COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in Hungary following the adoption of the Council Decision of 24 January 2012 under the Excessive Procedure for Hungary Accompanying the document Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Hungary
Date: 2013-05-29
Institutions: European Commission
Subjects: Hungary, budget deficit, budgetary equilibrium, economic statistics, gross domestic product, public expenditure, stability pact, tax reform

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
SWD(2013) 388 final 

COMMISSION STAFF WORKING DOCUMENT 

Analysis by the Commission services of the budgetary situation in Hungary following 
the adoption of the Council Decision of 24 January 2012 under the Excessive Procedure 
for Hungary 

Accompanying the document 

Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to bringing an end to the situation of an excessive government deficit in 
Hungary 

{COM(2013) 388 final} 

EN 

   EN 

 
 
 
 
  
 
  
 
 
 
 
1. 

INTRODUCTION 

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 
(TEC) setting a 2008 deadline for correction1. After the Council had decided twice, in January 
and  November  2005,  in  accordance  with  Article  104(8)  TEC,  that  Hungary  had  not  taken 
effective  action  in  response  to  its  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 a revised recommendation under  Article 
104(7) TEC, setting 2011 as the new deadline to correct the excessive deficit. 

In  its  27  January  2010  Communication  to  the  Council,  the  Commission  concluded  that 
Hungary had taken effective action in response to the latest Council recommendations, with 
which the Council concurred in its conclusions on 16 February 2010, notably since the deficit 
outcome for 2009 was expected to be very close to the target but "alerted about considerable 
risks attached to the 2010 deficit target, both on the revenue and the expenditure side". The 
Council,  in its 12 July  2011  Opinion  on the 2011 update of the convergence  programme of 
Hungary, recommended that Hungary "strengthen the fiscal effort in order to comply with the 
Council  recommendation  to  correct  the  excessive  deficit  in  a  sustainable  manner  […]  and 
ensure  that  the  budget  deficit  is  kept  safely  below  the  3%  of  GDP  threshold  in  2012  and 
beyond".  

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 Council noted that while Hungary formally respected the 
3%  of  GDP  reference  value  by  2011,  this  was  not  based  on  a  structural  and  sustainable 
correction. The budget surplus in 2011 hinged upon substantial one-off revenues of close to 
10%  of  GDP  and  was  accompanied  by  a  cumulative  structural  deterioration  of  over  2%  of 
GDP in 2010 and 2011 compared to a recommended cumulative fiscal improvement of 0.5% 
of  GDP.  Moreover,  while  the  authorities  adopted  and  implemented  substantial  structural 
measures, the 2012 budget deficit was foreseen not to exceed the 3% of GDP reference value 
again  only  thanks  to  net  one-off  revenues  of  around  0.7%  of  GDP.  In  fact,  the  non-durable 
nature of the correction was evidenced by the fact that in 2013 the headline deficit (estimated 
at 3¼% of GDP at the time) was expected to breach the reference value of the Treaty once 
more  even  after  taking  into  account  additional  measures  announced  since  the  Commission 
2011 Autumn Forecast.  

On 13 March 2012, the Council adopted a new recommendation in accordance with Article 
126(7)  of  the  TFEU  for  Hungary  to  bring  the  excessive  deficit  to  an  end  by  2012.  The 
Hungarian authorities were asked to undertake the following steps in particular: (i) put an end 
to the excessive deficit situation by 2012 in a credible and sustainable manner; (ii) undertake 
an additional fiscal effort of at least ½% of GDP to ensure the attainment of the 2012 deficit 
target of 2.5% of GDP; (iii) take necessary additional measures of a structural nature to ensure 
that the deficit in 2013 remains well below the 3% of GDP threshold. At the same time, the 
government debt ratio was recommended to be brought back on a declining path as soon as 
possible so that it represents sufficient progress towards compliance with the debt reduction 
benchmark.  The  budgetary  adjustment  also  needed  to  be  supported  by  the  proposed 

1 All documents related to the excessive deficit procedure of Hungary can be found at: 
http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/hungary_en.htm 

2

 
 
                                                            
improvements in the fiscal governance framework. The Council established the deadline of 13 
September  2012  for  the  Hungarian  government  to  take  effective  action.  Also  on  the  day  of 
adoption  of  this  Council  recommendation,  the  Council  decided  to  suspend  a  part  of  the 
Cohesion  Fund  commitment  appropriations  for  the  year  2013  for  Hungary  (in  line  with 
Article 4 of Council Regulation (EC) No 1084/2006).  

On  30  May,  based  on  the  2012  convergence  programme  and  further  specification  of  the 
savings  measures,  the  Commission  concluded  in  a  Communication  that  Hungary  had  taken 
effective  action  regarding  the  correction  of  the  excessive  deficit.  In  particular,  the  budget 
deficit was expected to reach 2.5% of GDP in 2012 and remained well below the 3% of GDP 
Treaty reference value in 2013 as recommended by the Council in March. Moreover, in the 
Communication  it  was  acknowledged  that  some  progress  had  been  made  on  enhancing  the 
fiscal  governance  framework  even  though  in  this  area  overall  progress  could  be  considered 
slow.  

Against  this  background,  the  Commission  adopted  on  30  May  a  proposal  for  lifting  the 
suspension of the Cohesion Fund commitment appropriations. On 22 June, 2012 the Council 
concurred with this assessment and adopted a decision lifting the suspension of the Cohesion 
Fund commitment appropriations.  

This  document  examines  the  macroeconomic  and  budgetary  outlook  for  Hungary  to  set  the 
stage  for  a  Commission  recommendation  for  a  Council  decision  abrogating  decision 
2004/918/EC  on  the  existence  of  an  excessive  deficit  in  Hungary.  In  particular,  it  examines 
the macroeconomic and budgetary developments since the Commission Communication of 30 
May  2012  to  the  Council  on  action  taken.  The  assessment  takes  notably  into  account  the 
macroeconomic and fiscal impact of corrective measures adopted on 13 May 2013, following 
the release of the Commission 2013 Spring Forecast. 

2.  

RECENT  MACRO-ECONOMIC  AND  BUDGETARY  DEVELOPMENTS  AND  OUTLOOK  FOR 
2013 AND 2014 

2.1. Macroeconomic developments and outlook  

In  2012,  the  Hungarian  economy  entered  into  recession  with  GDP  contracting  by  1.7%,  as 
against  the  assumed  slight  growth  underlying  the  adopted  2012  budget  and  the  stagnation, 
which  was  expected  in  the  Commission  interim  forecast  of  February  2012.  After  a  short 
recovery in 2010 and 2011, domestic demand fell by 3.7%. Investment continued to contract 
for the fourth consecutive year, against the background of tight lending conditions, increased 
economic  uncertainty  and  the  deleveraging  of  domestic  sectors.  Falling  disposable  income 
and high unemployment contributed to a renewed decline in consumption. Exports cushioned 
the  fall  in  GDP  but  their  pace  declined  sharply  on  account  of  a  deteriorating  external 
environment. An unusually weak performance in the agricultural sector as a consequence of a 
drought also contributed to the recession. 

For  2013,  GDP  growth  is  expected  to  increase  slightly  in  the  Commission  2013  Spring 
Forecast.  Export  markets  are  set  to  improve  and  a  stabilisation  of  domestic  demand  is 
assumed on account of an increase in households' real disposable income, although the high 
unemployment  rate  and  repayment  burden  still  keep  household  spending  very  contained. 
Private investment is set to remain negative in view of the continued fall in corporate lending 
and  high  surtaxes  on  some  capital-intensive  sectors.  This  tendency  can  be  somewhat 
counteracted  by  the  central  bank's  new  "Funding  for  Growth"  scheme  and  the  government-

3

 
 
sponsored lending measures. In addition, public investment is foreseen to expand in view of 
higher inflow of EU funds.  

In the Commission 2013 Spring Forecast, growth is expected to accelerate and reach 1.4% in 
2014.  This  is  explained  by  an  increased  contribution  from  net  exports  but  also  from  some 
expansion in domestic demand. Household consumption is projected to increase on account of 
a  further  increase  in  real  disposable  income.  Investment  growth  could  also  enter  into  a 
positive territory mostly on account of government-sponsored lending. However, in general, 
lending conditions are expected to remain tight and the low growth prospects keep investment 
demand contained.  

After  the  adoption  of  new  corrective  measures  on  13  May  to  bring  the  deficit  below  3%  of 
GDP, the growth outlook remains broadly unchanged. Although the incoming Q1 2013 data 
increases upside risks to the Commission 2013 Spring Forecast in the short term, corrective 
measures point to the opposite direction, most notably in 2014. Overall, Hungary's economic 
growth potential is very weak and the outlook has been even revised  somewhat downwards 
compared  to  the  time  of  the  previous  recommendation.  At  the  same  time,  the  output  gap  is 
hugely negative (currently around -4% of GDP) and is expected to improve only moderately 
throughout the forecast horizon, i.e. until 2014. 

Despite  a  recession,  employment  increased  by  1.7%  in  2012,  above  expectations. 
Employment  gains  partly  reflected  an  extension  of  the  Public  Works  Scheme  but  also 
increased  employment  in  small  enterprises.  However,  employment  of  larger  companies  has 
been  declining  since  early  2012.  Increasing  unit  labour  costs  and  weak  demand  have  been 
forcing  them  to  adjust  through  layoffs  to  maintain  their  profitability.  In  spite  of  increasing 
employment,  unemployment  did  not  decrease  from  its  2011  level  of  around  11%  due  to  a 
continuous increase in participation, which mainly reflects several government measures (e.g. 
extension of the Public Works Scheme, increase of the retirement age). In 2013, employment 
is  forecast  to  remain  broadly  stable.  From  2014,  with  the  rebound  in  economic  growth, 
employment  might  start  to  increase  again.  However,  as  the  participation  rate  is  projected  to 
grow further, a slight increase in unemployment is expected.  

While  the  inflation  outturn  for  2012  was  higher  than  previously  forecast,  a  stronger-than-
expected drop occurred in Q1 2013. In addition to the lower overall effect of indirect tax hikes 
compared to 2012, this drop is also due to the cut in regulated energy and other utility prices 
introduced as of January 2013. Furthermore, core inflation and unprocessed food prices were 
lower than previously projected. Price increases are expected to remain contained throughout 
the forecast horizon due to a highly negative output gap.  

4

 
 
Table 1: Comparison of key macroeconomic projections 

2011 

2012 

2013 

2014 

Real GDP 

HICP inflation 

Employment 

CP 2012 

COM EDP March 2012 

CP 2013 

COM SF 2013 

CP 20121 

COM EDP March 2012

CP 20131 

COM SF 2013 

CP 2012 

COM AF 2011 

1.7 

1.7 

1.6 

1.6 

3.9 

3.9 

3.9 

3.9 

0.8 

0.5 

CP 2013 

n.a. 

Current account balance 

Potential output 

Output gap 

COM SF 2013 

CP 2012 

COM AF 2011 

CP 2013 

COM SF 2013 

CP 2012 

COM AF 2011 

CP 2013 

COM SF 2013 

CP 2012 

COM AF 2011 

CP 2013 

COM SF 2013 

0.8 

1.4 

1.7 

1.0 

1.0 

0.3 

0.0 

0.0 

0.1 

-2.6 

-2.5 

-1.7 

-2.2 

Notes: 

1 National Consumer Price Index (CPI) 

0.1 

-0.1 

-1.7 

-1.7 

5.2 

5.1 

5.7 

5.7 

1.2 

1.1 

1.7 

1.7 

3.3 

3.2 

1.6 

1.9 

0.8 

0.1 

0.3 

0.1 

-3.2 

-2.2 

-3.6 

-3.9 

1.6 

1.6 

0.7 

0.2 

4.2 

4.1 

3.1 

2.7 

2.2 

0.0 

0.5 

0.1 

4.1 

3.8 

3.2 

2.5 

1.4 

0.3 

0.9 

0.2 

-3.0 

-1.1 

-3.7 

-3.9 

2.5 

n.a. 

1.9 

1.4 

3.0 

n.a. 

3.2 

3.0 

3.0 

n.a. 

0.8 

0.4 

4.0 

n.a. 

3.6 

2.6 

1.6 

n.a. 

1.1 

0.5 

-2.1 

n.a. 

-2.9 

-3.1 

Source: Commission 2011 Autumn Forecast (COM AF 2011); Commission March 2012 EDP SWD (COM EDP 
March 2012); Commission 2013 Spring Forecast (COM SF 2013); 2012 convergence programme for Hungary (CP 
2012); 2013 convergence programme for Hungary (CP 2013). 

5

 
 
 
  
  
 
2.2. Fiscal developments and outlook  

2.2.1. Budgetary developments in 2012 

In  2012,  on  the  basis  of  fiscal  efforts  amounting  to  around  3%  of  GDP,  the  general 
government deficit reached 1.9% of GDP. This was in part thanks to one-off revenues of ¾% 
of  GDP,  including  the  higher  than  budgeted  one-off  revenues  of  0.2%  of  GDP  related  to 
further  transfer  of  assets  from  the  private  to  the  public  pension  pillar.2  The  adopted  2012 
budget, which targeted a deficit of 2.5% of GDP on the basis of a 0.5% growth assumption, 
contained  an  extraordinary  reserve  of  1.1%  of  GDP  and  numerous  consolidation  measures, 
notably: (i) revenue-increasing measures of around 1¾% of GDP, including hikes by 2 pps in 
the standard VAT rate and in excise duties,  increases in social security contributions, as well 
as reform of the personal income tax scheme, (ii) structural measures on the expenditure side 
of ¾% of GDP (in line with the Széll Kálmán Plan announced in March 2011), in particular, 
cuts in unemployment  benefits and pharmaceutical subsidies, review of  pensions and other 
social  benefits,  (iii)  expenditure  constraints  of  ¼%  of  GDP  in  the  public  sector,  achieved 
mainly through a nominal wage freeze in most sectors and the limited increase in the purchase 
of goods and services at the line ministries. 

Faced  with  a  constantly  deteriorating  macroeconomic  outlook  throughout  2012,  the 
government adopted additional corrective measures of around 0.7% of GDP, of which around 
half was eventually implemented. First, new saving measures of 0.3% of GDP (consisting of a 
reduction  in  the  appropriations  of  the  line  ministries  and  the  introduction  of  a  permanent 
extraordinary  tax  on  the  telecommunication  services)  were  incorporated  in  the  2012 
convergence programme. Second, further, partly temporary expenditure cuts and other saving 
measures of 0.4% of GDP were announced in the context of the October 2012 EDP Progress 
Report. At the same time, the official deficit target for 2012 was revised upwards from 2.5% 
of  GDP  to  2.7%  of  GDP.  Altogether,  effectively  implemented  budgeted  and  additional 
corrective  measures  adopted  by  the  central  government  amounted  to  around  3%  of  GDP  in 
2012.  

In  2012,  the  balance  of  the  local  government  sector,  after  filtering  out  the  impacts  of  debt 
assumptions by the central government, improved by around 0.7% of GDP compared to the 
budgeted plans and also by around 0.4% of GDP compared to the previous year, mainly due 
to their low investment  activity. Local public investment declined by over  ½% of  GDP last 
year  compared  to  2011  as  capital  formation  financed  exclusively  from  domestic  sources 
shrank dramatically. This is likely to reflect the new legislations aiming at limiting the debt 
accumulation  of  the  local  government  sector  and  the  centralisation  of  selected  institutions 
(mainly in the education and health care sector), which could have discouraged municipalities 
to undertake investments in these areas. 

Overall, the deficit target  for 2012 was overachieved thanks to corrective measures adopted 
by the central government and to the better than expected local government sector's balance. 
In  addition,  the  full  activation  of  the  budgeted  extraordinary  reserves  counterbalanced  the 
budgetary  slippages,  partly  related  to  the  worse  than  earlier  expected  macroeconomic 
environment.  

2  One-off  revenues  in  2012  included  selected  extraordinary  sector  taxes,  take-over  of  further  private  pension 
assets  and  sale  of  telecommunication  licences,  which  were  partly  counterbalanced  by  tax  rebates  after  the 
extraordinary levy on selected financial institutions. 

6

 
 
 
 
 
 
                                                            
2.2.2. Budgetary developments in 2013  

The 2013 budget was adopted on 11 December 2012 and targeted a deficit of 2.7% of GDP, in 
line  with  the  revised  fiscal  path  presented  in  the  October  2012  EDP  Progress  Report.  The 
budget  included  a  1.3%  of  GDP  extraordinary  reserve  to  be  activated  in  case  of  emerging 
budgetary slippages. The 2013 convergence programme confirmed the official target, while it 
acknowledged that more than 0.7% of GDP of the buffer was not available anymore in light 
of  the  slippages  in  net  terms  in  the  first  quarter  of  2013,  mainly  related  to  the  lower  than 
budgeted revenues from VAT and the financial transaction duty.  

The Commission 2013 Spring Forecast projects a deficit of 3% of GDP in 2013. The 1.1 pps 
increase  in  the  deficit  compared  to  2012  can  be  mainly  attributed  to  an  increase  in 
expenditures, with the expenditure ratio increasing from 48.4% to 49.6% of GDP. This would 
mainly reflect higher investments partly in view of the increasing absorption of the EU funds. 
Consolidation measures on the expenditure side, such as the further impact of the review of 
selected  social  benefits  started  in  2011  and  the  freeze  of  the  public  wages  in  general,  are 
expected to be broadly offset by deficit-increasing measures, for instance by the extension of 
the Public Works Scheme and the increase in the expenditures of the budgetary institutions.  

The Commission 2013 Spring Forecast projects the revenue ratio to slightly exceed its 2012 
level,  at  46.6%  of  GDP.  Overall,  revenue-decreasing  and  increasing  elements  would  almost 
counterbalance each other. The revenue-decreasing elements include the phasing-out of one-
off  revenues  of  ¾%  of  GDP  and  stimulus  measures  of  close  to  1%  of  GDP,  i.e.  the 
introduction  of  a  fully  flat  personal  income  tax  system  as  well  as  targeted  cuts  of  social 
contributions combined with new preferential corporate taxes for SMEs. This would be partly 
offset  by  revenue-increasing  corrective  measures  of  1½%  of  GDP  announced  (i)  in  the 
context of the 2011 and 2012 convergence programmes, e.g. the introduction of the distance-
based  road  toll  system  and  the  financial  transaction  duty,  as  well  as  (ii)  in  three  successive 
packages during autumn 2012, such as higher taxes on energy and utility service providers. In 
addition,  the  increasing  absorption  of  the  EU  funds  is  expected  to  increase  the  revenues  by 
close to ½% of GDP. 

Compared  to  the  2013  convergence  programme,  the  Commission  2013  Spring  Forecast 
factors in an overall budgetary slippage of 0.9% of GDP. This consists of lower revenues of 
0.6% of GDP, mainly related to the VAT in light of the assumed lower impact of measures 
aiming at enhancing tax administration, the financial transaction duty, the gambling tax and 
the distance-based road toll system. 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  would  be  only  partly  offset  by  the  assumed  activation  of  the 
remaining extraordinary reserves of 0.6% of GDP. 

After the adoption and publication of the Commission 2013 Spring Forecast, on 13 May 2013, 
the Hungarian government adopted further corrective measures of more than 0.3% of GDP in 
2013 in gross terms, aiming at bringing the deficit well below 3% of GDP. Notably, the new 
fiscal package includes a temporary cut of the expenditures of selected budgetary institutions, 
which  would  become  permanent  unless  favourable  budgetary  developments  ensure  fiscal 
space.  The  net  deficit-improving  effect  of  these  savings  measures  is  estimated  by  the 
Commission to be close to 0.25% of GDP, taking into account their direct revenue impact and 
the  second-round  effects.  This  means  that  the  full  activation  of  the  remaining  extraordinary 
reserves, which increased to around 0.9% in light of the recently adopted corrective measures, 
could entirely counterbalance the budgetary slippages foreseen by the Commission in its 2013 

7

 
 
 
 
 
 
Spring  Forecast.  Consequently,  taking  into  account  the  new  consolidation  measures,  the 
general government deficit is expected to stand at 2.7% of GDP in 2013, i.e. below the Treaty 
reference  value  of  3%  of  GDP  and  in  line  with  the  government's  deficit  target  of  2.7%  of 
GDP.  

2.2.3. Budgetary developments in 2014 

The 2013 convergence programme has revised upwards the deficit target for 2014 from 2.2% 
to  2.7%  of  GDP,  which  is  identical  to  the  2013  deficit  target.  By  contrast,  the  Commission 
2013  Spring  Forecast,  based  on  the  usual  no-policy-change  assumption,  projects  the  2014 
deficit to increase to 3.3% from 3.0% of GDP in 2013. This would be mainly due to a further 
increase  in  the  expenditure  ratio  from  49.6%  to  50.3%  of  GDP,  partly  on  account  of  the 
launch  of  a  new  wage  compensation  system  in  the  public  education  sector.  In  addition,  the 
public investment ratio is assumed to increase in line with the growing absorption of the EU 
funds.  The  rise  of  other  expenditures  altogether,  however,  is  projected  to  lag  behind  the 
nominal  economic  growth  due  to  fiscal  discipline  reinforced  in  the  2013  convergence 
programme (e.g. nominal freeze of the public wages as a general rule, moderate increase of 
the social transfers) and to the further impact of earlier launched structural reforms. Compared 
to  the  previous  year,  the  slight  increase  of  the  revenue  ratio  in  2014,  as  projected  by  the 
Commission, mainly reflects the expected increase of the absorption of EU funds and the full 
year effect of the introduction of the distance-based road toll system in the middle of 2013. 
The  tax-to-GDP  ratio  is  expected  to  remain  at  its  2013  level,  also  in  light  of  the  expected 
increasing impact of the enhancement of the tax administration. 

For  2014,  compared  to  the  2013  convergence  programme,  the  Commission  2013  Spring 
Forecast  includes  lower  revenues  of  0.6%  of  GDP.  The  latter  are  mainly  related  to  the 
measures that also explain the different forecasts for 2013, i.e. VAT, the financial transaction 
duty, the gambling tax and the distance-based road toll system. On the expenditure side, the 
foreseen slippages of close to 0.5% of GDP, partly related to the application of the no-policy-
change  assumption  (i.e.  most  expenditure  items  are  forecast  to  increase  with  the  nominal 
potential growth rate barring the adoption of credible well-specified measures), are expected 
to be offset by the assumed activation of the planned extraordinary reserves of 0.5% of GDP. 

The  corrective  measures  adopted  by  the  Hungarian  government  on  13  May  2013,  i.e. 
following the publication of the Commission 2013 Spring Forecast, aim at bringing the deficit 
well below 3% of GDP also in 2014. These measures, amounting to around 0.7% of GDP in 
gross  terms,  include:  (i)  the  incorporation  of  the  2013  cut  of  the  expenditures  of    selected 
budgetary institutions into the 2014 budget, (ii) a nominal freeze of selected expenditures of 
the  budgetary  institutions  in  the  central  budgetary  sub-sector  at  their  2013  level,  (iii)  a 
nominal freeze of selected social cash allowances from 2013 to 2014, and (iv) the suspension 
of  selected  public  investment  projects  unless  they  can  be  financed  from  the  sale  of  non-
financial state assets. 

According to the Commission, the net budgetary impact of these measures could be estimated 
at around 0.45% of GDP, which would result in a deficit forecast of 2.9% of GDP in 2014. 
This  assessment  takes  into  account  (i)  all  information  publicly  announced,  notably  the 
government decree of 1259/2013, published on 13 May 2013, (ii) implementation risks, (iii) 
the  direct  revenue  impact,  as  well  as  (iv)  the  second-round  effects  of  the  measures.  In 
particular,  this  assessment  assumes  only  a  partial  implementation  of  the  nominal  freeze  of 
selected  expenditures  of  the  budgetary  institutions  and  of  the  suspension  of  certain  public 
investment projects.     

8

 
 
 
 
 
Table 2: Calculations of the budgetary impact of measures adopted on 13 May 2013 (% 
of GDP)1 

2013 

2014 

0.32 
0.32 
0.08 
0.24 

1a: Expenditure cuts of selected budgetary institutions 
Gross effect, estimated by the national authorities 
Gross effect, estimated by the Commission 
Direct impact on the tax revenues 
Net effect 

1b: Nominal freeze of selected expenditures in the central 
budgetary sub-sector 

Gross effect, estimated by the national authorities 
Gross effect, estimated by the Commission 
Direct impact on the tax revenues 
Net effect 

1.c Nominal freeze of selected cash transfers to households

Gross effect, estimated by the national authorities 
Gross effect, estimated by the Commission 
Direct impact on the tax revenues 
Net effect 

2. Cut of selected public investments 

Gross effect, estimated by the national authorities 
Gross effect, estimated by the Commission 
Direct impact on the tax revenues 
Net effect 

Second-round effects of measures 1a-c and 2 
Total gross fiscal impact 
Total net fiscal impact, including implementation risks, 
direct impact on tax revenues and second-round effects  
1Positive numbers indicate an improvement in the deficit. 

-0.01 
0.32 

0.23 

0.31 
0.31 
0.08 
0.23 

0.16 
0.08 
0.02 
0.06 

0.07 
0.07 
0.00 
0.07 

0.20 
0.13 
0.01 
0.12 
-0.04 
0.74 

0.44 

The  structural  general  government  balance,  following  a  cumulative  deterioration  of  close  to 
2%  of  GDP  in  2010  and  2011,  improved  by  3½%  of  GDP  in  2012.  According  to  the 
Commission 2013 Spring Forecast, the general government structural balance is expected to 
deteriorate to -1% and -1¾% of GDP in 2013 and 2014, respectively. Taking into account the 
impact of the additional corrective measures adopted on 13 May 2013, the structural balance 
is foreseen to stand at -¾% and -1½% of GDP this year and next, respectively, i.e. in line with 
the revised medium-term objective of -1.7% of GDP.    

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2.2.4. Public debt developments 

Regarding debt developments, the debt-to-GDP ratio decreased from a peak of 82% in 2010 
to 79.2% in 2012, thanks to substantial one-off capital transfers linked to the abolition of the 
mandatory private pension pillar and a number of consolidation measures, which were partly 
offset  by  the  revaluation  of  the  foreign  exchange  denominated  part  of  the  public  debt  by  a 
weaker  forint.  According  to  the  2013  convergence  programme,  the  debt-to-GDP  ratio  will 
continue  to  decline,  falling  to  78.1%  and  77.2%  in  2013  and  2014,  respectively,  and 
remaining  on  a  downward  path  thereafter.  In  2013  and  2014,  based  on  the  deficit  outlook 
contained  in  the  Commission  2013  Spring  Forecast  and  assuming  the  gradual  sale  of  the 
remaining  transferred  pension  assets,  it  is  forecast  to  stabilise  at  around  79%.  Taking  into 
account the impact of the new corrective measures, the debt ratio is estimated to decrease to 
79.4% and 78.4% in 2013 and 2014, respectively. 

2.2.5. Fiscal governance 

As  to  fiscal  governance,  the  Council  asked  the  Hungarian  authorities  to  adapt  the  law  on 
economic  stability,  in  particular  by  establishing  a  truly  binding  medium-term  framework 
(MTBF)  and  broadening  the  analytical  remit  of  the  Fiscal  Council  in  view  of  its 
unprecedented (in the EU and OECD) veto right over the annual budget. In the area of fiscal 
rules,  there  has  been  no  policy  response  so  far,  thus  the  MTBF  remains  purely  indicative. 
Significant  improvements  were  reported  to  be  planned  in  this  area  in  the  framework  of  the 
transposition  of  the  Directive  of  the  minimum  requirements  for  national  budgetary 
frameworks.3 Notably, a structural balance rule is being considered, possibly as part of a more 
binding MTBF. Although the 2013 convergence programme does not confirm these specific 
reform avenues,  it  announces that the related legislative  amendments  are  to be submitted to 
Parliament before the autumn session. 

On the institutional side, the September 2012 amendments reinforced the Fiscal Council 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 ensuring that the workings of this body would be based on 
thorough  quantitative  analysis  (also  through  the  mandatory  preparation  of  macro-fiscal 
baseline projections and assessments of major fiscal policy proposals). 

3  See  the  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 . 

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3. 

CONCLUSION 

After a fiscal loosening in 2010 and 2011, considerable consolidation efforts were achieved in 
2012, bringing the general government deficit down to 1.9% of GDP, well below the Treaty 
reference  value  and  below  the  target  of  2.5%  recommended  by  the  Council  on  13  March 
2012. 

Based on information available until the cut-off date, the Commission 2013 Spring Forecast 
projects a deficit of 3.0% and 3.3% of GDP in 2013 and 2014, respectively. According to the 
Commission's  updated  assessment,  taking  into  account  the  additional  savings  measures 
adopted on 13 May 2013, the deficit is expected to stand at 2.7% and 2.9% of GDP in 2013 
and 2014, respectively, i.e. below the Treaty reference value throughout the forecast horizon. 

11