COMMISSION STAFF WORKING DOCUMENT Assessment of the 2013 national reform programme and convergence programme for HUNGARY Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Hungary’s 2013 national reform programme and delivering a Council Opinion on Hungary’s convergence programme for 2012-2016
Date: 2013-05-29
Institutions: European Commission
Subjects: Hungary, budget deficit, dropout, economic recession, independence of the judiciary, means of public conveyance, poverty, price of energy, tax reform, youth unemployment

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
SWD(2013) 367 final 

COMMISSION STAFF WORKING DOCUMENT 

Assessment of the 2013 national reform programme and convergence programme for 
HUNGARY 

Accompanying the document 

Recommendation for a COUNCIL RECOMMENDATION  

on Hungary’s 2013 national reform programme and delivering a Council Opinion on 
Hungary’s convergence programme for 2012-2016 

{COM(2013) 367 final} 

EN 

   EN 

 
 
 
 
  
 
CONTENTS 

Executive summary .................................................................................................................... 3 

1. 

2. 

2.1. 

2.2. 

3. 

3.1. 

3.2. 

3.3. 

3.4. 

3.5. 

4. 

5. 

Introduction .................................................................................................................. 6 

Economic developments and challenges...................................................................... 8 

Recent economic developments and outlook............................................................... 8 

Challenges .................................................................................................................... 9 

Assessment of policy agenda ..................................................................................... 12 

Fiscal policy and taxation........................................................................................... 12 

Financial sector .......................................................................................................... 23 

Labour market, education and social policies ............................................................ 25 

Structural measures promoting growth and competitiveness..................................... 31 

Modernisation of public administration ..................................................................... 36 

Overview table ........................................................................................................... 39 

Annex ......................................................................................................................... 45 

2 

 
 
 
 
1. 

EXECUTIVE SUMMARY  

Economic outlook 

In 2012, Hungary entered a recession and its GDP decreased by 1.7 %. According to the 
Commission's spring 2013 forecast, growth is expected to pick up in 2013 by 0.2% and 
to  regain  momentum  in  2014,  rising  to  1.4%.  Due  to  increasing  participation,  despite  the 
1.7% increase in the employment, the unemployment rate remained in double digits (10.9%) 
in 2012, and is projected to increase slightly to 11.4% in 2013 and 11.5% in 2014. 

Although the headline fiscal deficit stood at 1.9% in 2012, the Commission 2013 spring 
forecast projects a deficit increasing above the Treaty reference value by 2014. After the 
May  2013  consolidation  package  (subject  to  some  implementation  risks)  the  headline 
deficit is projected to remain sustainably below 3% (2.7% and 2.9% of GDP in 2013 and 
2014).  Hungary's  structural  balance  (excluding  cyclical  fluctuations  and  one-off  factors) 
improved  by  3.4%  of  GDP  in  2012,  which  substantially  exceeds  the  recommended  fiscal 
effort of 2.4% of GDP. The Commission 2013 spring forecast projects only a slight reduction 
in public debt to 78.9% of GDP by 2014 (from 79.2% of GDP in 2012), which could decrease 
to 78.4% of GDP if the new corrective measures are taken into account.  

Key issues 

A weak country growth potential related to a worsening business environment, which is 
to a large extent driven by the lack of predictability and distortive effects of government 
policies. These measures have contributed to a quick pace of banking sector deleveraging and 
declining  investment  demand,  resulting  in  a  historically  low  investment  rate  and  reduced 
lending. Moreover, a number of recently adopted laws – most notably the fourth amendment 
to the Fundamental Law and restrictions in the service sector - have raised serious concerns 
over their compatibility with EU legislation and with the principles of the rule of law. Finally, 
Hungary  was  identified  by  the  Commission  this  year  as  experiencing  macroeconomic 
imbalances.  

After fiscal loosening in 2010 and 2011, the government made considerable consolidation 
efforts  and  reached  a  deficit  of  1.9%  of  GDP  in  2012,  well  below  the  target  of  2.5%. 
While the Commission 2013 Spring Forecast projects a renewed breach of the 3% of GDP by 
2014, consolidation steps announced on 13 May for 2013 and 2014 should sustainably correct 
the excessive deficit. 

However, Hungary faces serious challenges in the short- to medium term, related to the 
business  and  legal  environment  and  economic  growth  potential,  which  could  also 
undermine the success of fiscal consolidation.  

•  Fiscal  consolidation:  Despite  substantial  progress  with  consolidation,  the  quality  of 
the  fiscal  correction  raises  concerns,  with  a  high  share  of  revenue  side  measures 
targeted  most  notably  towards  few  selected  sectors.  Moreover,  although  Hungary 
achieved a deficit of 1.9% of GDP in 2012 (the deadline for bringing the deficit below 
3%)  and  over-achieved  the  recommended  structural  effort  of  2.4%  of  GDP,  high 
public  and external  debt  levels  (close to  80%  and  100%  of  GDP  respectively)  and  a 

3 

 
 
weak  growth  potential  associated  with  high  financing  costs  keep  the  economy 
vulnerable.  Fiscal  governance  needs  further  improvements  as  the  medium  term 
budgetary framework remains purely indicative and in spite of some reinforcement to 
the Fiscal Council. 

•  Business  environment:  The  recent  deterioration  of  the  business  environment,  most 
notably because of an increase in corporate surtaxes with varying rates across sectors, 
has  affected  Hungary's  growth  potential  and  productivity.  A  new  duty  on  bank 
transactions of around 0.5% of GDP adds to the permanent bank levy (0.5% of GDP), 
which  is  already  the  highest  tax  of  its  kind  in  Europe.  The  energy  profit  surtax 
increased  from  8%  to  31%  and  was  extended  to  public  utility  companies,  raising 
overall  taxation  of  profits  in  these  sectors  to  50%.  Meanwhile,  the  tax  structure  has 
become  more  complex,  with  six  corporate  income  tax  regimes  now  in  place,  while 
public administration reform has been delayed. Furthermore, higher entry costs in the 
service sector and increasing segmentation could contribute to weakening competition 
and productivity. 

•  Labour market: Unemployment remains high in spite of government's labour market 
reforms.  The  main  problems  for  labour  supply  are  the  difficulties  in  moving  from 
education to work (youth unemployment stood at 28.1% in 2012), skills mismatches 
that could not be adequately addressed by the dominant public work schemes among 
active labour market measures (accounting for over half of related spending in 2012), 
the  still  high  tax  burden  on  certain  groups  of  low  income  earners  (despite 
improvements introduced by the Job Protection Act) as well as the low availability of 
childcare  services.  In  addition,  labour  demand  is  held  back  by  a  historic  low 
investment  rate  and weak  productivity growth. Poverty and  social exclusion are also 
high,  with  23%  of  the  population  facing  severe  material  deprivation,  which  is 
exacerbated  by  the  cut  in  the  length  of  unemployment  benefits.  In  spite  of  recent 
improvements,  the  number  of  students  in  higher  education  is  still  below  the  EU 
average. Early School Leaving has started to increase again, from a low of 10.5 % in 
2010 to 11.5 % in 2012. Vocational education is not efficient enough and participation 
in lifelong learning is amongst the lowest in the EU.  

•  Energy/transport: Hungary is still well above the EU average in terms of energy and 
carbon  intensity,  which  contribute  to  a  persistently  high  energy  trade  deficit  (-5.4 % 
GDP  a  year  on  average  in  2007-11,  compared  to  -2.4 %  in  the  EU).  This  is  partly 
caused  by  heavily  regulated  energy  prices  and  the  lack  of  independence  of  the 
National Regulator. Inefficient public transport continues to weigh on the budget, and 
reforms have been delayed for too long, which is affecting economic growth and the 
environment.  

•  Judiciary:  Recent  developments  in  Hungary  have  increased  concerns  about  the 
judiciary's independence, most notably after the fourth amendment to the Fundamental 
Law.  Following  a  detailed  assessment  of  the  various  provisions,  the  European 

4 

 
 
Commission sent administrative letters requesting further clarification on this issue in 
May. 

5 

 
 
1. 

INTRODUCTION  

In  May  2012,  the  Commission  proposed  a  set  of  country-specific  recommendations  (CSRs) 
for  economic  and  structural  reform  policies  for  Hungary.  On  this  basis,  the  Council  of  the 
European Union adopted seven CSRs in the form of a Council Recommendation. These CSRs 
concerned  public  finances,  taxation,  the  labour  market,  the  business  environment,  education 
and  the  network  industries.  This  Staff  Working  Document  (SWD)  assesses  their  state  of 
implementation in Hungary. 

The SWD assesses policy measures in light of the findings of the Commission’s 2013 Annual 
Growth Survey (2013 AGS)1 and the second annual Alert Mechanism Report (2012 AMR),2 
which  were  published  in  November  2012.  The  2013  AGS  sets  out  the  Commission’s 
proposals  for  building  the  necessary  common  understanding  about  priorities  for  action  at 
national  and  EU  levels  in  2013.  It  identifies  five  priorities  to  guide  Member  States  towards 
renewed  growth:  pursuing  differentiated,  growth-friendly  fiscal  consolidation;  restoring 
normal  lending  to  the  economy;  promoting  growth  and  competitiveness  for  today  and 
tomorrow; tackling unemployment and the social consequences of the crisis; and modernising 
public  administration.  The  2012  AMR  serves  as  an  initial  screening  device  to  determine 
whether macroeconomic imbalances exist and whether risks are emerging in Member States. 
It found positive signs of macro-economic imbalances in Europe being corrected. To ensure 
that a complete and durable balance is achieved, Hungary and 13 other Member States were 
selected for a review of developments in the accumulation and unwinding of imbalances.3 

Against the background of the 2012 Council Recommendations, the 2013 AGS and the 2013 
AMR,  Hungary  presented  updates  of  its  national  reform  programme  (NRP)  and  its 
convergence programme (CP) in April 2013. These provide detailed information on progress 
made  since  July  2012  and  on  the  government’s  future  plans.  The  information  contained  in 
these  programmes  provides  the  basis  for  the  assessment  made  in  this  Staff  Working 
Document. 

The  programmes  submitted  went  through  a  limited  consultation  process  involving  civil 
society stakeholders and business associations.   

Overall assessment 

The analysis of this SWD leads to the conclusion that Hungary has made some progress 
on  measures  taken  to  address  the  CSRs  of  the  Council  Recommendation  but  major 
concerns  remain  regarding  the  business  environment  and  financial  intermediation.  In 
particular,  the  recommendation  on  public  finances  (CSR1)  was  broadly  implemented,  the 
recommendation  on  fiscal  governance  (CSR2),  taxation  (CSR3)  and  labour  market  reform 
(CSR4) were partly implemented, while limited progress was achieved on education (CSR6) 
and on the network industries (CSR7) and no progress was observed as regards the business 
environment (CSR5).  

1 COM(2012)750 final 
2 COM(2012)751 final 
3 13 in-depth reviews were published on 10 April 2013. While selected for an IDR in the 2012 AMR, Cyprus 
was ultimately not reviewed under the MIP due to the preparations for a financial assistance programme 

6 

 
 
                                                 
After  fiscal  loosening  in  2010  and  2011,  additional  fiscal  consolidation  measures  were 
approved  and  contributed  to  closing  the  fiscal  gap  for  2012  (the  deficit  turned  out  to  be 
1.9%  of  GDP,  i.e.  well  below  the  3%  of  GDP  reference  value,  although  including  one-off 
measures amounting to 0.75% of GDP). The public debt ratio decreased from 81.4 % in 2011 
to  79.2 %  in  2012.  The  Fiscal  Council  was  reinforced  both  in  terms  of  (optional)  tasks  and 
human resources.  

Challenges  are  mainly  linked  to  the  need  for  a  more  business  friendly  environment, 
conducive to growth and for improving competitiveness. Recent policy measures have in 
effect  increased  surtaxes  on  the  financial  sector  and  on  certain  non-financial  businesses.  A 
sizeable  new duty  on  bank  transactions (around 0.5% of GDP) was added to the permanent 
bank levy (0.5% of GDP), already the biggest tax of this kind in Europe. The surcharge profit 
tax  on  energy  was  increased  from  8%  to  31%  and  extended  to  public  utility  companies, 
therefore raising the overall taxation of profits in these sectors to 50 %. There have been some 
sensible  steps  with  the  adoption  of  new  simplified  business  taxes,  but  the  tax  structure  has 
become  more  complex,  as  Hungary  now  has  six  corporate  income  tax  regimes.  The 
government's intervention in energy prices has continued, as the right to set retail prices and 
network tariffs is only formally in the hands of the National Regulator. The public transport 
system  continues  to  be  inefficient,  with  delays  affecting  the  overall  reorganisation  and 
implementation of savings plans for national railways and the Budapest Transport Company, 
which have a direct effect on the government’s fiscal objectives.  

As  a  response  to  CSR3,  the  government  introduced  the  Job  Protection  Act  which 
reduces social contributions for certain categories of disadvantaged people. A number of 
measures to improve women’s participation have been taken, e.g. the expansion of day-care 
facilities for 0-3 years-olds and promotion of flexible forms of employment. In addition, the 
government  strengthened  active  labour  market  policies,  but  the  public  work  scheme  (PWS) 
remains the main pillar of employment policy, even though it seems to be an ineffective job 
activation measure. 

While the 2012 outcome was practically at the 2020 target (29.9% as opposed to 30.3%), 
recent  changes  in  higher  education  entail  a  strong  risk  that  the  number  of  entrants, 
particularly  from  disadvantaged  background,  will  decrease.  Also,  a  national  strategy  on 
early-school leaving has not been adopted yet. 

The policy plans submitted by Hungary address some of the challenges identified in last 
year's  Staff  Working  Document.  The  underlying  macroeconomic  path  underpinning  the 
convergence  programme  (CP)  appears  optimistic  and  the  deficit  targets  are  not  fully 
supported by well specified measures, according to the Commission 2013 spring forecast. The 
CP confirms the commitment to correcting the excessive deficit by the 2012 deadline, but did 
not  include  new  fiscal  consolidation  measures,  and  based  on  the  budgetary  projections 
included in the Commission's forecast, this was not yet ensured. However, after the adoption 
of a new corrective package on 10 May the fiscal deficit is projected to remain below 3% over 
the  forecast  horizon.  The  national  reform  programme  confirms  Hungary's  commitment  to 
addressing  labour  market  issues  but  could  contain  more  detailed  measures  to  improve  the 
business environment and to restore normal lending to the economy.   

7 

 
 
2. 

ECONOMIC DEVELOPMENTS AND CHALLENGES 

1.1. 

Recent economic developments and outlook   

Recent economic developments 

In 2012 and early 2013, growth in Hungary was strongly affected by the deleveraging of 
domestic  sectors,  weakening  global  activity  and  tight  lending  conditions.  Despite  an 
increase in the  participation  and  employment rates, unemployment remained in double-digit 
territory (10.9% for 2012) and is projected to increase slightly more on account of increased 
participation and a slightly decreasing employment rate. 

In 2012, the Hungarian economy entered a recession and GDP decreased by 1.7%. After 
a  short-lived  recovery  in  2011,  domestic  demand  fell  by  3.7%.  Investment  continued  to 
contract  for  the  fourth  year  in  a  row  against  a  background  of  tight  lending  conditions, 
uncertain  business  environment  and  deleveraging.  Falling  disposable  income  and  a  high 
unemployment rate, which reached 10.9 % in spite of a 1.7 % increase in total employment, 
contributed  to  a  decrease  in  consumption.  GDP  was  also  dragged  down  by  unusually  weak 
production  in  the  agricultural  sector.  Export  growth  cushioned  the  fall  in  output  but  it  then 
sharply decreased on account of a deteriorating external environment. 

Economic outlook 

For 2013, a mild recovery is forecast (+0.2% of GDP). Export markets are set to improve 
and stabilisation of domestic demand is expected due to an increase in real disposable income, 
although  the  high  unemployment  rate  and  on-going  deleveraging  would  keep  household 
spending  contained.  Private  investment  is  projected  to  remain  negative  in  view  of  policy 
uncertainty, the continued fall in lending and high surtaxes on some capital intensive sectors, 
while government investment would be boosted by a higher inflow of EU funds.  

In  2014,  growth  is  expected  to  reach  1.4%  due  to  a  positive  contribution  from  net 
exports  and  domestic  demand.  Household  consumption  is  set  to  increase  on  account  of 
further  improvement  in  real  disposable  income  and  looser  lending  conditions.  Investment 
growth  is  projected  to  turn  positive  on  account  of  government-sponsored  lending  and  the 
central bank's new "Funding for Growth" scheme."  

While the labour market participation rate is projected to grow further, the employment 
level is foreseen to remain broadly stable, so that unemployment is expected to stay in 
the  double  digits,  and  even  increase  slightly  to  11.4 %  in  2013  and  11.5%  in  2014. 
Companies  are  expected  to  adjust  to  weaker  profitability  conditions,  partially  through  lay-
offs,  though  this  will  be  counteracted  by  the  growing  public  work  scheme4  and  the  rise  in 
employment possibilities for small and medium-sized enterprises (SMEs).  

The macroeconomic forecast in the CP seems somewhat optimistic. The GDP projection is 
around half a percentage point (pp.) higher than the Commission 2013 spring forecast. This 

4 Government sponsored employment schemes in the public sector for those people in working age who are able 

to work and do not have a regular job. 

8 

 
 
                                                 
 
 
reflects  a  higher  forecast  for  both  domestic  demand  and  net  exports  compared  to  the 
Commission's assessment. The government's outlook for employment is also more optimistic 
than  the  forecast  by  the  Commission,  by  around  half  pp.  of  GDP  in  both  2013  and  2014.  
Finally, the CP projects somewhat higher inflation than the Commission's forecast does. 

The  CP  contains  the  government's  assessment  of  the  estimated  macroeconomic  impact 
of  structural  reforms.  According  to  the  analyses,  recent  policy  steps  could  increase  GDP 
growth by around 1% in 3 years' time, mainly through higher employment, while investment 
and  total  factor  productivity  will  decline.  However,  in  simulations  the  positive  GDP  effects 
are presented as a result of fiscal measures that actually increase the burden on the corporate 
sector  and  on  households'  consumption  and  only  slightly  reduce  the  burden  on  employment 
(+0.4% and +0.8% of GDP as opposed to -0.1% of GDP), which does not seem coherent. In 
addition, the simulations do not contain some recently adopted significant measures, such as 
keeping the bank levy at its initial level or an increased level of the financial transaction duty.  

While  a  changing  composition  of  economic  growth  toward  a  more  labour-intensive 
economy, as assessed in the CP, seems to be warranted, the Commission's assessment is 
much  more  pessimistic  on  the  overall  growth  effect  of  recent  economic  policy  steps 
compared to that of the Hungarian authorities. As indicated in the latest in-depth review 
on Hungary5, the recent deterioration of the business environment, most notably in relation to 
an increase in corporate surtaxes has contributed to a loss in the country's economic growth 
potential.  While  Hungary's  economic  policy  has  been  successful  in  increasing  the 
participation  rate  and  enhancing  SME  employment,  the  very  low  level  of  investment  and 
productivity growth holds back labour demand among larger corporations. 

1.2. 

Challenges   

Hungary faces significant challenges, which remain broadly the same as last year’s and 
largely  correspond  to  the  2013  Annual  Growth  Survey  priorities  and  are  further 
analysed in the 2012 AMR and the 2013 in-depth review (see box 1).  

In  particular,  Hungary  has  to  continue  its  fiscal  consolidation.  In  2012,  which  was  the 
deadline for Hungary to bring its excessive deficit procedure to an end, a deficit of 1.9% of 
GDP was achieved and the structural effort substantially exceeded the recommended effort of 
2.4% of GDP. In addition, based on the Commission 2013 spring forecast and subsequently 
adopted  additional  measures,  the  general  government  deficit  is  projected  to  remain  slightly 
below 3% of GDP in 2013 and in 2014. At the same time, the high public and external debt 
levels  (close  to  80 %  and  100%  of  GDP  respectively),  which  together  with  high  financing 
costs and weak growth potential, keep the economy vulnerable. 

Weak growth is related to a worsening business environment, to a large extent driven by 
the  lack  of  predictability  of  government  policies  and  the  quality  of  corporate  taxation 
(i.e.  high  sector  specific  surtaxes).  The  high  administrative  burden  on  businesses  is  also  a 
key factor, including in the field of taxation. Investment stands at a low level (below 17 % of 
GDP), as compared to other countries in the region and even to pre-crisis years (above 20 % 
of GDP in both cases). In the World Economic Forum Global Competitiveness Index (GCI), 
Hungary fell from the 48th position in 2011-12 to the 60th in 2012-13 (out of 144 countries). 

5 See European Commission (2013) 119 final at http://ec.europa.eu/europe2020/pdf/nd/idr2013_hungary_en.pdf  

9 

 
 
                                                 
While the public administration reform is on-going with some delays, corruption and the lack 
of competition in public procurement continue to affect government spending. 

Key policy challenges include restoring normal lending to the economy and avoiding a 
banking  sector  deleveraging  that  is  too  quick,  as  this  could  be  detrimental  to  growth. 
However, the high surtaxes in the financial sector and the high level of non-performing loans 
in  banks’  balance  sheets  make  it  more  difficult  to  accumulate  internal  capital  and  hinder 
incentives to providing credit.  

The  global  financial  crisis  demonstrated  the  urgent  need  for  national  authorities' 
efficient  surveillance  over  their  financial  systems.  So  far,  the  legislator  has  not  equipped 
the Hungarian Financial Supervisory Authority with regulatory powers based on the comply-
or-explain  principle.  Also  resolution  tools  currently  in  effect  are  inadequate  to  restructure 
financial institutions in emergency situations. 

Hungary’s  Europe  2020  employment  target  seems  too  ambitious  given  the  current 
employment  rate  and  projected  economic  and  demographic  trends.  Labour  market 
conditions remain similar to last year, with the employment rate being generally low, although 
increasing  from  60.7 %  in  2011  to  62.1%  in  20126,  i.e.  just  below  pre-crisis  levels.  Labour 
market barriers for Hungary are due to both supply and demand factors. The main problems 
for  labour  supply  include  skills  mismatches,  a  high  tax  burden  on  certain  groups  and  low 
availability  of  childcare  services  for  children  under  three.  Labour  demand  is  hindered  by  a 
negative  productivity  growth  rate  and  by  historically  low  investment,  both  partly  linked  to 
financial  disintermediation.  While  the  average  tax  rate  decreased,  the  tax  burden  on  low 
income earners (who have one of the lowest employment rates as compared to the rest of the 
EU) remains high in the regional context, even taking into account the recent targeted social 
contribution reductions. 

Despite  a  moderate  increase  in  the  overall  active  labour  force7,  poverty  and  social 
exclusion  are  still  high  and  23%  of  people  face  severe  material  deprivation8.  The 
reduction  of  the  length  of  unemployment  benefits  has  exacerbated  poverty  and  social 
exclusion9.  Although  in  principle  employment  and  social  benefit  reforms  may  incentivise  a 
return to the labour market, in  some regions it has  resulted in increasing poverty and  social 
exclusion, aggravated by lack of services. Specific labour market challenges affect some parts 
of the population, among them: young, low skilled and workers over 50 years old. Within the 
framework of the Job Protection Act, a social contribution reduction was introduced for these 
groups, but targeting could be improved.  

While  the  tertiary  educational  attainment  has  increased  substantially  in  recent  years, 
practically  achieving  the  country's  Europe  2020  target,  it  is  still  well  below  the  EU 
average.  At  the  same  time,  early  school  leaving  has  started  again  to  increase.  Hungary 
had  succeeded  in  reducing  the  proportion  of  early  school  leavers  in  the  last  decade  (from 
13.9 % in 2000 to 10.5 % in 2010), but this trend was reversed in 2011 (11.2 % in 2011 and 
11.5 % in 2012). Hungary’s education system is unable to minimise the disparities that stem 

6 In 2011 and 2012, the number of public workers changed significantly, which influenced employment trends. 
7 According to Labour Force Survey (LFS) statistics, it increased by +2  pps. between the end of 2007 and 2011, 

see: http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home  

8 Severe material deprivation is defined as being deprived of at least four of the nine basic items that are used to 

measure material deprivation. 

9 In mid-2012, 54% of registered job seekers were left without benefits. 

10 

 
 
                                                 
from  differences  in  socio-economic  backgrounds.  National  and  international  surveys10  show 
particularly  large  gaps  between  the  best  and  worst  performing  pupils.  Though  tertiary 
education attendance is improving, vocational education studies are either insufficient or not 
developed enough to address the skills mismatch on the job market. As detailed in the 2013 
AGS, lifelong learning is key to improving labour market conditions, yet Hungary has one of 
the  lowest  participation  rates  in  adult  education  among  EU  Member  States.  This  negative 
trend  is  also  reflected  in  the  workforce’s  low  occupational  mobility  and  low  adaptability  to 
change. 

Hungary  faces  substantial  challenges  in  network  industries.  The  economy  is  still  well 
above  the  EU  average  in  terms  of  energy  and  carbon  intensity,  which  contributes  to  a 
persistently high energy trade deficit. This is partly caused by heavily regulated energy prices 
and  by  a  lack  of  independence  of  the  National  Regulator.  Inefficient  public  transport 
continues to weigh on  the government's  budget. Reforms in  both  sectors  have  been delayed 
for too long, which is detrimental to public finances and economic growth, as well as to the 
environment. As pointed out in the 2013 in-depth review (IDR), a reform of the transport and 
energy systems is necessary for fiscal sustainability and economic efficiency. 

Recent developments in Hungary have further increased concerns about the judiciary's 
independence,  most  notably  after  the  fourth  amendment  to  the  new  Fundamental 
Law.11.  Notably,  the  power  to  transfer  cases  from  one  court  to  another  was  granted  to  the 
President of the National Judicial Office, aggravating concerns about the independence of the 
judiciary.  As  the  independence  of  the  judiciary  assures  the  predictability,  certainty,  fairness 
and  stability  of  the  legal  system  in  which  businesses  operate,  such  perceived  lack  of 
independence can deter investments. In addition, the fourth amendment introduced provisions 
on European Court of Justice's judgements and restrictions on political advertisements in the 
media which have also raised concerns about compliance with EU law.  

Innovation, in particular of SMEs, remains limited primarily because of a lack of funds. 
A secondary challenge is the mismatch between qualifications in the labour market and those 
that  are  needed  in  sectors  at  the  forefront  of  Research  and  Development  (R&D)  and 
innovation. The potential of eco-innovation remains largely untapped. 

Box 1: Summary of the 2013 in-depth review (IDR) under the Macroeconomic 
Imbalance Procedure (MIP) 

The second IDR in the macro-imbalances procedure for Hungary (2013 IDR) stated that the 
country  is  experiencing  macroeconomic  imbalances,  which  require  monitoring  and  decisive 
policy  action. In particular, the on-going  adjustment of the highly negative net international 
investment  position,  largely  driven  by  private  sector  deleveraging  in  the  context  of  high 
public  debt  and  by  a  deteriorating  business  environment,  which  has  contributed  to  reduced 

10  The  OECD’s  2009  Programme 

(see 
http://www.oecd.org/pisa/pisaproducts/pisa2009); 
the 
Evaluation of Educational Achievement)  Trends  in  International  Mathematics  and  Science  Study  (i.e. 
TIMSS);  and  the  Progress  in  International  Reading  Literacy  Study  (i.e.  PIRLS)  from  2011  (see 
http://timss.bc.edu/) 

International  Student  Assessment 
IEA’s 

(International  Association 

(PISA) 

report 

the 

for 

for 

11 See the Commission's press release: http://europa.eu/rapid/press-release_IP-13-327_en.htm  

11 

 
 
 
                                                 
investments, still need very close attention to reduce the significant risks of adverse effects on 
the functioning of the economy. 

The IDR concludes that, despite the on-going adjustment process, Hungary’s growth potential 
has  unnecessarily  suffered  due  to  a  number  of  non-market-friendly  policies  and  the  country 
remains vulnerable as a result of a combination of a high level of debt and low growth. 

Net  International  Investment  Position  (NIIP):  External  imbalances  have  decreased  as  the 
current  account  is  in  surplus  for  the  third  year  in  a  row.  Therefore,  the  NIIP  has  been 
improving steadily, but at -103% of GDP in 2012 it remained significantly above the -35% of 
GDP  threshold.  This  is  expected  to  be  the  case  in  the  years  to  come  as  well.  The  current 
account  turnaround  that  started  in  2009  was  caused  mainly  by  a  fall  in  domestic  demand; 
export  competitiveness  has  somewhat  deteriorated.  After  a  marked  decline  during  the  2009 
recession, the deficit in the factor income has started widening again, though it remains below 
pre-crisis levels. Both elements suggest that the external correction is partly cyclical. 

Private  sector  debt:  Most  of  the  recent  external  adjustment  reflects  a  deleveraging  of  the 
private sector which is necessary to correct imbalances, most notably in the household sector. 
At the same time, the rapid fall in corporate credit, against a background of policy uncertainty 
and  sectorial  surtaxes,  especially  in  the  financial  sector,  has  contributed  to  historically  low 
investment and productivity growth rates, and therefore eroded the country’s growth potential. 

Public sector debt: Public debt was reduced from close to 82 % of GDP to around 79 % of 
GDP  over  the  period  2010  to  2012,  thanks  to  one-off  capital  transfers  and  consolidation 
measures. However, it is still very high as compared to regional peers. Due to the high share 
of foreign ownership of public debt securities and the relatively high gross financing needs, 
public sector deleveraging is a vulnerable process. 

Unemployment: The high unemployment rate (persistently above 10 %) is less of a concern 
as it mainly reflects an increase in participation rate; the employment rate is back at pre-crisis 
level. Private sector employment also improved in the SME sector, but this is strongly linked 
to the public work scheme (PWS). As there are no visible signs of movement from the PWS 
to the open labour market, it seems unlikely that GDP will sustainably increase, partly due to 
insufficient training. Also, the sustainability of increased private sector employment is at risk 
due to low investment and productivity. 

3. 

ASSESSMENT OF POLICY AGENDA 

3.1. 

Fiscal policy and taxation  

The  2013  Convergence  Programme  aims  at  a  nominal  deficit  of  2.7%  of  GDP  in  2013 
and  2014  and  its  reduction  in  later  years  (2.2%  and  1.3%  of  GDP  in  2015  and  in  2016, 
respectively). This means an upward revision of the deficit targets compared to the 2012 CP 
(see  Table  1).  According  to  the  2013  CP,  the  medium-term  objective  (MTO),  which  was 
revised from a structural balance12 of -1.5% to -1.7% of GDP in the 2013 CP, is overachieved 
in 2013 (similarly to 2012) and should be achieved in the coming years. This fiscal trajectory 

12  Cyclically-adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission  on  the 

basis of the information provided in the programme, using the agreed methodology. 

12 

 
 
                                                 
is  set  to  fulfil  the  requirements  of  the  fiscal  rules  at  national  and  EU  levels.  In  particular, 
according to the 2013 CP, the foreseen deficit path could bring the excessive deficit to an end, 
since  the  deficit  was  below  the  3%  Treaty  reference  value  in  2012  (deadline  set  by  the 
Council), and is expected to remain below this threshold over the forecast horizon. Moreover, 
it would be in line with the provisions of the preventive arm of the Stability and Growth Pact, 
in particular as the MTO reflects the Pact's objectives. 

Table 1: Nominal general government deficit targets (% of GDP) 

2012 CP 

2013 CP 

2013 

2.2 

2.7 

2014 

1.9 

2.7 

2015 

1.5 

2.2 

2016 

n.a. 

1.3 

The  government  renewed  its  fiscal  consolidation  effort  in  2012  following  some  fiscal 
loosening  in  2010  and  2011  as  exemplified  by  a  cumulative  structural  deterioration  of 
close to 2% of GDP over this period. In the latter year the impact of the tax cuts of around 
2% of GDP on the headline balance was masked by substantial one-off revenues of close to 
10% of GDP, stemming from the transfer of the private pension assets. 

In  2012,  the  actual  budget  deficit  of  1.9%  of  GDP  was  lower  than  the  deficit  target  of 
2.5%  of  GDP  set  in  the  2012  CP.  Compared  to  the  adopted  2012  budget,  the  2012  CP 
already  contained  deficit-improving  measures  of  around  0.3%  of  GDP  adopted  in  February 
and  April  2012,  including  savings  in  line  ministries  and  the  introduction  of  a  tax  on 
telecommunication services, to compensate slippages both on the expenditure and the revenue 
side. In the context of the October 2012 EDP Progress Report (Report), further measures of 
around 0.4% of GDP were announced partly to counterbalance earlier expenditure increases 
of  0.2%  of  GDP  in  selected  areas.  At  the  same  time,  the  report  revised  the  official  target 
upwards,  to  2.7%  of  GDP.  Overall,  the  deficit  target  for  2012  was  overachieved  thanks  to 
budgeted  savings  measures  of  close  to  2.75%  of  GDP,  to  further  corrective  measures 
implemented  in  the  course  of  2012  as  well  as  to  the  improvement  of  the  local  government 
sector's  balance13  by  0.4%  of  GDP  compared  to  the  previous  year.14  In  addition,  the  full 
activation of the budgeted extraordinary reserves of 1.1% of GDP as well as the higher than 
budgeted one-off revenues of 0.2% of GDP related to the transfer of assets from the private to 
the public pension pillar counterbalanced the budgetary slippages, which were partly related 
to a worse-than-expected macroeconomic environment. 

13 The lower deficit in the local government sector could reflect the lower investment in institutions that were 
taken over by the central government in the course of 2012 or at the beginning of 2013 and the impact 
of legislative changes aimed at limiting their indebtedness. 

14 Importantly, corrective measures were adopted in the course of 2012 to improve the 2012 deficit, against the 
backdrop  of  the  following  factors:  (i)  starting  from  the  2011  autumn  forecast,  the  Commission 
consistently  projected  in  all  publications  that  the  2012  deficit  would  be  in  line  with  the  3%  of  GDP 
threshold;  (ii)  the  EDP  staff  working  document  on  effective  action  of  30  May  2012  and  the 
Commission's 2012 autumn forecast envisaged that the original deficit target of 2.5% of GDP would be 
attained  with  available  reserves,  which  could  even  ensure  a  lower  deficit  if  eliminated  as  eventually 
happened; and (iii) the 2013 winter forecast included a deficit calculation of 2.4% of GDP, i.e. again 
below the original deficit target of 2.5% of GDP and the revised target of 2.7% of GDP. 

13 

 
 
 
 
                                                 
The  magnitude  of  the  2012  fiscal  effort  measured  by  the  improvement  of  the  adjusted 
structural balance (3.5% of GDP), is supported by a detailed assessment of discretionary 
measures, which indicates a fiscal effort of around 3% of GDP. Approximately two-thirds 
of  this  effort  was  made  on  the  revenue  side  (e.g.  VAT-rate  hike  to  27%,  increased  social 
contribution  by  1  pp.,  elimination  of  the  employment  tax  credit)  and  one-third  on  the 
expenditure  side  (e.g.  spending  restraints  in  line  ministries,  cuts  in  social  transfers  to 
households). 

For 2013, the latest CP expects a deficit of 2.7% of GDP, which is higher than the target 
of  2.2%  of  GDP  included  in  the  2012  CP,  but  in  line  with  the  revised  target  of  the 
Autumn  2012  EDP  Progress  Report,  which  was  also  integrated  into  the  2013  budget. 
Compared to the 2012 CP, expected lower economic growth (close to -4% in nominal terms) 
increased  the  deficit  by  1¼%  of  GDP  mainly  due  to  the  higher  expenditure  ratio.  Stimulus 
measures (introduction of a fully flat personal income tax system, targeted social contribution 
cuts  and  new  preferential  corporate  tax  systems  for  SMEs)  and  higher  government 
consumption in selected areas also increased the deficit by close to 1% of GDP. These were 
partly compensated by the revenue-based corrective packages of 1¾% of GDP announced in 
three steps in the autumn 2012 and on the context of the 2011 and 2012 CPs. These corrective 
measures  placed  the  highest  burden  of  adjustment  on  the  financial  (e.g.  repealing  an  earlier 
commitment  to  halve  the  bank  levy  while  increasing  the  financial  transaction  duty),  energy 
and  utility  sectors.  The  remaining  gap  of  ½%  of  GDP  resulted  in  the  higher  2013  deficit 
target. The 2013 CP confirmed the implementation of all planned consolidation measures, but 
did not include further deficit-improving measures. 

The  Commission  2013  Spring  Forecast  projects  a  deficit  of  3%  of  GDP  in  2013. 
Compared to the 2013 CP, it factors in a budgetary slippage of 0.9% of GDP. This includes 
lower revenues of 0.6% of GDP, mainly related to VAT in light of the assumed lower impact 
of measures aimed at enhancing tax administration, the financial transaction duty, gambling 
tax and the distance-based road toll. It also includes foreseen slippages of 0.3% of GDP on the 
expenditure  side,  mainly  pertaining  to  the  transport  sector.  The  projected  revenue  shortfalls 
and expenditure overruns were expected to be only partly off-set by the assumed activation of 
the remaining extraordinary reserves of 0.6% of GDP. 

On  13  May  2013,  following  the  release  of  the  Commission's  forecast,  the  government 
adopted further corrective measures of more than 0.3% of GDP for 2013. Notably, these 
included  the  temporary  cut  of  the  expenditures  of  selected  budgetary  institutions,  which 
would  become  permanent  unless  favourable  budgetary  developments  provide  fiscal  space. 
The net deficit-improving effect of these saving measures is estimated by the Commission to 
close to 0.25% of GDP, taking into account their direct revenue side impact and second-round 
effects. Taking into consideration all the available information, the 2013 deficit is projected to 
be 2.7% of GDP, in line with the official target. 

In 2014, the 2013 CP targets a deficit of 2.7% of GDP. Compared to the previous year, the 
slight  increase  of  the  revenue  ratio  in  2014  mainly  reflects  the  envisaged  increase  in  the 
absorption  of  EU  funds  and  the  effect  of  introducing  the  distance-based  road  toll  system  in 
mid-2013. On the expenditure side, public wages are set to increase significantly in light of 
the  launch  of  a  new  wage-compensation  system  in  the  education  sector.  In  addition,  public 
investment is assumed to increase in line with increasing absorption of EU funds. The rise of 
other expenditures altogether, however, is set to lag behind the economic growth because of 

14 

 
 
maintained fiscal discipline as announced and enhanced in the 2013 CP (e.g. nominal freeze 
of  the  public  wages  except  in  the  public  education  sector,  moderate  increase  of  the  social 
transfers) and to the protracted impact of earlier structural reforms. It is important to note that, 
one-off items are not included in this projection. 

According to the Commission 2013 Spring Forecast, the 2014 deficit, based on the usual 
no-policy change assumption, is projected to increase further to 3.3% of GDP. Compared 
to the 2013 CP, the Commission's forecast includes lower revenues of 0.6% of GDP, mainly 
related  to  the  same  measures  which  explain  the  different  forecasts  in  2013  (i.e.  VAT,  the 
financial transaction duty, gambling tax and the distance-based road toll). On the expenditure 
side, the foreseen slippages of close to 0.5% of GDP, partly related to the operationalisation 
of  the  no-policy-change  assumption15,  are  off-set  by  the  assumed  activation  of  the  planned 
extraordinary reserves of 0.5% of GDP.  

When incorporating the net deficit-improving impact of around 0.4% of GDP of the new 
corrective package adopted on 13 May (which also reflects direct revenue side impacts 
and some implementation risks as opposed to the officially estimated 0.7% of GDP gross 
impact),  the  Commission's  2014  deficit  projection  could  be  revised  down  to  2.9%  of 
GDP. The additional measures includes the following elements: (i) for budgetary institutions, 
the  reduced  expenditure  level  will  serve  as  the  basis  for  the  2014  budgetary  appropriations; 
(ii) both cash transfers to households and the purchase of selected goods and services on the 
central  budgetary  sub-sector  will  be  frozen  at  their  2013  nominal  level;  (iii)  selected  major 
public investment projects could only be continued if financed from the additional revenues 
from the sale of non-financial state assets.  

15 For example most expenditure items are forecast to increase with the nominal potential growth rate barring the 

adoption of specific measures. 

15 

 
 
                                                 
Box 1. Main budgetary measures 

Revenue 

Expenditure 

2012 

•  •  Hike  in  the  VAT  standard  rate  from  25%  to 

• 

27% (+0.6% of GDP) 
Increase  in  social  contributions  (+0.4%  of 
GDP) 

•  Net effect of the reform of PIT (+0.2% of GDP) 
•  Other  tax  increases,  including  raising  excise 
duties and the introduction of a tax on telecom 
services (+0.9% of GDP)  

Wage  compensation 
the  private  sector 
to 
provided through social contribution allowances 
(-0.4% of GDP) 

• 

in 

Implementation  of  structural  reform  steps  laid 
down 
the  Szell  Kalman  Programme  
(unemployment  benefits,  sick  pay,  disability 
pensions,  pharmaceutical  and  public  transport 
subsidies, -0.8% of GDP) 

•  Nominal wage freeze in the public sector together 

with wage compensation (-0.4% GDP) 

•  Outlays  related  to  the  agreement  with  the  banks 

(+0.25% of GDP, similar effect as in 2011) 

•  Extension of the public works programme (+0.2% 

of GDP) 

2013 

•  Phasing  out  of  extraordinary  sector  levies  on 
the  telecom,  retail  and  energy  sectors  (-0.55% 
of GDP) 

•  Narrowing of tax base of PIT (-0.35% of GDP) 
• 
Introduction  of  a  financial  transaction  duty 
(0.75% of GDP) 

•  Job  Protection  Act:  targeted  cuts  in  social 
contributions and introduction of two simplified 
taxation schcmes for SMEs (-0.6% of GDP) 
•  Maintenance  of  the  financial  sector  levy  at  its 

•  Further 

imlementation  of 
(pension 

the  Szell  Kalman 
system,  pharmaceutical 
Programme 
subsidies,  rationaliation  of  instituions,  -0.4%  of 
GDP)  

•  Nominal wage freeze in the public sector  (-0.2% 

• 

of GDP) 
Increase  of    appropriations  for  certain  budgetary 
chapters (0.4% of GDP)  

•  Outlays related to the agreement with the banking 

sector (+0.2% of GDP) 

original size (+0.25% of GDP) 

•  Further  extension  of  the  public  work  programme 

•  Hikes in sectoral levies and introduction of new 

(+0.1% of GDP) 

• 

• 

corporate surcharges (0.55% of GDP) 
Increase  in  the  efficiency  of  tax  collection, 
mainly  through  the  establishment  of  on-line 
links  to  cash  registers  (0.55%  of  GDP,  serious 
implementation risks) 
Introduction  of  a  distance-based  road  toll  from 
considerable 
1 
implementation risks) 
Increase of excise duties (0.1% of GDP) 

(0.25%  of  GDP, 

• 
•  Elimination  of  cap  of  pension  contributions 

July 

(0.15% of GDP) 

•  Lower wage compensation in the private sector 

(0.2% of GDP)  

2014 

•  Additional 

take-up 
taxation schemes (-0.2% of GDP) 

the 

in 

two  simplified 

•  New  wage  system  in  the  public  education  sector 

(0.6% of GDP) 

•  Full  year  effect  of  the  electronic  road  toll 

(0.25% of GDP, implementation risks) 

•  Full  phasing  out  of  the  wage  compensation  in 

•  Nominal  freeze  of  selected  expenditures  of  the 
budgetary chapters (e.g. wages, purchase of goods 
and services, subsidies; -0.4% of GDP) 

the private sector (+0.2% of GDP) 

  Note:  The  budgetary  impact  in  the  table  is  the  impact  reported  in  the  programme,  i.e.  by  the  national 
authorities. A positive sign implies that revenue / expenditure increases as a consequence of this measure.  

16 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
On  top  of  the  factors  explaining  the  differences  between  the  2013  CP  and  the 
Commission's  updated  assessment,  further  risks  that  could  significantly  affect  future 
deficit outcomes can be identified. On the deficit-improving side, these include potentially 
higher savings related to the full implementation of structural measures (e.g. introduction of a 
more sophisticated distance-based tolling system in line with initial plans; accelerated review 
of  disability  pensions)  as  well  as  lower-than-planned  take-up  of  the  targeted  social 
contributions  reductions  and  of  the  preferential  corporate  tax  systems  for  SMEs  introduced 
from  2013.  On  the  deficit-increasing  side,  the  following  could  be  highlighted:  higher 
expenditure  related  to  road  maintenance,  further  financing  for  higher  education;  capital 
transfers  to  offset  losses  of  the  central  bank;  higher  subsidies  to  the  state-owned  public 
transport  companies  and  potential  adverse  decisions  of  the  EU  court  related  to  the  tax  on 
telecommunication services.  

Overall, the first part of the CSR1 made in 2012 was broadly fulfilled. The 2012 deficit 
was brought well below the reference value of 3% of GDP due to the rigorous implementation 
of  the  2012  budget  and  the  adoption  of  further  measures.  The  adjusted  structural  balance 
improved  by  3.5%  of  GDP,  which  substantially  exceeds  the  recommended  fiscal  effort  of 
2.4% of GDP. This is also reflected in the fact that the MTO was significantly overachieved 
in 2012. Moreover, based on the updated assessment of the Commission taking into account 
the  new  corrective  measures,  the  deficit  is  expected  to  stay  below  the  3%  of  GDP  Treaty 
reference  value  in  both  2013  and  2014.  This  fiscal  performance  should  be  seen  against  the 
backdrop  of  a  deteriorated  macroeconomic  environment  compared 
the  scenario 
underpinning the most recent EDP recommendation made in March 2012. Despite substantial 
progress  with  consolidation,  the  quality  of  the  fiscal  correction  raises  concerns,  with  a  high 
share of revenue side measures targeted most notably towards some selected sectors. 

to 

In 2013, the (recalculated) structural balance of -1% of GDP is well above the MTO of -
1.7% of GDP and identical to it in 2014. Although it slightly deteriorates further in 2015 
and in 2016, it remains close to the MTO and can be assessed as achieved. The 2013 and 
2014 structural deficit predicted in the Commission 2013 Spring Forecast slightly exceeds the 
one projected by the 2013 CP, but remains above or close to the MTO. After the most recent 
corrective measures, the structural deficit is expected to improve by around 0.3 pp. compared 
to  the  Commission  2013  Spring  Forecast  to  -¾%  and  -1½%  of  GDP  in  2013  and  2014, 
respectively.  At  the  same  time,  the  projected  deficit  path,  which  includes  a  cumulative 
structural  deterioration  of  over  1%  of  GDP  between  2012  and  2016,  does  not  provide 
considerable  fiscal  space  on  top  of  the  automatic  stabilizers  to  off-set  any  potential  adverse 
developments  (e.g.  less  tax-rich  economic  growth).  In  addition,  in  2016,  in  light  of  the 
Hungarian  national  fiscal  numerical  rule,  the  nominal  deficit  will  have  to  be  significantly 
improved,  which  would  require  a  considerable  fiscal  effort,  in  particular  assuming  that 
economic growth will not exceed its potential level by as much as was projected in the 2013 
CP.  

Similarly,  according  to  the  information  provided  in  the  2013  CP,  the  growth  rate  of 
government expenditure in 2013 and  2014,  net of  discretionary revenue measures,  will 
be  broadly  in  line  with  the  reference  medium-term  rate  of  potential  GDP  growth 
(indicative reference rate of 0.1%), but is expected to significantly exceed it in 2015 and 
2016. While the breach of the expenditure benchmark can be justified by the overachievement 

17 

 
 
 
of the MTO before 2014, it can also reflect the fact that the 2013 CP assumed higher potential 
economic growth than the Commission did.16 

Box 2. Excessive deficit procedure for Hungary 

to 

in  response 

taken  effective  action 

that  Hungary  had  not 

On 5 July 2004, the Council decided that Hungary had an excessive budget deficit and issued 
a recommendation under Article 104(7) of the Treaty establishing the European Community 
setting a deadline for correction of 2008. After the Council had decided twice, in January and 
its 
November  2005 
recommendations,  it  issued  a  third  Article  104(7)  recommendation  to  Hungary  in  October 
2006,  postponing  the  deadline  to  2009.  In  July  2009,  against  the  background  of  a  severe 
economic downturn which triggered fiscal adjustment measures and the provision of EU/IMF 
balance of payments support, the Council concluded that Hungary had taken effective action 
and issued revised recommendations setting 2011 as the new deadline to correct the excessive 
deficit.  On  24  January  2012,  the  Council  adopted  a  decision  under  Article  126(8)  of  the 
Treaty  establishing  that  Hungary  had  not  taken  effective  action  in  response  to  the  Council 
Recommendation of July 2009. The most recent Council Recommendation under Art. 126(7) 
TFEU  was  adopted  on  13  March  2012.  The  Council  recommended  that  the  Hungarian 
authorities should put an end to the present excessive deficit situation by 2012 in a credible 
and  sustainable  way.  Hungary  was  asked  to  undertake  an  additional  fiscal  effort  of  at  least 
0.5% of GDP to ensure attainment of the 2012 deficit target of 2.5% of GDP and put in place 
the necessary additional structural measures to ensure that the deficit remains well below the 
3% threshold in 2013. At the same time, the government debt ratio was recommended to be 
brought  back  on  a  declining  path  as  soon  as  possible,  to  show  sufficient  progress  towards 
compliance with the debt reduction benchmark. The Council recommended that the budgetary 
adjustment be supported by improvements to the fiscal governance framework.  

An overview of the current state of the excessive deficit procedure, including also additional 
EDP  steps  adopted  after  the  finalisation  of  this  staff  working  paper,  is  available  on: 
http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/hungary_en.htm. 

Following  an  overall  assessment  of  Hungary's  budgetary  plans,  with  the  structural 
balance  as  a  reference  and  including  an  analysis  of  expenditures,  net  of  discretionary 
revenue measures, the adjustment path towards the MTO seems to be appropriate. 

The  deficit  path  included  in  the  2013  CP  would  result  in  a  gradual  decrease  in  public 
debt, from 79.2% of GDP in 2012 to 73.4% of GDP in 2016. This debt trajectory is higher 
than projected in the 2012 CP, where the public debt was projected to decrease to 72.7% of 
GDP already in 2015. This reflects the higher primary deficit targets, the lower nominal GDP 
path  as  well  as  the  development  of  the  stock-flow  adjustments  in  selected  years.  The 
Commission 2013 Spring Forecast projects only a slight reduction of public debt, to 78.9% of 
GDP  by  2014,  mainly  due  to  a  higher  primary  deficit  and  lower  nominal  growth,  which  is 
estimated  to  decrease  to  78.4%  of  GDP  if  the  impact  of  the  new  corrective  measures  is 

16 In addition, in 2016, the breach of the expenditure benchmark is also explained by the methodology applied. 
The  drop  in  absorption  of  EU  funds  due  to  the  new  financial  cycle  is  asymmetrically  calculated,  i.e. 
government  expenditure  on  EU  programmes  fully  matched  by  EU  funded  revenue  are  fully  deducted 
from total government expenditure, while the related reduction of public investment is only partly taken 
into account.  

18 

 
 
                                                 
incorporated. Despite  a  declining debt path, the public debt-to GDP ratio is still well above 
that of regional peers.  

In 2013 and 2014, the debt reduction benchmark could be expected to be met based on 
the  Commission  2013  Spring  Forecast,  since  the  deterioration  of  the  (recalculated) 
structural  balance  of  0.3%  of  GDP  and  0.6%  of  GDP,  respectively,  is  identical  to  or 
below the minimal linear structural adjustment (MLSA) of -0.3% in 2013 and -0.7% in 
2014.  The  deterioration  of  the  structural  balance  of  0.1%  in  2013  and  of  0.6%  of  GDP  in 
2014,  as  calculated  by  the  Commission  taking  into  account  the  impact  of  the  corrective 
measures  adopted  on  13  May  2013,  also  suggests  that  the  debt  reduction  benchmark  is 
expected to be met. 

Long-term sustainability 

Overall,  Hungary  does  not  face  a  risk  of  fiscal  stress  in  the  short  and  medium  term.17 
Risks  to  fiscal  sustainability  are  also  low  in  the  long  term,  but  depend  on  Hungary  fully 
implementing  its  planned  ambitious  fiscal  consolidation  and  the  primary  balance  being 
maintained  at  2014  level  well  beyond  that  year.  Government  debt  (79.2 %  of  GDP  in  2012 
and expected to fall to 78.9 % in 2014) is above the 60 % of GDP threshold specified in the 
Treaty. The risks would be much higher if the structural primary balance reverted to the lower 
values  seen  in  the  past,  such  as  the  average  for  the  period  1998  to  2012.  The  focus  should 
therefore be on reducing government debt.  

At  the  same  time,  the  Commission's  illustrative  medium-term  calculations18  show  that 
the  recent  slight  decrease  in  public  debt  could  turn  into  an  increase  if  financing 
conditions deteriorate. In particular, debt sustainability analysis that incorporates alternative 
interest  rate  and  growth  assumptions,  as  compared  to  a  baseline  scenario  based  on  current 
(market)  conditions,  reveals  some  vulnerability.  For  instance,  if  long-term  interest  rates 
permanently stay at around 8.5 % (a level comparable to the severe financial market stress in 
the first quarter of 2012), debt would already start to increase in 2014 and would reach 85 % 
of GDP in 2020. 

Fiscal framework 

In 2011, Hungary completely revamped its fiscal governance system. With the adoption of 
the new Basic Law and subsequent laws (the cardinal Law on Economic Stability and the new 
Public  Finance  Act),  virtually  all  elements  of  the  promising  system19  established  in  the 
framework  of  the  2008-2010  EU-IMF  financial  assistance  programme  were  replaced.  In 
addition  to  the  re-regulation  of  numerical  rules,  institutions  and  budgetary  procedures,  the 
system  includes  certain  new  provisions  that  may  weaken  the  institutional  safeguards  of 
domestic  economic  governance,  namely  severe  restrictions  on  the  competences  of  the 

17 European Commission (2012): Fiscal Sustainability Report 2012. European Economy, No. 8., Brussels. Web: 
http://ec.europa.eu/economy_finance/publications/european_economy/2012/fiscal-sustainability-
report_en.htm 

18 http://ec.europa.eu/economy_finance/publications/occasional_paper/2013/pdf/ocp137_en.pdf 
19  For  a  description  of  the  previous  system  and  the  new  constitutional  provisions,  see:  European  Commission 
(2012):  Fiscal  governance  in  Hungary.  In:  Fiscal  frameworks  across  Member  States:  Commission 
country  fiches  from  the  2011  EPC  peer  review.  Occasional  Papers,  No  91,  European  Commission, 
Directorate General for Economic and Financial Affairs, p. 20-26. 

19 

 
 
                                                 
Constitutional Court20 and a requirement for a two-thirds parliamentary quorum to change the 
features of tax policy.21 

Overall,  while  the  2011  changes  include  elements  that  help  reduce  government  debt,  a 
number of significant aspects need to be adjusted to ensure a stable and credible fiscal 
framework. The new set-up has strengthened certain aspects of the fiscal governance system, 
by  providing  it  with  a  strong  constitutional  basis  and  constraining  municipalities’  debt 
accumulation  by  making  sure  that  local  governments  get  central  authorisation  before  taking 
out  loans.22  However,  other  aspects  have  been  weakened,  for  example  the  forward-looking 
medium-term real debt rule has been replaced with a nominal debt ceiling and, although the 
Fiscal Council was granted veto rights over the budget, its mandatory analytical mandate and 
practical  work  focused  only  on  qualitative  assessments  published  in  the  context  of  the 
budgetary  debate.  These  drawbacks  may  impede  the  new  system’s  credibility  and  its 
effectiveness in guiding fiscal expectations. This is why last year's CSR called for revising the 
cardinal Law on Economic Stability to include the numerical rules in a binding medium-term 
budgetary framework, and to broaden the analytical remit of the Fiscal Council. 

As regards fiscal rules, there has been no policy response so far, thus the medium-term 
budgetary  framework  (MTBF)  remains  purely  indicative.  Significant  improvements  are 
being planned in this area23. A structural balance rule and a correction mechanism to be used 
in case of deviations are being considered, possibly as part of a more binding MTBF, in order 
to  define  the  adjustment  path  to  the  medium-term  objective.  The  2013  Convergence 
Programme  did  not  confirm  these  specific  reform  avenues,  but  stated  that  the  related 
legislative amendments are to be submitted to parliament before the autumn session. 

On the institutional side, further improvements are still needed to ensure that the Fiscal 
Council’s  analyses  are  commensurate  with  its  strong  veto  competence.  The  Hungarian 
Fiscal  Council  has  an  unprecedented  (in  the  EU  and  OECD)  and  constitutionally  enshrined 
veto right over the annual budget bill. The September 2012 amendments to the cardinal Law 
on  Economic  Stability  reinforced  it,  both  in  terms  of  optional  tasks  and  resources.  More 
specifically,  a  small  analytical  team  is  being set  up  within  the  Office  of  the  Parliament  and 
informal  expert  networks  are  being  established.  However,  further  improvements  are  still 
needed, as the credibility of fiscal policy would benefit from assigning the systematic ex-post 
monitoring  of  compliance  with  numerical  fiscal  rules  to  an  independent  body,  and  from 
ensuring  that  the  work  of  this  body  would  be  based  on  thorough  quantitative  analysis 

20 The Court only retained the right to review and annul legislation concerning budgetary or taxation matters if it 
conflicted with certain human rights. This restriction does not apply if public debt falls below 50% of 
GDP  (laws  exempted  from  the  constitutional  review  should  not  be  subject  to  it  even  if  the  debt  ratio 
falls below 50 %). 

21 The Law on Economic Stability prescribes that the personal and corporate income tax system be proportionate 
and that family tax allowances cannot decrease. These unusual provisions significantly limit the ability 
of the current or any future government to change the tax system and adapt it to fiscal necessities. 
22 In its first year of operation, the new procedure proved to be an effective tool. In total, an aggregate amount of 

0.2% of GDP was authorised, of which 80 % was accounted for by renegotiations of existing loans. 

23  Based  on  information  provided  in  October  2012  for  the  Commission’s  Interim  Progress  Report  on  the 
transposition  of  the  budgetary  frameworks  Directive.  The  document  is  available  at:  http://eur-
lex.europa.eu/LexUriServ/LexUriServ.do?uri=SWD:2012:0433:FIN:EN:PDF . 

20 

 
 
                                                 
(especially  through  the  mandatory  preparation  of  macro-fiscal  baseline  projections  and 
assessments of major fiscal policy proposals24). 

Tax system 

According  to  the  Commission  2013  spring  forecast,  the  total  tax-to-GDP  ratio  is 
expected  to  increase  to  around  39%  in  2013,  from  37%  in  2011.  Revenue  from  indirect 
taxes is expected to increase to close to 19% of GDP, up from 17% in 2011, which was the 3rd 
highest EU figure at the time. This in part reflects the increase in standard VAT rate to 27% in 
2012,  the  highest  in  the  EU.  The  Commission  predicts  that  revenues  from  direct  taxes  will 
reach  around  7.5%  of  GDP  in  2013,  which  is  only  a  slight  increase  compared  to  the  2011 
level of 6.9 %, well below the EU average of 12.9 %. At the same time, despite declining on 
high  income  earners  and  employees  with  family,  the  tax  burden  on    single  low  earners  (at 
67% of the average wage) stood at 46.7%, the second highest value in the EU in 2012. Due to 
sector-specific taxation, the overall tax level in the corporate sector is also high as compared 
to the rest of the EU, despite the low level of corporate income taxes (CIT). 

In  2012,  the  Council  Recommendation  for  Hungary  contained  CSRs  concerning  a  tax  shift 
away  from  labour  taxes  on  low-income  earners  (CSR3)  and  the  establishment  of  a  non-
distortive and stable framework for corporate taxation (CSR5). 

Overall,  the  government  did  not  follow  the  2012  recommendation  to  establish  a  non-
distortive and stable framework for taxation of corporations and has increased the tax 
burden on selected corporate sectors by introducing further permanent sectoral surtaxes. In 
particular, although the crisis taxes adopted in 2010 for the telecom, energy and retail sectors 
were phased out as of 2013, new surtaxes were introduced on the telecom, energy and public 
utilities  sectors.  Moreover,  the  crisis  tax  on  the  banking  sector  (the  bank  levy)  has  become 
permanent, contrary to an earlier agreement with the banking sector to halve it in 2013 and to 
further reduce it in 2014. In addition, a financial transaction duty is now levied on all cash and 
bank transfer transactions at a rate of 0.2 % (0.3 % in case of cash withdrawals), although with 
a  cap.  International  experience  with  bank  transaction  taxes  is  negative  and  shows  that  they 
lead to reduced bank deposits and to weaker lending. Moreover, in most cases no stakeholder 
consultation  was  carried  out  before  adopting  these  measures,  which  further  harmed  the 
investment climate.  

Varying tax rates between corporate sectors hamper an effective allocation of resources 
and  affect  investment  and  lending.  The  heavy  tax  burden  placed  on  corporations,  and  in 
particular the taxation of production inputs, have a direct negative impact on investment and 
returns.25  In  addition,  frequent  tax  changes  have  a  detrimental  effect  on  investment  by 
contributing  to  an  uncertain  business  environment.  Moreover,  Hungarian  companies  face  a 
decreasing  credit  supply,  which  is  partly  caused  by  the  impact  of  surtaxes  on  financial 
institutions.  In  the  meantime,  the  corporate  taxation  framework  has  become  more  complex, 
increasing  the  tax  compliance  burden  and  distortions.26  According  to  the  World  Bank, 

24 For instance, draft changes above a certain threshold, including those legislative initiatives that are outside the 

standard budgetary cycle. 

25 See also the "In-depth Review on Hungary", European Commission (2013). 
26 The corporate tax system now consists of six different schemes or rates, most of them combined with a local 
business tax. Two new simplified corporate tax schemes were introduced in 2013, on top of an already 
existing simplified business tax scheme and a preferential CIT rate of 10 % for businesses below a HUF 
500 million (EUR 1.7 million) tax base. These are the lump-sum tax for small businesses and the small 

21 

 
 
                                                 
businesses need an average of 12 tax payments and spend 277 hours per year on paying taxes, 
with Hungary ranking as the 118th country in the world in terms of easiness of paying taxes27.  

Importantly,  some  less  distorting  revenue-increasing  potential  is  still  available.  Tax 
expenditure is close to 3 % of GDP,  and mainly  related to  VAT and  personal  income tax.28 
Moreover,  the  government  sees  tax  non-compliance  as  having  a  major  impact  on  revenues 
and  intends  to  tackle  it  with  various  measures,  including  the  compulsory  connection  of  all 
cash registers in the country with the tax authority. 

As  a  response  to  CSR3,  and  after  the  2011  introduction  of  a  single  16%  rate  for  the 
private income tax to replace the previous rates of 17% and 32%29 and the abolition of 
the  general  tax  allowance,  the  Hungarian  government  has  reduced  social  contribution 
rates for selected target groups through the "Job Protection Act" (JPA). Since January 
2013 low-skilled workers, women returning from maternity leave, young and old people are 
eligible for reduced social security payments. These groups were selected because of their low 
participation  rates  and  in  order  to  minimise  wage  underreporting,  typically  associated  with 
wage support schemes for low income earners. The JPA was introduced to alleviate the effect 
of an increased labour tax burden on low earners, caused by the elimination of the general tax 
allowance previously granted to low and medium earners30. 

In  general,  from  the  point  of  view  of  economic  growth  and  employment,  reducing 
specific groups’ social contributions is a step in the right direction. However, high wage 
earners  and  people  with  high  employability  (e.g.  highly  educated  elderly  employees)  are 
eligible under the JPA and the proportion of low-income earners not explicitly included in the 
scheme might be non-negligible. Additionally, even if a low income earner (i.e. single earner 
at 67% of the average wage) is eligible for the JPA, the tax wedge of such a worker is reduced 
to about 41 %, still a high value in regional comparison. As the JPA has only been in place 
since 2013, there is no evaluation of it yet, but an impact assessment would be useful. 

Although the CSR3 recommended shifting the tax burden to energy or property taxes, 
government policies went in a different direction. Recurrent taxes on immovable property 
are significantly smaller in Hungary than in the EU (0.3 % of GDP compared to 1.3 % of GDP 
in 201131) as not all municipalities levy the building tax32. The government, however, has so 
far  ruled  out  the  introduction  of  a  centrally  administered  recurrent  property  tax.  Given  that 
real  estate  prices  have  been  falling  since  2004  and  that  housing  investment  stands  at 
historically  low  levels,  it  may  actually  be  worth  postponing  such  a  tax  until  the  housing 
market  has  regained  momentum.  Regarding  energy  taxation,  a  special  corporate  income  tax 
rate of 31% has been introduced in the public utility sector. In addition, an extra tax is now 
levied  on  the  stock  of  pipelines  and  other  utility  networks,  which  is  a  disincentive  for 
investment into the capital stock. These measures cannot be considered an adequate reply to 

business tax. In addition, a separate corporate rate (of 50 %) is applied to the energy sector, instead of 
the standard 19 % corporate income tax rate.  

27 http://www.doingbusiness.org/  
28 Commission estimate based on the 2013 budget. 
29  These  PIT  rates  were  subject  to  the  practice  of  super-grossing  (multiplying  by  1.27)  in  2011  and  above  a 
certain income threshold half-supergrossing (multiplying by 1.135) in 2012. In this way, the effective 
PIT rates were higher than the official rates. 

30 Additionally, the minimum wage was also raised both in 2012 and in 2013 by more than 20% in total 
31Source: 2013 edition of the "Taxation trends in the European Union" 
32 Some richer townships could afford not to apply it. 

22 

 
 
                                                                                                                                                         
CSR3, as they do not provide incentives to reduce energy consumption and have distortionary 
effects unlike, for example, energy consumption taxes. 

3.2. 

Financial sector   

The Hungarian financial sector is deleveraging at a very quick pace. With assets totalling 
183% of GDP, the relative size of Hungary's financial sector lags behind that of the euro area 
(weighted average of 330% GDP). During the pre-crisis years, it grew quickly mainly thanks 
to external funding, net external debt of the banking sector reached 30% of GDP in the fourth 
quarter  of  2008.  A  rapid  deleveraging  has  been  on-going  since  mid-2010,  with  banks'  net 
external debt falling by close 50% (to 15% of GDP), until the fourth quarter of 2012.  

Banks  do  not  support  economic  growth  through  lending.  The  stock  of  outstanding 
corporate loans fell by 25% between the last quarter of 2008 and 2012. Based on the central 
bank's  analysis33,  this  seems  to  be  mostly  caused  by  banks'  low  willingness  to  lend.  In  a 
general climate of uncertainty, banks cite high credit risk, negative internal capital generation 
capacity  and  recessionary  pressures,  as  the  main  reasons  for  tightening  conditions  on  new 
lending.34 In contrast to corporations, households are simply not willing to borrow as long as 
their  monthly  repayment  burden  remains  high  and  uncertainty  in  the  general  economic 
environment prevails.  

Government measures have had a strong negative impact on bank's profitability, which 
contributed to deleveraging and tight credit conditions. The bank levy remains the biggest 
tax of its kind in Europe (at around 0.5% of GDP)35. Besides the levy, loan loss provisioning 
weighed  heavily  on  the  banking  sector's  profitability,  resulting  in  a  loss  of  around  0.5%  of 
GDP in 2012. This loss has followed an even worse result in 2011, mainly caused by one-off 
losses related to the early repayment scheme in 2011, valued at around 0.9% of GDP36. With 
the  introduction  of  a  financial  transaction  duty  in  2013,  the  current  tax  structure  in  the 
financial sector has become even less sustainable, as total sector surtaxes now stand above 1% 
of GDP, compared to the sector's added value, which is less than 4% of GDP. Moreover, most 
of  these  measures  were  taken  without  proper  consultation  of  sector  stakeholders  and  often 
violate earlier  government  commitments, as was the case with the promised decrease in the 
size of the bank levy.  

In  addition  to  the  early  repayment  scheme,  the  government  adopted  several  other 
measures to help households with foreign currency loans.37 Introduction of the exchange 
rate cap for non-distressed borrowers allows them to pay their monthly instalment at a fixed 

33http://english.mnb.hu/Root/Dokumentumtar/ENMNB/Kiadvanyok/mnben_infrep_en/mnben_inflation_201209

27/infl_jelentes_201209_en.pdf 

34 Foreign banks (owning around three-quarters of total assets) are more bearish on Hungary and plan to further 
deleverage  from  their  Hungarian  subsidiaries,  while  domestic  banks  plan  to  increase  somewhat  their 
share in corporate lending. 

35 The tax has now become an integral part of the Hungarian banking sector's taxation and continues to be levied 
on 0.53% of banks' assets over HUF 50 billion (EUR 170 million). With business volumes shrinking on 
average by 12% since 2009 and for some banks by as much as 25%, the levy is indeed an extremely 
damaging tax. 

36 The Hungarian government introduced a scheme allowing early repayment of foreign currency-denominated 
mortgages at a discounted exchange rate, with banks which had to cover the difference, although they 
were allowed to reduce their 2011 profit up to 30% from the losses in the scheme. 

37 However, participation in all of these schemes fell short of earlier expectations. 

23 

 
 
                                                 
exchange  rate  level.38  A  further  measure  converted  nonperforming  foreign  exchange  (FX) 
mortgages  to  HUF  loans  with  25%  debt  relief.39  Finally,  the  National  Asset  Management 
Company  was  set  up  to  purchase  flats  owned  by  distressed  borrowers  who  met  certain 
eligibility  conditions.40  While  the  government's  endeavour  to  help  distressed  FX  debtors  is 
legitimate, it may increase borrowers' moral hazard and decrease their willingness to pay due 
to the expectation of further support. 

Managing  the  deteriorating  portfolio  quality  represents  the  biggest  challenge  as  non-
performing  loans  (NPLs)  have  been  increasing  since  2009.  The  rise  slowed  down  the 
second half of 2012; however, asset quality is likely to further weaken throughout 2013 due to 
weak  economic  activity.41  Meanwhile,  banks  are  unwilling  to  recognise  the  full  extent  of 
potential losses in capital resulting in a low loan loss coverage compared to regional peers and 
loan  restructuring  is  becoming  a  way  to  avoid  further  provisioning42.  Portfolio  cleaning  is 
extremely low as the mortgage market is frozen. 

A high capital adequacy ratio in the banking system ensures resilience against adverse 
shocks.  At  15%,  the  capitalisation  of  Hungarian  banks  has  reached  unprecedented  levels  of 
almost  double  the  regulatory  minimum  of  8%.  Capital  buffers  place  banks  in  their  comfort 
zone  when  it  comes  to  withstanding  even  an  extremely  adverse  shock  and  digesting  the 
mounting pile of NPLs trapped on their balance sheets. 

As  conditions  for  Hungarian  SMEs  to  obtain  market-based  loans  have  once  more 
worsened  in  2012,  EU-funded  SME  support  programmes  became  an  even  more 
important  means  of  financing.  To  facilitate  SMEs'  access  to  finance  and  to  revitalise  the 
economy,  the  government  has  implemented  some  measures43  while  a  reformed  JEREMIE44 
programme  has  been  successful  in  disbursing  EU  Structural  Funds.  However,  due  to  far-
reaching absorption, Hungary is running out of these funds and in 2013 only limited supplies 
are still available.45 Therefore, it is increasingly important for the government to prioritise its 
action and to use additional resources such as the European Social Fund, where payments to 
beneficiaries  are  still  slow.  In  addition,  integration  of  the  export  insurance  bank  into  the 

38 The debt resulting from the difference between this fixed exchange rate and the market rate is accumulated on 
a separate account, while the debt's interest expense is covered by the government and the lenders.  
39 In this case, banks again covered the losses from the scheme, although they were again allowed to deduct 30% 

of their losses from their possible profits. 

40 Based on the debtor's social situation, see http://www.netzrt.hu/?page_id=148 for more details. 
41 In The last quarter of 2012, household NPLs stood at 16.1%, corporate ones at 19% of loan value (13% and 
17.4%  a  year  earlier).  Corporate  loan  portfolios  have  genuinely  worsened,  household  bad  loans  have 
remained  stable  in  absolute  terms  and  the  increase  in  the  NPL  ratio  is  mainly  attributable  to  a 
contraction in the outstanding loan stock. 

42 12% of all corporate loans have already been restructured, while in the household segment this ratio is already 

equal to almost one third.  

43  The  Széchenyi  Card  Programme  provides  credit-card  based  low-interest  loans  for  micro-  to  medium-sized 
enterprises at Hungarian credit institutions. By 2012, over 218000 cards have been issued. In the spring 
of  2012,  the  programme  was  extended  to  help  SMEs  participate  in  EU  tenders  (Széchenyi  Önerő 
Kiegészítő  Hitel  and  Széchenyi  Támogatást  Megelőlegező  Hitel  –  Szechenyi,  i.e.  own  contribution 
supplementary loan and pre-grant advancement loan). In December 2012, the government decided to 
continue to invest in this programme. 

44 Joint European Resources for Micro- to Medium-sized Enterprises.  
45This  occurred  in  particular  through  the  Combined  Microcredit  Programme,  which  provides  loans  combined 
with  non-refundable  grants  to  very  small  enterprises.  New  calls  have  also  been  published  under 
JEREMIE's Venture Capital Programme, focusing on seed financing. 

24 

 
 
                                                 
Hungarian  EXIM  bank,  together  with  the  planned  expansion  of  its  balance  sheet,  point  to 
increased state-funding of export financing for SME, as detailed in the 2013 NRP .  

Besides, as reported in the NRP, the central bank announced the "Funding for Growth 
Scheme" to give zero-cost refinancing to the commercial banking sector to be used for 
fixed  margin  interest  rate  loans  to  SMEs,  both  for  new  loans  and  for  financing  the 
conversion of FX loans into HUF based ones.46 The central bank's endeavour to intervene in 
SME lending is partly understandable. Based on the MNB's former analyses47 it can be argued 
that lending rates to SMEs without government guarantees stand at prohibitively high levels 
(around 12%). This level (and also the corresponding difference compared to the base rate) is 
much higher than in other European countries. While it is clear that there is a problem with 
the underlying business environment and the high sovereign funding cost, which determines 
the cost of bank lending, SMEs suffer particularly from the high interest rate environment, as 
their credit risk has disproportionately increased during the crisis. This level of interest rate is 
hard  to  cover  from  revenues  even  for  expanding  and  well-functioning  SMEs.  By  the  same 
token, the share of unhedged FX debt among SMEs is also prohibitively high at around 75% 
of  total  FX  debt,  which  also  poses  a  permanent  liquidity  problem  in  the  sector.  The 
programme is relatively market-friendly as MNB does not try to circumvent the commercial 
banking sector. However, capping the interest rate margin on loans can be problematic from 
the commercial banks' point of view. Given the inherent risk in the sector it is questionable 
whether  a  200bp  interest  margin  (after  50bp  guarantee  fee)  is  attractive  to  banks.  The  high 
current  lending  margins  towards  SMEs  at  5-6%  are  probably  in  pair  with  possible  losses 
given default track records. However, a substantially reduced margin can raise the question of 
who will bear possible losses, and with an increasing government's involvement in the SME 
sector, future fiscal costs can also increase.  

The global financial crisis demonstrated the extent to which the existing banking system 
may force national authorities to act to preserve value and safeguard financial stability. 
The first financial assistance programme to Hungary advocated the need for a state-of-the-art 
supervision,  including  granting  effective  emergency  powers  to  the  financial  supervisor  and 
establishment  of  a  resolution  mechanism.  The  latter  aimed  to  facilitate  rapid  pre-emptive 
action  by  the  authorities  to  preserve  business  continuity  if  a  financial  institution  needed 
restructuring,  in  a  way  that  allocates  all  losses  to  shareholders  and  creditors  in  line  with 
Hungary's  financial  stability  objectives.  While  the  Hungarian  Financial  Supervisory 
Authority's powers have been substantially increased over the past three years, the legislator 
has  not  equipped  it  with  regulatory  powers  based  on  the  comply-or-explain  principle.  Also, 
resolution  tools  and  the  framework  for  an  effective  resolution  of  financial  groups  never 
became  law,  leaving  Hungary  with  an  insolvency  regime  that  is  ill-equipped  to  restructure 
financial institutions or to mitigate disruption due to financial institution failure. 

3.3. 

Labour market, education and social policies  

In  2012,  the  Council  Recommendation  for  Hungary  contained  CSRs  concerning  taxation  of 
labour, women’s participation in the labour market (CSR3), the Public Employment Service, 
the public work scheme and the national social inclusion strategy (CSR4). 

46 Both programmes are capped at HUF 250 billion (EUR 850 million), around 0.8% of GDP. 
47 See for example Report on Financial Stability, November 2012. 

25 

 
 
                                                 
Although it has increased over the past years partly thanks to the government’s policy 
measures,  such  as  restrictions  on  early  retirement  and  reduction  of  social  benefits,  the 
participation  and  employment  rates  in  Hungary  are  still  among  the  lowest  in  the  EU. 
The  pension  reform  has  not  been  supported  by  active  ageing  measures  to  enhance  older 
workers'  employability.  In  addition,  unemployment  risks  are  higher  for  certain  people,  in 
particular for: low-skilled workers (only 36.5 % are employed, compared to an EU average of 
53.4 %);  youth  (50.8 %  of  20-29  year-olds  are  employed,  compared  to  61.2 %  in  the  EU); 
women, especially with young children48; older workers (only 36.9% of 55-64 year-olds are 
employed,  compared  to  an  EU  average  of  48.9%);  and  Roma  (only  one  in  three  are  in 
employment).  Long-term  unemployment  is  also  a  source  of  concern.  In  2012,  47 %  of 
unemployed people looked for a job for one year or longer, with the average length of time in 
unemployment  lasting  18  months.  Yet,  in  2011,  the  maximum  period  covered  by 
unemployment benefits was reduced from nine to three months, on average not long enough 
to find an employment. 

To  boost  employment,  the  government  introduced  the  Job  Protection  Act  (JPA), 
alongside the Public Work Scheme (PWS) and the single rate Personal Income Tax49, as 
described in the National Reform Programme. The JPA is a step towards more employment-
friendly  taxation  of  labour,  as  recommended  in  the  2012  CSR  (see  section  3.1),  but  is  not 
properly  targeted,  hence  it  does  not  directly  address  reducing  the  tax  wedge  of  low  income 
earners. 

Even if the NRP states that the PWS will not increase public sector employment as from 
2014,  at  present  the  bulk  of  Hungary’s  budgetary  resources  on  labour  market  policies 
are used for this programme. As the primary aim of the government is to provide the long-
term unemployed with work-related income instead of social benefits, the proper targeting of 
PWS  on  long-term  unemployed  or  inactive  people  is  essential.  While  PWS  advantages  on 
improving activity level should be acknowledged, its long-term benefits on employability are 
yet to be proven. In 2012, only around 10 % of the approximately 260 000 participants could 
return  to  the  labour  market  after  exiting  the  scheme  and  most  had  no  access  to  activation 
services; only 2.9% of them received training. Government plans in the NRP to substantially 
increase the share of participants in trainings should be welcomed. However it should be also 
noted that by having wages below the official minimum wage, public works may negatively 
affect  competition  and  crowd  out  private  sector  companies  in  certain  labour-intensive 
industries, such as agriculture and construction. 

In  line  with  CSR4  and  the  Annual  Growth  Survey,  the  government  has  strengthened 
active  labour  market  policies  (ALMP).  According  to  the  NRP,  available  European  Social 
Fund resources have been reallocated to the most successful programmes implemented by the 
Public  Employment  Service  (PES)50  and  non-governmental  service  providers  and,  by  doing 
so, have strengthened their capacities. In the meantime, other state institutions (responsible for 
rehabilitation and social inclusion) have been created, which make the system more complex 
for individuals. As the PES must manage active labour market policies and the PWS, it would 
benefit from further capacity development, including a sound system of profiling its clients. 

48 Hungary’s employment rate of women with young children is among the lowest in the EU. 
49 The Hungarian personal income tax rate was lowered to 16%, replacing the 2010 tax rates of 17% and 32%  
50  Active  labour  market  programme  supporting  the  employability  of  disadvantaged  people  (SoROP  1.1.2  and 

1.1.4) under the Social Renewal Operational Programme, priority axis 1. 

26 

 
 
                                                 
Despite a number of training measures listed in the NRP, adult participation in lifelong 
learning is still one of the lowest in the EU. As detailed in the 2013 AGS, lifelong learning 
is a key tool for addressing skills bottlenecks, reducing mismatches between job supply and 
demand,  and  boosting  productivity.  Low  participation  in  trainings  and  professional 
requalification limits the Hungarian workforce’s mobility, the promotion of active ageing and 
shows low adaptability to change and to labour market needs. 

As  highlighted  in  the  NRP,  youth  unemployment  (under  the  age  of  25)  is  worrying, 
having increased from 11.9 % in 2001 to 28.1 % in 2012, while youth employment rate is 
18.6%.  When  implementing  the  Council  recommendation  on  establishing  a  Youth 
Guarantee,51 particular attention should be paid to quality apprenticeship programmes and to 
adopting additional ALMP that decrease the number of people ‘not in education, employment, 
or training’. The European Social Fund will remain the main EU source of funding for youth 
employment policies, in particular through the support of the Youth Employment Initiative. 

In  order  to  encourage  women’s  participation,  the  government  promoted  flexible 
working arrangements through labour code regulation, specific small-scale programmes 
introduced by 2012 NRP and expanded childcare facilities. There is still no comprehensive 
impact  assessment  of  these  new  measures,  but  the  available  facilities  can  only  care  for  less 
than 8% of children under 3 years old in Hungary, against 28% at EU level. The 2013 NRP 
identifies scarce capacity of day-care services and lack of flexible jobs as the main obstacles 
faced by women with small children who want to the return to the labour market. Integrating 
women  into  the  labour  market  is  crucial  because  Hungary’s  total  workforce  is  expected  to 
shrink52, while in the last 5 years the employment rate of women remained approximately the 
same.  The  impact  of  parenthood  on  women’s  employment  is  three  times  higher  than  in  the 
EU53. This may be linked to the long parental leave people are entitled to (up to 3 years with 
cash benefits), which may act as a powerful disincentive to return to work, especially for low-
income-earning women.  

Education and Training 

In  2012,  the  Council  Recommendation  for  Hungary  contained  a  CSR  concerning 
implementing a strategy on early school leaving (ESL) and reforming higher education 
to improve access for disadvantaged young pupils.  

A national strategy on ESL has not been adopted yet, although it is under preparation as 
indicated  in  the  2013  NRP.  While  Hungary  achieved  some  progress  in  lowering  the 
number  of  ESL  prior  to  2010,  this  trend  has  been  reversed  in  the  past  two  years.  An 
increasing  number  of  disadvantaged  pupils,  a  high  proportion  of  which  are  of  Roma  origin 
may  reinforce  this  negative  trend.  In  order  to  improve  school  attainment  for  disadvantaged 

51 Council Recommendation of 22 April 2013 on establishing a Youth Guarantee (2013/C 120/01)  to ensure that 
all  people  under  the  age  of  25  receive  a  high  quality  offer  of  employment,  continued  education,  or 
apprenticeship/traineeship  within  4  months  of  becoming  unemployed  or  leaving  formal  education,  in 
line with the Council Recommendation agreed on 28 February 2013   

52According to the OECD’s paper on "Closing the Gender Gap: Act Now" (December 2012), if women’s labour 
force participation reached that of men, the labour force would decrease by 2.2% (instead of by 10 % if 
there is no policy change) and GDP per capita would increase by 0.6 of a percentage point per year. 

53  The  difference  in  percentage  points  between  the  employment  rate  of  women  (20-49  year-olds)  without 
children and women with dependent children aged 0-6. It is -33.6 pps for Hungary; for the EU it is -
11.7 pps. 

27 

 
 
                                                 
pupils  and  reduce  ESL  in  the  long  run,  the  government  made  kindergarten  compulsory  for 
children  over  three  years  old.  Affordable  quality  childcare  providing  early  childhood 
development  from  the  earliest  age  contributes  to  breaking  the  cycle  of  disadvantage,  thus 
improving  social  inclusion.  However,  success  will  depend  on  providing  the  required 
kindergarten  places,  as  well  as  on  tackling  other  barriers  to  access  (e.g.  distance, 
transportation and financial ones). The lowering of the compulsory school age from 18 to 16, 
might lead to an increased number of young people leaving education without secondary level 
qualifications. According to the NRP, as from September 2013 trainings will be provided for 
those  who  are  below  the  compulsory  schooling  age  limit  and  have  not  been  admitted  to 
secondary education, with an aim to motivating learning and developing the skills necessary 
for the acquisition of a profession.  

The  recently  adopted  Public  Education  Act  and  the  shift  to  a  centralised  public 
education  system,  if  not  implemented  carefully,  might  increase  social  inequalities  and 
segregation.  Pupils  in  disadvantaged  micro-regions  perform  considerably  worse  than  the 
national  average  and  the  registered  increase  in  the  share  of  students  entering  secondary 
education  in  Hungary  affected  only  marginally  children  with  multiple  disadvantages  and 
Roma  students.  Also,  the  percentage  of  students  from  these  groups  applying  to  secondary 
school programmes offering a chance to undergo a final examination is rising only slowly54. 
Only 22% of Roma students complete upper-secondary education and the number of schools 
with a Roma majority among pupils has increased by 43 % since 200455. In these schools, the 
quality  of  education  and  the  number  of  classes  taught  by  subject  teachers  is  lower.  As 
indicated  in  the  2013  NRP  a  series  of  targeted  measures  such  as  equal  opportunity 
scholarships  are  being  implemented  to  support  disadvantaged  students,  but  more  efforts  are 
needed  to  reduce  inequalities  through  mainstream  education  policy.  At  the  same  time,  the 
total national budget allocated to schools education was decreased by 17%.56 

Although  the  number  of  students  entering  higher  education  has  grown  significantly  in 
recent years, further work is needed to reach the EU average. According to the NRP the 
main target groups of the planned measures in higher education aimed at attaining the Europe 
2020 target are students aged between 20 and 24 who are already in higher education while 
further  increase  of  tertiary  attainment  level  is  not  promoted.  The  on-going  higher  education 
reform is not clear on its mid-term strategy and it is doubtful that besides old measures it can 
further  improve access  for  disadvantaged pupils, as recommended in the 2012  CSR.  Recent 
changes,  uncertain  plans  on  the  number  of  state-financed  scholarships  and  on  tuition  fees 
resulted in a severe drop in the number of applicants57. As referred to in the 2013 NRP, new 
forms of scholarships and a student loan programme (Diakhitel II) provide support for higher 
education  studies  in  fields  with  societal  importance.  However,  current  state-financed 
scholarships are offered only to students who agree to work in Hungary after they graduate, 
which  raises  questions  about  compliance  with  workers’  freedom  of  movement  in  the  EU. 
Finally, students from lower socio-economic backgrounds tend to be more averse to financial 
risks  so  their  access  to  higher  education  will  still  be  difficult  despite  the  new  government's 
student loan system.  

54 See 2013 NRP, page 27. 
55 National Social Inclusion Strategy 
56 This makes Hungary one of the top three countries in Europe in terms of school expenditure reduction (from 
pre-primary to upper secondary). Source: Eurydice: Funding of Education in Europe 2000-2012, Figure 
2.6a 

57 From 141.000 in 2011 to 95.000 in 2013. See www.felvi.hu 

28 

 
 
                                                 
Implementation  of  the  2011  reform  of  the  vocational  education  and  training  system 
should  be  closely  monitored  to  ensure  labour  market  relevance  and  to  facilitate  the 
transition between  various  educational levels and vocational tracks, particularly in the 
light of high ESL rate. According to the NRP, the drop-out rate in vocational schools reaches 
30%,  particularly  in  disadvantaged  regions.  Recently,  the  duration  of  vocational  education 
was  shortened  and  time  devoted  to  the  acquisition  of  key  competences  substantially 
decreased.  At  present,  it  is  planned  to  reinforce  the  apprenticeship  system  and  to  better 
involve  the  business  sector58,  to  reduce  the  gap  between  skills  supply  and  needs.  The  full 
launch of the new system is planned as from September 2013, by this time the preparation for 
the necessary organizational changes will also be completed. 

Social policies 

Since  the  start  of  the  financial  crisis,  the  social  situation  in  the  country  has  worsened.  
According to the NRP, some 220,000 people more live in poverty than in 2008. 31% of 
the  population  is  at  risk  of  poverty  or  social  exclusion,  and  23%  faces  severe  material 
deprivation59, according to the NRP, because of the economic crisis, growing unemployment 
and of the negative effects of austerity measures on low-income people. In order to create an 
incentive  for  returning  to  the  labour  market,  Hungary  reduced  the  maximum  amount  of 
unemployment benefits and shortened the related entitlement period60. However this step has 
left most registered job seekers without an allowance or a job in 2012. In parallel, eligibility 
for social benefits has been restricted which further increased the number of people in need. 

Box 3 —Health    

The health status of the Hungarian population is among the lowest in the EU  

The health status of the Hungarian population is lower than the EU average and among the lowest in 
the  OECD.  Life  expectancy  at  birth  and  healthy  life  expectancy  at  birth61  are  lower  than  the  EU 
average, while child mortality is well above it. Non-communicable diseases are the leading causes of 
morbidity  and  mortality.  Moreover,  the  incidence  of  major  communicable  diseases  in  Hungary  is 
negatively evolving. Lifestyle-related risk factors are highly prevalent, particularly related to smoking, 
an unhealthy diet and lack of physical activity.  

The health sector workforce is shrinking 

A significant number of health professionals have left the country, thus threatening the sustainability 
of  services.  Latest  analyses  available  on  the  Hungarian  health  system  point  out  that  the  absolute 
number of physicians working in inpatient and outpatient care has dropped substantially between 2003 
and 2010 and that increased professional mobility may contribute to the overall decline in the number 
of  physicians  in  the  near  future  as  well.  To  encourage  medical  specialists  to  stay  in  Hungary,  the 

58 The Hungarian Chamber of Commerce and Industries (HCCI), the Chamber of Agriculture and other actors 
59 23.1% of Hungary’s population is affected by severe material deprivation, compared to only 8.4 % in the EU. 
60 The maximum period for unemployment benefits has been reduced from 270 to 90 days. The upper limit of the 
benefit  was  decreased  from  120 %  of  the  minimum  wage  to  the  minimum  wage.  So  far,  no  impact 
assessment is available on the effects of the measure. 

61 Life expectancy at birth for women (78.7 years vs. 83.2 years in the EU-27) and for men (71.2 years vs. 77.5 
years in the EU-27). Healthy life years at birth for women (59.1 years vs. 62.2 years EU27) and for men 
(57.6  years  vs.  61.8  years  EU27).  These  data  are  part  of  the  2011,  European  Community  Health 
Indicators  

29 

 
 
                                                 
Resident  Physician  Support  Programme  was  introduced  and  provides  scholarship  grants.  However, 
solving the problem of the health sector workforce requires a more comprehensive intervention.62 

Hungary's public spending on healthcare remains below the EU average 

Hungary's total healthcare spending and public spending on healthcare remain below the EU average, 
with public funding currently decreasing. Projections of current public health spending per capita do 
not  point  to  a  significant  burden  on  public  finances  in  the  medium-  or  long-term  either.63  However, 
formal and informal out of pocket payments are high and constitute an additional barrier as there are 
no  exemptions  for  low  income  or  high  risk  groups.  The  system  is  hospital-centric.  Hungary  spends 
only 17% of its public healthcare budget on ambulatory care (as compared to an EU average of 25%) 
and has few general practitioners per capita. This may lead to cost-inefficiencies as patients are opting 
hospital in-patient care instead of out-patient care or for more resource-intensive specialists.  

Increasing  cost  effectiveness  and  sustainable  investments  in  healthcare  can  have  positive  spill-over 
effects  by  potentially  increasing  the  effective  retirement  age,  as  Hungary  currently  has  one  of  the 
lowest "healthy life expectancies at age 50" in the EU. Consequently, any successful move towards the 
Europe 2020 employment target will also require improving the population's health. 

Healthcare reform has been initiated but no progress was reported in the 2013 NRP 

The  government  took  steps  to  reform  healthcare  in  line  with  the  "Semmelweis  Plan".  Nevertheless, 
further improvement of the system to make it more sustainable and transparent is necessary to ensure 
access to good quality care and to optimise care delivery across different socio-economic groups and 
regions. A clear action plan and continuous monitoring would help avoiding new inefficiencies.  

The  NRP  highlights  that  poverty  continues  to  disproportionately  affect  disadvantaged 
territories64 and groups, in particular the Roma, more than 90% % of whom are at risk of 
poverty,65 as well as children. The number of people at risk of poverty has increased during 
the international financial crisis, from 2.83 million in 2008 to 3.1 million in 2011. They are 
affected  by  a  high  level  of  unemployment,  low  education  levels,  poor  housing  and  poor 
health. 

Hungary adopted a National Social Inclusion Strategy (also covering Roma) in 2011 and 
started  its  implementation,  as  reported  by  the  NRP,  but  results  are  still  unclear.  The 
strategy  aims  at  improving  employment,  education,  health  and  housing  conditions,  but  the 
counteracting mainstream policy developments and limited national resources allocated to it 
could  severely  affect  its  efficiency  and  sustainability,  while  the  worsening  poverty  situation 
calls  for  further  integrated  efforts  and  monitoring  based  on  pre-determined  quantitative 
targets, which are currently being set up. 

62  The  2013  NRP  underlines  a  lack  of  resources  of  HUF  624  million  for  2013-2015,  needed  to  achieve  the 

expected results 

63 Long-term healthcare expenditure projections show an expected increase in healthcare expenditure of 1.1 pp of 

GDP by 2060 (2012 Ageing Report EPC/EC) 

64 Regional economic disparities are important. The Budapest region is the only one with a GDP per capita above 
the EU-27 average. The labour market has a strong regional dimension as well, with particularly high 
(long-term) unemployment rates in North Hungary and North Great Plain. Significant differences also 
exist between urban and rural areas, as a high proportion of marginalised people, mainly Roma, live in 
the latter.  

65  According  to  a  recent  survey,  the  percentage  of  households  at  risk  of  poverty  is  more  than  double  for 
marginalised  Roma  households  than  for  marginalised  non-Roma  households.  See  FRA  report: 
http://fra.europa.eu/en/publication/2012/situation-roma-11-eu-member-states-survey-results-glance. 

30 

 
 
 
                                                 
3.4. 

Structural measures promoting growth and competitiveness  

Business environment  

In  2012,  the  Council  Recommendation  for  Hungary  contained  a  CSR  concerning  a 
stable  regulatory  and  business-friendly  environment  for  financial  and  non-financial 
enterprises, including foreign direct investors (CSR5).  

However,  the  general  business  environment  has  deteriorated  due  to  an  unpredictable 
policy  environment  as  evidenced  by  a  series  of  measures  that  imposed  additional 
burdens  and  a  growing  number  of  restraints  on  investors.  Examples  include  sector 
specific surtaxes (see also section 3.1 – Taxation) and restrictions on various services, namely 
waste  treatment,  the  pharmaceutical  retail  sector,  meal  voucher  providers  and  the  financial 
sector (see also section 3.2 – financial sector).  

As  regards  sector  specific  surtaxes,  although  the  crisis  taxes  adopted  in  2010  for  the 
telecom,  energy  and  retail  sectors  were  phased  out  as  of  2013,  new  surtaxes  were 
introduced on the telecom, energy and public utilities sectors. Moreover, the crisis tax on 
the  banking  sector  (the  bank  levy)  has  become  permanent,  contrary  to  an  earlier  agreement 
with  the  banking  sector  to  halve  it  in  2013  and  to  further  reduce  it  in  2014.  In  addition,  a 
financial transaction duty is now levied on all cash and bank transfer transactions at a rate of 
0.2 % (0.3 % in case of cash withdrawals), although with a cap.  

Hungary  has  taken  no  steps  to  remove  the  persisting  restrictions  to  the  freedom  of 
establishment in the retail sector66, which will be applied until the end of 2014 despite the 
economic importance of the sector for Hungary.67 The 2013 NRP does not foresee to address 
the restrictions either.  

Further  entry  restrictions  in  the  service  sector  have  been  also  introduced.  The 
government  has  imposed  restrictive  conditions  for  issuing  hot  meal  vouchers  (de  facto 
excluding existing foreign operators from the market) and a state monopoly has been imposed 
on  issuing  cold  meal  vouchers.  In  addition,  amendments  to  the  pharmaceutical  sector  law 
(Gyftv)  by  limiting  foreign  investors'  presence  on  the  market  with  a  compulsory  sell-off  of 
their stake can further harm investor confidence.68 These amendments seem unjustified, and 
may cause the end of pharmacy chains in Hungary and increase product costs. They are also 
discriminatory towards foreign companies, as most chains are owned by foreign investors (the 
law  suggests  keeping  medicine  supplies  ‘within  national  interest’).  Furthermore,  waste 
management  was  completely  remodelled  by  a  bill  which  has  entrusted  the  organization  of 
public  service  waste  management  to  the  state  and  provided  that  the  public  service  of 
household  waste  management  (collection  and  recycling)  should  be  made  by  companies 
majority-owned  by  the  state  or  its  communities.  For  these  reasons,  the  Commission  has 
initiated an EU pilot procedure regarding restrictions on the freedom of establishment in July 
2012.  Although  the  bill  was  partially  modified  in  November  2012,  the  condition  of  the 

66 The so called ‘plaza-stop law’ prescribes prior approval for building commercial facilities exceeding 300 m². 
67 Retail accounts for 4 % of GDP and 9.1 % of the workforce.  
68  According  to  them,  one  shareholder  may  not  hold  shares  in  more  than  four  pharmacies  and  must  sell  any 
pharmacy above the limit of four to one of the pharmacists working in that pharmacy. Each pharmacist 
should progressively increase his/her share from 1 % now to 25% in 2014 and 50 % in 2017. 

31 

 
 
                                                 
majority  ownership  of  state  enterprises  in  the  management  of  household  waste  was  not 
removed. Moreover, the activity has been reserved exclusively for non-profit entities.  

According  to  international  observers  the  situation  has  deteriorated  over  the  last  three 
years. In the 2011 World Bank Doing Business report69, Hungary ranked as the 46th easiest 
country  to  do  businesses  in;  two  years  later  it  has  reached  the  54th  position.  If  the  investor 
protection ranking is taken into account, Hungary is the 128th best country in the world (down 
from  120th  in  2011)  and  the  worst  in  the  whole  EU.  Also,  last  year  the  country  fell  by  12 
places  on  the  World  Economic  Forum  Global  Competitiveness  Index.  Recently  introduced 
restrictions  and  artificially  created  monopolies  disproportionately  hurt  foreign  investors, 
mainly in the service sector. Furthermore, corruption70 and diversion of public funds71 remain 
significant problems and add to  the unfavourable business climate72  hence  making  Hungary 
difficult for both domestic and foreign operators and hampering investment and competition. 
Finally,  a  generally  unstable  and  volatile  regulatory  environment  remains  a  hurdle  for 
business, an issue which according to the 2013 NRP, the government is aware of and is trying 
to tackle by increasing the predictability of legislation. 

Research and innovation 

Business  sector  R&D  spending  has  been  increasing  from  0.36%  of  GDP  in  2004  to 
0.75%  in  2011.  This  has  contributed  to  an  increase  of  the  R&D  intensity  up  to  1.21 %  of 
GDP  in  2011,  in  line  to  achieve  the  Europe  2020  target  of  1.8 %  of  GDP.  However,  the 
negative trend in the governmental budget for R&D since 2009 is a matter of concern. 

The  Innovation  Union  Scoreboard  ranks  Hungary  as  a  moderate  innovator.  Business 
R&D  investment  is  driven  primarily  by  foreign-owned  companies.  Two-thirds  of 
industrial  innovation  is  concentrated  around  Budapest,  with  a  strong  sectoral  presence  in 
pharmaceutical,  electronics,  informatics  and  automotive  industries.  The  smart  specialisation 
strategy  announced  in  the  2013  NRP  may  contribute  –  with  its  strong  regional  focus  –  to 
stimulating  innovation  in  lagging  behind  regions.  This  effort  of  spreading  innovation 
processes more widely throughout Hungary is very relevant and ambitious and could mitigate 
the  heavy  concentration  of  RDI  in  Budapest.  At  the  same  time,  low  rates  of  government 
investment  in  environmental  and  energy  R&D, green  early-stage  investment  and  total  R&D 
personnel put Hungary among the lowest scoring countries on eco-innovation73. 

There  have  been  frequent  changes  in  the  governance  of  Science,  Technology  and 
Innovation  (STI)  policies74  and  the  new  National  Innovation  Strategy  (2013-2020)  is 
significantly delayed. According to the 2013 NRP, the strategy is expected to be adopted in 
the  first  quarter  of  2013,  following  an  inter-ministerial  consultation  stage,  which  does  not 

69 http://www.doingbusiness.org/. 
70 96% of Hungarians think corruption is a major problem in their country. There are only three countries where 

people have worst perceptions in the EU, see the special Eurobarometer on corruption. 

71 For this indicator, Hungary ranks 106th in the WEF Global Competitiveness Report for 2012-2013 
72 http://ec.europa.eu/enterprise/policies/industrial-competitiveness/monitoring-member-states/improving-public-

administration/files/pa_report_en.pdf 

73 Eco-Innovation Observatory, see  http://www.eco-innovation.eu/  
74 The high-level political body in the field of STI policy, the National Research, Innovation and Science Policy 
Council (NKITT), was dissolved in July 2012, when the Governmental Development Cabinet, a body 
chaired by the prime minister, was set up.  

32 

 
 
 
                                                 
seem  to  be  achievable  anymore.  The  draft  strategy,  based  on  the  critical  challenges  it 
identifies75,  sets  the  following  priorities:  support  for  globally  competitive  research  centres; 
ensuring  stable  financing76;  intensifying  knowledge  flows;  efficiently  targeting  support 
measures to boost the research, development and innovation (RDI) activity of both large and 
SME companies. The strategy also plans to tackle the projected shortage of human resources 
in  technical  sciences  and  engineering,  partly  caused  by  brain  drain,  as  these  are  urgently 
needed  in  sectors  at  the  forefront  of  RDI77.  As  detailed  in  the  2013  NRP,  the  National 
Innovation Strategy will be complemented by a Smart Specialization Strategy by the end of 
2013,  establishing  regional  priorities.  Moreover,  it  will  play  a  key  role  in  preparing  for 
Horizon  2020, in drawing up  a  comprehensive RDI promotion system, and is  going to  be a 
framework for planning the Smart Specialisation Strategy, which is expected to be adopted in 
the second half of 2013. A timely implementation of the Strategy is essential to maximise the 
effectiveness of RDI expenditure and its impact on growth and jobs in 2014-2020.   

In  2012,  CSR5  recommended  that  Hungary  develop  ‘targeted  incentive  schemes  to 
support  innovative  SMEs’,  as  only  13%  of  Hungarian  SMEs  carry  out  innovation 
activities.78  The  available  support  schemes  must  be  more  targeted  and  focused  on 
innovation.  For  example,  despite  a  number  of  funding  mechanisms  being  directed  towards 
eco-innovation  through  various  public  programmes,  the  amount  of  available  funding  is  still 
insufficient  for  strengthening  the  Hungarian  eco-innovation  market.  Hungary  has  had 
significant  experience  with  the  financial  instruments  (FIs)  under  the  EU’s  cohesion  policy 
funds in the period 2007-2013. To boost innovation and growth, the use of EU funds should 
shift  further  away  from  classical  grant  schemes  and  move  towards  financing  corporate  RDI 
activities. Currently, financial instruments are mainly used to support SMEs in their general 
business activity, e.g. for the purchase of new machinery. Another impediment to growth is 
Hungarian  SMEs’  lack  of  integration  into  the  global  value  chain  of  the  numerous 
multinationals  present  in  the  country.  These  multinationals  would  also  benefit  from  being 
better integrated into the national and local economic networks and innovation systems. EU 
cohesion policy can play a crucial role here, for example through targeted business advisory 
services,  partnering  approaches  and  cluster  policies.  In  this  context,  the  NRP  2013  NRP 
announces a major focus of the new Hungarian strategy for SME policies 2014-20 (currently 
being finalised) on SMEs' innovation potential, networking,  cooperation and entrepreneurial 
skills which can contribute to enhance competitiveness. 

Hungary  has  not  fully  seized  the  growth  and  jobs  potential  of  the  digital  economy. 
Whereas  it  is  doing  relatively  well  as  regards  rolling  out  of  broadband,  its  take-up  remains 
below the EU average. The take-up of mobile broadband is the lowest in the EU. Overall, lack 
of  frequencies  for  wireless  communications,  a  continued  and  increasing  fiscal  burden  on 
operators, and regulatory uncertainty may put the necessary investment at risk. 

75  Challenges  are  grouped  into  3  main  areas:  knowledge  generation  (lack  of  competitive  knowledge  centres, 
researcher capacity, obsolete R&D infrastructure, inadequate financing); knowledge flows (weak inter-
sectoral  links,  inadequate  international  embeddedness  and  technology  transfer);  and  knowledge 
utilisation (the striking gap between foreign and domestic companies) 

76 funding for basic research, availability of venture capital, seed capital 
77  According  to  the  World  Economic  Forum  Global  Competitiveness  Index,  among  EU  Member  States  only 
Romania is more severely hit by brain drain than Hungary. Only 15 countries worldwide (out of 144 in 
the report) suffer from it more than Hungary, according to the Executive Opinion Survey on which the 
report is based. 

78 As opposed to an EU average of 30% 

33 

 
 
                                                 
Transport 

Implementation  of  the  measures  included  in  the  Szell  Kalman  Plan,  which  is  aimed  at 
improving  the  cost-efficiency  and  performance  of  transport,  is  prone  to  considerable 
delays.  Although  the  introduction  of  a  distance-based  e-toll  system  for  heavy-duty  vehicles 
has  been  confirmed  for  1  July  by  the  latest  Convergence  Programme  as  well  as  by  the 
proposed  road  toll  act,  given  that  the  technology  of  the  system  is  being  still  unknown  and 
there  are  concerns  about  the  procurement  process,  the  risk  of  implementing  a  sub-optimal 
system ( i.e. which is not based on the most advanced technology  that is able to extend the 
effective  coverage  to  most  transport  routes  in  the  country)  is  high.  Also,  last  year  the 
parliament  voted  against  the  introduction  of  a  congestion  charge  planned  for  the  centre  of 
Budapest  and  there  is  no  certainty  on  when  it  will  be  back  on  the  government's  agenda.  If 
well-designed, these two measures could also contribute to reducing the significant external 
cost of road transport. 

The  lack  of  a  comprehensive  transport  strategy  hinders  the  financial  sustainability  of 
the  transport  systems  and  of  projects  of  key  importance.  As  for  collective  transport, 
financing the Hungarian State Railways (MÁV) and the Budapest Transport Company (BKV) 
has  become  unsustainable  over  the  last  years.  Although  the  new  CP  refers  to  a  recent 
agreement  between  the  government  and  Budapest,  it  contains  no  concrete  plans  about  the 
reform of public transport in the capital, and a long-term solution is still to be found for the 
financing of BKV. The restructuring and streamlining of MÁV announced in the 2011 NRP 
has started; at the same time the budgeted appropriation for track operation in 2013 seems to 
cover  all  due  costs  (after  a  long  period  of  underestimating  these  costs).  In  2012,  a  more 
flexible tariff system was introduced, but no substantial changes have been made to discounts, 
which impede cost recovery.79 As a response to last year's CSR, the 2013 NRP states that the 
revision of the tariff system has been completed, while it concedes that "discounts offered on 
social  basis,  however,  can  only  be  reviewed  gradually  due  to  social  and  transport  policy 
reasons."  The  2013  NRP  and  CP  also  reiterate  other  measures  previously  announced  (e.g. 
reviewing preferential tariffs, the congestion charge or the modernisation of ticketing) without 
including  any  details,  except  for  the  procurement  of  more  environmentally-friendly  buses. 
This  could  attenuate  the  problem  of  old  rolling  stock,  which  continues  to  cause  regular 
disruptions, high energy consumption and pollution. However, although this is a step in the 
right direction, it appears isolated; such actions should be reinforced and complemented with 
policy  means  to  encourage  the  use  of  public  transport  in  the  2014-2020  Partnership 
Agreement  and  relevant  operational  programme(s).  The  lack  of  own  resources  of  public 
transport companies may endanger the success of the call in question. Finally, there seem to 
be no plans to improve the conditions for navigation on the Danube, which remains a barrier 
to competitiveness. 

Energy and the environment 

In 2012, the Council Recommendation for Hungary contained a CSR concerning cross-
border  capacities  of  the  electricity  network,  the  independence  of  the  energy  regulator 
and regulated energy prices (CSR7). 

79 According to MÁV, 90 % of passengers need a ticket to travel. In 2012, 40 % of them travelled at full price, 
the  rest  benefitted  from  one  of  the  43  available  reductions.  In  the  case  of  BKV,  the  number  of  those 
travelling for free is not even known. 

34 

 
 
 
                                                 
increased 

interconnections  with 

Hungary  adequately 
its  neighbours,  as  was 
recommended.  The  Hungarian  power  grid  is  now  linked  with  Austria,  Slovakia, 
Ukraine,  Serbia,  Romania  and  Croatia,  and  four  new  programmes  with  Slovakia  are 
currently  under  discussion.  Interconnection  already  amounts  to  some  30%  of  domestic 
electricity  generation  capacity,  which  is  higher  than  the  10%  requirement80  referred  in  the 
NRP.  In  the  case  of  natural  gas,  it  is  important  to  complete  the  interconnector  between 
Hungary and Slovakia by January 2015, as planned. 

The  energy  regulator’s  lack  of  full  independence  still  raises  concerns.  The  right  to  set 
retail prices and network tariffs is only formally in the hands of the National Regulator (the 
Hungarian Energy Office), though the NRP claims that the new Energy Office, created by a 
recently adopted law in March 2013, is exclusively subordinated to legislative acts and it is an 
independent regulatory organ. In reality, in order to calculate tariffs, the Regulator must apply 
the  methodology  detailed  in  ministerial  decrees.  In  addition,  recent  amendments  to  the 
Hungarian electricity and gas acts do not allow network operators to recover incurred costs, as 
is required by internal market rules.81 

Instead  of  gradually  abolishing  regulated  prices,  the  government  continued  price 
regulation. At the outset of 2013, the government forced a 10 % reduction of end-user retail 
electricity and gas prices on all providers. This move does not provide incentives to investors 
in  the  energy  sector  and  increases  the  probability  of  cross-subsidising  consumers  under 
regulated tariffs by other consumers (not falling under universal service provision). Following 
a  court  decision,  which  allowed  energy  providers  to  set  higher  tariffs,  the  government 
increased the powers of the new Energy Office82 so that its decisions can only be appealed at 
the level of the Constitutional Court.83 The 2013 NRP mentions the opportunity to phase-out 
the regulated energy prices only on a longer time horizon, in parallel with the accomplishment 
of the European internal energy market, leading to converging national wholesale electricity 
and gas prices and by further installation of adequate cross-border capacity.  

Government intervention may be one of the causes of the retail market not functioning 
properly. It takes an average of 252 days for a company to get access to electricity,84 which 
makes Hungary the second slowest country in the EU and the ninth slowest worldwide. 

Hungary is still way above the EU average in terms of energy and carbon intensity, and 
its  excessive  energy  consumption  causes  external  imbalances.  The  household  sector  has 
one  of  the  highest  energy  and  carbon  intensities  in  the  whole  EU,  which  shows  scope  for 
improving  efficiency  across  the  board,  from  household  appliances  to  building  efficiency. 
Doing so would have a positive impact on Hungary’s external account, which presents one of 
the highest energy trade deficits in the EU (-5.4 % GDP per year on average, compared with -
2.4 %  of  GDP  in  the  EU  in  2007-11).  The  country  is  heavily  dependent  on  imported  fossil 
energy sources and has the highest gas trade balance deficit in the EU (-2.5 % GDP), which 
also points to possible supply risks.    

80 Council Presidency Conclusions of the Barcelona European Council, 15-16 March, 2002 
81 Art.14(1) of Reg. 714/2009 requires that network tariffs reflect actual costs of the network operators. Fees and 
surcharges that can be passed on to consumers have been limited (e.g. banking transaction fees, tax on 
wires and pipelines cannot be passed on). 

82 Magyar Energetikai és Közmű-szabályozási Hivatal. 
83  Contrary  to  the  right  to  appeal  principle  established  under  Dir.2009/72/EC  (art.  37  -—  par.  16  and  17) 

concerning common rules for the internal market in electricity. 

84 World Bank Doing Business 2013 report 

35 

 
 
                                                 
At  the  same  time,  end-user  electricity  and  gas  price  cuts  do  not  give  incentives  for 
sustainable energy consumption and efficiency measures. The National Energy Efficiency 
Action Plan (NEEAP) was adopted, but some of its elements are still delayed, such as green 
procurement and the national strategy for energy efficiency of buildings. EU Structural Funds 
co-finance  national  energy  efficiency  projects,  although  they  fall  short  on  demand  and  are 
quickly depleted after calls  are  published. Alternative  financing  mechanisms  are  under-used 
(including revolving funds and energy performance contracting). In addition, regulated prices 
do  not  facilitate  broader  deployment  of  renewable  energy  sources  or  reduction  of  external 
fossil fuel dependency, so they should be limited to vulnerable customers only. 

The  regulatory  environment  to  support  co-generation  has  deteriorated.  The  abrupt 
discontinuation of the purchase obligation scheme for electricity from co-generation in 2011, 
without proper measures to replace it, resulted in a sharp and significant drop of 7.4% in the 
share of cogeneration in just two years (from 20.9% in 2010 to 13.4%, whereas the national 
economic  potential  is  25%).  The  general  price  regime  coupled  with  heat  price  regulation  is 
not conducive to improving efficiency in energy production and consumption. The regulatory 
framework  and  support  system  do  not  follow  the  strengthened  requirements  of  the  new 
Energy  Efficiency  Directive85,  and  do  not  promote  co-generation  either,  in  particular  in 
district heating and cooling.  

Hungary still faces significant challenges to reaching its 2020 renewable energy sources 
target.  The  country  has  not  finished  transposing  the  Renewable  Energy  Sources  Directive, 
but2011  it  nearly  doubled  the  proportion  of  renewable  sources  in  its  gross  final  energy 
consumption  between  2005  and  2011;  these  now  account  for  8.1 %  of  Renewable  Energy 
Sources. 

Hungary  is  well  positioned  to  meet  its  2020  greenhouse  gas  emissions  target  for 
emissions  outside  the  Emissions  Trading  Scheme  (ETS).  Projections  of  2020  emissions, 
based on existing measures, show that Hungary will meet its target by reducing greenhouse 
gas  emissions  by  26 %.  Nevertheless,  while  emissions  in  other  sectors  are  falling,  transport 
sector  emissions  have  increased  since  2005.  This  trend  also  leads  to  high  fine-particle 
pollution86, which is currently the highest risk to public health, especially in Budapest, and is 
responsible for 2200 premature deaths per year.87  

3.5.  Modernisation of public administration  

The  2013  Annual  Growth  Survey  notes  the  importance  of  improving  the  transparency 
and  quality  of  public  administration.  In  2012,  the  Council  Recommendation  for  Hungary 
contained  a  CSR  concerning  public  administration  reform  (CSR5).  According  to  the  2012 
National Reform Programme, this is one of the Hungarian government’s priorities. 

To  this  end,  the  Simple  State  programme  included  114  measures  to  reduce  the 
administrative  burden  on  businesses  by  approximately  HUF  500  billion  (EUR  1.7 
billion)88.  While  the  programme  is  on-going  the  implementation  has  been  somewhat 
delayed.  The  programme  was  announced  in  2011  (originally  with  114  measures)  and  most 

85 Directive 2012/27/EU of the European Parliament and of the Council of 25 October 2012 on energy efficiency 
86 PM10 i.e. particulate matter, 10 micrometres, a type of air pollution. 
87 See http://gamapserver.who.int/gho/interactive_charts/phe/oap_mbd/atlas.html. 
88 Approximately 1.7 % of GDP. 

36 

 
 
                                                 
(93)  measures  were  completed  by  February  2013.  However  a  few  measures  have  been 
delayed, some even beyond 2014 (e.g. e-governance); according to the 2013 NRP, and eight 
were cancelled. By the first half of 2013, 93 measures have been adopted89, saving HUF 288 
billion (EUR 988 million), while another 13 are expected to be implemented by the end of the 
year90,  with  expected  savings  of  around  HUF  100  billion  (EUR  342  million).  However,  the 
slowed down reform and unclear monitoring arrangements91 point to a risk for the programme 
to not achieving the expected impact. The 2013 NRP mentions that further measures are in the 
pipeline,  mainly  focusing  on  increasing  the  stability  of  the  regulatory  environment,  without 
detailing the exact nature of these measures. 

Reforms have been on-going in the framework of the Magyary Programme in order to 
increase  the  efficiency  of  public  administration  vis-à-vis  citizens.  In  this  case  98%  of 
planned  measures  have  already  been  adopted  by  April  2013.  The  government’s  anti-
corruption  programme92  is  a  central  element.  Regrettably  however,  the  programme  which 
focuses  on  prevention  through  measures  such  as  training  and  the  introduction  of  codes  of 
ethics,  does  not  tackle  the  issue  of  insufficient  law-enforcement  in  this  area,  nor  does  it 
address reinforcement of party financing control, a key area of concern.93 The 2013 NRP does 
not  foresee  such  measures  to  be  covered  in  the  coming  years  either.    Moreover,  the 
achievements  listed  in  the  NRP  cover  only  a  fraction  of  the  entire  programme;  most  of  the 
announced  steps  have  not  been  started  yet  and  according  to  2013  NRP  implementation  is 
expected  by  the  end  of  2014.  Lack  of  monitoring  of  implemented  measures  also  remains  a 
problem. 

Administrative  simplification  through  business  portals  can  significantly  improve 
efficiency for businesses and for the public administration by transforming paper-based public 
services into user-friendly digital ones. The 2013 NRP mentions the government intentions to 
develop  the  Points  of  Single  Contact  (PSC)  required  under  the  Services  Directive,  but  does 
not provide details on how the authorities intend to address its limitation. In particular, not all 
procedures are supported online, and PSCs are of limited use to cross-border service providers 
for linguistic reasons (information is only available in Hungarian) and because they require a 
Hungarian electronic signature. 

Successful implementation of cohesion policy may also be threatened due to insufficient 
administrative capacity (mainly at the level of EU fund beneficiaries). The amount at risk of 
de-commitment  in  2013  is  estimated  at  EUR  500-600  million  and  is  related  mainly  to  the 
transport,  energy  and  environment  sectors.  The  announced  change  in  the  institutional  setup 
responsible for implementing the 2014-20 programmes94 further exacerbates this risk. 

A low level of competition in public procurement persists, although a new law entered 
into  force  on  1  January  2012  with  the  aim  of  streamlining  public  procurement  rules  and 

89 Savings achieved by the end of 2012 are estimated at HUF 190-250 billion (EUR 650-857 million), taking into 

account measures already implemented before the launch of the Simple State Programme 
90 With expected savings of around HUF 100 billion (EUR 342 million) according to government's estimates 
91 No information on the work of the committee that oversees the Simple State programme is publicly available 
92  Government  decree  1104/2012(IV.6.)  on  anticorruption  measures  and  the  adoption  of  the  Programme  on 

Preventing Corruption in Public Administration. 

93 http://media.transparency.org/nis/cogs/?Country=hu. 
94 According to government decree 1600/2012. (XII. 17) the managing authorities will be relocated to the line 
ministries (instead of the current National Development Agency containing the managing authorities of 
all Operational Programmes), with coordination ensured by the Prime Minister’s office. 

37 

 
 
                                                 
ensuring  more  transparency  in  spending  public  funds.  However,  the  2013  NRP  does  not 
announce new measures to address remaining concerns. In particular, these relate to the fact 
that below a certain threshold only SMEs can submit offers, which has a negative impact on 
competition  in  public  tenders,  and  negative  repercussions  for  taxpayers.  Moreover,  a  very 
high proportion of public procurement procedures involved one single bidder: 54.3 % in 2010 
and 49.1 % in 2011. This figure was even higher when a negotiated procedure was used (on 
average  61 %).  Furthermore,  questionable  direct  awards  continue  to  surface.  The  electronic 
submission  of  tenders  is  currently  not  possible  in  Hungary,  so  the  economic  benefits  of  e-
procurement95 are currently not being exploited. 

The  2013  Annual  Growth  Survey  also  underlined  the  importance  of  improving  the 
quality,  independence  and  efficiency  of  judicial  systems,  to  enhance  trust  and  stability. 
This  is  an  important  component  of  an  attractive  business  environment  and  ensures  the 
effective and timely enforcement of contracts and competition rules. 

The  developments  in  Hungary  in  2012  and  2013  have  increased  concerns  about  the 
judiciary’s  independence.  In  January  2012,  the  mandatory  retirement  age  for  judges, 
prosecutors and public notaries was lowered by 8 years. In November 2012, the EU Court of 
Justice ruled (C-286/12) that such a sudden lowering of the retirement age violates EU equal 
treatment rules. With the aim of bringing the domestic law in line with this ruling, Parliament 
adopted amendments in March 2013 to gradually decrease the retirement age from 70 to 65 
over  a  10-year  period,  as  well  as  to  offer  various  help  for  the  judges  concerned  (including 
reinstatement to their former positions and one-off compensations). 

Moreover, in March 2013, the Hungarian parliament adopted the fourth amendment to 
the Fundamental Law in the last two years, including new provisions that raise serious 
concerns  related  to  the  principle  of  the  rule  of  law,  EU  law  and  Council  of  Europe 
standards96. Notably, the power to transfer cases from one court to another was granted to the 
President of the National Judicial Office, aggravating concerns about the independence of the 
judiciary.  This  issue  was  brought  to  the  attention  of  the  Hungarian  government  by  the 
Commission  on  several  occasions  in  2012,  and  was  also  highlighted  by  the  Venice 
Commission  of  the  Council  of  Europe.  Following  a  detailed  assessment  of  the  adopted 
various provisions, on 2 May the European Commission sent administrative letters requesting 
further clarification on this issue, as well as regarding two other new articles: the clause on 
European  Court  of  Justice  judgements  entailing  payment  obligations  and  the  restrictions  on 
the publication of political advertisements. 

95 For example: greater transparency, faster procedures and more competition. 
96 See the Commission's press release: http://europa.eu/rapid/press-release_IP-13-327_en.htm  

38 

 
 
                                                 
4. 

OVERVIEW TABLE 

2012 commitments 

Summary assessment 

Country-specific recommendations (CSRs) 

Hungary has broadly implemented this CSR. 

Most  of  the  budgeted  consolidation  measures  and 
additional ones announced in the course of the year 
were  rigorously  implemented  in  2012,  which  was 
the  deadline  for  Hungary  to  bring  the  excessive 
deficit to an end. As a result, the deficit came out at 
1.9%  of  GDP,  well  below  the  Council  endorsed 
deficit target of 2.5% of GDP. The structural effort, 
corrected for  the  effects of revised potential  output 
growth and windfall revenues compared to the time 
the  Council 
is 
recommendation  was 
estimated  to  be  at  3.5%  of  GDP  in  2012,  which 
substantially  exceeds  the  recommended  effort  of 
2.4% of GDP. The public debt ratio decreased from 
81.4 % in 2011 to 79.2 % GDP in 2012. 

issued, 

Therefore, 
sufficiently 
the  government  was 
ambitious as it repeatedly committed itself to fiscal 
consolidation.  However,  the  new  fiscal  measures 
were increasingly concentrated on the revenue side, 
raising  questions  about  the  sustainability  of  the 
consolidation  efforts.  Based  on  the  Commission 
2013 spring forecast, the general government deficit 
is projected to increase to 3% of GDP in 2013 and 
to  worsen  further  to  3.3%  in  2014,  assuming  no-
policy-change. On 13 May, following the release of 
the  2013  spring  forecast,  the  government  adopted 
further  corrective  measures  of  0.3%  of  GDP  for 
2013 and 0.7% of GDP for 2014 (in gross terms) in 
order  to  keep  the  deficit  both  in  2013  and  2014 
below the 3% of GDP reference value.  

Hungary has partially implemented this CSR. 

There was no change to the medium-term budgetary 
framework  (MTBF),  which  is  purely  indicative. 
Hungary  would  benefit  from  a  revised  general 
(central)  government  numerical  rule  whose  design 
focuses  on  the  structural  deficit,  as  this  would  be 
more  conducive  to  effective  multi-year  planning. 
The  Hungarian  authorities  are  of  the  opinion  that 
the  numerical  rules  (linking  debt  reduction  to 
economic  growth)  that  are  currently  in  place  are 
well-founded  and  appropriately  strict,  but  they 

CSR  1:  Correct  the  excessive  deficit  by  2012  in  a 
durable  manner,  by  implementing  the  2012  budget  and 
the  subsequently  approved  consolidation  measures, 
while  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 MTO, including 
the  expenditure  benchmark,  and  ensure 
meeting 
sufficient  progress  towards  compliance  with  the  debt 
reduction  benchmark.  Also 
the 
accumulated macroeconomic imbalances, put the public 
debt ratio on a firm downward path 

to  help  mitigate 

CSR 2: 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 

39 

 
 
 
 
 
acknowledged  that  strengthening  the  MBTF  is 
necessary to make it binding, at least to some extent 
(related amendments are planned to be submitted to 
parliament before the autumn session, as part of the 
package  on 
the 
requirements  of  national  budgetary 
minimum 
frameworks). 

the  Directive  on 

transposing 

As  for  institution  building,  an  amendment  to  the 
cardinal  law  was  adopted  in  September  2012  and 
reinforced the Fiscal Council (FC) both in terms of 
(optional) tasks and resources (5-strong staff should 
be hired from the allocated budgetary appropriation 
to work in the Office of the Parliament). So far, the 
FC has relied primarily on analytical input provided 
by the Hungary National Bank (quantified estimates 
for  macro  and  fiscal  variables)  and  the  State  Audit 
Office (qualitative risk assessments). It is crucial to 
monitor  whether  the  on-going  reinforcement  of  the 
FC will make it strong enough to be able to perform 
its analytical role. 

Hungary has partially implemented this CSR. 

The  Job  Protection  Act,  which  came  into  force  in 
2013,  is  an  adequate  step  towards  last  year’s  CSR 
because  it  lowers  social  contributions  for  certain 
categories of workers, thus reducing the tax wedge. 
However,  it  does  not  efficiently  target  low-income 
earners  as  the  criteria  are  not  set  on  the  basis  of 
income.  Therefore,  a  non-negligible  share  of  lower 
productivity  workers  does  not  have  access  to  the 
programme.  At  the  same  time,  as  a  no-income 
ceiling  is  applied,  certain  groups  of  high  income 
earners are also eligible for contribution cuts. 

in  nurseries  and 

In  2012,  the  government  implemented  several 
measures  aimed  at  further  improving  the  labour 
market  participation  of  women.  This  includes  the 
creation  of  new  places 
the 
development of day-care facilities. The new Labour 
Code  that  was  enforced  in  mid-2012  includes  time 
off for breastfeeding, job protection for mothers, the 
right to unpaid leave for childcare reasons, and the 
obligation 
to  hire  employees 
returning  from  parental  leave  and  with  children 
under three part-time, upon the employee’s request.  

for  employers 

CSR 3: 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 
encourage  women’s 
to 
participation  in  the  labour  market,  particularly  by 
expanding childcare and pre-school facilities. 

the  capacity  of 
increase 
to 

CSR  4:  Strengthen 
the  Public 
the  quality  and 
Employment  Service 
effectiveness  of  training,  job  search  assistance  and 
individualised  services,  with  particular  regard  for 
disadvantaged groups. Strengthen the activation element 

Hungary has partially implemented the CSR. 

The  government  strengthened  active  labour  market 
the  Public 
the  capacities  of 
policies  and 

40 

 
 
 
 
 
 
in the public work scheme through effective training and 
job  search  assistance.  Implement  the  National  Social 
(Roma) Inclusion Strategy, and mainstream it with other 
policies. 

Employment  Service  by  reallocating  available 
the  most 
to 
European  Social  Fund  resources 
successful  programmes 
targeting  disadvantaged 
people. 

However,  the  public  work  scheme  is  still  a  major 
pillar  of  employment  policy,  although  it  seems  an 
ineffective  way  of  reintegrating  people  into  the 
labour market. 

Although  training  was  planned  as  part  of  the 
scheme,  it  was  poorly  implemented  and  did  not 
have  successful  results.  The  activation  element  is 
still missing. 

While  a  system  to  monitor  the  social  inclusion 
strategy  was  presented,  mid-term  targets  were  set 
only  in  part.  Certain  elements  of  the  new  laws  on 
public  and  vocational  education 
further 
segregating the Roma, which is not in line with the 
strategy. 

risk 

Although  a  number  of  targeted  measures  are 
available to help disadvantaged people get access to 
education,  mainstream  education  policy  does  not 
seem  to  appropriately  address  the  needs  set  out  in 
the National Social Inclusion Strategy.  

Hungary has partially implemented the CSR, but no 
progress  was  achieved  on  improving  the  business 
environment.   

The  system  of  applying  special  taxes  to  certain 
sectors  and  the  restriction  of  large-scale  retail 
enterprises  has  been  maintained.  Entry  costs  in  the 
service sector have increased further. 

have 

should 

burden 

The  bulk  of  measures  aimed  at  reducing  the 
administrative 
been 
implemented  by  the  end  of  2012,  but  there  have 
been  delays  and  the  deadline  was  moved  to  2014, 
which  shows  that  the  reform  has  slowed  down 
somewhat.  By  mid-2013,  93  measures  have  been 
adopted,  but  further  delay  is  expected  in  important 
areas,  most  notably  in  e-government.  Lack  of 
effective monitoring and of transparency as regards 
practical implementation and actual impact remains 
a problem. 

CSR  5:  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, 
tax 
including 
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. 

investors.  Reduce 

foreign  direct 

Low  level  of  competition  in  public  procurement 
persists, although a new law entered into force on 1 
January 2012. 

The  new  innovation  strategy  was  drafted  and  a 
consultation  was  launched  at  the  end  of  2012.  The 

41 

 
 
 
 
 
 
schemes  proposed 

incentive 
support  of 
innovative  SMEs  are  still  to  be  assessed.  The 
potential  of  eco-innovation  has 
to  be  further 
explored. 

in 

Limited progress was achieved on this CSR 

The early school leaving strategy will only be ready 
at  the  end  of  2013.  The  number  of  early  school 
leavers decreased from 13.9 % in 2000 to 10.5 % in 
2010,  but  this  trend  reversed  in  2011,  when  the 
number of early school leavers reached 11.2 % and 
11.5%  in  2012.  The  government  is  aware  of  the 
increasing  challenge  posed  by  the  number  of  early 
school  leavers  and  has  started  implementing  some 
the  National  Public 
in 
measures  embedded 
Education Act, but results are not visible yet.  

is  a  major 
Exclusion  from  quality  education 
problem for Roma children. The number of Roma-
majority  schools  has  increased,  but  their  quality  of 
education  remains  below  average.  The  schools  do 
not equip their pupils with the basic skills needed to 
join the labour market and to participate in lifelong 
learning programmes.    

Hungary  would  need  to  do  more  to  ensure  that 
implementing the higher education reform improves 
access to education for disadvantaged people. 

The  tertiary  education  strategy  and  thus  the  entire 
higher education reform is not clear on its mid-term 
strategy and the uncertainties around state-financed 
places  and  additional  loan  schemes  further  limit 
access of disadvantaged youth to tertiary education. 

Hungary’s tertiary attainment rate is increasing, due 
to  the  substantial  expansion  of  higher  education 
between  2002  and  2010.  However,  current  policy 
developments  might  lead  to  a  decrease  of  the 
number of students in higher education.   

Limited progress was achieved on this CSR 

Implementation of the reform in the transport sector 
is  slow  at  best.  Based  on  the  limited  amount  of 
information  available  on  measures  that  are  being 
considered, both effectiveness and ambition seem to 
be  limited.  The  policy  response  is  not  sufficiently 

CSR  6:  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. 

CSR  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. 

42 

 
 
 
 
 
 
 
 
 
clear  and  precise,  which  raises  questions  about  the 
reform’s credibility. 

Increasing  cross-border  electricity  capacities  is  on-
going.  Independence  of  the  National  Regulator  is 
still an issue, as are regulated prices, with decisions 
on  which  powers  should  be  re-delegated  to  the 
regulator being made at ministry level. 

Europe 2020 (national targets and progress) 

Employment rate target set in the 2013 NRP: 75 % 

R&D target: 1.8 % 

target:  +10 % 
(GHG)  emissions 
Greenhouse  gas 
(compared  to  2005  emissions,  ETS  emissions  not 
covered by this national target) 

Renewable energy target: 13 % 

Share  of  renewable  energy  in  all  modes  of  transport: 
10 % 

Indicative national energy efficiency target for 2020:  

1113  PJ  primary  energy  consumption  in  2020  (236  PJ 
savings  compared  to  BAU),  resulting  in  760  PJ  final 
energy  consumption.  This  implies  reaching  a  level  of 
26.584  Mtoe  primary  consumption  in  2020  and  18.152 
Mtoe final energy consumption.  

The employment rate was 60.4 % in 2010, 60.7 % in 
2011  and  62.1%  in  2012.  It  has  increased  slightly 
since  2010,  but  is  still  far  behind  both  the  EU 
average and Hungary’s national target. 

In  2011,  R&D  intensity  increased  to  1.21 %  of 
GDP,  from  1.17 %  in  2010.  Reaching  the  target  is 
realistic,  although  very  challenging  in  the  present 
economic  context.  Hungary  should  maintain  the 
4.5 %  average  annual  rate  of  increase  it  had  in  the 
last decade in order to reach the Europe 2020 target. 

Non-ETS  greenhouse  gas  emissions  decreased  by 
16 % between 2005 and 2011 

Based on the latest national projections submitted to 
the Commission, and if existing measures are taken 
into  account,  it  is  expected  that  the  target  will  be 
reached:  -26 %  in  2020  compared  to  2005  (with  a 
margin of 36 percentage points). 

Share  of  total  renewable  energy  in  gross  final 
energy  consumption  was  8.1  %  in 2011  and 0.5  % 
in the transport sector. (Source: Eurostat's estimate. 
April  2013.  For  2011,  only  formally  reported 
biofuels compliant with Art. 17 and 18 of Directive 
2009/28/EC are included). 

the  primary  energy  consumption 

In  2011 
in 
Hungary  was  1,044  PJ.  Hungary  has  set  an 
indicative  national  energy  efficiency 
in 
accordance  with  Articles  3  and  24  of  the  Energy 
Efficiency  Directive  (2012/27/EU).  It  has  also 
expressed  it,  as  required,  in  terms  of  an  absolute 
level  of  primary  and  final  energy  consumption  in 
2020 and has provided information on the basis on 
which data this has been calculated. 

target 

Early school leaving target: 10 % 

Although  Hungary  succeeded 

in  reducing 

the 

43 

 
 
 
 
 
 
number  of  early  school  leavers  in  the  last  decade 
(from  13.9 %  in  2000  to  10.5 %  in  2010),  progress 
has  stalled  in  the  last  few  years  and  the  trend  has 
even  reversed 
in  2011  (11.2 %)  and  slightly 
deteriorated in 2012 (11.5%). 

Hungary  is  very  close  to  reach  the  national  target 
which  is  one  of  the  lowest  among  EU  Member 
States.  

Tertiary educational attainment was 23.9 % in 2009, 
25.7 % in 2010, 28.1 % in 2011 and 29.9% in 2012. 

Hungary has not yet reached the national target and 
is below the EU target of 40 %. 

Current  policy  developments  are  likely  to  decrease 
instead of increase the number of students. 

The  number  of  people  at  risk  of  poverty  increased 
to 3.1 million in 2011 (against the 2008 baseline of 
2.83 million). 

The  poverty  rate  has  therefore  not  been  improved. 
On  the  contrary,  now  there  are  some  150000  more 
people  at  risk  of  poverty,  compared  against  the 
baseline.    

Tertiary education target: 30.3 % 

Target on the reduction of population at risk of poverty 
or social exclusion in number of persons: 

450 000 

44 

 
 
 
 
 
 
 
5. 

ANNEX 

Table I. Macroeconomic indicators  

Core indicators
GDP growth rate
Output gap 1
HICP (annual % change)
Domestic demand (annual % change) 2
Unemployment rate (% of labour force) 3
Gross fixed capital formation (% of GDP)
Gross national saving (% of GDP)
General Government (%  of GDP)
Net lending (+) or net borrowing (-)
Gross debt
Net financial assets 
Total revenue 
Total expenditure
  of which: Interest
Corporations (%  of GDP)
Net lending (+) or net borrowing (-)

1995-
1999

2000-
2004

2005-
2009

2010

2011

2012

2013

2014

2.4
-1.4
16.5
1.9
8.9
22.3
20.0

-6.5
68.5
-28.4
45.2
51.7
8.3

4.2
1.4
7.1
4.5
5.9
23.3
17.7

-6.0
56.6
-36.4
43.2
49.2
4.5

0.4
2.1
5.1
-1.7
8.0
21.7
16.5

-6.2
69.5
-52.7
44.6
50.8
4.2

1.3
-3.7
4.7
-0.5
11.2
18.3
19.9

-4.3
81.8
-61.5
45.4
49.7
4.1

1.6
-2.2
3.9
0.1
10.9
17.9
20.5

4.3
81.4
-52.7
53.8
49.5
4.1

-1.7
-3.9
5.7
-3.7
10.9
17.2
19.3

-1.9
79.2
n.a
46.5
48.4
4.2

0.2
-3.9
2.6
-0.2
11.4
16.9
19.8

-3.0
79.7
n.a
46.6
49.6
4.2

1.4
-3.1
3.1
0.8
11.5
16.6
19.2

-3.3
78.9
n.a
47.0
50.3
4.0

-4.1

-2.3

-0.4

4.7

4.6

3.7

5.0

5.9

n.a
n.a
8.9
20.2

n.a
n.a
11.4
21.4

n.a
n.a
10.5
21.4

2.6
n.a
37.3
1.2
19.4
5.2

-104.2
-0.9
16.8
16.8

-120.4
5.2
11.3
23.4

-114.8
10.0
13.4
24.5

-104.7
-2.3
15.4
20.1

-113.3
-3.4
13.8
22.3

2.7
67.5
37.2
2.8
19.4
6.4

1.4
63.0
36.8
3.5
19.5
6.1

5.9
58.7
33.5
5.7
16.9
10.8

1.1
62.3
35.5
4.2
17.5
6.4

-5.5
59.0
36.5
2.7
18.9
6.1

Net financial assets; non-financial corporations
Net financial assets; financial corporations
Gross capital formation
Gross operating surplus
Households and NPISH (%  of GDP)
Net lending (+) or net borrowing (-)
Net financial assets
Gross wages and salaries
Net property income
Current transfers received
Gross saving
Rest of the world (%  of GDP)
Net lending (+) or net borrowing (-)
Net financial assets
Net exports of goods and services
Net primary income from the rest of the world
Net capital transactions 
Tradable sector
Non tradable sector
  of which: Building and construction sector
Real effective exchange rate (index, 2000=100)
Terms of trade goods and services (index, 2000=100)
Market performance of exports (index, 2000=100)
Notes:
1 The output gap constitutes the gap between the actual and potential gross domestic product at 2005 market prices.
2 The indicator on domestic demand includes stocks.
3  Unemployed persons are all persons who were not employed, had actively sought work and were ready to begin working immediately or within two weeks. 
The labour force is the total number of people employed and unemployed. The unemployment rate covers the age group 15-74.

-5.2
106.8
0.6
-5.7
0.9
45.3
40.3
4.3
100.1
99.0
112.8

3.0
110.4
6.5
-4.7
1.8
44.6
39.9
3.6
94.7
99.0
125.7

3.4
99.5
6.7
-5.0
2.3
46.3
38.6
3.4
94.4
97.6
126.3

4.5
n.a
7.8
-6.5
2.6
45.5
38.5
3.1
93.8
96.7
128.4

-4.8
75.0
-0.3
-4.7
0.0
47.7
37.8
4.2
69.8
101.8
68.2

-7.4
81.9
-2.8
-5.0
0.2
45.8
40.0
4.7
86.6
101.3
88.8

6.1
n.a
8.4
-6.4
3.5
n.a
n.a
n.a
92.9
96.6
132.0

5.6
n.a
8.2
-6.3
3.1
n.a
n.a
n.a
90.2
96.8
130.6

2.3
n.a
37.4
0.3
19.1
4.9

2.3
n.a
37.3
1.0
19.5
4.9

Source :
Commission services’ 2013 spring forecasts (COM); Convergence programme (CP).

45 

 
 
 
 
 
 
 
Table II. Comparison of macroeconomic developments and forecasts 

Real GDP (% change)

Private consumption (% change)

Gross fixed capital formation (% change)
Exports of goods and services (% change)
Imports of goods and services (% change)
Contributions to real GDP growth:

- Final domestic demand

- Change in inventories

- Net exports
Output gap1
Employment (% change)

Unemployment rate (%)

Labour productivity (% change)

HICP inflation (%)

GDP deflator (% change)

Comp. of employees (per head, % change)
Net lending/borrowing vis-à-vis the rest of the 
world (% of GDP)

2012

2013

2014

2015

2016

COM CP

COM CP

COM CP

-1.7

-1.4

-3.8
2.0
0.1

-1.9

-1.6

1.7

-3.9
0.1

10.9

-1.8

5.7

3.2

4.6
4.5

-1.7

-1.4

-3.8
2.0
0.1

-1.9

-1.6

1.7

-4.0
1.7

10.9

-3.4

5.7

3.2

0.4
4.3

0.2

0.2

-1.5
3.2
3.0

-0.3

0.1

0.4

-3.9
0.0

11.4

0.2

2.6

3.3

-0.4
5.6

0.7

0.1

-0.2
3.3
2.7

-0.2

0.2

0.7

-3.5
0.5

10.7

0.2

3.1

3.5

1.7
6.3

1.4

1.0

0.8
6.2
6.1

0.8

0.0

0.6

-3.1
0.4

11.5

1.0

3.1

3.5

5.4
6.1

1.9

1.8

1.3
5.8
5.2

1.0

0.0

0.9

-2.2
0.8

10.5

1.1

3.2

3.4

6.0
6.9

CP

2.3

1.8

3.5
6.1
5.7

1.5

0.0

0.8

-0.6
0.9

10.2

1.5

3.0

2.2

4.1
6.8

CP

2.5

1.8

3.5
6.1
5.8

1.6

0.0

0.9

1.1
0.9

9.8

1.5

3.0

2.2

3.7
4.7

Note:
1In percent of potential GDP, with potential GDP growth recalculated by Commission services on the basis of the programme 
scenario using the commonly agreed methodology.

Source :

Commission services’ 2013 spring forecasts (COM); Convergence programme (CP).

46 

 
 
 
Table III. Composition of the budgetary adjustment 

(% of GDP)

Revenue

of which:

- Taxes on production and imports

- Current taxes on income, wealth, etc.

- Social contributions

- Other (residual)

Expenditure

of which:

- Primary expenditure

of which:

Compensation of employees

Intermediate consumption

Social payments

Subsidies

Gross fixed capital formation

Other (residual)

- Interest expenditure

General government balance (GGB)

Primary balance

One-off and other temporary measures
GGB excl. one-offs
Output gap2
Cyclically-adjusted balance

2

3
Structural balance (SB)
Change in SB

Two year average change in SB 

Structural primary balance
Change in structural primary balance

3

Expenditure benchmark

Applicable reference rate

4

5

Deviation
Two-year average deviation (% GDP)

 (% GDP)

2012

2013

2014

2015

2016

COM COM

46.5

46.6

18.0

6.9

13.2

8.4

48.4

18.6

6.9

12.9

8.2

49.6

CP

46.9

18.9

6.9

12.8

8.3

49.6

1
COM

47.0

18.6

7.0

12.8

8.6

50.3

CP

47.1

18.5

7.0

12.8

8.8

49.8

CP

46.8

18.3

7.0

12.8

8.7

49.0

CP

43.1

18.0

7.1

12.6

5.4

44.4

44.2

45.4

45.5

46.3

46.0

45.4

41.0

9.9

7.6

17.6

1.3

3.0

4.8

4.2

-1.9

2.3
0.7

-2.6

-3.9

0.0

-0.7

3.4

1.3

3.4

-0.57

7.2

-1.4

9.8

7.8

17.5

1.3

4.0

4.9

4.2

-3.0

1.2
0.0

-3.0

-3.9

-1.1

-1.1

-0.4

1.5

3.1

-0.4

0.54

-0.9

3.2

9.6

7.7

17.5

1.3

4.0

5.4

4.1

-2.7

1.4
0.0

-2.7

-3.5

-1.0

-1.0

-0.3

1.5

3.1

-0.4

0.54

-1.1

-1.6

10.4

8.0

17.2

1.3

4.8

4.6

4.0

-3.3

0.7
0.0

-3.3

-3.1

-1.8

-1.8

-0.7

-0.6

2.1

-0.9

0.08

0.3

-0.3

10.2

7.7

17.0

1.1

4.8

5.3

3.8

-2.7

1.1
0.0

-2.7

-2.2

-1.7

-1.7

-0.6

-0.5

2.1

-0.9

0.08

0.2

-0.4

9.9

7.4

16.8

1.0

4.8

5.6

3.6

-2.2

1.4
0.0

-2.2

-0.6

-1.9

-1.9

-0.2

-0.4

1.7

-0.4

0.08

0.5

0.4

9.6

6.3

16.5

1.0

1.8

5.8

3.4

-1.3

2.1
0.0

-1.3

1.1

-1.8

-1.8

0.1

-0.1

1.6

-0.1

0.08

2.4

1.4

Change: 
2012-2016

CP

-3.4

0.0

0.2

-0.6

-3.0

-4.0

-3.2

-0.3

-1.3

-1.1

-0.3

-1.2

1.0

-0.8

0.6

-0.2
-0.7

1.3

5.0

-1.8

-1.1

-

-

-1.8

-

-

-

-

Notes:

1On a no-policy-change basis.
2Output gap (in % of potential GDP) and cyclically-adjusted balance according to the programme as recalculated by Commission services on 
the basis of the programme scenario using the commonly agreed methodology.
3Structural (primary) balance = cyclically-adjusted (primary) balance excluding one-off and other temporary measures.
4 Reference medium-term rate of potential GDP growth. The (standard) reference rate applies from year t+1, if the country has reached its 
M TO in year t. A lower  rate applies as long as the country is adjusting towards its M TO, including in year t.The reference rates applicable 
to 2014 onwards have been updated in 2013. 
5 Deviation of the growth rate of public expenditure net of discretionary revenue measures and revenue increases mandated by law from the 
applicable reference rate. The expenditure aggregate used for the expenditure benchmark is obtained following the commonly agreed 
methodology. A positive sign implies that expenditure growth exceeds the applicable reference rate. 

Source :

Convergence programme (CP); Commission services’ 2013 spring forecasts (COM); Commission services’ calculations.

47 

 
 
 
 
 
 
  
Table IV. Debt dynamics 

(% of GDP)

1
Gross debt ratio
Change in the ratio
Contributions 2 :

1. Primary balance

2. “Snow-ball” effect

Of which:

Interest expenditure

Growth effect

Inflation effect

3. Stock-flow adjustment

Of which:

Cash/accruals diff.

Acc. financial assets

Privatisation

Val. effect & residual

5,6

Gap to the debt benchmark
7
Structural adjustment
To be compared to:
Required adjustment8

Notes:

Average
2007-2011

76.6

3.1

-1.5

1.9

4.3

0.4

-2.7

2.7

2012

79.2

-2.2

-2.3

3.0

4.2

1.4

-2.6

-3.0

2013

2014

COM

79.7

0.6

-1.2

1.4

4.2

-0.2

-2.5

0.3

CP

78.1

-1.1

-1.4

0.9

4.1

-0.5

-2.7

-0.5

COM

78.9

-0.8

-0.7

0.3

4.0

-1.1

-2.6

-0.3

CP

77.2

-0.9

-1.1

-0.1

3.8

-1.4

-2.5

0.3

2015
CP

76.1

-1.1

-1.4

0.2

3.6

-1.7

-1.7

0.1

2016
CP

73.4

-2.7

-2.1

0.0

3.4

-1.8

-1.6

-0.6

2013

2014

2015

2016

2012

COM / 

3

CP
n.r.
-0.3

-0.8

n.r.
n.r.

n.r.

4

CP

n.r.
-0.3

COM / 

3

CP
n.r.
-0.7

4

CP

n.r.
-0.7

-0.8

-1.2

-1.1

CP

-1.8
n.r.

n.r.

CP

-2.0
n.r.

n.r.

1End of period.
2The snow-ball effect captures the impact of interest expenditure on accumulated debt, as well as the impact of real GDP growth 
and inflation on the debt ratio (through the denominator). The stock-flow adjustment includes differences in cash and accrual 
accounting, accumulation of financial assets and valuation and other residual effects. 

3 Assessment of the consolidation path set in CP assuming growth follows the COM  forecasts.
4Assessment of the consolidation path set in the CP assuming growth follows the CP projections.
5Not relevant for M ember Sates that were subject to an EDP procedure in November 2011 and for a period of three years 
following the correction of the excessive deficit.
6Shows the difference between the debt-to-GDP ratio and the debt benchmark. If positive, projected gross debt-to-GDP ratio 
does not comply with the debt reduction benchmark.
7Applicable only during the transition period of three years from the correction of the excessive deficit for EDP that were ongoing 
in November 2011.

8Defines the remaining annual structural adjustment over the transition period which ensures that - if followed – M ember State 
will comply with the debt reduction benchmark at the end of the transition period, assuming that COM  (SP) budgetary 
projections for the previous years are achieved.

Source :

Convergence programme (CP); Commission services’ spring 2013 forecasts (COM); Commission services’ calculations.

48 

 
 
  
 
 
 
 
 
 
 
 
Table V.  Sustainability indicators 

S2

of which:

Initial budgetary position (IBP)

Long-term cost of ageing (CoA)

of which:

Pensions

Health care

Long-term care

Others

S1 (required adjustment)*

of which:

Initial budgetary position (IBP)

Debt requirement (DR)

Long-term cost of ageing (CoA)

S0 (risk for fiscal stress)**

Debt,  % of GDP (2012)

Age-related expenditure, % of GDP (2012)

HU

EU27

No-policy 
change 
scenario 

Programme 
(SCP) 
scenario

No-policy 
change 
scenario 

Programme 
(SCP) 
scenario

-0.1

-0.4

0.3

-0.2

0.7

0.4

-0.5

-1.4

-1.2

1.1

-1.3

0.4

-0.1

0.5

0.0

0.7

0.3

-0.5

-1.4

-0.8

0.9

-1.5

3.0

0.8

2.2

1.0

0.9

0.6

-0.4

2.2

0.0

1.9

0.3

0.28

79.2

22.2

:

87.0

25.8

1.3

-0.9

2.2

1.1

0.8

0.6

-0.3

0.5

-1.8

1.9

0.4

Note: 
The 'No-policy change' scenario depicts the sustainability gap under the assumption that the budgetary position evolves 
according to the Commissions' spring 2013 forecast until 2014. The 'Programme (SCP)' scenario depicts the sustainability gap 
under the assumption that the budgetary plans in the programme are fully implemented.
* The required adjustment of the primary balance until 2020 to reach a public debt of 60% of GDP by 2030.              
** The critical threshold for the S0 indicator is 0.44. 

Source : 
Commission services; 2013 stability programme.                                                                                                                               

Table VI. Taxation indicators 

49 

 
 
 
Total tax revenues (incl. actual compulsory social contributions, % of GDP)

38.0

37.3

40.3

40.1

37.9

37.0

2002

2006

2008

2009

2010

2011

Breakdown by economic function (% of GDP)1
     Consumption

              of which:

              - VAT

              - excise duties on tobacco and alcohol

             - energy

             - other (residual)

     Labour employed

     Labour non-employed

     Capital and business income

     Stocks of capital/wealth
     p.m.  Environmental taxes 2
3
VAT efficiency
     Actual VAT revenues as % of theoretical revenues at standard rate

14.2

14.0

14.4

15.2

14.9

14.5

7.8

1.1

2.2

3.0

7.6

1.3

2.1

3.0

7.8

1.4

2.0

3.2

8.6

1.5

2.0

3.1

8.7

1.3

2.1

2.8

8.5

1.3

2.0

2.7

18.8

18.0

19.8

18.8

17.5

17.2

0.3

3.7

1.0

2.8

0.3

3.7

1.3

2.8

1.0

3.8

1.5

2.7

0.6

4.0

1.5

2.7

0.5

2.6

2.5

2.7

0.3

2.4

2.5

2.5

45.2

55.0

57.1

49.8

52.4

52.3

Note: 
1 Tax revenues are broken down by economic function, i.e. according to whether taxes are raised on consumption, labour or capital. See European Commission 
(2013) Taxation trends in the European Union, for a more detailed explanation.
2 This category comprises taxes on energy, transport and pollution and resources included in taxes on consumption and capital.
3 The VAT efficiency is measured via the VAT revenue ratio. The VAT revenue ratio is defined as the ratio between the actual VAT revenue collected and the 
revenue that would theoretically be raised if VAT was applied at the standard rate to all final consumption. A low ratio can indicate a reduction of the tax base due 
to large exemptions or the application of reduced rates to a wide range of goods and services ('policy gap') or a failure to collect all tax due to e.g. fraud ('collection 
gap'). See European Commission (2012), Tax reforms in EU M ember States, European Economy 6/2012 and Taxation Papers 34/2012 for a more detailed 
explanation.

Source: Commission

50 

 
 
 
 
 
 
Table VII. Financial market indicators 

Total assets of the banking sector (% of GDP)

121.3

142.6

130.3

114.7

112.8

2008

2009

2010

2011

2012

Share of assets of the five largest banks (% of total assets)

Foreign ownership of banking system (% of total assets)
Financial soundness indicators:
              - non-performing loans (% of total loans)1),2)
              - capital adequacy ratio (%) 1), 3)
              - return on equity (%) 1)
Bank loans to the private sector (year-on-year % change)

Lending for house purchase (year-on-year % change)

Loan to deposit ratio

CB liquidity as % of liabilities

Banks' exposure to countries receiving official financial assistance  (% of GDP)

Private debt (% of GDP)
Gross external debt (% of GDP)4)
            - Public
            - Private

Long term interest rates spread versus Bund (basis points)*

Credit default swap spreads for sovereign securities (5-year)*
Notes: 

1) Latest data (December 2012).
2) Overdue loans declared nonperforming before 90 days.
3) Basel I and Basel II being applied simultaneously.
4) Latest data 2012Q3.

* M easured in basis points.

Source :

54.4

64.0

3.0
12.3

16.4

8.3

9.8

55.2

54.1

6.7
13.9

8.3

-5.4

-1.1

54.6

…

9.8
13.9

0.4

-5.2

-4.4

139.2

132.4

138.4

0.6

…

65.2

36.8
72.9

4.3

0.0

…

71.5

47.8
88.9

5.9

0.1

…

67.7

46.8
69.7

4.5

54.6

…

13.4
14.2

-4.0

-13.2

-18.9

128.1

0.4

…

58.7

48.0
77.0

5.0

…

…

15.8
15.9

-1.2

-5.5

-9.4

110.7

0.6

…

…

53.4
76.9

6.4

205.8

338.3

288.3

382.4

463.1

Bank for International Settlements and Eurostat (exposure to macro-financially vulnerable countries), IMF (financial soundness indicators), 
Commission (long-term interest rates), World Bank (gross external debt) and ECB (all other indicators).

51 

 
 
 
 
Table VIII. Labour market and social indicators 

Labour market indicators
Employment rate
(% of population aged 20-64)
Employment growth 
(% change from previous year)
Employment rate of women
(% of female population aged 20-64)
Employment rate of men 
(% of male population aged 20-64)
Employment rate of older workers 
(% of population aged 55-64)
Part-time employment (% of total employment, 
15 years and more)
Part-time employment of women  (% of women employment, 15 
years and more)
Part-time employment of men  (% of men employment, 15 years 
and more)
Fixed term employment (% of employees with a fixed term 
contract, 15 years and more)
Transitions from temporary 
to permanent employment
Unemployment rate1 (% of labour force, 
age group 15-74)
Long-term unemployment rate2 (% of labour force)
Youth unemployment rate 
(% of youth labour force aged 15-24)
Youth NEET rate (% of population aged 15-24)

Early leavers from education and training (% of pop. 18-24 with at 
most lower sec. educ. and not in further education or training)

Tertiary educational attainment (% of population 30-34 having 
successfully completed tertiary education)
Formal childcare (from 1 to 29 hours; % over the population less 
than 3 years)
Formal childcare (30 hours or over; % over the population less 
than 3 year)
Labour productivity per person employed (annual % change)

Hours worked per person employed  (annual % change)
Labour productivity per hour worked (annual % change; constant 
prices)

Compensation per employee (annual % change; constant prices)

Nominal unit labour cost growth (annual % change)

Real unit labour cost growth (annual % change)

Notes:

2007

2008

2009

2010

2011

2012

62.6

0.7

55.5

70.2

33.1

4.1

5.8

2.8

7.3

6.5

7.4

3.4

18.1

11.3

11.4

61.9

-1.8

55.1

69.0

31.4

4.6

6.2

3.3

7.9

4.4

7.8

3.6

19.9

11.5

11.7

60.5

-2.5

54.4

67.0

32.8

5.6

7.5

3.9

8.5

3.3

10.0

4.2

26.5

13.4

11.2

60.4

60.7

62.1

0.7

55.0

66.0

34.4

5.8

8.0

3.9

9.7

2.9

11.2

5.5

26.6

12.4

10.5

0.4

54.9

66.8

35.8

6.8

9.2

4.7

8.9

2.2

10.9

5.2

26.1

13.3

11.2

0.1

56.4

68.1

36.9

7.0

9.7

4.7

9.4

:

10.9

4.9

28.1

14.7

11.5

20.1

22.4

23.9

25.7

28.1

29.9

2.0

6.0

-0.6

-0.3

-0.3

0.1

6.2

0.7

2.0

5.0

2.7

0.2

2.6

1.9

4.4

-0.9

2.0

5.0

-4.4

-0.8

-3.6

-5.0

2.8

-0.7

1.0

8.0

0.6

-0.3

1.0

-2.7

-0.9

-3.3

1.0

7.0

1.2

0.9

0.4

-0.1

1.8

-1.3

:

:

-1.8

-4.4

2.8

1.4

6.5

3.2

1 Unemployed persons are all persons who were not employed, had actively sought work and were ready to begin working immediately or within two 
weeks. The labour force is the total number of people employed and unemployed.

2 Long-term unemployed are unemployed persons for at least 12 months.

Sources: 
Commission (EU Labour Force Survey and European National Accounts) 

52 

 
 
 
 
 
 
Expenditure on social protection benefits (% of 
GDP)
Sickness/Health care

Invalidity

Old age and survivors

Family/Children

Unemployment

Housing and Social exclusion n.e.c.

Total

of which:  means tested benefits
Social inclusion indicators
At-risk-of-poverty or social exclusion1 
(% of total population)
At-risk-of-poverty or social exclusion of children 
(% of people aged 0-17)
At-risk-of-poverty or social exclusion of elderly 
(% of people aged 65+)
At-Risk-of-Poverty rate2 (% of total population)
Severe Material Deprivation3  (% of total population)
Share of people living in low work intensity households 4 (% of 
people aged 0-59)
In-work at-risk-of poverty rate (% of persons employed)
Impact of social transfers (excluding pensions) on reducing 
poverty
Poverty thresholds, expressed in national currency at constant 
prices 5
Gross disposable income (households)
Relative median poverty risk gap (60% of median equivalised 
income, age: total)

Notes:

2006

2007

2008

2009

2010

6.35

2.16

9.30

2.83

0.67

0.54

22.00

0.96

5.67

2.15

9.77

2.85

0.77

0.92

22.26

1.42

5.62

2.10

10.19

2.86

0.83

0.72

22.45

1.22

5.68

2.09

10.45

3.02

0.97

0.69

23.03

1.24

5.69

1.91

10.47

2.92

0.91

0.53

22.55

1.06

2007

2008

2009

2010

2011

29.4

34.1

21.1

12.3

19.9

11.3

5.8

58.0

28.2

33.4

17.5

12.4

17.9

12.0

5.8

59.2

29.6

37.2

17.5

12.4

20.3

11.3

6.2

57.1

29.9

38.7

16.8

12.3

21.6

11.8

5.3

56.7

31.0

39.6

18.0

13.8

23.1

12.1

6.1

52.2

624000

614800

624955

599141

601200

14546172

15059911

15012489

15276712

16343730

19.8

17.3

16.3

16.5

18.3

1 People at-risk-of poverty or social exclusion (AROPE): individuals who are at-risk-of poverty (AROP) and/or suffering from severe 
material deprivation (SM D) and/or living in household with zero or very low work intensity (LWI).

2 At-risk-of poverty rate (AROP): share of people with an equivalised disposable income below 60% of the national equivalised median 
income. 
3 Share of people who experience at least 4 out of 9 deprivations: people cannot afford to i) pay their rent or utility bills, ii) keep their home 
adequately warm, iii) face unexpected expenses, iv) eat meat, fish, or a protein equivalent every second day, v) enjoy a week of holiday 
away from home once a year, vi) have a car, vii) have a washing machine, viii) have a colour tv, or ix) have a telephone.

4 People living in households with very low work intensity: share of people aged 0-59 living in households where the adults (excluding 
dependent children) work less than 20% of their total work-time potential during the previous 12 months.

5 For EE, CY, M T, SI, SK, thresholds in nominal values in Euros; HICP -  index 100 in 2006 (2007 survey refers to 2006 incomes)

Sources: 
For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC.

53 

 
 
Table IX. Product market performance and policy indicators 

Performance indicators

Labour productivity1 total economy (annual 
growth in %)
Labour productivity1 in manufacturing (annual 
growth in %)
Labour productivity1 in electricity, gas, steam and 
air conditioning supply (annual growth in %)
Labour productivity1 in the construction sector 
(annual growth in %)
Total number of patent2 applications per million of 
labour force

Policy indicators

Enforcing contracts 3 (days)
Time to start a business 3 (days)
R&D expenditure (% of GDP)
Tertiary educational attainment 
(% of 30-34 years old population)
Total public expenditure on education 
(% of GDP)

Product market regulation4, Overall
(Index; 0=not regulated; 6=most regulated)
Product market regulation4, Retail
(Index; 0=not regulated; 6=most regulated)
Product market regulation4, Network Industries 5
(Index; 0=not regulated; 6=most regulated)

2003-
2007

3.2

7.9

2.9

2008

2009

2010

2011

2012

2.7

-4.4

0.6

-1.5

-12.8

15.8

1.2

0.0

-1.8

-0.1

-11.2

-8.1

2.0

-4.7

n.a.

-3.1

-6.9

1.8

-3.3

-3.3

-3.8

36.9

42.5

46.0

47.7

n.a.

n.a.

2003-
2007
335

39

1.0

2008

2009

2010

2011

2012

335

5

1.0

395

4

1.2

395

4

1.2

395

4

1.2

395

5

n.a.

18.4

22.4

23.9

25.7

28.1

29.5

5.51

5.10

5.12

4.88

n.a.

n.a.

2007

2008

2009

2010

2011

2012

n.a.

n.a.

1.3

2.1

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

1.8

n.a.

n.a.

n.a.

n.a.

n.a.

Notes:
1 Labour productivity is defined as gross value added (in constant prices) divided by the number of persons employed.
2 Total number of patent applications to the European Patent Office (EPO) per million of labour force
3 The methodologies, including the assumptions, for this indicator are presented in detail on the website 
http://www.doingbusiness.org/methodology. 

4 The methodologies of the product market regulation indicators are presented in detail on the website 
http://www.oecd.org/document/1/0,3746,en_2649_34323_2367297_1_1_1_1,00.html. The latest available product market 
regulation indicators refer to 2003 and 2008, except for Network Industries.
5 Aggregate Energy, Transport and Communications Regulation (ETCR).
*figure for 2007.

Source :
Commission, World Bank - Doing Business  (for enforcing contracts and time to start a business) and OECD (for the 
product market regulation indicators). 

54 

 
 
 
 
Table X. Green Growth 

Green Growth performance

Macroeconomic
Energy intensity 
Carbon intensity 
Resource intensity (reciprocal of resource productivity)
Waste intensity 
Energy balance of trade 
Energy weight in HICP
Difference between change energy price and inflation 
Environmental taxes over labour taxes
Environmental taxes over total taxes

Sectoral 

Industry energy intensity 
Share of energy-intensive industries in the economy
Electricity prices for medium-sized industrial users**
Gas prices for medium-sized industrial users***
Public R&D for energy 
Public R&D for the environment
Recycling rate of municipal waste
Share of GHG emissions covered by ETS*
Transport energy intensity
Transport carbon intensity
Security of energy supply
Energy import dependency
Diversification of oil import sources 
Diversification of energy mix
Share renewable energy in energy mix

kgoe / €
kg / €
kg / €
kg / €
% GDP
%
%
ratio
ratio

kgoe / € 
% GDP
€ / kWh
€ / kWh
% GDP
% GDP
ratio
%
kgoe / €
kg / €

%
HHI
HHI
%

2002-
2006

0.45
1.33
2.55
n.a.
-3.2%
n.a.
n.a.
15.3%
7.5%

0.19
10.8
n.a.
n.a.
n.a.
n.a.
13.4%
n.a.
n.a.
n.a.

n.a.
n.a.
n.a.
n.a.

2007

2008

2009

2010

2011

0.42
1.18
1.84
n.a.
-4.6%
13
15.4
13.9%
6.9%

0.15
11.1
0.11
0.03
0.01%
0.01%
20.4%
35.3%
0.72
1.96

61.3%
0.67
0.27
5.1%

0.41
1.13
2.05
0.26
-6.3%
14
7.5
13.0%
6.7%

0.15
11.2
0.12
0.04
0.01%
0.02%
23.8%
37.0%
0.77
2.05

63.4%
0.67
0.27
5.9%

0.42
1.11
1.80
n.a.
-4.9%
14
3.1
13.5%
6.7%

0.14
11.2
0.13
0.04
0.01%
0.02%
24.9%
33.2%
0.80
2.13

58.7%
0.64
0.25
7.2%

0.42
1.11
n.a.
0.26
-5.2%
15
1.6
14.3%
6.9%

0.14
n.a.
0.11
0.03
0.00%
0.01%
31.3%
33.8%
n.a.
n.a.

58.3%
0.70
0.25
7.5%

0.41
n.a.
n.a.
n.a.
-6.0%
15
1.9
n.a.
n.a.

n.a.
n.a.
0.10
0.04
0.01%
0.01%
n.a.
33.9%
n.a.
n.a.

52.0%
n.a.
0.25
7.5%

Country-specific notes: 
The year 2012 is not included in the table due to lack of data.
General explanation of the table items:
Source: Eurostat unless indicated otherwise; ECFIN elaborations indicated below
All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2000 prices)
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)
          Carbon intensity: Greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)
          Resource intensity: Domestic M aterial Consumption (in kg) divided by GDP (in EUR)
          Waste intensity: waste (in kg) divided by GDP (in EUR)
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP  
Energy weight in HICP: the share of the "energy" items in the consumption basket used in the construction of the HICP
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual %-change)
Environmental taxes over labour or total taxes: from DG TAXUD's database "Taxation trends in the European Union"
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR) 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP
Electricity and gas prices medium industrial users: consumption band 500  - 2000M Wh and 10000 - 100000 GJ;  figures excl. VAT.
Recycling rate of municipal waste: ratio of municipal waste recycled over total municipal waste
Public R&D for energy or for the environment: government spending on R&D (GBAORD) for these categories as % of GDP
Share of GHG emissions covered by ETS: based on greenhouse gas emissions as reported by M ember States to EEA (excl LULUCF)
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transp industry gross value added (2005 EUR)
Transport carbon intensity:  greenhouse gas emissions in transport activity divided by gross value added of the transport sector
Energy import dependency: net energy imports divided by gross inland energy consumption incl. energy consumption international bunkers

Diversification of oil import sources: Herfindahl index (HHI), calculated as the sum of the squared market shares of countries of origin 

Diversification of the energy mix: Herfindahl Index over natural gas, total petrol products, nuclear heat, renewable energies and solid fuels

Share renewable energy in energy mix: %-share in  gross inland energy consumption, expressed in tonne oil equivalents

*Provisional data (15 April 213). Commission Services and EEA.

** For 2007 average of S1 & S2 for DE, LU, NL, FI, SE & UK. Other countries only have S2.

*** For 2007 average of S1 & S2 for IT, NL, FI, SE & UK. Other countries only have S2.

55