COMMUNICATION FROM THE COMMISSION TO THE COUNCIL Assessment of action taken by Hungary in response to the Council Recommendation of 13 March 2012 with a view to bringing an end to the situation of excessive government deficit
Date: 2012-05-30
Institutions: European Commission
Subjects: Hungary, budget deficit, budget estimate, economic recession, public debt, public expenditure, stability pact

EUROPEAN COMMISSION 

Brussels, 30.5.2012  
COM(2012) 276 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

Assessment of action taken by Hungary 

in response to the Council Recommendation of 13 March 2012 with a view to bringing 
an end to the situation of excessive government deficit 

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COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

Assessment of action taken by Hungary 

in response to the Council Recommendation of 13 March 2012 with a view to bringing 
an end to the situation of excessive government deficit 

1. 

EXCESSIVE DEFICIT PROCEDURE AND MOST RECENT RECOMMENDATIONS 

On 5 July 2004, by Decision No 2004/918/EC1, the Council established, in accordance with 
Article 104(6) of the Treaty establishing the European Community (TEC), that an excessive 
deficit existed in Hungary and adopted a recommendation in accordance with Article 104(7) 
TEC with a view to bringing the excessive deficit situation to an end by 2008. 

On 18 January 2005, by Decision No 2005/348/EC2 in accordance with Article 104(8) TEC, 
the  Council  decided  that  Hungary  had  not  taken  effective  action  in  response  to  its 
recommendation and, on 8 March 2005, issued a second recommendation in accordance with 
Article 104(7) TEC, confirming the 2008 deadline for the correction of the excessive deficit. 
On 8 November 2005, by Decision No 2005/843/EC3 in accordance with Article 104(8) TEC, 
the  Council  established  that  Hungary  had  for  a  second  time  failed  to  comply  with  the 
recommendations in accordance with Article 104(7) TEC. Accordingly, on 10 October 2006, 
the Council addressed a third recommendation to Hungary in accordance with Article 104(7) 
TEC  postponing  the  deadline  for  the  correction  of  the  excessive  deficit  to  2009.  On  7  July 
2009,  the  Council  in  its  recommendation  adopted  in  accordance  with  Article  104(7)  TEC 
(henceforth  Council  Recommendation  of  7  July  2009)  concluded  that  the  Hungarian 
authorities  could  be  considered  to  have  taken  effective  action  in  response  to  the 
recommendations  of  10  October  2006  and,  against  the  background  of  the  severe  economic 
downturn  issued  revised  (fourth)  recommendations  in  accordance  with  Article  104(7)  TEC, 
setting  a  further  new  deadline  of  2011  for  Hungary  to  correct  the  situation.  On  27  January 
2010,  the  Commission  adopted  a  Communication  to  the  Council4  concluding  that  Hungary 
had taken effective action in response to the Council Recommendation of 7 July 2009, but it 
nevertheless drew the attention to considerable risks. 

On  24  January  2012,  by  Decision  No  2012/139/EU5,  the  Council  established  in  accordance 
with Article 126(8) Treaty on the Functioning of the European Union (TFEU) that Hungary 
had  not  taken  effective  action  in  response  to  the  Council  Recommendation  of  7  July  2009 
within the period laid down therein. While the 3% of GDP reference value for the deficit was 
not breached in 2011, this was not based on a structural and sustainable correction, but hinged 
upon  substantial  one-off  revenues.  At  the  same  time,  there  was  a  structural  deterioration  in 
2010  and  2011  of  over  2%  of  GDP,  as  compared  to  a  recommended  cumulative  fiscal 
improvement of 0.5% of GDP. Moreover, while the authorities were implementing structural 

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OJ L 389, 30.12.2004, p. 27. 
OJ L 110, 30.4.2005, p. 42. 
OJ L 314, 30.11.2005, p. 18. 
COM(2010) 10 final. 
OJ L 66, 6.3.2012, p. 6. 

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measures in 2012, which were expected to largely offset the previous deterioration, the 3% of 
GDP reference value for the deficit would again be respected in 2012 only thanks to one-off 
revenues of close to 1% of GDP and the Treaty reference value would be breached again in 
2013 once all one-off measures would be phased out. Following that Council Decision, on 13 
March  2012,  by  Implementing  Decision  No  2012/156/EU6,  the  Council  decided  to  suspend 
part  of  the  commitments  from  the  Cohesion  Fund  for  Hungary  with  effect  from  1  January 
2013  in  line  with  Article  4  of  Council  Regulation  (EC)  No  1084/2006  of  11  July  2006 
establishing a Cohesion Fund7.  

On  the  same  day,  the  Council  also  issued  new  (the  fifth)  recommendations  to  Hungary,  in 
accordance  with  Article  126(7)  TFEU  and  Article  3  of  Regulation  (EC)  No  1467/978 
(henceforth  Council  Recommendation  of  13  March  2012),  establishing  a  new  deadline  of 
2012  for  bringing  the  situation  of  an  excessive  deficit  to  an  end.  Furthermore,  the  Council 
made the following specific recommendations: 

•  The Hungarian  authorities should  bring the general government deficit  below the 3% of 
GDP reference value in a credible and sustainable manner in accordance with the multi-
annual path outlined in the updated convergence programme as endorsed by the opinion 
expressed  by  the  Council  on  12  July  2011.  Specifically  to  this  end,  the  Hungarian 
authorities should: 

(a)  Ensure the attainment of the 2012 deficit target of 2.5% of GDP, which based on the 
macroeconomic  framework  after  the  2012  February  Interim  Forecast  of  the 
Commission services would require an additional fiscal effort of at least 0.5% of GDP 
on top of the 1.9% of GDP that is already foreseen. In particular, this should be done 
through a further specification and rigorous implementation of the deficit-decreasing 
measures included in the Széll Kálmán Plan and the updated convergence programme 
as  well  as  the  adoption  of  further  consolidation  measures  of  a  structural  nature  as 
necessary. 

(b) Allocate  possible  windfall  gains  for  improving  the  headline  balance,  including 
possible  one-off  revenues  stemming  from  the  step  back  of  beneficiaries  from  the 
private to the public pension pillar. 

(c)  Take necessary additional measures of a structural nature as needed to ensure that the 
deficit in 2013, estimated to exceed the 3% of GDP reference value by 0.6% of GDP 
based on the macroeconomic framework after the 2012 February Interim Forecast of 
the  Commission  services,  remains  well  below  the  threshold  even  after  the  expected 
and recommended full phasing out of one-off revenues of close to 1% of GDP. These 
measures  could  include  a  further  specification  and  implementation  of  the  planned 
structural reforms included in the Széll Kálmán Plan. 

(d) Incorporate sufficient reserve provisions in the forthcoming budget laws (on top of the 
general  reserve  prescribed  by  the  Public  Finance  Act),  to  ensure  the  achievement  of 
the budgetary targets even in case of unforeseen events.  

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OJ L 78, 17.3.2012, p. 19. 
OJ L 210, 31.7.2006, p. 79. 
OJ L 209, 2.8.1997, p. 6. 

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•  That budgetary adjustment should contribute to bringing the government gross debt ratio 
onto a declining path. In particular, sufficient progress toward compliance with the debt 
reduction benchmark should be ensured for a period of three years from the correction of 
the excessive deficit, in accordance with paragraph 1a of Article 2 of Regulation (EC) No 
1467/97. 

•  According  to  the  Council  Recommendation  in  12  July  2011,  the  Hungarian  authorities 
should  operationalise  the  key  constitutional  fiscal  rules  by  adapting  the  cardinal  law  on 
economic stability. The numerical rules should ensure that the budget process is within the 
context of a truly binding medium-term framework and the analytical remit of the Fiscal 
Council should be broadened. 

The Council established the deadline of 13 September 2012 for the Hungarian government to 
take  effective  action  and  to  specify  the  measures  that  will  be  necessary  to  progress  towards 
ensuring a durable correction of the excessive deficit. At the same time, it committed to assess 
whether Hungary took necessary corrective action already in the context of its meeting on 22 
June 2012 with a view to lifting the partial suspension of the Cohesion Fund commitments in 
2013  if  the  conditions  are  met9.  In  order  to  facilitate  the  decision  of  the  Council,  the 
Commission committed to present the Council without delay its assessment whether effective 
action  has  been  taken,  following  the  adoption  by  the  Hungarian  government  of  corrective 
measures  fulfilling  the  Council  Recommendation  of  13  March  2012  under  Article  126(7) 
TFEU. These commitments and the actions undertaken by the Hungarian authorities provide 
the background for this Communication. 

It  is  worth  noting  that  the  Council  also  invited  the  Hungarian  authorities  to  make  the 
necessary structural effort to reach its budget target of a deficit of 2.2% of GDP for 2013 in a 
way that ensures that the medium-term objective is sustained alongside the durable correction 
of the excessive deficit. 

2. 

ASSESSMENT OF EFFECTIVE ACTION TAKEN 

According to Regulation (EC) No 1467/97 and the revised Code of Conduct10 a Member State 
should  be  considered  to  have  taken  effective  action  if  it  has  acted  in  compliance  with  the 
Article 126(7) 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  budgetary  targets  initially  recommended  by  the  Council  and  the 
underlying improvement in the cyclically adjusted balance net of one off and other temporary 
measures. 

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10 

Recital  12  of  Council  Implementing  Decision  2012/156/EU  concerning  the  partial  suspension  of  the 
Cohesion  Fund  commitments  in  2013  reads:  "In  accordance  with Article  4(2)  of  Regulation  (EC) No 
1084/2006,  if by  22  June 2012,  or  at  a  later  date,  the  Council  establishes  that  Hungary  has  taken  the 
necessary  corrective  action,  it  will  decide,  without  delay,  to  lift  the  suspension  of  the  commitments 
concerned." 
“Specifications on the implementation of the Stability and Growth Pact and Guidelines on the format 
and content of Stability and Convergence Programmes”, of 24 January 2012. See 
http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/coc/code_of_conduct_en.pdf 

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2.1. 

Assessment of action taken regarding the 2012 and 2013 budgetary outcome 

The  underlying  macroeconomic  environment  has  weakened  slightly  compared  to  the 
Commission  services'  2012  February  forecast  underpinning  the  Council  recommendation  of 
13 March  2012, which projected  real  GDP to contract by 0.1% in 2012 and to recover to a 
modest  1.6%  in  2013.  This  weakening  is  mainly  linked  to  the  worse–than-expected 
performance in the construction industry in the first quarter. In addition, recent new measures 
(see  details  below)  further  deteriorated  the  short-  and  medium-term  growth  outlook  and, 
according  to  the  Commission  services'  2012  spring  forecast  and  based  on  information 
available until the cut-off date11, real GDP is expected to decrease by 0.3% in 2012 and to rise 
only  by  1.0%  in  2013.  The  2012  convergence  programme  (CP)  contains  a  somewhat  more 
optimistic growth outlook (0.1% in 2012 and 1.6% in 2013) mainly on account of (i) higher 
private  consumption  expenditure  driven  by  more  sanguine  assumptions  regarding 
employment growth in the private sector and (ii) more dynamic gross fixed capital formation.  

The  2011  general  government  budget  reached  a  surplus  of  4.3%  of  GDP,  thanks  to  one-off 
revenue  of  9.7%  of  GDP  stemming  from  the  de  facto  elimination  of  the  earlier  compulsory 
private pension fund12. Excluding one-off factors, however, the budget was in deficit by 5¼% 
of  GDP.  Although  this  outcome  is  broadly  in  line  with  the  estimation  included  in  the 
Commission Staff Working Document accompanying the Commission recommendation for a 
Council recommendation under Article 126(7) TFEU of March 2012, it is better than foreseen 
by  the  government  in  their  excessive  deficit  procedure  (EDP)  progress  report  of  December 
2011 and by the Commission services in early January 201213 and mainly reflects the better-
than-expected budgetary balance of the local government sector.  

2.1.1.  Deficit correction in 2012 based on Commission services' 2012 spring forecast and 

use of windfall revenues 

In  2012,  according  to  the  Commission  Services'  2012  spring  forecast,  the  budget  deficit  is 
expected to reach 2.5% of GDP, which is in line with the official deficit target and lower by 
0.5% of GDP than the deficit estimate included in the 2012 March assessment. This improved 
outlook mainly reflects three elements.  

1.  It  incorporates  the  base  effect  of  the  better-than-expected  outcome  of  the  2011  budget 

(0.1% of GDP).  

2.  The  government  announced  new  saving  measures  of  0.3%  of  GDP  in  the  2012  CP 
affecting the 2012 budgetary developments. These contain revenue increasing measures of 

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On  15  May,  the  Hungarian  Statistical  Office  published  its  flash  estimate  for  Q1  2012.  On  seasonally 
and  calendar  adjusted  terms,  real  GDP  declined  by  1.3%,  taking  also  analysts  by  surprise,  in 
comparison with the 0.5% decline expected in the 2012 spring forecast published on 11 May, i.e. a few 
days before this flash estimate became available. 
In  2011  the  government  made  it  possible  for  the  members  of  the  earlier  compulsory  private  pension 
funds  to  switch  back  to  the  public  pension  pillar  and  incentivised  them  to  do  so.  Against  this 
background,  97%  of  the  members  decided  to  switch  back,  which  resulted  in  (i)  a  one-off  budgetary 
revenue  in  light  of  the  transfer  of  their  accumulated  assets  to  the  general  government  and  (ii) 
permanently higher pension contribution revenues to the public pension pillar. 
Commission Staff Working Document accompanying the Commission recommendation for a Council 
decision under Article 126(8) of the Treaty. See: 
http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/30_edps/other_documents/2012-
03-06_hu_126-7_commission_swd_en.pdf 

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more  than  0.1%  of  GDP,  including  the  introduction  of  a  new  tax  on  telecommunication 
services  and  the  reverse  charge  VAT  in  agriculture.  On  the  expenditure  side,  savings  of 
0.2%  of  GDP  consist  of  the  cut  of  the  appropriations  of  line  ministries  and  a  further 
reduction  of  pharmaceutical  subsidies.  In  light  of  the  implementation  risk  related  to  the 
expenditure  side  measures,  the  calculations  in  the  Commission  services’  2012  spring 
forecast incorporate savings of 0.2% of GDP (out of the total 0.3% of GDP). 

3.  Beyond the new saving measures, the deficit outlook is affected by newly emerged one-
off developments. These new one-off revenues of 0.4% of GDP include (i) the impact of a 
new  wave  of  stepping  back  of  the  remaining  final  beneficiaries  from  the  private  to  the 
public  pension  pillar  in  response  to  government  incentives  with  deadline  of  end  March 
2012 (0.2% of GDP)14 and (ii) a one-off revenue of 0.2% of GDP related to the fact that 
some  EU  structural  funds  were  received  only  in  January  2012  whereas  the  government 
made  the  related  payments  to  final  beneficiaries  already  in  December  2011,  which  was 
communicated  to  the  Commission  services  in  the  context  of  the  April  2012  forecast 
mission15. They are expected to be partly counterbalanced by new one-off expenditure of 
0.15%  of  GDP  related  to  the  transport  sector  (this  decision  was  communicated  to  the 
Commission services also in April). Thus, net one-offs are expected to increase by around 
0.25% of GDP to around 0.9% of GDP. Without these temporary factors the budget deficit 
would be above the 3% of GDP reference value (notably at 3.4% of GDP). 

Although  the  2012  deficit  target  is  foreseen  to  be  reached,  according  to  the  Commission 
services'  2012  spring  forecast,  it  would  require  the  elimination  of  the  full  amount  of 
extraordinary reserve buffer (contingent expenditure cuts)16 of close to 1½% of GDP, which 
was created to compensate for unforeseen developments while the deficit target can be met17. 
In contrast, the 2012 CP calculates with a still available extraordinary reserve buffer of 0.4% 
of GDP in 2012. This difference is on account of the expenditure slippages of close to ½% of 
GDP expected by the Commission services related to pharmaceutical subsidies, the transport 
sector and a lack of sufficient detail about the cuts in budgetary appropriations as well as the 
somewhat lower tax revenues in light of the lower economic growth forecast. 

According  to  the  Council  Recommendation  of  13  March  2012,  any  windfall  revenue, 
including  possible  one-off  revenues  stemming  from  the  step  back  of  beneficiaries  from  the 
private  to  the  public  pension  pillar,  is  to  be  allocated  to  improve  the  headline  balance. 
Whereas the 2012 CP did not incorporate these revenues, they were incorporated in the 2012 
spring  forecast  with  the  effect  that  the  deficit  is  projected  to  reach  (but  not  outperform)  the 
target.  

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17 

Albeit the deadline was 31 March 2012 for stepping back from the private to the public pension pillar 
and it was known that around one-fourth of the remaining members had chosen to switch to the public 
pillar with a corresponding one-off revenue transfer of 0.2% of GDP, the 2012 CP did not incorporate 
any revenue from this operation. 
The  same  accounting  in  cash-flow  and  in  ESA  terms  applied  by  the  government  is  subject  to 
verification by Eurostat. 
The  same  accounting  in  cash-flow  and  in  ESA  terms  applied  by  the  government  is  subject  to 
verification by Eurostat. 
The submitted budget contained an extraordinary reserve buffer of 0.7% of GDP, which was increased 
by  0.4%  to  1.1%  of  GDP  in  the  adopted  budget.  Saving  measures  of  close  to  0.4%  of  GDP  in  2012 
incorporated  in  the  2012  CP,  according  to  the  government's  calculation,  aim  at  re-establishing  some 
extraordinary reserve buffer since the budgeted extraordinary reserve buffer of 1.1% of GDP serve as an 
off-set of already evident revenue shortfalls and expenditure slippages. 

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2.1.2.  Deficit correction in 2013 based on Commission services' 2012 spring forecast and 

reserve provisions 

In  the  Commission  services'  2012  spring  forecast,  the  budget  deficit  is  projected  to  rise  to 
2.9% of GDP in 2013, which means that the budget deficit is expected to be below the 3% of 
GDP reference value both in 2012 and in 2013, even though in the first year this depends on 
one-off measures. The 2013 deficit forecast is lower by 0.7% of GDP than the deficit estimate 
incorporated in the 2012 March assessment of 3.6% of GDP but higher by 0.7% of GDP than 
the official target of 2.2% of GDP. The improvement of the fiscal outlook reflects numerous 
additional  saving  measures  announced  in  the  2012  CP.  According  to  the  estimation  of  the 
government, these measures can reduce the 2013 budget deficit by around 1.7% of GDP The 
2012 CP, mainly based on the more favourable than earlier expected 2011 data, also counts 
with a lower deficit in the local government sector by 0.2% of GDP in 2012 and 0.3% of GDP 
in 2013. The gross deficit improving impact (of around 1.7% of GDP) of the saving measures 
is calculated with the revenue indicated in the 2012 CP as a minimum (0.4% of GDP) from 
the financial transaction levy. This approach is supported by the decision of the Government 
on  9  May,  which  aims  at  collecting  this  minimum  revenue.  At  the  same  time,  it  includes 
saving of close to 0.2% of GDP from the strict control of expenditure on purchase of goods 
and services in the public sector, which was implicit in the 2012 CP and became public on 16 
May 2012.  

On the revenue side those include (i) the introduction of the financial transaction duty (at least 
0.4% of GDP), (ii) the higher tax rates on the insurance services and on the energy and the 
public  utility  sector  (0.2%  of  GDP),  (iii)  the  full  yearly  impact  of  the  tax  on  the 
telecommunication sector and the reverse charge VAT in agriculture (0.2% of GDP) as well 
as  (iv)  the  introduction  of  the  electronic  road  toll  as  of  July  2013  (0.25%  of  GDP).  On  the 
expenditure side, measures include (i) the cut of the appropriations of the budgetary chapters 
and the state-owned enterprises, (ii) the nominal freezing of the  expenditure  on purchase of 
goods  and  services  in  the  central  government  sub-sector  as  well  as  (iii)  the  reduction  in 
subsidies  to  the  public  transport  sector  and  the  pharmaceuticals,  altogether  with  a  gross 
budgetary improving effect of more than 0.6% of GDP. 

Taking  into  account  the  lack  of  specific  information  available  at  the  cut-off  date  of  the 
Commission services' 2012 spring forecast (26 April 2012) and implementation risks related 
mainly to some expenditure cuts, only two-thirds of this deficit improving effect of 1.7% of 
GDP (i.e. 1.1% of GDP) could be incorporated in the forecast. Whereas the 2012 CP forecasts 
that  the  deficit  target  of  2.2%  of  GDP  will  be  achieved  while  preserving  an  extraordinary 
reserve  buffer  of  0.2  –  0.5%  of  GDP  (depending  on  revenue  raised  from  the  financial 
transaction tax), the  Commission services' 2012  spring forecast projects a  deficit just  below 
the reference value of 3% of GDP without any extraordinary reserve buffer left (and assuming 
no one-offs and temporary measures for that year). This higher deficit forecast mainly reflects 
the implementation risks associated with the earlier and recently announced saving measures 
(¼% and ½% of GDP, respectively) as well as a worse macroeconomic outlook (resulting in a 
higher deficit by ¼% of GDP)18

 .  

The recommendation also asks the government to incorporate sufficient reserve provisions in 
the forthcoming budget laws. While the Commission services' 2012 spring forecast does not 

18 

It  is  worth  highlighting  that some  details  of  the  measures  have  not  yet been  specified  on  the revenue 
side either, which creates uncertainty for the assessment of their budgetary impact. 

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foresee  that  reserve  buffer  is  left  in  2013  to  compensate  for  possible  slippages,  it  has  taken 
into account some implementation risk. Moreover, the authorities still have the opportunity to 
include such reserve buffer in the forthcoming budget laws. This, as well as the use of one-off 
revenues to improve the structural budget, will be monitored based on the semi-annual EDP 
Progress Report expected to be continuously delivered by the government until the abrogation 
of the EDP. 

2.1.3.  New information after the cut-off date of the spring forecast 

Following the cut-off date of the Commission services' 2012 spring forecast, the government 
provided  further  details  related  to  the  cut  of  the  appropriations  of  the  budgetary  chapters 
amounting  to  0.15%  of  GDP,  of  which  only  one  third  was  taken  into  account  in  the 
Commission services' 2012 spring forecast due to lack of sufficient details. New information 
clarified  the  extent  to  which  the  budgets  of  the  various  ministries  and  appropriations  are 
affected  and  that  the  intended  savings  are  based  on  a  cancellation  of  selected  tasks  and 
improvement of efficiency, which can ensure their sustainability. Based on this information, 
the Commission services can now include the full 0.15% of GDP effect of this measure into 
their updated projection. Moreover, by Government Decision No. 1152/2012 of 16 May 2012 
amending the Government Decision No. 1122/2012 (IV.25.), the government made public its 
decision to nominally freeze the expenditure of the central budgetary sub-system as well as to 
contain it at the half of the inflation rate for the local government sub-system on purchase of 
goods  and  services  in  2013  (these  were  only  implicitly  assumed  in  the  2012  CP).  The 
government  also  clarified  that  this  saving  of  close  to  0.2%  of  GDP  would  be  implemented 
based  on  the  same  principles  applied  for  the  cut  of  the  appropriations  of  the  budgetary 
chapters. This decision improves the Commission services' updated budgetary assessment by 
only 0.1% of GDP as there are some implementation risks, also in view of the fact that the 
central government has limited impact on the budgetary planning of the local governments.  

On  9  May  2012  the  authorities  adopted  some  key  parameters  of  a  tax  package  (draft  laws 
were submitted to Parliament on 11 May), which contained a number of elements that differed 
from the description in the 2012 CP. In general, the subject of the new taxes will consistently 
be  the  companies  and  not  the  consumers  as  previously  anticipated,  which  may  further 
deteriorate the investment climate as exemplified by the statements of the concerned business 
organisations.  As  to  the  specific  numerical  changes,  the  government  decided  on  ceilings  on 
the  telecom  tax  monthly  payments  and  a  lower-than-planned  tax  hike  for  the  surcharge  on 
energy  and  public  utility  companies  with  combined  revenue  loss  of  close  to  0.1%  of  GDP. 
This  is  planned  to  be  compensated  by  correspondingly  higher  receipts  from  the  financial 
transaction  duty  as  the  removal  of  the  originally  foreseen  capping  would  not  be  fully 
counterbalanced  by  a  narrower  list  of  taxable  transactions.  On  the  basis  of  information 
available at the time of finalising this assessment, this new information did not have an impact 
on the overall revenue expected from the tax package.  

Taking  into  account  all  of  this  new  information  received  after  the  cut  off  date  of  the 
Commission  services'  2012  spring  forecast  and  notably  the  further  details  regarding 
expenditure which have a deficit reducing impact of 0.2% of GDP, the 2013 deficit would be 
projected to fall to 2.7% of GDP, which can be considered to be well below the threshold of 
3% of GDP (see Table 1 for the evolution of the Commission's assessment at different stages). 

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2.1.4.  Fiscal effort underlying the deficit correction in 2012 and 2013 

In its Recommendation of 13 March 2012, the Council invited the government to ensure the 
attainment of the 2012 deficit target of 2.5% of GDP and a deficit well below the threshold of 
3%  of  GDP  in  2013.  Based  on  the  macroeconomic  framework  emerging  from  the 
Commission services' 2012 February forecast, this was expected to require an additional fiscal 
effort  of  at  least  ½%  of  GDP  in  2012  (on  top  of  the  1.9%  of  GDP  already  foreseen)  and 
further efforts in 2013 (given a deficit forecast of 3.6% of GDP for that year).  

According  to  the  Commission  services'  2012  spring  forecast,  following  a  deterioration  of 
1.4%  of  GDP  in  2010  and  an  additional  0.7%  of  GDP  in  2011,  the  structural  balance  is 
expected to improve by 2¼% of GDP in 2012, which exceeds the improvement expected in 
the 2012 March assessment by ¼% of GDP. While this is slightly below the additional fiscal 
effort recommended by the Council, this is partly explained by a (small) downward revision 
of potential growth between the Commission services' 2012 February forecast  and  the 2012 
spring forecast (with a negative impact on the cyclically adjusted budget balance in 2012 of 
0.1% of GDP). 

Moreover, tax revenue (net of the impact of discretionary measures) in 2012 has been lower 
than  suggested  by  GDP  developments  and  standard  tax  elasticities,  part  of  which  may  have 
contributed to the change in the structural balance falling slightly short of the required fiscal 
effort. Taking these factors into consideration, the fiscal effort for 2012 can be considered to 
be broadly in line with what was required under the Council Recommendation of 13 March 
2012.  

In 2013, a slight additional improvement of the structural budget balance (0.1% of GDP) was 
foreseen  by  the  2012  spring  forecast.  Taking  into  account  the  new  information  provided  by 
the  government  following  the  cut-off  date  of  the  forecast,  this  would  raise  the  additional 
improvement to over ¼% of GDP.  

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Table 1: Evolution of budgetary forecast 

Commission March 2012 assessment 
Underlying macroeconomic developments 
One-offs 

revenue  side  (additional  move  of  members  from  the  private  to 
public pension pillar, special accounting of EU Funds) 
expenditure  side  (debt  related  expenditure  in  the  transport 
sector) 

Other fiscal developments (e.g. change in the wage compensation 
system, adjustment to tax changes) 
Commission assessment before new measures were taken 
Saving measures outlined in the 2012 convergence programme 

revenue  side  (e.g.  financial  transaction  duty,  electronic  road 
toll, extra tax on energy and telecom sector) 
expenditure  side  (e.g.  cut  of  expenditure  at  the  budgetary 
chapters, reduction of pharmaceutical subsidies) 
Second-round macroeconomic effects of the saving measures 
2012 spring forecast (published on 11 May 2012) 
Further information on expenditure side saving measures (after the 
cut-off date of the 2012 spring forecast) 
Updated Commission assessment  

2012 
-3.0 
-0.05 
0.25 

0.40 

-0.15 

0.15 

-2.65 
0.20 

2013 
-3.6 
-0.05 
0.0 

0.0 

0.0 

-0.10 

-3.75 
1.10 

0.15 

0.90 

0.05 

0.20 

-0.05 
-2.5 

0.10 

-2.5¹ 

-0.25 
-2.9 

0.20 

-2.7 

¹ Further information on saving measures created extraordinary reserve buffer of 0.1% of GDP 

2.1.5.  Overall assessment regarding deficit and debt correction 

Overall, and also taking into account information that became available after the cut-off date 
of the Commission services' 2012 spring forecast, the budget deficit is expected to reach 2.5% 
of  GDP  in  2012  and  remain  well  below  the  3%  of  GDP  reference  value  in  2013  as 
recommended  by  the  Council  in  March  this  year.  The  improvement  of  the  fiscal  forecast 
mainly reflects the budgetary effect of new measures of 0.3% of GDP in 2012 and 1.3% of 
GDP in 2013 announced in the context of the 2012 CP and further explained thereafter, which 
also contribute to the improvement of the structural balance by ¼% of GDP in 2012 and an 
additional ½% of GDP in 2013 compared to the 2012 March assessment. Other factors, such 
as the base effect of the somewhat better-than-expected 2011 budget balance and higher one-
off  revenues,  also  contribute  to  the  improving  headline  deficit  outlook  and  make  the  deficit 
target of 2.5% of GDP in 2012 attainable. 

It may be useful to note that the consolidation steps raise some questions in terms of quality, 
as they are mainly concentrated on the revenue side and may hinder economic growth also in 
light of the deteriorating business environment due to the de facto replacement of temporary 
sectoral levies that were supposed to be phased out by permanent sectoral taxes in largely the 
same  sectors.  As  mentioned  in  the  context  of  the  Council  Recommendation,  in  order  to 
achieve a durable correction of the excessive deficit, Hungary could benefit from measures in 
the  area  of  the  universal  child  benefit  (possibly  in  connection  with  the  recently  introduced 

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family  tax  allowances),  a  centralised,  value-based  property  tax  and  from  enhancing  the 
progressive nature of the flat income tax scheme19. 

In 2011, the general government debt declined somewhat, to 80.6% of GDP, in the light of the 
sizeable primary surplus of 8¼% of GDP that was to a large extent offset by the depreciation 
of the forint of more than 10%. The debt is expected to decrease to 78.5% of GDP in 2012 
and  slightly  further  in  2013,  based  on  the  deficit  outlook  incorporated  in  the  2012  spring 
forecast  and  assuming  that  no  public  assets  will  be  sold20.  According  to  the  CP  update,  the 
public debt is continuously reduced throughout the programme period to 77% of GDP in 2013 
and  below  73%  of  GDP  in  2015.  As  to  compliance  with  the  debt  reduction  benchmark, 
Hungary  will  be  in  a  transition  period  in  the  three  years  following  the  correction  of  its 
excessive  deficit  (i.e.  2013-2015).  The  planned  fiscal  adjustment  would  ensure  sufficient 
progress towards compliance with the debt reduction benchmark. Based on the planned fiscal 
adjustment, the debt reduction benchmark will be met in 2015. According to Article 2(1a) of 
Regulation (EC) No 1467/97, for a Member State which was subject to an excessive deficit 
procedure  on  8  November  2011  and  for  a  period  of  three  years  from  the  correction  of  the 
excessive deficit, the requirement under the debt criterion shall be considered fulfilled if the 
Member State concerned makes sufficient progress towards compliance.  

2.2. 

Assessment of action taken regarding fiscal governance 

As regards fiscal governance, the Council asked the Hungarian authorities to adapt the law on 
economic stability, in particular by establishing a truly binding medium-term framework and 
broadening the analytical remit of the Fiscal Council. The 2012 CP announced that, following 
a review of the new regulatory framework in place, the Government will submit to Parliament 
the necessary amendment during the spring session. At the time of finalising this assessment, 
no information was provided on the planned amendments. In order to ensure full transposition 
of  the  Council  directive  of  minimum  requirements  for  national  budgetary  frameworks,  a 
timetable was set up in the framework of the Government's database for the harmonisation of 
Hungarian law with EU law (managed by the Ministry of Public Administration and Justice); 
it starts with a decision on conceptual issues in June 2012 and foresees the completion of the 
legislative process by Autumn 2013. As regards the functioning of the Fiscal Council, in late 
March 2012, it was legislated that the President of this body would receive a salary and could 
set  up  a  small  secretariat  within  the  Office  of  the  Parliament  (these  aspects  were  missing 
before). While this constitutes a small step in the right direction, as some institutionalisation 
of the Fiscal Council appears to be more commensurate with its strong veto power over the 
annual budget, overall progress in this area can be considered to be slow, and developments 
on fiscal governance will need to be closely monitored. 

3. 

CONCLUSIONS 

On  current  information  it  appears  that  Hungary  has  taken  action  representing  adequate 
progress towards the correction of the excessive deficit.  

In  particular,  the  2012  deficit  target  of  2.5%  of  GDP  is  expected  to  be  met  and  the  2013 
budget  deficit  is  foreseen  to  be  well  below  the  threshold  of  3%  of  GDP  against  a  slightly 

19 
20 

Recital 13 in the Council Recommendation of 13 March. 
A significant part of these public assets stem from the takeover of the assets in the framework of the de 
facto elimination of the earlier mandatory private pension pillar. 

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weakened underlying macroeconomic environment The 2012 deficit is expected to be reached 
based on structural measures of 0.3% of GDP and also builds on a small positive base effect 
from 2011 as well as some one-off developments Taking into account the effect of revisions 
to potential GDP growth and that tax revenue (net of the impact of discretionary measures) in 
2012 falls short of what could be expected on the basis of GDP developments and standard 
tax  elasticities,  the  fiscal  effort  in  2012  can  be  considered  to  be  broadly  in  line  with  the 
requirement of the Council Recommendation of 13 March 2012.  

In  2013,  based  on  all  publicly  available  information  also  after  the  cut-off  date  of  the  2012 
spring  forecast,  the  deficit  is  foreseen  by  the  Commission  services  to  reach  2.7%  of  GDP 
thanks to a series of consolidation measures and thus to remain well below the 3% of GDP 
Treaty reference value even after the full phasing-out of net one-off measures of 0.9% of GDP 
revenues.  Based  on  this  deficit  forecast  and  additional  information  received  since  then,  the 
general government debt is expected to decrease from 80.6% of GDP in 2011 to below 78.5% 
of GDP in 2012 and slightly further in 2013.  

The  baseline  scenario  incorporated  in  the  2012  spring  forecast  is  surrounded  by  symmetric 
risks. On the one hand, a lower deficit may be attained by a more favourable than currently 
assumed balance of the local governments, or lower interest expenditure of the public sector. 
On  the  other  hand,  there  are  deficit  increasing  risks,  for  instance  the  higher-than-expected 
expenditure linked to the losses of the central bank. In addition, the recently announced new 
taxes  could  trigger  a  further  deterioration  in  the  investment  climate  in  a  non-linear  manner, 
which may also suffer from the latest strong GDP decline in the first quarter that could not be 
integrated in the forecast and thus negatively affect the deficit. 

As  regards  fiscal  governance,  the  intention  to  submit  legislative  amendments  to  Parliament 
was announced in the 2012 CP. However, at the time of finalising this assessment, no public 
information on the content and ambition of the planned revision was available. From March 
2012, the President of the Fiscal Council has become eligible for a competitive remuneration 
and setting up a small secretariat. Against the background of this slow progress, developments 
on  fiscal  governance  will  need  to  be  closely  monitored  also  as  a  follow-up  of  the  2012 
country-specific recommendation on fiscal governance reform.  

In  view  of  the  above  assessment,  the  Commission  considers  that  no  further  steps  in  the 
excessive deficit procedure of Hungary are needed at present. A rigorous implementation and 
swift progress with the specifications of all announced measures will be needed to keep the 
budget  deficit  safely  below  the  3%  of  GDP  reference  value.  The  design  of  consolidation 
measures  could  be  further  improved,  in  close  and  ex  ante  consultation  with  relevant 
stakeholders and international organisations. The fiscal governance framework still needs to 
be adjusted to be in line with the Council recommendation so that the country would benefit 
from the creation of a well-functioning institutional system. Against this background, and also 
in  light  of  the  recent  worse-than-expected  first  quarter  growth  data,  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 prolonged history of this Excessive Deficit 
Procedure.  The  bi-annual  EDP  reports  by  the  government  will  be  one  of  the  sources  of 
information for this purpose. 

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Table 2: Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 
Output gap1 
(% of potential GDP) 
General government balance²
(% of GDP) 
Primary balance 
(% of GDP) 
Cyclically-adjusted balance1,3
(% of GDP) 

Structural balance4 
(% of GDP) 

Government gross debt 
(% of GDP) 

Notes:  

2011 
1.7 
1.7 
-2.3 
-2.4 
4.3 
4.3 
8.3 
8.3 
5.3 
5.4 
-4.3 
n.a.-
4.0 
80.6 
80.6 

2012 
-0.3 
0.1 
-2.7 
-3.0 
-2.5 
-2.5 
1.5 
1.6 
-1.3 
-1.1 
-2.1 

2013 
1.0 
1.6 
-2.0 
-2.6 
-2.9 
-2.2 
1.2 
2.0 
-2.0 
-1.0 
-2.0 

2014 
n.a. 
2.5 
n.a. 
-1.7 
n.a. 
-1.9 
n.a. 
2.2 
n.a. 
-1.1 
n.a. 

2015 
n.a. 
2.5 
n.a. 
-1.2 
n.a. 
-1.5 
n.a. 
2.2 
n.a. 
-0.9 
n.a. 

-1.9 

-1.2 

-1.1 

-0.9 

78.5 
78.4 

78.0 
77.0 

n.a. 
73.7 

n.a. 
72.7 

COM  
CP 
COM  
CP 
COM  
CP 
COM  
CP 
COM  
CP 
COM  

CP 

COM  
CP 

1 For CP, output gaps and cyclically-adjusted balances according to the programmes as 
recalculated by Commission services on the basis of the information in the programmes. 

2 Based on information received after the cut-off date of the Commission services' 2012 spring 
forecast, the 2013 headline deficit forecast could be revised down to 2.7% of GDP. 

3 Cyclically-adjusted balance excluding one-off and other temporary measures. 

4 In line with the revision of the 2013 headline deficit forecast based on information received 
after the cut-off date of the Commission services' spring forecast, the corresponding structural 
balance also improved by ¼% of GDP in 2013. 

Source: Commission services’ 2012 spring forecast (COM) published on 11 May 
2012 and 2012 convergence programme (CP) 

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