Recommendation for a COUNCIL RECOMMENDATION on Hungary’s 2012 national reform programme and delivering a Council opinion on Hungary’s convergence programme for 2012-2015
Date: 2012-05-30
Institutions: European Commission
Subjects: Hungary, Roma, administrative formalities, budgetary equilibrium, dropout, economic stabilisation, employment service, energy grid, free competition, innovation, means of public conveyance, public debt, tax reform

EUROPEAN COMMISSION 

Brussels, 30.5.2012  
COM(2012) 317 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on Hungary’s 2012 national reform programme  

and delivering a Council opinion on Hungary’s convergence programme for 2012-2015

{SWD(2012) 317 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

on Hungary’s 2012 national reform programme  

and delivering a Council opinion on Hungary’s convergence programme for 2012-2015 

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 5(2) thereof, 

Having  regard  to  Regulation  (EU)  No  1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16  November  2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances2, and in particular Article 6(1) thereof, 

Having regard to the recommendation of the European Commission3, 
Having regard to the resolutions of the European Parliament,4  

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) 

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4 

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 

OJ L 209, 02.08.1997, p. 1 
OJ L 306, 23.11.2011, p. 25 
COM(2012)317 final 
P7_TA(2012)0048 and P7_TA(2012)0047 

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(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

(9) 

Member States5, which together form the ‘integrated guidelines’. Member States were 
invited  to  take  the  integrated  guidelines  into  account  in  their  national  economic  and 
employment policies. 

On  12  July  2011,  the  Council  adopted  a  recommendation  on  Hungary’s  national 
reform  programme  for  2011  and  delivered  its  opinion  on  Hungary’s  updated 
convergence programme for 2011-2014. 

On 23 November 2011, the Commission adopted the second Annual Growth Survey, 
marking  the  start  of  the  second  European  semester  of  ex-ante  and  integrated  policy 
coordination,  which  is  anchored  in  the  Europe  2020  strategy.  On  14  February  2012, 
the  Commission,  on  the  basis  of  Regulation  (EU)  1176/2011,  adopted  the  Alert 
Mechanism Report6, in which it identified Hungary as one of the Member States for 
which an in-depth review would be carried out. 

On 2 March 2012, the European Council endorsed the priorities for ensuring financial 
stability,  fiscal  consolidation  and  action  to  foster  growth.  It  underscored  the  need  to 
pursue  differentiated,  growth-friendly  fiscal  consolidation,  to  restore  normal  lending 
conditions  to  the  economy,  to  promote  growth  and  competitiveness,  to  tackle 
unemployment  and  the  social  consequences  of  the  crisis,  and  to  modernise  public 
administration. 

On 29 February 2012, the European Parliament and Hungary exchanged views under 
Article 2a of 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 policies. 

On 2 March 2012, the European Council also invited Member States participating in 
the Euro Plus Pact to present their commitments in time for inclusion in their stability 
or convergence programmes and their national reform programmes. 

On 23 April 2012, Hungary submitted its convergence programme covering the period 
2012-2015 and its 2012 national reform programme. In order to take account of their 
interlinkages,  the  two  programmes  have  been  assessed  at  the  same  time.  The 
Commission  has  also  assessed,  in  an  in-depth  review  under  Article  5  of  Regulation 
(EU) No 1176/2011, whether Hungary is affected by macroeconomic imbalances. The 
Commission  concluded  in  its  in-depth  review7  that  Hungary  is  experiencing  external 
and internal Imbalances, although not excessive.  

Based  on  the  assessment  of  the  2012  Convergence  Programme  pursuant  to  Council 
Regulation  (EC)  No  1466/97,  the  Council  is  of  the  opinion  that  the  macroeconomic 
scenario underpinning the budgetary projections in the programme is optimistic. The 
Hungarian authorities’ growth projections for 2012 and 2013 are higher by around half 
a percentage point compared to the Commission's 2012 spring forecast on the account 
of the more optimistic official assumptions regarding domestic demand, particularly in 
2013. The objective of the budgetary strategy outlined in the programme is to ensure 

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Council Decision 2012/238/EU of 26 April 2012 
COM(2012) 68 final 
SWD(2012)157 final 

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the  sustainable  correction  of  the  excessive  deficit  by  the  2012  deadline  set  by  the 
Council.  The  official  deficit  targets  and  the  planned  fiscal  efforts  comply  with  the 
March  2012  Council  recommendations  based  on  Article  126(7).  The  programme 
confirms  the  previous  medium-term  budgetary  objective  (MTO)  of  1.5%  of  GDP, 
which it plans to achieve by 2013. The MTO adequately reflects the requirements of 
the Stability and Growth Pact. Based on the (recalculated) structural budget balance8, 
progress  towards  the  MTO  does  not  appear  to  be  adequate  in  2013  against  the 
assessment  of  the  Commission's  2012  spring  forecast,  which  takes  into  account  the 
implementation  risks  related  to  selected  saving  measures  and  a  less  optimistic 
macroeconomic  scenario.  The  growth  rate  of  government  expenditure,  taking  into 
account discretionary revenue measures, is in line with the expenditure benchmark of 
the  Stability  and  Growth  Pact  in  2013,  but  not  in  2014  and  in  2015.  According  to 
government plans, the public debt is continuously reduced throughout the programme 
period  to  below  73%  of  GDP  in  2015,  but  will  remain  above  the  60%  of  GDP 
reference  value.  Regarding  the  debt  reduction  benchmark,  Hungary  will  be  in 
transition  period  in  2013-2014  and  the  programme  would  ensure  sufficient  progress 
towards  compliance  with  the  benchmark.  According  to  the  programme,  the  debt 
reduction  benchmark  would  be  met  at  the  end  of  the  transition  period,  in  2015,  and 
thereby should help to reduce the accumulated external and internal indebtedness.  

(10)  New regulations have been adopted for the implementation of the constitutional fiscal 
governance  framework,  but  some  of  its  features  remain  weak.  The  medium-term 
budgetary  planning  is  only  indicative,  the  resources  of  the  Fiscal  Council  are  not 
commensurate  with  its  newly-granted  strong  veto  power,  and  the  availability  of 
budgetary information remains insufficient. Strengthening the medium-term budgetary 
planning  dimension  and  widening  the  analytical  remit  of  the  Fiscal  Council  would 
help  to  ensure  that  the  new  constitutional  fiscal  governance  framework  can  play  its 
role. 

(11)  Policy responses to address the impact of tax reform on low wage earners (minimum 
wage increase, wage subsidy scheme) have not contributed to enhancing employment, 
whereas measures to encourage women’s participation in the labour market are a small 
step  in  the  right  direction.  Making  labour  taxation  more  employment-friendly  and 
further strengthening measures to encourage the participation of women in the labour 
market,  particularly  by  expanding  childcare  and  pre-school  facilities,  would  help  to 
improve the employment rate.  

(12)  The  public  employment  service  has  been  reorganised  resulting  in  an  overall 
downsizing, pointing in the opposite direction of what was recommended in 2011. In 
the field of active labour market policies some measures aiming to provide tailor-made 
services  for  disadvantaged  groups,  for  instance,  under  ESF  programmes,  appear 
credible  and  relevant.  However,  other  measures  aimed  at  disadvantaged  groups  (e.g. 
public works) are unlikely to be effective in improving the placement of participants in 
the open job market. Serious steps to strengthen the capacity of the public employment 
service  should  be  taken  without  delay,  while  keeping  the  right  balance  of  funding 
between public works and other active labour market policies, to help to improve the 

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Cyclically  adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission 
services  on  the  basis  of  the  information  provided  in  the  programme,  using  the  commonly  agreed 
methodology. 

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functioning  of  the  labour  market  and  raise  the  participation  rate.  Raising  the  growth 
potential through structural reform in the labour market would also be important for a 
sustained  reduction  of  the  vulnerabilities  stemming  from  the  large  stock  of  external 
and  internal  debt.  Furthermore,  the  national  Roma  integration  strategy  has  not  been 
mainstreamed in other policies.  

(13)  Measures  to  improve  the  business  environment  largely  go  in  the  right  direction,  but 
there  is  significant  room  for  further  progress.  Efforts  to  improve  access  to  non-bank 
funding are also going in the right direction, but a comprehensive assessment of SME 
policies  is  still  missing.  Hungary  ranks  very  low  on  many  indicators  measuring  the 
transparency and quality of public administration, where progress would also help in 
improving the stability of the institutional and policy environment. This, in turn, could 
improve conditions for foreign direct investment and would support the reduction of 
the significant imbalance in the net international investment position: in particular, the 
ratio of reinvested profits fell dramatically in 2009 and 2010 partly on account of the 
crisis but also as a result of a number of controversial and unpredictable changes in the 
policy  and  fiscal  environment  and  in  the  legal  and  institutional  system.  The  recent 
trend in public funding for research and innovation (since mid-2010) is not in line with 
the  2012  Annual  Growth  Survey  priority  of  differentiated  growth-friendly  fiscal 
consolidation. 

(14)  The  Hungarian  government  carried  out  a  higher  education  reform  that  introduced 
changes in the structure and funding of higher education. In addition, elements of the 
new legislation on school education risk increasing the number of early school leavers 
and  segregation  in  the  Hungarian  school  system.  The  equally  important  issue  of 
lifelong learning is not sufficiently addressed. Improving education at all levels will be 
important to raise the competitiveness of the Hungarian labour force. 

(15)  The lack of progress in restructuring public transport has been an important reason for 
budget  slippages  in  recent  years.  The  vast  majority  of  the  rolling  stock  of  public 
transport companies have reached the limits of their utility. Increasing the cross-border 
capacity  of  the  electricity  network  could  facilitate  a  potential  increase  in  trade  with 
neighbouring countries. The national energy regulator is not empowered to organise its 
structures  autonomously  and  lacks  exclusive  competence  to  set  network  tariffs 
including  the  rate  of  return  that  network  operators  are  allowed  to  earn.  Regulated 
prices should only apply to vulnerable customers. 

(16) 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
the 
comprehensive  analysis  of  Hungary’s  economic  policy.  It  has  assessed 
convergence  programme  and  national  reform  programme,  and  has  presented  an  in-
depth review. It has taken into account not only their relevance for sustainable fiscal 
and socio-economic  policy in Hungary, but also their compliance  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.  Its 
recommendations under the European Semester are reflected in recommendations (1) 
to (7) below.  

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(17) 

(18) 

In  the  light  of  this  assessment,  the  Council  has  examined  Hungary’s  convergence 
programme, and its opinion9 is reflected in particular in recommendation (1) below. 

In the light of the results of the Commission’s in-depth review and this assessment, the 
Council  has  examined  Hungary’s  2012  national  reform  programme  and  Hungary’s 
convergence programme. Its recommendations under Article 6 of Regulation (EU) No 
1176/2011 are reflected in particular in recommendations (1), (3), (4) and (5) below;  

HEREBY  RECOMMENDS  THAT  HUNGARY  SHOULD  TAKE  ACTION  WITHIN  THE 
PERIOD 2012-2013 TO: 

1. 

2. 

3. 

4. 

5. 

6. 

9 

Correct the excessive deficit by 2012 in a durable manner, by implementing the 2012 
budget  and  reducing  the  reliance  on  one-off  measures.  Thereafter,  specify  all 
structural measures necessary to ensure a durable correction of the excessive deficit 
and  to  make  sufficient  progress  towards  the  medium-term  budgetary  objective 
(MTO), including meeting the expenditure benchmark, and ensure sufficient progress 
towards compliance with the debt reduction benchmark. To mitigate the accumulated 
macroeconomic imbalances put the public debt ratio on a firm downward path. 

Revise the cardinal law on economic stability by putting the new numerical rules into 
a  binding  medium-term  budgetary  framework.  Continue  to  broaden  the  analytical 
remit  of  the  Fiscal  Council,  with  a  view  to  increasing  the  transparency  of  public 
finances. 

Make the taxation of labour more employment-friendly by alleviating the impact of 
the  2011  and  2012  tax  changes  on  low  earners  in  a  sustainable,  budget-neutral 
manner, for example by shifting part of the tax burden to energy taxes and recurrent 
taxes  on  property.  Strengthen  measures  to  encourage  women’s  participation  in  the 
labour market, particularly by expanding childcare and pre-school facilities. 

Strengthen the capacity of the Public Employment Service to increase the quality and 
effectiveness  of  training,  job  search  assistance  and  individualised  services,  with 
particular regard for disadvantaged groups. Strengthen the activation element in the 
public work scheme through effective training and job search assistance. Implement 
the National Roma Integration Strategy, and mainstream it with other policies. 

Implement  measures  envisaged  to  reduce  the  administrative  burden.  Ensure  that 
public  procurement  and  the  legislative  process  support  market  competition  and 
ensure a stable regulatory and business-friendly environment for financial and non-
financial enterprises, including foreign direct investors. Reduce tax compliance costs 
and  establish  a  stable,  lawful  and  non-distortive  framework  for  corporate  taxation. 
Remove unjustifiable restrictions on the establishment of large-scale retail premises. 
Provide specific well-targeted incentive schemes to support innovative SMEs in the 
new innovation strategy.  

Prepare  and  implement  a  national  strategy  on  early  school-leaving  by  ensuring 
adequate  financing.  Ensure  that  the  implementation  of  the  higher  education  reform 
improves access to education for disadvantaged groups. 

Under Article 9(2) of Council Regulation (EC) No 1466/97. 

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7. 

Reform the public transport system to make it more cost efficient. Increase the cross-
border  capacities  of  the  electricity  network,  ensure  the  independence  of  the  energy 
regulator and gradually abolish regulated energy prices. 

Done at Brussels, 

For the Council 
The President 

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