Recommendation for a COUNCIL DECISION Establishing that no effective action has been taken by Hungary in response to the Council Recommendation of 7 July 2009
Date: 2012-01-11
Institutions: European Commission
Subjects: EU control, Hungary, anti-crisis plan, budget deficit, financial year, stability pact

EUROPEAN COMMISSION 

Brussels, 11.1.2012 
COM(2012) 5 final 

Recommendation for a 

COUNCIL DECISION 

Establishing that no effective action has been taken by Hungary in response to the 
Council Recommendation of 7 July 2009  

 
 
  
 
Recommendation for a 

COUNCIL DECISION 

Establishing that no effective action has been taken by Hungary in response to the 
Council Recommendation of 7 July 2009  

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 126(8) thereof, 

Having regard to the recommendation from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

According  to  Article  126  of  the  Treaty,  Member  States  are  to  avoid  excessive 
government deficits. 

The Stability and Growth Pact is based on the objective of sound government finances 
as a means of strengthening the conditions for price stability and for strong sustainable 
growth  conducive  to  employment  creation.  The  Stability  and  Growth  Pact  includes 
Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the 
implementation  of  the  excessive  deficit  procedure1,  which  was  adopted  in  order  to 
further the prompt correction of excessive general government deficits. 

The  Council,  acting  upon  a  recommendation  by  the  Commission,  decided  on  5  July 
2004, in accordance with Article 104(6) of the Treaty, that an excessive deficit existed 
in  Hungary2.  On  the  same  day,  and  also  on  the  basis  of  a  recommendation  by  the 
Commission,  the  Council  adopted  recommendations  under  Article  104(7)  asking  the 
Hungarian authorities to take action in a medium-term framework in order to bring the 
deficit below 3 % of GDP by 2008. 

In January 2005, in accordance with Article 104(8) TEC, the Council considered that 
Hungary had not taken effective action in response to its recommendation and issued 
another recommendation based on Article 104(7) TEC in March 2005, confirming the 
2008  deadline  for  the  correction  of  the  excessive  deficit.  After  a  substantial 
deterioration of the budgetary outlook in Hungary, the Council decided in November 

1 
2 

OJ L 209, 2.8.1997, p. 6. 
OJ  L  389,  30.12.2004,  p.  27.  All  EDP-related  documents  for  Hungary  can  be  found  at  the  following 
website: http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/index_en.htm. 

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2005  that  Hungary  had  for  the  second  time  failed  to  comply  with  recommendations 
third 
under  Article  104(7)  TEC.  Accordingly, 
recommendation  under  Article  104(7)  TEC  to  Hungary  in  October  2006,  postponing 
the  deadline  for  the  correction  of  the  excessive  deficit  to  2009.  In  July  2009  it 
concluded that the Hungarian authorities could be considered to have taken effective 
action  in  response  to  the  recommendations  from  October  2006.  Against  the 
background of the severe downturn in the context of the economic and financial crisis, 
it issued a revised (the third) recommendations under Article 104(7) TEC. 

the  Council  addressed  a 

The Council recommendation of July 2009 called on the Hungarian authorities to put 
an  end  to  the  excessive  deficit  situation  by  2011  at  the  latest.  Specifically,  Hungary 
was recommended to limit the deterioration of the fiscal position in 2009 by ensuring a 
rigorous implementation of the adopted and announced corrective measures to respect 
the  target  of  3.9  %  of  GDP.  Additionally,  starting  from  2010,  it  was  also 
recommended to rigorously implement the necessary consolidation measures to ensure 
a  continued  reduction  of  the  structural  deficit  and  a  renewed  decline  of  the  headline 
deficit,  with  an  increased  reliance  on  structural  measures,  in  view  of  warranting  a 
lasting  improvement  of  public  finances.  The  Council  also  recommended  to  spell  out 
and  adopt  in  a  timely  manner  the  consolidation  measures  necessary  to  achieve  the 
correction of the excessive deficit by 2011 and ensure, at least, a cumulative 0.5% of 
GDP  fiscal  effort  over  2010  and  2011.  The  Hungarian  authorities  were  also 
recommended to ensure that the government gross debt ratio was brought onto a firm 
downward trajectory.  

On  27  January  2010  the  Commission  adopted  a  Communication  to  the  Council 
concluding that, based on information available at the time, it considered that Hungary 
had taken effective action in response to the Council recommendations of July 2009, 
in particular taking into account consolidation measures of 1½% of GDP to meet the 
2009  deficit  target  of  3.9%  of  GDP,  structural  reforms  in  the  pension  and  the  social 
benefit system supporting the achievement of the 2010 deficit target of 3.8% of GDP, 
and  progress  regarding  the  implementation  of  the  new  fiscal  framework  but  alerted 
about considerable risks. 

(5) 

(6) 

(7) 

A new assessment of the action taken by Hungary to correct the excessive deficit by 
2011 in response to the Council recommendation under Article 104(7) of the Treaty, 
based on, inter alia, the 9th EDP progress report submitted to the Commission and the 
Council on 15 December 2011, leads to the following conclusions:  

–  In  2010  the  actual  budget  deficit  exceeded  the  target  by  0.4%  of  GDP  while 
economic growth was stronger in 2010 than foreseen by the Commission services' 
2009  Spring  Forecast,  which  had  served  as  the  basis  for  the  Council 
recommensations  of  July  2009.  In  2011,  the  general  government  balance  is 
expected  (both  by  the  government  and  the  Commission  services'  Autumn  2011 
Forecast)  to  turn  into  surplus,  but  only  thanks  to  one-off  revenues  of  9  ¾%  of 
GDP linked to the transfer of the pension assets from the private pension schemes 
to the state pillar and of 0.9% of GDP from sectoral levies (on telecom, energy, 
retail  and  financial  sectors).Without  one-off  measures  the  deficit  would  have 
reached around 6% of GDP and by far surpassed the 3% of GDP reference value 
in  the  Treaty.  In  their  2011  autumn  EDP  notification,  the  Hungarian  authorities 
projected  a  surplus  of  3.9%  of  GDP.  The  Commission  services'  2011  Autumn 
Forecast  projected  a  somewhat  lower  surplus  (3.6%  of  GDP),  notably  since  it 

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included the assumption of part of the debt of public transport companies' (0.2% 
of GDP). Based on recent information on one-offs received after the cut-off date 
of the 2011 Autumn Forecast, the surplus may even be lower. As to the structural 
deficit, it deteriorated by 1½% in 2010 and by 1¼% in 2011, a cumulative 2¾% 
of  GDP,  contrary  to  the  Council  recommendation  of  ensuring,  at  least,  a 
cumulative  0.5%  of  GDP  fiscal  effort  over  these  two  years  as  needed  to  correct 
the  deficit  by  the  2011  deadline  in  a  sustainable  manner.  This  structural 
deterioration is a reflection of the fact that tax cuts amounting to over 2% of GDP 
were not suffiently compensated by structural measures. 

–  Regarding 2012, the draft budget targets a deficit of 2.5% of GDP in line with the 
2011  update  of  the  Convergence  Programme  (CP).  In  order  to  achieve  this,  the 
budget  proposal  contains  several  measures,  altogether  amounting  to  close  to  4% 
of  GDP  according  to  the  authorities,  while  setting  aside  0.7%  of  GDP  as  an 
extraordinary reserve buffer. In contrast, the Commission services' 2011 Autumn 
Forecast  projects  the  2012  general  government  deficit  to  reach  2.8%  of  GDP. 
Compared  to  the  draft  budget,  this  higher  deficit  number  reflects,  among  other 
factors, a lower economic growth projection for 2012 by 1 pp. as well as a more 
prudent assessment of revenue and expenditure developments. At the same time, it 
assumes in line with the relevant legislation that the extraordinary reserve is not 
expected to be spent. Nevertheless, the 3% of GDP threshold is only respected on 
the  back  of  a  close  to  0.9%  of  GDP  one-off  revenue  stemming  from  the  above-
mentioned extraordinary levies. 

–  According to the Commission services' 2011 Autumn Forecast, and based on the 
usual no-policy-change assumption, the budget deficit was projected to deteriorate 
again to 3.7% in 2013. This is chiefly due to the fact that the phasing out of the 
extraordinary levies of around 0.9% of GDP is not expected to be counterbalanced 
by the additional savings from the structural reform programme for that year. 

–  Based  on  budgetary  developments  since  the  publication  of  the  2011  Autumn 
Forecast,  the  2012  projection  of  2.8%  of  GDP  still  appears  to  be  plausible 
(without taking into the recent deterioration in the macroeconomic environment). 
This  is  explained  by  the  fact  that  the  deficit-decreasing  impact  of  the  new 
consolidation  package  of  0.4%  of  GDP  adopted  by  the  government  on  15 
December 2011 is broadly counterbalanced by the deficit-increasing amendments 
adopted to the draft budget as well as by the net budgetary costs of the agreement 
with  the  banking  sector  concluded  on  15  December  2011  which  are  not  yet 
appropriately offset by additional consolidation measures). 

–  For 2013, taking into account some further specifications of the structural reform 
programme  (related  government  and  Parliamentary  decisions  are  detailed  in  the 
December  2011  progress  report),  the  positive  base  effect  from  2012  and  the  net 
cost  stemming  from  the  agreement  with  the  banking  sector,  the  2013  deficit 
projection contained in the 2011 Autumn Forcast could be lowered from 3.7% of 
GDP to 3¼% of GDP, which is still clearly above the 3% deficit threshold. The 
difference between this updated assessment and the official target (2.2% of GDP) 
notably stems from the fact that in the absence of specific steps about half of the 
structural  reform  programme  could  not  be  taken  into  account.  The  remainder  of 
the  difference  compared  to  the  official  target  is  related  to  a  higher  expenditure 
forecast  notably  in  the  area  of  state-owned  transport  enterprises  and  the 

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maintenance  of  roads  and  also  incorporates  some  difference  in  growth 
assumptions. 

–  The  risks  to  these  updated  medium-term  projections  are  tilted  to  the  downside. 
There  is  some  positive  risk,  notably  stemming  from  the  continuation  of  better-
than-expected revenue inflows into 2012 and 2013. However, it is expected to be 
more  than  offset  by  negative  risks.  In  particular,  interest  rates  for  all  maturities 
have increased, the exchange rate has weakened, and the medium-term economic 
outlook seems to have worsened since the 2011 Autumn Forecast was published 
on  10  November  2011.  Overall,  if  these  factors  were  taken  into  account,  the 
deficit  projections  in  both  2012  and  2013  would  be  further  increased  by  ½%  of 
GDP, leading to deficits of just above 3% of GDP and 3¾% of GDP, respectively. 

–  According  to  the  2011  Autumn  Forecast,  gross  public  debt,  given  both  the 
forecast  deficit  numbers  and  the  exchange  rate  assumptions,  is  expected  to 
increase  again  to  nearly  77%  of  GDP  by  2013,  following  a  temporary  drop  in 
2011  due  to  the  takeover  of  the  private  pension  assets.  If  the  medium-term 
budgetary  projections  were  updated  only  on  the  basis  of  new  measures  adopted 
after  the  cut-off  date  of  the  forecast,  the  projected  2012  debt  ratio  would  be 
largely  unchanged  and  improve  only  slighly  in  2013.  However,  further  possible 
revisions  in  the  budgetary  projections,  taking  into  account  most  notably  the 
increased yields, the end-2011 HUF/EUR exchange rate of 311 (which is around 
12% weaker than the technical assumption used in the Autumn Forecast), as well 
as the weaker macroeconomic environment would lead to a debt ratio of around 
80%  in  2011,  after  which  it  would  stabilise  at  around  78.5%  in  both  2012  and 
2013  whereas  the  Council  recommended  that  the  gross  debt  ratio  should  be 
brought onto a firm downward trajectory.  

(8) 

The overall conclusion is while Hungary formally respects the 3% of GDP reference 
value by 2011 this is not based on a structural and sustainable correction. The budget 
surplus in 2011 hinges upon substantial one-off revenues of over 10% of GDP and is 
accompanied  by  a  cumulative  structural  deterioration  in  2010  and  2011  of  2¾%  of 
GDP  compared  to  a  recommended  cumulative  fiscal  improvement  of  0.5%  of  GDP. 
Moreover,  while  the  authorities  are  implementing  substantial  structural  measures  in 
2012;  the  3%  of  GDP  reference  value  is  again  only  respected  thanks  to  one-off 
measures  of  close  to  1%  of  GDP.  Finally,  in  2013,  the  deficit  (at  3¼%  of  GDP)  is 
expected  to  surpass  the  reference  value  in  the  Treaty  again  even  after  taking  into 
account additional measures announced since the Commission services' 2011 Autumn 
Forecast). The higher deficit in 2013 is mainly linked to the fact that temporary one-
off revenues are being phased out as planned while not all planned structural reforms 
are sufficiently specified. Overall, this supports the conclusion that the response by the 
Hungarian  authorities  to  the  Council  recommendation  according  to  Article  104(7)  of 
the Treaty of 7 July 2009 has been insufficient, 

HAS ADOPTED THIS DECISION:  

Hungary has not taken effective action in response to the Council recommendation according 
to Article 104(7) of the Treaty of 7 July 2009. 

Article 1 

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Article 2 

This Decision is addressed to Hungary. 

Done at Brussels, 

For the Council 
The President 

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