 
municipalities (3.6% of GDP against a plan of 3.8% of GDP). Altogether, including measures 
adopted  before  the  May  progress  report,  fiscal  consolidation  measures  worth  1½%  of  GDP 
were  adopted  in  2009  compared  to  the  original  budget.  The  impact  was  mainly  on  the 
expenditure side (in particular, cuts in public wages, pensions, and housing subsidies) and to a 
limited  extent  (0.2%  of  GDP)  also  on  the  revenue  side.  Progress  towards  meeting  the  2009 

5 

6 

The report has been registered as a document of the Council of the European Union 14226/09 (ECOFIN 
616, UEM 233), Brussels, 8 October 2009. 
The  international  assistance  package  of  a  total  of  EUR  20  billion  was  subsequently  completed  by  a 
World Bank loan of EUR 1 billion.  

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deficit  target  was  further  supported  by  inter  alia  higher  dividend  payments  by  state-owned 
companies, enhanced expenditure control on line ministries as well as by lower-than-expected 
net  interest  expenditure  of  around  0.2%  of  GDP,  bringing  the  total  savings  to  nearly  2%  of 
GDP.  This  offset  the  sharp  deterioration  of  government  revenues,  linked  to  the  massive 
contraction  of  economic  activity.  In  structural  terms,  the  improvement  in  the  general 
government  balance  in  2009  is  estimated  to  be  close  to  3%  of  GDP,  which  brings  the 
accumulated structural adjustment after 2006 to 8½ % of GDP.  

As  far  as  2010  is  concerned,  the  Hungarian  Parliament  adopted  on  30  November  2009  a 
budget in compliance with the target of 3.8% of GDP for the 2010 general government deficit. 
It  is  underpinned  by  several  expenditure-reducing  structural  measures,  inter  alia  by  further 
reforms of the pension and the social support system. In addition, the 2010 budget includes 
lower transfers from the central government to the long distance public transport system and 
to  the  municipalities.  The  Commission  services'  2009  autumn  forecast  projected  a  general 
government  deficit  of  4.2%  of  GDP  in  2010.  Since  then,  additional  details  concerning  the 
restructuring  of  the  loss-making  public  transport  system  and  the  reduction  of  transfers  to 
lower  levels  of  government  have  rendered  the  2010  deficit  target  of  3.8%  of  GDP  more 
credible.  However,  the  2010  deficit  target  is  still  subject  to  a  number  of  risks.  Revenue,  in 
particular  from  corporate  income  tax  and  excises,  could  be  lower  than  expected,  and 
expenditure could be higher, in particular regarding the long-distance public transport system 
and transfers to lower levels of government, as measures in both areas are not fully backed by 
structural  savings.  While  reserves  amounting  to  0.8%  of  GDP  should  provide  a  sufficient 
cushion as requested in the Council recommendations of 7 July 2009, it cannot be excluded 
that further measures will need to be taken to reach the target. In this respect, the authorities 
have  expressed  their  commitment  to  take  adequate  action  should  any  downward  risks 
materialise.  

Regarding the structural balance, the Commission services’ 2009 autumn forecast showed no 
improvement in 2010. However, taking into account the additional measures in the area of the 
loss-making  public  transport  system  made  public  in  December  2009  and  the  increased 
reserves in the final 2010 budget, there could be a small improvement in the structural balance 
in 20107. Given the Council recommendation which asks for a cumulative fiscal effort over 
2010 and 2011 of at least 0.5% of GDP, additional measures will be needed mainly in view of 
the  tax  cut  of  0.6%  of  GDP  foreseen  in  2011  and  would  have  to  be  reflected  in  the  2011 
budget.  

Hungary has made improvements in the area of fiscal governance that should facilitate future 
consolidation  and  reduce  the  risk  of  a  return  to  unsustainable  policies.  A  new  fiscal 
framework is in place as of 2010. During the preparation of the 2010 budget, the majority of 
its  new  elements  were  already  taken  into  account  and  the  newly  established  Fiscal  Council 
has taken up its work. A review of budgetary procedures has been prepared and published on 
the  website  of  the  Ministry  of  Finance  on  15  December,  explaining  changes  that  became 
necessary  due  to  the  new  fiscal  framework  and  identifying  some  areas  where  further 
improvements are needed. 

As  far  as  the  government  debt-to-GDP  ratio  is  concerned,  the  Commission  services  2009 
autumn  forecast  projects  the  ratio  to  stabilize  just  below  80%  of  GDP  in  2010,  and  to  start 

7 

The calculation of the structural balance is associated with considerable uncertainties especially for new 
Member States. 

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9 

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diminishing in 2011. The additional measures outlined above and not yet taken into account in 
the autumn forecast should contribute to a slightly lower path for the debt ratio than projected. 
Moreover, a 2011 budget in line with the Council recommendations would further accelerate 
this development.  

4.3. 

Conclusions 

On  current  information  it  appears  that  Hungary  has  taken  action  representing  adequate 
progress  towards  the  correction  of  the  excessive  deficit  within  the  time  limits  set  by  the 
Council. In particular, Hungary:  

•  took effective action with respect to the 2009 general government deficit target of 3.9% of 
GDP notably by adopting fiscal consolidation measures of 1½% of GDP in 2009 compared 
to the original budget and by enhancing expenditure control on line ministries, that offset 
revenue shortfalls; 

•  has  adopted,  on  30  November  2009,  a  central  government  2010  budget  in  line  with  the 
general  government  deficit  target  of  3.8%  of  GDP  and  included  structural  measures  in 
particular in the pension and the social support system supporting this target; 

•  has  backed  the  vast  majority  of  expenditure-reducing  measures  by  appropriate  laws  that 
were adopted either already in 2009, or in the accompanying laws of the 2010 budget and 
has included in its 2010 budget a sufficient level of reserves; 

•  has started implementing its new fiscal framework in the context of the preparation of the 
2010 budget, and has initiated work on further improving budgetary planning procedures 
and budget controls with a view to enhancing the medium-term budgetary framework. 

However, there are considerable risks attached to the 2010 deficit target, both on the revenue 
and  the  expenditure  side.  Against  this  background,  and  in  view  of  already  agreed  non-
compensated  tax  cuts  in  2011,  the  required  cumulative  0.5%  of  GDP  structural  adjustment 
necessary to bring the deficit below 3% in 2011 is not yet ensured.  

In  view  of  the  above  assessment,  the  Commission  considers  that  no  further  steps  in  the 
excessive deficit procedure of Hungary are needed at present. The Commission will continue 
to closely monitor budgetary developments in Hungary in accordance with the Treaty and the 
SGP, in particular in the light of the fragile situation of public finances. 

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Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 
Output gap1 
(% of potential GDP) 
General government balance 
(% of GDP) 
Primary balance 
(% of GDP) 
Cyclically-adjusted balance2 
(% of GDP) 
Structural balance3 
(% of GDP) 

Government gross debt 
(% of GDP) 

COM autumn 2009 forecast 
National forecast 
COM autumn 2009 forecast 
National forecast 
COM autumn 2009 forecast 
National forecast 
COM autumn 2009 forecast 
National forecast 
COM autumn 2009 forecast 
National forecast 
COM autumn 2009 forecast 
National forecast 
COM autumn 2009 forecast 
National forecast 

2007 
1.0 
1.0 
3.1 
n.a. 
-5.0 
-5.0 
-0.9 
-0.9 
-6.4 
n.a. 
-5.5 
n.a. 
65.9 
65.9 

2008 
0.6 
0.6 
2.9 
n.a. 
-3.8 
-3.8 
0.4 
0.4 
-5.1 
n.a. 
-4.8 
n.a. 
72.9 
72.9 

2009 
-6.5 
-6.7 
-4.0 
n.a. 
-4.1 
-3.9 
0.2 
0.5 
-2.2 
n.a. 
-2.1 
n.a. 
79.1 
78.8 

2010 
-0.5 
-0.9 
-4.7 
n.a. 
-4.2 
-3.8 
-0.1 
0.7 
-2.1 
n.a. 
-2.1 
n.a. 
79.8 
79.2 

2011 
3.1 
n.a. 
-2.0 
n.a. 
-3.9 
n.a. 
-0.2 
1.3 
-3.0 
n.a. 
-3.0 
n.a. 
79.1 
n.a. 

Source: Hungarian Ministry of Finance, Second Notification under the EDP 2009, Sixth EDP progress report of 
September 2009, Commission services' 2009 autumn forecast 
1 The figures of the Commission services' 2009 autumn forecast are based on estimated potential growth of 1.4%, 
0.8%, 0.3%, 0.2% and 0.3% respectively in the period 2007-2011.  
2 Due to the exceptionally volatile economic environment between 2008 and 2011, the usual cyclical component 
of the deficit, using standard elasticities, may not sufficiently capture the impact of the downturn.  
3 Structural balance = cyclically adjusted balance excluding one-off and other temporary measures.  

EN 

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   EN