Recommendation for a COUNCIL RECOMMENDATION on Hungary’s 2014 national reform programme and delivering a Council opinion on Hungary’s 2014 convergence programme
Date: 2014-06-02
Institutions: European Commission
Subjects: Hungary, budget deficit, competitiveness, economic growth, economic reform, economic stabilisation, financial control, job creation, multilateral surveillance, social situation, stability pact













EUR-Lex - 52014DC0418 - EN











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52014DC0418

Recommendation for a COUNCIL RECOMMENDATION on Hungary’s 2014 national reform programme and delivering a Council opinion on Hungary’s 2014 convergence programme /* COM/2014/0418 final - 2014/ () */









 
 
Recommendation for a
COUNCIL RECOMMENDATION
on Hungary’s 2014 national reform
programme
and delivering a Council opinion on Hungary’s 2014 convergence programme

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 policies[1], 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 imbalances[2], and in particular
Article 6(1) thereof,
Having regard to the recommendation of the
European Commission[3],
Having regard to the resolutions of the
European Parliament[4],
Having regard to the conclusions of the
European Council,
Having regard to the opinion of the
Employment Committee,
Having regard to the opinion of the
Economic and Financial Committee,
Having regard to the opinion of the Social
Protection Committee,
Having regard to the opinion of the
Economic Policy Committee,
Whereas:
(1)                   
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.
(2)                   
On 13 July 2010, the Council, on the basis of
the Commission's proposals, 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 States, 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 or
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 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.
(4)                   
On 9 July 2013, the Council adopted a
recommendation on Hungary’s national reform programme for 2013 and delivered
its opinion on Hungary’s updated convergence programme for 2013-2016. 
(5)                   
On 13 November 2013, the Commission adopted the
Annual Growth Survey[5],
marking the start of the 2014 European Semester of economic policy
coordination. On the same day on the basis of Regulation (EU) No 1176/2011, the
Commission adopted the Alert Mechanism Report[6],
in which it identified Hungary as one of the Member States for which an
in-depth review would be carried out.
(6)                   
On 20 December 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.
(7)                   
On 5 March 2014, the Commission published the
results of its in-depth review for Hungary[7],
under Article 5 of Regulation (EU) no 1176/2011. The Commission's analysis leads
it to conclude that Hungary continues to experience macroeconomic imbalances,
which require monitoring and decisive policy action. In particular, the ongoing
adjustment of the highly negative net international position, the high level of
public and private debt in the context of a fragile financial sector and
deteriorating export performance continue to deserve very close attention with
a view to reducing the important risks of adverse effects on the functioning of
the economy.
(8)                   
On 30 April 2014, Hungary submitted its 2014
national reform programme and its 2014 convergence programme. In order to take
account of their interlinkages, the two programmes have been assessed at the
same time.
(9)                   
The objective of the budgetary strategy outlined
in the 2014 Convergence Programme is to bring down the headline deficit from
2.9% of GDP in 2014 to 1.9% by the end of the programme period. This is to be
achieved with a strongly back-loaded consolidation path, while the deficit
targets have been significantly revised upwards compared to the previous
programme. The programme confirms the medium-term objective of -1.7% of GDP,
which reflects the objectives of the Stability and Growth Pact. However, on the
basis of the recalculated structural balance, the medium-term objective is not expected
to be attained by the end of the programme period. The (recalculated)
structural balance planned to deteriorate by 1.5 pps in 2014, thereby
significantly deviating from the medium-term objective, and is set to stabilize
in 2015, implying a shortfall of 0.5% of GDP from the required improvement
towards the medium-term objective. The expenditure benchmark shows a
significant deviation in both 2014 and 2015. The (recalculated) structural balance
is planned to deteriorate further in both 2016 and 2017. Overall, a significant
deviation from the adjustment path towards the medium-term objective is planned
as of 2014. The programme projects a gradual but continuous decrease in
government debt from 79% of GDP in 2013 to around 75% of GDP in 2017. The
macroeconomic scenario underpinning the budgetary projections in the programme
is broadly plausible for 2014-2016, with GDP projected to grow by 2.3% and 2.5%
this year and next, against 2.3% and 2.1% according to the Commission 2014 spring
forecast. However, the programme is too optimistic for 2017. Risks to the
budgetary targets are broadly balanced in 2014, but there are increasing risks
that the deficit may turn out higher than targeted as from 2015. Particular
risks stem from the fact that the planned reduction in the expenditure ratio is
foreseen to be achieved by instituting across-the-board nominal freezes or
restraining increases below the inflation rate for most of the discretionary
spending items. The Commission 2014 spring forecast projects a headline deficit
for 2014 and 2015 identical to the targets of the programme. With a projected
structural deficit of 2.2% of GDP in 2014 and 2.3% in 2015, the Commission forecast
confirms the risk of significant deviation from the medium-term objective as
from 2014. Moreover, the Commission forecast also points to non-compliance with
the debt reduction benchmark in 2014 and 2015. Based on its assessment of the
programme and the Commission forecast, pursuant to Council Regulation (EC) No
1466/97, the Council is of the opinion that there is a need for additional
structural consolidation efforts in view of the risks of significant deviation
from the medium-term objective as well as of non-compliance with the debt rule
as from 2014.
(10)               
The medium-term budgetary framework has been
strengthened by extending the planning horizon beyond the current budget year. Its
effectiveness and binding nature are however not yet ensured. New numerical
fiscal rules have been introduced, but design weaknesses have not been corrected,
linked mainly to the absence of systematic ex-post monitoring, the lack of a
maximum permissible deviation levels and sound correction mechanisms. The
Fiscal Council's narrow list of mandatory tasks and its analytical capacity are
still not commensurate with its budgetary veto right. Further strengthening the
medium-term budgetary framework and broadening the Fiscal Council's mandatory
mandate would help improve the credibility, transparency and effectiveness of
the overall fiscal framework.
(11)               
Notwithstanding the Central Bank's subsidised 'Funding
for Growth' scheme for small and medium-sized enterprises, normal lending to
the economy has not picked-up in a sustainable manner. The regulatory burden on
the financial sector has been further increased, thus limiting the capacity for
capital accumulation. Measures like the increase of the financial transaction
duty have contributed to a pick-up in the cash usage of the economy. The
household portfolio has further deteriorated and the high proportion of
non-performing loans currently represents one of the biggest challenges for the
financial sector. Portfolio cleaning is hindered by the weak efficiency of
resolution proceedings. No substantial new measure has been taken to remove bad
assets from banks' balance sheets. The combination of a heavy regulatory burden
and a high share of non-performing loans have led to a squeeze on available
credits. The government repeatedly announced its intention to introduce a new relief
scheme to assist foreign currency borrowers; in most cases, these have not
targeted distressed borrowers and have a negative impact on the payment culture
of households, due to the expectation of further government help. Financial
regulation and supervision has been strengthened by integrating the Financial
Supervisory Authority into the central bank structure and giving the central
bank the responsibility for macroprudential oversight. Preparatory work has
started on establishing bank resolution regime. 
(12)               
Although the frequency of tax changes has
decreased compared to the previous year, no substantial progress was made in making
the corporate tax system more balanced. Some of the existing sector-specific
taxes were even increased. The application of different tax rates across
sectors is an obstacle to the effective allocation of resources and thus
negatively affects growth. To make taxation more employment-friendly, Hungary has widened eligibility for the personal income tax family tax credit, which can
help low-wage earners. The tax wedge on single
low-income earners is one of the highest in the EU. The
eligibility criteria for the Job Protection Act have remained in essence unchanged,
even though a significant proportion of low earning workers remain outside the
scope of the measure. It will be important to evaluate the impact and
cost-effectiveness of the scheme and to adapt it as necessary to enhance its
capacity to bring people into employment. Some progress was made in shifting
taxation away from labour towards environmental taxes, but additional measures
are needed. The online connection of cash-registers to the tax authority is
gradually being implemented, after repeated delays in the past. However, Hungary still suffers from a high level of tax non-compliance, with a sustained level of
undeclared work and VAT compliance gap. Control measures should be strengthened
in particular with a view to improving the efficiency of combatting VAT fraud.
(13)               
The youth unemployment rate has decreased in
2013, while the rate of young people who are not in employment, education or
training has increased. An efficient coordination of the Public Employment
Service branch offices with educational institutions and local stakeholders could
increase outreach. Capacity-building in the public employment service,
including preparation of a client profiling system, has started, while active
labour market policies for the open labour market should be evaluated to assess
their efficiency and effectiveness and if necessary adapted to improve access
to the labour market for some disadvantaged groups. The activation element in
different labour market and social measures (Public Work Scheme, unemployment
benefits, and social assistance) needs to be strengthened. The Public Work
Scheme attracts the bulk of budgetary resources available for employment
measures, but in 2013 less than 10% of its participants were able to return to
the open labour market after exiting the scheme. This raises the question of
whether the scheme should be adapted, for example by building stronger links to
activation, training and job search support, to secure a more lasting
employment impact. Women's labour market participation has been encouraged by
increased flexibility in the paid parental leave system and the provision of
childcare capacities, but further efforts are needed as employment levels among
women remain below 60%. The period of eligibility for unemployment benefit is shorter
than the average time required by job seekers to find employment. The number of
people at risk of poverty or social exclusion in Hungary is growing steadily
and currently represents close to a third of the whole population. Poverty
continues disproportionately to affect disadvantaged groups, in particular
children and the Roma. While a National Social Inclusion Strategy is in place,
policy measures in most fields do not systematically promote the goals defined
by that strategy. Integrated and streamlined policy
measures are needed to reduce poverty effectively. 
(14)               
The business environment
in Hungary is characterised by frequent changes in the regulatory framework and
limited competition in an increasing number of sectors. New barriers have been introduced
in the services sector and existing ones have not been removed (e.g. pharmacies,
waste management, mobile payment, retail tobacco and textbooks). Overall
investment has declined particularly strongly in those sectors where
sector-specific surtaxes have been imposed in recent years. Between 2010 and
2013, nominal investment declined by 44 % in energy, 28 % in
finance and 18 % in the communication sectors, while increasing by
3.4 % overall. Some progress has been made in improving competition in
public procurement, but further efforts are needed. For example, greater
reliance on e-procurement could generate significant cost savings, improve the
transparency of public procurement and increase competition. Steps have been
taken to implement integrity strategies and to promote better transparency
standards in the public administration, but further efforts are needed to
tackle corruption effectively. 
(15)               
The proportion of early school leavers is on the
rise and the adoption of an early school leaving prevention strategy has been
repeatedly delayed. Further efforts are needed to equip pupils with basic
skills, competences and qualifications that are relevant for the labour market.
Equal access to mainstream quality education still remains a major problem for
disadvantaged children, in particular Roma. A new law
on vocational training, which inter alia introduces a new 'dual model', has been enacted to reduce the still-difficult transition from
education to the labour market, the effects of which need to be closely
monitored. 
(16)               
Hungary continued to
implement reductions in end-user electricity and gas prices in 2013 and 2014.
These price cuts, coupled with the extra tax burden on energy companies, have
negatively affected energy providers' capacity to recover costs and energy
investments and network maintenance. At present, households' energy intensity is
among the highest in the EU and energy efficiency could be improved in
particular in the residential sector. The lack of independence of the energy
regulator in setting access-to-network conditions and tariffs still raises
concerns. Some steps have been taken to streamline the organisation of public
transport companies, but sustainability could be further improved by tackling
operating costs and changing the tariff system.
(17)               
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 the national
reform programme. 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.
(18)               
In the light of this assessment, the Council has
examined Hungary’s convergence programme, and its opinion[8] is reflected in
particular in recommendation (1) below.
(19)               
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) and (5) below.
HEREBY RECOMMENDS that Hungary take action within the period 2014-2015 to:
1.           Reinforce
the budgetary measures for 2014 in the light of the emerging gap of 0.9% of GDP
relative to the Stability and Growth Pact requirements, namely the debt
reduction rule, based on the Commission 2014 spring
forecast. In 2015, and thereafter, significantly strengthen the
budgetary strategy to ensure reaching the medium-term objective and compliance
with the debt reduction requirements in order to keep the general government
debt ratio on a sustained downward path. Further enhance the binding nature of
the medium-term budgetary framework through systematic ex-post monitoring of
compliance with numerical fiscal rules and the use of corrective mechanisms. Improve
the transparency of public finances, including through broadening the mandatory
remit of the Fiscal Council, by requiring the preparation of regular
macro-fiscal forecasts and budgetary impact assessments of major policy
proposals. 
2.           Help restore normal lending
flows to the economy, inter alia by improving the design of and reducing the
burden of taxes imposed on financial institutions. Adjust the financial
transaction duty in order to avoid diverting savings from the banking sector
and enhance incentives for using electronic payments. Investigate and remove
obstacles to portfolio cleaning inter alia by tightening provisioning rules for
restructured loans, removing obstacles to collateral foreclosure as well as
increasing the speed and efficiency of insolvency proceedings. In this respect,
closely consult stakeholders on new policy initiatives and ensure that these are
well-targeted and do not increase moral hazard for borrowers. Further enhance
financial regulation and supervision.
3.           Ensure a stable, more
balanced and streamlined corporate tax system, including by phasing out distortive
sector-specific taxes. Reduce the tax wedge for low-income earners, inter alia by
improving the efficiency of environmental taxes. Step up measures to improve
tax compliance – in particular to reduce VAT fraud – and reduce its overall
costs.
4.           Strengthen well-targeted
active labour market policy measures, inter alia by accelerating the
introduction of the client profiling system of the Public Employment Service.
Put in place the planned youth mentoring network and coordinate it with education
institutions and local stakeholders to increase outreach. Review the public
works scheme to evaluate its effectiveness in helping people find subsequent
employment and further strengthen its activation elements. Consider increasing
the period of eligibility for unemployment benefits, taking into account the
average time required to find new employment and link to activation measures.
Improve the adequacy and coverage of social assistance while strengthening the
link to activation. In orderv to alleviate poverty, implement streamlined and
integrated policy measures to reduce poverty significantly, particularly among
children and Roma.
5.           Stabilise the regulatory
framework and foster market competition, inter alia by removing barriers in the
services sector. Take more ambitious steps to increase competition and
transparency in public procurement, including the introduction of
e-procurement, and further reduce corruption and the overall administrative
burden.
6.           Implement a national
strategy on early school leaving prevention with a focus on drop-outs from
vocational education and training. Put in place a systematic approach to reducing
educational segregation and to promote inclusive mainstream education for
disadvantaged groups, in particular Roma. Support the transition between
different stages of education and towards the labour market, and closely
monitor the implementation of the vocational training reform. Implement a
higher-education reform that enables greater tertiary attainment, particularly
by disadvantaged students.
7.           Review the impact of
energy price regulation on incentives to invest and on competition in the electricity
and gas markets. Take further steps to ensure the autonomy of the national
regulator in establishing network tariffs and conditions. Take measures to
increase energy efficiency in particular in the residential sector. Further
increase the sustainability of the transport system, inter alia by reducing
operating costs and reviewing the tariff system of state owned enterprises in
the transport sector.
Done at Brussels,
                                                                       For
the Council
                                                                       The
President
[1]               OJ L 209, 2.8.1997, p. 1.
[2]               OJ L 306, 23.11.2011, p. 25.
[3]               COM(2014) 418 final.
[4]               P7_TA(2014)0128 and P7_TA(2014)0129.
[5]               COM(2013) 800 final.
[6]               COM(2013) 790 final.
[7]               SWD(2014) 85 final.
[8]               Under Article 9(2) of Council Regulation (EC) No
1466/97.