Recommendation for a COUNCIL RECOMMENDATION on the National Reform Programme 2011 of Hungaryand delivering a Council opinionon the updated Convergence Programme of Hungary, 2011-2015
Date: 2011-06-07
Institutions: European Commission
Subjects: EU programme, Hungary, budget policy, economic growth, employment policy

EUROPEAN COMMISSION 

Brussels, 7.6.2011 
SEC(2011) 821 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of Hungary 

and delivering a Council opinion 

on the updated Convergence Programme of Hungary, 2011-2015 

{SEC(2011) 725 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of Hungary 

and delivering a Council opinion 

on the updated Convergence Programme of Hungary, 2011-2015 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 9(3) thereof, 

Having regard to the recommendation of the European Commission2, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

After consulting the Economic and Financial Committee, 

Whereas: 

(1) 

(2) 

On  26  March  2010,  the  European  Council  agreed  to  the  European  Commission's 
proposal  to  launch  a  new  strategy  for  jobs  and  growth,  Europe  2020,  based  on 
enhanced coordination of economic policies, which will focus on the key areas where 
action 
to  boost  Europe’s  potential  for  sustainable  growth  and 
competitiveness. 

is  needed 

On 13 July 2010, the Council adopted a recommendation on the broad guidelines for 
the economic policies of the Member States and the Union (2010 to 2014) and on 21 
October  2010,  adopted  a  decision  on  guidelines  for  the  employment  policies  of  the 
Member States3, which together form the “integrated guidelines”. Member States were 
invited  to  take  the  integrated  guidelines  into  account  in  their  national  economic  and 
employment policies. 

1 
2 
3 

OJ L 209, 2.8.1997, p. 1. 
OJ C , , p. . 
Maintained for 2011 by Council Decision 2011/308/EU of 19 May 2011. 

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(3) 

(4) 

(5) 

(6) 

(7) 

On  12  January  2011,  the  Commission  adopted  the  first  Annual  Growth  Survey, 
marking  the  start  of  a  new  cycle  of  economic  governance  in  the  EU  and  the  first 
European semester of ex-ante and integrated policy coordination, which is anchored in 
the Europe 2020 strategy.  

On  25  March  2011,  the  European  Council  endorsed  the  priorities  for  fiscal 
consolidation  and  structural  reform  (in  line  with  the  Council’s  conclusions  of  15 
February and 7 March 2011 and further to the Commission’s Annual Growth Survey). 
It  underscored  the  need  to  give  priority  to  restoring  sound  budgets  and  fiscal 
sustainability,  reducing  unemployment  through  labour  market  reforms  and  making 
new efforts to enhance growth. It requested Member States to translate these priorities 
into  concrete measures to be included  in their Stability or Convergence Programmes 
and National Reform Programmes. 

On  15  April  2011,  Hungary  submitted  its  2011  Convergence  Programme  update 
covering the period 2011-2015 and its 2011 National Reform Programme. In order to 
take account of the interlinkages, the two programmes have been assessed at the same 
time.  

Hungary was severely hit by the crisis in autumn 2008, with the country losing access 
to  market-based  financing.  To  overcome  these  difficulties,  Hungary  implemented  an 
adjustment  programme  that  focused  on  fiscal  consolidation  and  financial  sector 
supervision  and  was  supported  by  financial  assistance  from  the  EU  and  the  IMF. 
Against  this  background,  the  country  regained  market  access  in  spring  2009  and  the 
economy emerged from recession: after a contraction of 6.7% in 2009, GDP grew by 
1.2%  in  2010,  supported  by  increasing  exports.  At  the  same  time,  unemployment 
increased further to over 11% from the pre-crisis level of below 8%. In the second half 
of 2010, the government announced significant tax cuts to be implemented over 2010-
2013.  To  limit  the  fiscal  deterioration,  it  introduced,  in  parallel,  extraordinary  levies 
and  decided  to  abolish  the  mandatory  private  pension  pillar.  Although  this  made  it 
possible to limit the slippage in 2010 to 0.4% of GDP above the deficit target of 3.8% 
of  GDP  and  will  result  in  a  surplus  in  2011,  the  underlining  position  deteriorated 
significantly. Against this background, and with a view to strengthening the economic 
growth potential, the government announced a structural reform programme in March 
2011 and adopted further consolidating measures.  

is  slightly 

too  favourable, 

in  particular  regarding 

Based on the assessment of the updated Convergence Programme pursuant to Council 
Regulation  (EC)  No  1466/97,  the  Council  is  of  the  opinion  that,  based  on  the 
Commission's  2011  spring  forecasts,  the  macroeconomic  scenario  underpinning  the 
budgetary  projections 
the 
development of domestic demand. The update aims to correct the excessive deficit by 
the  2011  deadline  set  by  the  Council,  to  be  achieved  with  a  surplus  of  2%  of  GDP 
thanks to the significant one-off revenues from the pension assets. The budget would 
turn into a deficit of 2.5% of GDP in 2012 and thereafter gradually decline to 1.5% of 
GDP  in  2015,  mainly  based  on  expenditure  restraint.  The  update  confirms  the 
country’s  medium-term  objective  (MTO)  for  the  budgetary  position  in  structural 
terms, a deficit of 1.5% of GDP. The consolidation strategy is expected to reduce the 
budgetary  deficit  in  a  structural  way  and  put  the  debt  on  a  downward  path  to  reach 
64%  of  GDP  by  2015.  However,  it  appears  to  be  back-loaded  with  structural 
improvement starting only from 2012 whereas the cumulative structural deterioration 
of  over  3%  of  GDP  over  2010  and  2011  is  not  in  line  with  the  Council 

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recommendation of July 2009 asking Hungary to achieve a structural adjustment of at 
least  0.5%  of  GDP.  The  spring  forecast  shows  a  deficit  of  3.3%  of  GDP  in  2012, 
which assumes some implementation risks; on this basis it cannot be excluded that the 
threshold  may  be  breached  again  in  that  year  unless  further  measures  are  taken.  In 
addition,  the  projected  deficit  path  does  not  provide  for  the  necessary  structural 
adjustments that would ensure achievement of the MTO by the end of the programme 
period; in particular, there is no further structural adjustment beyond 2013. Finally, the 
abolishment of the mandatory private pension pillar and the strong incentives provided 
for switching over to the public pension pillar result in additional revenues in short and 
medium  term  but  also  increases  the  long-term  liabilities  and  so  may  deteriorate  the 
long-term fiscal sustainability. 

Fiscal  consolidation  remains  a  major  challenge.  Without  rigorous  implementation  of 
the  measures  announced  and  additional  measures  of  a  structural  nature  it  cannot  be 
ensured  that  the  excessive  deficit  is  corrected  on  a  sustainable  basis  and  appropriate 
progress is made towards the medium-term objective. Moreover, fiscal  consolidation 
will  also  help  to  put  debt  reduction  on  an  appropriately  declining  path  and  improve 
long-term  sustainability  which  appears  to  be  at  medium  risk.  Making  full  use  of 
windfall  revenues  could  help  accelerate  the  fiscal  consolidation.  Against  this 
background,  the  authorities'  bi-annual  Excessive  Deficit  Procedure  progress  reports 
will serve as a useful tool for closely monitoring progress of fiscal consolidation.  

The  recently  adopted  Constitution  establishes  a  constitutional  debt  brake  at  50%  of 
GDP and gives the Fiscal Council a veto right over the annual budget, which could be 
a  first  step  forward  improving  the  budgetary  framework.  However,  important  details 
will  only  be  specified  in  the  subsequent  'cardinal'  laws  (e.g.  what  the  temporary 
numerical rules will be until the debt ratio declines to 50%, the precise interpretation 
of  the  escape  clause,  etc.).  The  imposition  of  a  nominal  debt  cap  if  used  as  an  all-
purpose device could, ceteris paribus, lead to a pro-cyclical fiscal stance. In addition, 
the remit of the revamped fiscal body is relatively narrow (preparing an opinion on the 
draft budget, with a right to veto) and does not cover the entire budgetary cycle (e.g. 
through  real-time  assessments  of  new  policies  with  major  budgetary  implications). 
Finally,  other  aspects  of  fiscal  governance,  such  as  the  medium-term  orientation  of 
fiscal policy and the issue of transparency have not yet been clarified. 

(8) 

(9) 

(10)  The employment rate is among the lowest in the EU (60.4%). The employment rate of 
women is also low (55.0%), while the gap between  the employment  rates of women 
with and without 0-6-year old children is the second biggest in the EU (33.6, against 
the EU average of 12.1 percentage points). There are deficiencies both in the capacity 
and  in  the  quality  of  day-care  services  in  Hungary,  with  particularly  scant  provision 
outside the larger cities, and in regions with very high unemployment. Improving day-
care provision would be an important measure to facilitate both parents' participation 
in the labour force.  

(11)  Hungary has had a relatively high tax burden on labour. The new personal income tax 
system partly addresses its negative effects on employment, but the tax burden on low 
earners without children has in fact increased, especially when taking into account the 
phasing out of employment tax credits. 

(12)  The  public  employment  services  (PES)  suffer  from  insufficient  administrative 
capacity, and previous injections of funds have not improved the efficiency of services 

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in  integrating  the  unemployed  into  the  labour  market.  The  funding  of  employment 
programmes  is  not  sufficiently  linked  to  results.  The  duration  of  unemployment 
benefits has recently been reduced to the lowest levels in the EU. The impact of this 
measure  on  the  labour  market  needs  to  be  assessed,  in  particular  to  determine  its 
effectiveness in raising employment participation.  

(13)  Poverty  and  related  factors  such  as  joblessness  or  low  education  levels  continue  to 
affect some disadvantaged groups, particularly the Roma, disproportionately. The low-
skilled have a particularly low employment rate (36.8%, compared with the European 
average of 53.4%), especially among men. According to estimates, 70% of the Roma 
population live under the poverty threshold. A great majority of them live in deprived 
regions, with little access to labour market opportunities and public services.  

(14)  SMEs  have  been  hindered  by  the  complexity  of  the  regulatory  framework,  a  heavy 
administrative  burden  and 
in  public 
administration.  SMEs’  access  to  early-stage  financing  has  been  more  scant  than  the 
EU  average.  The  National  Reform  Programme  includes  a  number  of  measures  to 
reduce  administrative  burdens.  The  role  of  non-banking  funding  mechanisms  is 
lagging  behind  that  played  in  other  European  countries.  The  effectiveness  of  prior 
programmes to support the sector has not been systematically evaluated. 

limited  accountability  and 

transparency 

(15)  The  Commission  has  assessed  the  Convergence  Programme  and  National  Reform 
Programme for Hungary and has also taken into account the government's intention to 
shadow  the  Euro  Plus  Pact4.  It  has  taken  into  account  not  only  their  relevance  for 
sustainable  fiscal  and  socio-economic  policy  in  Hungary  but  also  their  conformity 
with  EU  rules  and  guidance,  given  the  need  to  reinforce  the  overall  economic 
governance  of  the  European  Union  by  providing  EU-level  input  into  future  national 
decisions.  It  considers  that  the  fiscal  adjustment  strategy  mainly  based  on  the 
expenditure  side  is  back-loaded.  Hence,  the  2011  deadline  set  by  the  Council  for 
bringing the deficit below the 3% of GDP threshold is only met due to the significant 
one-off revenues from the pension assets. Structural improvement will not begin until 
2012 and, taking into account the implementation risks, it cannot be excluded that the 
threshold  may  be  breached  again  in  that  year  unless  further  measures  are  taken. 
Moreover,  in  the  longer  term  the  Convergence  Programme  does  not  secure  further 
progress towards the MTO. Further measures to increase labour market participation 
and modernise employment services would help to increase job opportunities. Further 
reductions  in  administrative  burdens  would  help  improve  the  business  environment 
and help SMEs grow.  

(16) 

In  light  of  this  assessment,  also  taking  into  account  the  Council  Recommendation 
under Article 126(7) of the Treaty on the Functioning of the European Union of 7 July 
2009,  the  Council  has  examined  the  2011  update  of  the  Convergence  Programme  of 
Hungary and its opinion5 is reflected in particular in its recommendation under (1) and 
(2) set out below. Taking into account the European Council conclusions of 25 March 
2011, the Council has examined the National Reform Programme of Hungary, 

4 
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SEC(2011) 725. 
Foreseen in Article 9(3) of Council Regulation (EC) No 1466/97. 

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HEREBY RECOMMENDS that Hungary should take action within the period 2011-2012 to: 

(1) 

(2) 

(3) 

(4) 

(5) 

Strengthen the fiscal effort to reduce the structural deterioration in 2011 implicit in 
the planned 2% of GDP budget surplus and avoid that the budget balance breaches 
the  3%  of  GDP  threshold  again  in  2012.  Adopt  additional  fiscal  measures  of  a 
permanent nature at the latest in the 2012 budget to secure the budgetary targets for 
2012  and  2013  in  the  Convergence  Programme.  Ensure  progress  towards  the 
medium-term  objective  by  at  least  0.5%  of  GDP  annually  until  the  end  of  the 
programme  horizon  and  use  possible  windfall  revenues  to  accelerate  the  fiscal 
consolidation.  

Adopt  and  implement  regulations  specifying  the  operational  aspects  of  the  new 
constitutional fiscal governance framework, including, inter alia, the numerical rules 
that  will  be  implemented  at  the  central  and  local  level  until  the  debt  ratio  has 
declined to below 50% of GDP. Broaden the remit of the Fiscal Council to cover the 
entire  budgetary  cycle,  in  particular  through  real-time  assessments  of  new  policies 
with  major  budgetary  implications  and  strengthen  the  fiscal  framework  to  cover 
multiannual fiscal planning and to improve the transparency of public finances.  

Enhance participation in the labour market by alleviating the impact of the tax reform 
on  low  earners  in  a  budget-neutral  manner.  Strengthen  measures  to  encourage 
women's  participation  in  the  labour  market  by  expanding  childcare  and  pre-school 
facilities.  

Take  steps  to  strengthen  the  capacity  of  the  Public  Employment  Service  and  other 
providers to increase the quality and effectiveness of training, job search assistance 
and individualised services. Link funding  of programmes to results. In consultation 
with  stakeholders,  introduce  tailor-made  programmes,  for  the  low  skilled  and  other 
particularly disadvantaged groups.  

Improve  the  business  environment  by  implementing  all  the  measures  envisaged  for 
regulatory  reform  and  lowering  administrative  burdens  in  the  National  Reform 
Programme;  assess  the  effectiveness  of  current  SME  support  policies  and  adjust 
public programmes in order to improve access to non-bank funding.  

Done at Brussels, 

For the Council 
The President 

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