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, banking system, budget deficit, budgetary equilibrium, dropout, educational reform, labour market, liberalisation of the market, price of energy, stability programme, tax reform

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
COM(2013) 367 final 

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

{SWD(2013) 367 final} 

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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 

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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 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 9(2) thereof, 

Having  regard  to  Regulation  (EU)  No  1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16  November  2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances2, and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission3, 
Having regard to the resolutions of the European Parliament4, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

After consulting the Economic and Financial Committee, 

Whereas: 

(1) 

(2) 

On  26  March  2010,  the  European  Council  agreed  to  the  Commission’s  proposal  to 
launch  a  new  strategy  for  growth  and  jobs,  Europe  2020,  based  on  enhanced 
coordination of economic policies, which will focus on the key areas where action is 
needed to boost Europe’s potential for sustainable growth and competitiveness. 

On 13 July 2010, on the basis of the Commission's proposals, the Council adopted a 
recommendation  on  the  broad  guidelines  for  the  economic  policies  of  the  Member 
States and the Union (2010 to 2014) and, on 21 October 2010, adopted a decision on 
guidelines  for  the  employment  policies  of  the  Member  States5,  which  together  form 
the  ‘integrated  guidelines’.  Member  States  were  invited  to  take  the  integrated 
guidelines into account in their national economic and employment policies. 

(3) 

On  29  June  2012,  the  Heads  of  State  and  Government  decided  on  a  Compact  for 
Growth and Jobs, providing a coherent framework for action at national, EU and euro 
area levels using all possible levers, instruments and policies. They decided on action 

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OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2013) 367 final . 
P7_TA(2013)0052 and P7_TA(2013)0053. 
Council Decision2013/208/EU of 22 April 2013. 

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(4) 

(5) 

(6) 

(7) 

(8) 

(9) 

to be taken at the level of the Member States, in particular expressing full commitment 
to  achieving  the  objectives  of  the  Europe  2020  Strategy  and  to  implementing  the 
country-specific recommendations. 

On 6 July 2012, the Council adopted a recommendation on Hungary’s national reform 
programme  for  2012  and  delivered  its  opinion  on  Hungary’s  updated  convergence 
programme for 2011-2015. 
On  28  November  2012,  the  Commission  adopted  the  Annual  Growth  Survey6, 
marking  the  start  of  the  2013  European  Semester  of  economic  policy  coordination. 
Also  on  28  November  2012,  the  Commission,  on  the  basis  of  Regulation  (EU)  No 
1176/2011,  adopted  the  Alert  Mechanism  Report7,  in  which  it  identified  Hungary  as 
one of the Member States for which an in-depth review would be carried out. 

On  14  March  2013,  the  European  Council  endorsed  the  priorities  for  ensuring 
financial stability, fiscal consolidation and action to foster growth. It underscored the 
need  to  pursue  differentiated,  growth-friendly  fiscal  consolidation,  to  restore  normal 
lending conditions to the economy, to promote growth and competitiveness, to tackle 
unemployment  and  the  social  consequences  of  the  crisis,  and  to  modernise  public 
administration. 
On  10  April  2013,  the  Commission  published  the  results  of  its  in-depth  review8  for 
Hungary,  under  Article  5  of  Regulation  (EU)  No  1176/2011.  The  Commission’s 
analysis leads it to conclude that Hungary is experiencing macroeconomic imbalances, 
which  deserve  monitoring  and  require  decisive  policy  action.  In  particular,  the 
ongoing  adjustment  of  the  highly  negative  net  international  investment  position, 
largely driven by private sector deleveraging in a context of high general government 
debt and a weak business environment continues to deserve very close attention so as 
to reduce the important risks of adverse effects on the functioning of the economy.  

On 24 April 2013, Hungary submitted its 2013 convergence programme covering the 
period  2012-2016  and,  on  22  April  2013,  its  2013  national  reform  programme.  In 
order to take account of their interlinkages, the two programmes have been assessed at 
the same time. 

in 

the  budgetary  projections 

Based  on  the  assessment  of  the  2013  convergence  programme  (the  programme) 
pursuant  to  Council  Regulation  (EC)  No  1466/97,  the  Council  is  of  the  opinion  that 
the 
the  macroeconomic  scenario  underpinning 
Programme is somewhat optimistic. The Hungarian authorities’ growth projections for 
2013  and  2014  of  0.7%  and  1.9%  are  higher  by  around  half  a  percentage  point 
compared  to  the  Commission  2013  spring  forecast.  The  objective  of  the  budgetary 
strategy  outlined  in  the  programme  is  to  ensure  the  sustainable  correction  of  the 
excessive deficit by the 2012 deadline and the continued respect of the medium-term 
objective (MTO). Hungary has undertaken significant fiscal efforts in 2012 and with a 
budget  deficit  outcome  of  1.9%  of  GDP  overachieved  the  deficit  target  of  2.5%  of 
GDP recommended by the Council, partly on account of additional one-off revenues 
of 0.2% of GDP on top of those which were acknowledged already at the time of the 
Council  recommendation.  However,  the  corrective  measures  for  2012  and  beyond, 
notably  those  announced  in  the  autumn  of  2012  were  mainly  concentrated  on  the 
revenue  side,  primarily  focusing  on  selected  sectors,  raising  questions  about  the 

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COM(2012) 750 final. 
COM(2012) 751 final. 
SWD(2013) 119 final. 

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sustainability of the consolidation efforts. According to the Commission 2013 spring 
forecast  further  efforts  are  needed  for  both  2013  and  2014  in  order  to  correct  the 
excessive  deficit  in  a  sustainable  manner.  Following  the  publication  of  the  spring 
forecast the government adopted a new corrective package, and based on the updated 
assessment  of  the  Commission,  the  deficit  is  projected  to  remain  below  the  3%  of 
GDP  threshold  with  the  new  measures  in  both  2013  and  2014.  The  programme  has 
changed the MTO from a structural balance of -1.5% to -1.7% of GDP. The new MTO 
is in line with the requirements of the Stability and Growth Pact. Hungary recorded a 
structural balance of -0.7% of GDP in 2012, i.e. well above its revised MTO, and the 
Commission  2013  spring  forecast  foresees  the  structural  balance  to  stay  in  line  with 
the MTO over the forecast horizon and to stand at -1.1% in 2013 and -1.8% in 2014. 
Based  on  the  measures  adopted  after  the  Commission  2013  spring  forecast  the 
structural balance could remain above the MTO in 2014 as well. 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, but is 
expected to significantly exceed it in 2015 and 2016. Thus, the expenditure benchmark 
will not be met in these two years. According to government plans, the public debt-to-
GDP ratio will continuously decrease throughout the programme period from 79.2% in 
2012 to 77.2% in 2014 and further to 73.4% in 2016, i.e. it will remain above the 60% 
of  GDP  reference  value.  In  contrast,  the  Commission  2013  spring  forecast,  taking 
account  of  risks  to  the  consolidation  plans,  expected  only  a  marginal  decrease  to 
78.9% of GDP in 2014 which should be around 0.5 pps lower with the new corrective 
measures. Hungary will be in a transition period from 2013 regarding compliance with 
the debt criterion, and according to the Commission 2013 spring forecast it is making 
sufficient progress towards compliance with the debt criterion in 2013 and 2014. 

(10)  The  medium-term  budgetary  framework  is  still  merely  indicative  so  the  horizon  of 
fiscal  planning  is  focusing  only  on  the  actual  budget  year.  In  addition,  despite  some 
recent  improvements,  the  mandatory  tasks  and  the  analytical  resources  of  the  Fiscal 
Council are still not commensurate with its unprecedented veto power and the need for 
the  systematic  ex-post  assessment  of  compliance  with  numerical  fiscal  rules. 
Strengthening  the  medium-term  budgetary  framework  and  widening  the  mandatory 
remit  of  the  Fiscal  Council  would  help  to improve  the  solidity  and  credibility  of  the 
recently revamped fiscal governance framework. 

(11)  The  Hungarian  financial  sector  is  deleveraging  at  a  very  quick  pace,  partly  due  to 
some  policy  measures  that  have  had  a  strong  negative  impact  on  the  profitability  of 
banks  and  contribute  to  tight  credit  conditions.  Managing  the  deteriorating  portfolio 
quality represents one of the biggest challenges for the financial sector, associated with 
an  increasing  number  of  non-performing  loans.  In  the  last  years,  the  government 
adopted several measures to help foreign currency borrowers, in several cases without 
a  consultation  of  stakeholders  in  the  banking  sector.  However,  these  measures  were 
not always targeted toward distressed borrowers. The adoption of a series of measures 
in  a  short  time  might  increase  moral  hazard  among  borrowers  due  to  the  continuous 
expectation  of  further  government  help.  The  global  financial  crisis  demonstrated  to 
which  extent  the  existing  banking  system  may  force  national  authorities  to  act  to 
safeguard  financial  stability.  The  first  financial  assistance  programme  to  Hungary 
advocated  the  need  for  a  state-of-the-art  supervision  including  effective  emergency 
powers  to  the  financial  supervisor  and  the  establishment  of  a  resolution  mechanism. 
While  over  the  past  three  years  the  powers  of  the  Hungarian  Financial  Supervisory 
Authority  have  been  substantially  increased,  the  legislator  has  not  equipped  it  with 
sufficient monitoring powers. 

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(12)  Hungary has not followed the 2012 recommendation to establish a non-distortive and 
stable framework for the taxation of corporations and has increased the tax burden on 
selected  corporate  sectors  by  introducing  further  permanent  sectoral  surtaxes.  While 
the  new  small  business  tax  introduced  as  part  of  the  Job  Protection  Act  has  a 
favourable design, the existence of several different tax rates across corporate sectors 
hampers  effective  allocation  of  resources  and  affects  investment  and  lending.  The 
introduction of reduced social security contribution rates under the Job Protection Act 
is  a  step  in  the  right  direction  to  reduce  the  tax  wedge  on  labour.  However,  the  tax 
wedge on low wage earners is still high and a  refining of the system to better target 
this group would be desirable. Hungary also plans to tackle tax non-compliance with 
several  measures,  such  as  the  compulsory  connection  of  all  cash  registers  with  tax 
authorities.  Regarding  energy  taxation,  measures  taken  do  not  provide  incentives  to 
reduce energy consumption and have distortionary effects. 

(13)  The  low  employment  rate  is  associated  with  a  very  low  rate  of  labour-market 
participation.  Youth  unemployment  has  increased  from  11%  in  2001  to  28.1%  in 
2012.  The  Public  Work  Scheme  uses  the  bulk  of  budgetary  resources  to  provide  the 
long-term  unemployed  with  work-related  income  instead  of  social  benefits,  while  its 
long-term  benefits  on  employability  are  yet  to  be  proven.  Hungary  has  strengthened 
active labour market policies but some disadvantaged people should have more access 
to them and adult participation in lifelong learning is still one of the lowest in the EU. 
In the last five years, the employment rate of women  remained  approximately  at the 
same low level. In order to encourage women to participate in the labour market, the 
flexible  working 
government  expanded  child-care 
arrangements.  The  social  situation  continues  to  worsen:  31 %  of  the  population  is  at 
risk  of  poverty  or  social  exclusion  and  a  high  percentage  of  people  face  severe 
material  deprivation.  Poverty  continues  to  disproportionately  affect  disadvantaged 
territories and communities, in particular the Roma 

facilities  and  promoted 

(14)  The  business  environment  in  Hungary  has  constantly  deteriorated  in  the  last  three 
years  due  to  a  series  of  measures  including  restrictions  on  investors  and  an  unstable 
regulatory  framework,  in  particular  in  the  services  sector.  Recent  restrictions  which 
affect disproportionately foreign investors are focussed mainly on the services sector, 
including  retail.  The  Simple  State  programme  included  114  measures  to  reduce  the 
administrative  burden  on  businesses  by  approximately  HUF  500  billion  but  its 
implementation  has  been  somewhat  delayed.  Low  levels  of  competition  in  public 
procurement  persist,  although  a  new  law  entered  into  force  on  1  January  2012.  The 
anti-corruption programme is a central element to the Magyary Programme. However, 
the programme does not tackle either the issue of insufficient law-enforcement in this 
area or the stricter checks on party financing, a key area of concern. Moreover, most of 
the  announced  steps  have  not  yet  been  undertaken.  Lack  of  monitoring  of 
implemented  measures  also  remains  problematic.  The  developments  in  Hungary  in 
2012  and  2013  have  increased  concerns  about  the  judiciary's  independence.  The 
Innovation Union Scoreboard ranks Hungary as a moderate innovator. Business R&D 
investments are driven primarily by foreign-owned enterprises. 

(15)  Hungary  succeeded  in  reducing  the  number  of  early  school  leavers.  Since  there  are 
still major regional  differences,  the  new  elements of the  centralised  public-education 
system, if not implemented carefully, might have a negative impact and increase social 
inequalities  and  segregation.  Although  the  number  of  students  entering  higher 
education has grown significantly in recent years, further work is needed to reach the 

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(16) 

(17) 

(18) 

(19) 

EU  average  and  the  national  Europe  2020  target.  It  is  doubtful  whether  the  ongoing 
higher-education reform can improve access for disadvantaged pupils. 

Implementation of the measures included in the Szell Kalman Plan, which is aimed at 
improving  the  cost-efficiency  and  performance  of  public  transport,  is  prone  to 
considerable  delays  and  the  lack  of  a  comprehensive  transport  strategy  hinders  the 
financial  sustainability  of  the  transport  system.  While  Hungary  has  adequately 
increased  power  grid  interconnections  with  its  neighbours  as  recommended  in  2012, 
the lack of independence of the energy regulator in setting energy tariffs and the high 
share of regulated energy prices still raise concerns. 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Hungary’s  economic  policy.  It  has  assessed 
the 
convergence  programme  and  national  reform  programme  and  presented  an  in-depth 
review.  It  has  taken  into  account  not  only  their  relevance  for  sustainable  fiscal  and 
socio-economic  policy  in  Hungary  but  also  their  compliance  with  EU  rules  and 
guidance,  given  the  need  to  reinforce  the  overall  economic  governance  of  the 
European  Union  by  providing  EU-level  input  into  future  national  decisions.  Its 
recommendations under the European Semester are reflected in recommendations (1) 
to (7) below. 

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

In the light of the Commission’s in-depth review and this assessment, the Council has 
examined  the  national  reform  programme  and  the  convergence  programme.  Its 
recommendations  under  Article  6  of  Regulation  (EU)  No  1176/2011  are  reflected  in 
recommendations (1), (2), (3), (4), (5), (7) below, 

HEREBY RECOMMENDS that Hungary should take action within the period 2013-2014 to: 

1. 

2. 

3. 

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Implement a credible and growth friendly fiscal strategy by specifying the necessary 
measures  focusing  on  expenditure  savings  and  preserve  a  sound  fiscal  position  in 
compliance with the medium-term objective over the programme horizon. Building 
on the above steps, put the general government debt ratio on a firm downward path, 
also with a view to mitigating the accumulated macroeconomic imbalances. Enhance 
the  medium-term  budgetary  framework  by  making  it  more  binding  and  by  closely 
linking  it  to  numerical  rules.  Broaden  the  mandatory  remit  of  the  Fiscal  Council, 
including through systematic ex-post monitoring of compliance with numerical fiscal 
rules  as  well  as  the  preparation  of  regular  macro-fiscal  forecasts  and  budgetary 
impact assessments of major policy proposals. 

Help restore normal lending to the economy primarily by improving the capacity for 
capital  accumulation  in  the  financial  sector,  inter  alia  by  lowering  the  extra  burden 
currently  imposed  on  it.  Improve  portfolio  quality  by  removing  bad  assets  from 
banks'  balance  sheets,  closely  consult  stakeholders  on  new  policy  initiatives  and 
make sure that new policy measures do not increase moral hazard among borrowers. 
Enhance  financial  regulation  and  supervision,  notably  by  giving  more  effective 
emergency  powers  to  the  Hungarian  Financial  Supervisory  Authority  and  by 
establishing a bank resolution regime. 

Ensure  a  stable,  more  balanced  and  predictable  corporate  tax  system.  Streamline 
corporate taxation and minimise distortions of resource allocation created by sector-

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

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specific taxes, so as to foster growth and employment. Continue making taxation of 
labour more employment-friendly by alleviating the tax burden on low-wage earners, 
inter alia by refining the eligibility criteria for the Job Protection Act, and by shifting 
taxation  away  to  environmental  taxes.  Fully  implement  and  step  up  the  already 
announced  measures  to  improve  tax  compliance  and  reduce  the  cost  of  tax 
compliance. 

Address  youth  unemployment, for example through a Youth Guarantee.  Strengthen 
active labour market policy measures and enhance the client profiling system of the 
Public  Employment  Service.  Reduce  the  dominance  of  the  public  works  scheme 
within  employment  measures  and  strengthen  its  activation  elements.  Reinforce 
training programmes to boost participation in lifelong learning. Continue to expand 
child-care facilities to encourage women's participation. Ensure that the objective of 
the National Social Inclusion Strategy is mainstreamed in all policy fields in order to 
reduce poverty, particularly among children and Roma. 

Create  a  supportive  business  environment,  in  particular  restore  an  attractive 
environment for foreign direct investors, by making the regulatory framework more 
stable  and  by  fostering  market  competition.  Ensure  the  prompt  implementation  of 
measures  envisaged  to  reduce  the  administrative  burden,  improve  competition  in 
public  procurement  and  take  adequate  measures  to  tackle  corruption.  Address 
concerns  about  the  independence  of  the  judiciary.  Remove  recently  introduced 
barriers in the services sector, including in retail services. Provide targeted incentives 
to support innovative enterprises. 

Implement a national strategy on early school-leaving and ensure that the education 
system  provides  all  young  people  with  labour-market-relevant  skills,  competences 
and  qualifications.  Improve  access  to  inclusive  mainstream  education,  in  particular 
for Roma. Support the transition between different stages of education and towards 
the labour market. Implement a higher-education reform that enables greater tertiary 
attainment, particularly by disadvantaged students. 

Gradually abolish regulated energy prices while ensuring the effective protection of 
economically  vulnerable  consumers.  Take  further  steps  to  ensure  the  independence 
of  the  national  regulator.  Ensure  the  financial  sustainability  of  state  owned 
enterprises  in  the  transport  sector  by  reducing  operational  costs  and  increasing 
revenues. 

4. 

5. 

6. 

7. 

Done at Brussels,  

For the Council 
The President 

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