COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and convergence programme for HUNGARY Accompanying the document 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 convergence, economic growth, economic reform, economic stabilisation, financial control, job creation, stability programme













EUR-Lex - 52014SC0418 - EN











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52014SC0418

COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and convergence programme for HUNGARY Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Hungary’s 2014 national reform programme and delivering a Council opinion on Hungary’s 2014 convergence programme /* SWD/2014/0418 final */









CONTENTS
Executive summary. 3
1............ Introduction. 5
2............ Economic situation. 6
3............ Challenges and assessment of policy
measures. 7
3.1......... Fiscal policy and taxation. 7
3.2......... Financial sector 18
3.3......... Labour market, education and social
policies. 21
3.4......... Structural measures promoting sustainable
growth and competitiveness. 26
3.5......... Modernisation of public administration. 34
4............ Conclusions. 37
Overview table. 38
Annex... ... 46

Executive summary

After a GDP decline
of 1.7 % in 2012, Hungary emerged from recession in 2013, with a moderate real
GDP growth of 1.1 %. Domestic demand became the
main driver of the economy helped by investment (5.9 % increase), thanks in
part to a substantial inflow of EU funds, while household consumption remained
almost stagnant. GDP growth is projected to increase to 2.3 % in 2014 and slow
down to 2.1 % in 2015. Inflation declined to a historical low of 1.7 % in 2013
and is projected to decrease even further to 1 % this year, partly due to
regulated price cuts and declining commodity prices, as well as a negative
output gap. Employment increased by 1.6 % on account of an extension of the
Public Work Scheme, an increasing number of frontier workers, and the whitening
of the shadow economy. Despite increasing participation, unemployment decreased
to 10.2 % in 2013.
Overall, Hungary has made limited progress in addressing the 2013 country-specific recommendations .
Although the country overachieved its 2013 general
government deficit target, the quality of fiscal consolidation has not improved.
While there has been some progress in enhancing the fiscal governance
framework, the mandatory remit of the Fiscal Council has not been broadened. Despite
the central bank’s subsidy scheme for small and medium enterprises, normal (i.e.
non-subsidised) lending in the economy has not yet returned. The regulatory burden
on the financial sector has further increased contrary to last year's
recommendation. Household portfolios have continued deteriorating, partly due
to the government’s continuous communication on new foreign currency mortgage
relief schemes that contributed to a weakening of the payment culture and
increased moral hazard. There has been only limited progress in reducing the
tax burden on low-income earners, despite an extension of the deduction of
family tax credits, as this measure is only targeted at families with children.
However, some progress could be observed with tax compliance. Overall, there
was limited observable progress in improving the business environment. Although
the government has addressed the recommendation on strengthening the judiciary
and made strides to reduce administrative burdens, entry costs have further increased
in several market segments, particularly in the service sector, where
restrictions to competition have increased. Improvements have been made to encourage
the participation of women in the labour market, through extended childcare
facilities and regulatory amendments to facilitate the return to work after
parental leave. Limited progress has been achieved towards education targets, the
government’s strategies still being under development. No progress was achieved
with respect to the energy recommendation; gas and electricity prices remain
regulated and substantial price cuts were approved in the universal service provider’s
segments, with possible negative spill-over effects on corporations in the open
energy market.
The submitted national
reform programme and convergence programme contain a detailed assessment of
reform measures as well as macroeconomic and fiscal projections. As regards the projections, although the baseline path is broadly
realistic, risk scenarios are narrowly focused. In particular, the adverse
scenario does not contain the potential negative feedback effects that can be
most important from a budgetary point of view. 
Hungary’s weak growth potential could be strengthened in several ways. In
specific terms, the country needs to make further progress on the following
challenges:  
•                
Fiscal policy: The
budgetary strategy still relies on a high level of expenditure and on extensive
taxation of few selected sectors, which affects the overall allocative
efficiency of the economy. The effectiveness of the revamped fiscal framework is
yet to be proved in terms of medium-term budgetary planning and the accountability
of the Fiscal Council.
•                
Financial sector:
Despite the increasing share of subsidised lending schemes, normal lending can
only return if banks incentives to lend are set right. Currently, banks'
lending activity is hindered by the high taxes imposed on the sector and by a
large share of non-performing loans. A potential,  new foreign currency mortgage
relief scheme also carries some risks if it were to be applied in a
not-targeted manner and without proper consultation of all stakeholders. Given an
already deteriorated payment culture among borrowers, an important challenge is
to improve the situation of insolvent borrowers without increasing moral hazard
further.
•                
Taxation: Hungary has a number of sector-specific surtaxes which distort economic incentives and
investment. The corporate tax system remains complicated. The tax burden on
low-wage earners still weighs on job creation, while there is still room to
shift the burden to environment taxes. Measures to improve tax compliance are still
needed and have to be fully implemented yet.
•                
Labour market and social inclusion: The key labour market challenge continues to be increasing the
participation rate and reducing unemployment by improving the skills of the
labour force. At present, training opportunities in the country are not
sufficient: quality is mixed and not targeted to the needs of different
jobseekers, while a high share of the working-age population does not have the
skills required by the labour market. In addition, there is a clear risk that
the very short length of unemployment benefit deteriorates job prospects. The
dominance of the public works scheme in active labour market policies is high
and increasing. This reduces the resources available for high-quality trainings
that are needed to equip low-skilled job seekers with qualifications relevant
for the labour market. The social situation continues worsening and the social
protection system is unable to provide adequate support and services to the
most deprived, including Roma.
•                
Business environment: Competition in the service sector remains subdued because entry
barriers have not been reduced or removed. In addition, the regulatory
framework still lacks transparency and predictability: stakeholder
consultations are not systematically carried out and evidence-based impact
assessments are often pressurised.  
•                
Education: Access
to a quality, inclusive mainstream primary and secondary education to provide better
general competences, as required by the labour market, is another key challenge,
as well as encouraging participation by pupils from all backgrounds in tertiary
education.
•                
Energy and transports: Energy prices continued being regulated and the current price
system does not adequately reflects the cost of energy supply, with possible
consequences on sustainability of energy provision. Autonomy of the energy regulator remains limited, while
enhancing energy efficiency is an important challenge. Ensuring a sustainable
and efficient public transport system, while providing a good quality service,
remains a challenge.  


1.        
Introduction  

In May 2013, the
Commission proposed a set of country-specific recommendations (CSRs) for
economic and structural reform policies in Hungary. Based
on these recommendations, the Council of the European Union adopted seven CSRs
in the form of a Council Recommendation in July 2013. These CSRs concerned
public finances, the financial sector, taxation, the labour market, the
business environment, education and network industries. This staff working document
(SWD) assesses the state of implementation of these recommendations in Hungary.
The staff woking
document assesses policy measures in light of the findings of the Commission’s
Annual Growth Survey 2014 (AGS)[1] and
the third annual Alert Mechanism Report (AMR),[2]
which were both published in November 2013. The AGS sets out the Commission’s
proposals for building the necessary common understanding about the priorities
for policy action at national and EU level in 2014. It identifies five
priorities to guide Member States to renewed growth: pursuing differentiated,
growth-friendly fiscal consolidation; restoring normal lending to the economy;
promoting growth and competitiveness for today and tomorrow; reducing
unemployment and the social consequences of the crisis; and modernising public
administration. The AMR serves as an initial screening device to determine
whether macroeconomic imbalances exist or risk emerging in Member States. The
AMR found positive signs that macroeconomic imbalances in Europe are being
corrected. To ensure that a complete and durable rebalancing is achieved, Hungary and
15 other Member States were selected for a review of developments in the
accumulation and unwinding of imbalances. These in-depth
reviews were published on 5 March 2014 along with a
Commission communication.[3]
Against the
background of the 2013 Council Recommendations, the AGS, the AMR and the
in-depth review, Hungary presented updates of its national reform programme (NRP)
and of its CP on 30 April 2014. These programmes provide detailed information
on progress made since July 2013 and on the government’s plans specified in the
NRP. The information contained in these programmes provides the basis for the
assessment made in this staff working document.
The preparation
of the 2014 convergence (CP) and national reform programmes (NRP) somewhat lacked
genuine civil involvement and social partnership compared to last year's
preparation process. The involvement of the national parliament was constrained
by the national elections early April. One week before the submission of the
final NRP to the European Commission, the National Economic and Social Council
was informed about the European Semester process and received a 3-pages summary
of the draft NRP under preparation. Representatives of trade unions and
academia present called for an in-depth discussion of the NRP and the measures
it contains once the document was adopted.

2.        
Economic situation

In
2013, the Hungarian economy emerged from recession and experienced real GDP
growth of 1.1 % with domestic demand becoming the main driver of the economy.
After unusually weak production growth in the agricultural sector in 2012, the
year 2013 brought a positive correction. Overall investments increased, for the
first time since 2008, by 5.9 %, mainly as a result of public investment
supported by an inflow of EU funds, but corporate investment also started to
accelerate. Nevertheless, the economy is still characterised by a de-leveraging
of domestic sectors, and tight lending conditions, although the process slowed
down in the second half of 2013. The sharp decline in inflation to 1.7 % has
contributed to increasing households’ real disposable income. However, the elevated
repayment burden and still high level of unemployment continued to weigh on
households' consumption, which only grew by 0.2 %. In 2013 national
employment increased by 1.6 % and reached its pre-crisis level,  partly boosted
by public works.
Since the
crisis, potential output growth has been meagre, mostly on account of a low
contribution from total factor productivity and capital accumulation. The
weak total factor productivity contribution could stem from problems with
financial de-leveraging and the low level of innovation. Capital accumulation
is affected by ongoing de-leveraging in the private sector and also by an
uncertain business environment.
Economic outlook
GDP
growth is expected to accelerate to 2.3 % in 2014 but to slightly slow down to
2.1 % in 2015. In both years, domestic demand is set to be the main
driver of growth. Overall, investment is forecast to pick up strongly to 7 % in
2014 but to decelerate to around 4.2 % in 2015, as the effect of increased EU
fund absorption is expected to fade away by 2015 with the end of the 2007-2013
programming period. At the same time, private consumption is forecast to grow
around 1.5 % in both years, reflecting increasing real disposable income and
improving employment prospects. The unemployment rate is projected to decrease
further below 9 % over the forecast horizon. Potential output growth is
slightly improving towards 1 %, but it is expected to remain below the level of
other countries in the region. 
The
growth projections in the convergence programme and in the Commission 2014
spring forecast are the same for 2014, while for 2015 the national projection
is more optimistic by 0.4 pps. As regards the composition of
growth, the convergence programme sees private consumption growing 0.4 pp more
in both years than the Comission 2014 spring forecast. Government consumption
expenditure is 0.4 pp higher for 2014 in the convergence programme, but 2.6 pps
lower for 2015 which means that the convergence programme foresees it to
decrease in real terms by 0.6 %. in the case of gross fixed capital formation
the convergence programme projection is somewhat more conservative than the
Commission 2014 spring forecast, but broadly similar for 2015. Exports and
imports' projections are very close for 2014, but exports are projected to grow
more in 2015 in the convergence programme than in the Commission 2014 spring forecast.
the convergence programme projects inflation at 0.8 % and 2.9 %, compared to 1
% and 2.8 % in the Commission 2014 spring forecast for 2014 and 2015
respectively.
Overall
it can be concluded that the convergence programme relies on a plausible
macroeconomic outlook, which is a bit more optimistic for the year 2015 than
the Commission 2014 spring forecast. The national
reform programme is based on the same economic outlook as the convergence
programme and contains the estimated macro impact of structural reforms. The
impacts are quantified and the methodology used is described in detail in the convergence
programme and in the decription of the model used by the Ministry for National
Economy.

3.        
Challenges and assessment of policy measures
3.1.                
   Fiscal policy and taxation

In
2013, Hungary received a CSR on fiscal policy and fiscal governance. The analysis in this staff woking document leads to the conclusion
that Hungary has made some progress on measures taken to address this
recommendation. (For the full CSR assessment, see the overview table in Section 4).
Budgetary developments and debt
dynamics
The
2014 convergence programme aims at a nominal deficit trajectory below the
Treaty reference value, which would bring down the general government deficit
from 2.9% of GDP in 2014 to 1.9% by the end of the programme period in 2017. The
programme confirms the medium-term objective of -1.7% of GDP, which reflects
the objectives of the Stability and Growth Pact. According to the authorities,
the foreseen deficit path ensures that the structural balance remains
consistent with the medium-term objective throughout the programme period.
However, the structural balance recalculated by the Commission[4] 
points to a risk of a significant and persistent deviation from the medium-term
objective (with a structural balance ranging between -2.2% and -2.4% of GDP
during the programme period). 
In
2013, the general government deficit reached 2.2% of GDP, thus overachieving
the deficit target of 2.7% of GDP set in the 2013 convergence programme. The
better-than-expected budgetary outcome reflects the fact that the total
expenditures turned out to be lower than planned by 0.5% GDP, while total
revenues were broadly in line with the target. Nevertheless, there was a
considerable shortfall in taxes and social contributions as a whole even after
the mid-year tax-increasing measures, but these revenue slippages were
compensated by the substantially higher-than-projected non-tax receipts. On the
expenditure side, spending overruns occurred at the central government, inter
alia, reflecting the launch of a new compensation scheme for teachers, other
wage-related payments and higher-than-budgeted outlays on goods and services.
However, these expenditure increases adding up to around 0.5% of GDP were more
than offset by the total effect of 1% of GDP resulting from the activation of
the remaining extraordinary reserve (a component of current expenditures), the
extra one-off receipts from the sale of telecom frequency licences as well as from
cost savings by local governments.
For
2014, the convergence programme projects a deficit of 2.9% of GDP implying a
relaxation of the previously set target of 2.7% of GDP. This
revision reflects both the fiscal effect of changed macroeconomic conditions
and budgetary measures. Revenues are estimated to fall by 0.2% of GDP due to
the slow-down in inflation and the unfavourable base effects. The extension of
family tax allowances also increases the deficit. Moreover, the programme
incorporates additional expenditures of about 0.9% of GDP, involving extra
spending on health care, higher appropriations at line ministries as well as an
increased level of domestic public investment. The above-mentioned adverse impacts
of around 1.3% of GDP are largely counterbalanced by expenditure-decreasing
adjustments amounting to 1.1% of GDP. The offsetting factors include (i)
further one-offs related to the sale of telecommunication frequency rights,
(ii) the reduction of the budgeted extraordinary reserves, (iii) decreased
social transfer payments (partly stemming from the lower indexation of
pensions), (iv) the introduction of the teachers' new wage system in a stepwise
manner rather than in one shot and (v) the assumed persistence of local
government savings. 
   || Box 1:  Main budgetary measures ||   
   || Revenue || Expenditure ||   
   || 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, including the one-off charge to be paid in the last four months (0.8% of GDP) ·       Job Protection Act: targeted cuts in social contributions and introduction of two simplified taxation schcmes for SMEs (-0.5% of GDP) ·       Elimination of the cap for employees’ pension contributions (0.15% of GDP) ·       Lower wage compensation (from social contributions) in private sector (0.25% GDP) ·       Introduction of a distance-based road toll from 1 July 2013 (0.2% of GDP) ·       Other tax measures (hikes in sectoral levies; introduction of new corporate surcharges (e.g. public utility tax) (0.6% of GDP) || ·       Nominal wage freeze in most branches of the public sector (-0.35% of GDP) ·       Introduction of the first step (at 60% of the legislated renumeration) of the new wage system in public education from 1 September (0.15% of GDP) ·       Increased outlays related to the FX mortgage support schemes agreed with the banking sector (+0.15% of GDP) ·       Extension of the public work scheme (0.1% of GDP) ·       Sale of frequency rights (recorded as negative expenditure, -0.25% of GDP) ||   
   || 2014 ||   
   || ·       Extension of the deductability for family allowance (-0.15% of GDP) ·       Additional take-up for targeted SSC cuts and for simplified taxation schemes (-0.1% of GDP) ·       Full phasing out of the wage compensation (from social contributions) in the private sector (+0.15% of GDP) ·       Full-year effect of the distance-based road toll (0.2% of GDP) ·       Increase in the efficiency of tax collection, mainly through the establishment of on-line links to cash registers (0.5% of GDP, serious implementation risks) || ·       Nominal wage freeze in most branches of the public sector (-0.2% of GDP) ·       Full-year impact and additional step (10 pps) of the new wage system in public education (0.35% of GDP) ·       Sale of frequency rights (recorded as negative expenditure, -0.4% of GDP) ||   
   || 2015 ||   
   || ·       Additional take-up for the two simplified taxation schemes (-0.05% of GDP) || ·       Nominal wage freeze in most branches of the public sector and operational costs are foreseen to increase below the inflation rate (net impact: -0.3% of GDP, imlementation risks) ·       Additional step (10 pps) of the new wage system in public education (0.15% of GDP) ||   
   || 2016 ||   
   || ·       Additional take-up for the two simplified taxation schemes (-0.05% of GDP) || ·       Nominal wage freeze in most branches of the public sector and operational costs are foreseen to increase below the inflation rate (net impact: -0.35% of GDP, imlementation risks) ·       Additional step (10 pps) of the new wage system in public education (0.15% 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. ||   
The Commission 2014 spring forecast
projects a deficit of 2.9% of GDP for 2014, which is identical to the official
target.
However, this similarity masks significant differences regarding the estimation
of the underlying budgetary processes. Compared to the 2014 convergence
programme the spring forecast factors in a slippage of 0.3% of GDP in tax
receipts. This is partly related to a more pessimistic evaluation of base
effects and to the somewhat weaker projected nominal growth of tax bases, but
also reflects a more cautious assessment of measures aiming to enhance tax administration.
The revenue shortfalls are expected to be offset by the assumed cancellation of
the extraordinary reserve (0.3% of GDP). By contrast, the deficit target of the
convergence programme is based on the inclusion of the extraordinary reserve on
the expenditure side. 
The
envisaged medium-term consolidation path of the convergence programme is
heavily back-loaded. The deficit is expected to decrease only
slightly to 2.8% of GDP in 2015, and then with an accelerating pace of
adjustment it would be reduced to 2.5% of GDP in 2016 and further to 1.9% of
GDP in 2017. In 2015, the Commission 2014 spring forecast, following the
no-policy-change assumption, estimates a marginal deficit improvement, which
coincides again with the target. Unlike the convergence programme  however,
the forecast is also based on the assumption that the extraordinary reserve
will not be spent.
Compared
to the previous convergence programme, the deficit trajectory has significantly
shifted upwards. This results in a cumulative medium-term
deviation of 1.2% of GDP, with the deficit currently set at 2.5% of GDP for
2016 as opposed to the target of 1.3% of GDP in the same year of the 2013 convergence
programme. This gap appears to stem from both the modified macroeconomic
scenario (i.e. the reduced nominal GDP path and the lower growth elasticity of
major tax bases) and the effect of measures[5].
The
medium-term fiscal consolidation plan of the  convergence programme is based on
the policy of general expenditure containment, which is envisaged to be
achieved without any further structural measures or institutional changes. Accordingly,
the total expenditure-to-GDP ratio would drop from 50.1% in 2014 to
44.8% in 2017. Within this, the corrected primary expenditure-to-GDP ratio
(filtering out the balance-neutral impact of declining EU funds) would decrease
by 3.5% of GDP over the same period (by 1% in 2015 and by a further 2.5%
between 2015 and 2017). The convergence programme anticipates this significant
reduction against the backdrop of an average nominal GDP growth of 5.5% and on
the basis of instituting nominal freezes or setting increases below the rate of
inflation for most of the discretionary spending items (including the salaries
of public employees and the operational costs of governmental institutions).
Social transfers also feature strongly in the shrinking expenditure ratio due
to the inflation-based indexation rule of pensions, the already enacted legal
restrictions on early retirement as well as the nominal freezing of all other cash
benefits. At the same time, total revenues will also go down in terms of GDP,
but to a smaller extent. The corrected revenue-to-GDP ratio is projected to
fall by 2.6% (by 1% in 2015 and by a further 1.6% between 2015 and 2017). This
pattern does not stem from revenue-cutting measures, but rather reflects the
indirect budgetary effects of the contracting expenditure ratio (i.e. the tax
content of gross public spending) as well as the foreseen lower-than-unitary
growth elasticity of tax bases.   
Both
upside and downside risks could be identified to the convergence programme deficit
trajectory. On the deficit-improving side, the officially
requested change for the calculation of national co-payments for EU funds from
public to total cost may result in significant one-off revenues (possibly up to
½% of GDP) in the year when it is approved by the Commission. On the
deficit-increasing side, it should be stressed that the bulk of the expenditure
reduction is foreseen to be achieved through a nominal freeze for the wages for
most branches in the public sector (in place since 2008) and a stringent
expenditure restraint for the operational costs of budgetary institutions.
Given that these areas have already been targeted by successive cuts and
freezes over the last 7-8 years, both measures carry increasing implementation
risks. Finally, the acceleration in the deficit reduction in 2017 is the result
of the projected hike-up in growth, which is a rather optimistic scenario.
Further
uncertainties stem from the revenue effects of the protracted introduction of
online cash registers and from the balance of local governments. The
new system of on-line links, if appropriately implemented and backed-up by
targeted tax audits, could even result in higher revenues than currently
estimated by the Commission (0.2% of GDP), although the government’s
expectation of a 0.5% of GDP sustained increase in VAT receipts seems to be on
the high side. The balance of local governments could continue delivering
positive surprises, provided that recent surpluses were due to a permanent
adjustment to a lower expenditure trajectory following a wide-ranging
reorganisation. However, it could imply negative risks as well if the
better-than-expected outcomes were rather the result of delayed spending (such
overruns could be financed from the accumulated deposits of municipalities,
amounting to 1.7% of GDP at end-2013).
Box 2: Hungary's status vis-à-vis the Stability and Growth Pact
Hungary is
subject to the preventive arm of the Pact and it is not expected to reach its medium-term
objective over the programme horizon. Therefore, it should ensure sufficient
progress towards its medium-term objective.
As
the debt ratio was at 79.8% of GDP in 2012, exceeding the 60% of GDP reference
value, during the three years following the correction of the excessive deficit
  Hungary is also subject to the transitional arrangements as regards
compliance with the debt criterion. In this period it should ensure sufficient
progress towards compliance.
For
the 2013 budgetary outcome, the (recalculated) structural balance of -0.7% of
GDP is significantly above the medium-term objective of -1.7% of GDP. In 2014,
the (recalculated) structural balance would deteriorate by 1.5 pps to -2.2% of
GDP resulting in a significant deviation from the medium-term objective. The
structural balance is expected to stabilize at -2.2% of GDP in 2015, whereas
the sufficient adjustment path towards the medium-term objective would require
an improvement of 0.5 pps. The Commission 2014 forecast reinforces this
assessment with an estimated structural balance similar to that of the convergence
programme. Moreover, the programme does not foresee progress towards
achievement of the medium-term objective by the end of the program horizon as
the (recalculated) structural balance would deteriorate further by an
additional 0.1 pp. in both 2016 and 2017. 
According
to the information provided in the convergence programme, the growth rate of
government expenditure over 2014, net of discretionary revenue measures, will
exceed the reference medium-term rate of potential GDP growth of 0.1%.
Furthermore, the corresponding growth rate of expenditure over 2015 is not
expected to contribute to an annual structural adjustment towards the medium-term
objective by 0.5% of GDP, as expenditure growth rate is above -1.1%, i.e. the
lower rate allowed under the expenditure benchmark. The deviation from the
expenditure benchmark has a negative impact on the structural balance (above
0.5% of GDP in both 2014 and 2015). This conclusion is also supported by the
similar assessment based on the Commission 2014 spring forecast.
Following
an overall assessment of Hungary's budgetary development, with the structural
balance as a reference, including an analysis of expenditure net of
discretionary revenue measures, a significant deviation from the adjustment
path towards the medium-term objective is to be expected in 2014 and 2015. 
The
2014 convergence programme envisages a gradual decrease in the government
debt-to GDP ratio, from 79.2% in 2013 to 74.7% in 2017.
Although the foreseen primary surpluses could have allowed a faster debt
reduction throughout the programme horizon, the snow-ball effect is anticipated
to turn into deficit-reducing only in the outer years. The programme’s debt
trajectory is higher than projected in the 2013 convergence programme, where
the government debt was projected to decrease to 73.4% of GDP already in 2016.
This primarily reflects a lower nominal GDP path, but the higher primary deficit
targets as well as the development of the stock-flow adjustments in selected
years (notably in 2015, when the pre-financing of EU projects in the closing
phase is projected in the convergence programme to have an important
debt-increasing impact) also contributes to the upward shift in the debt path.
The Commission 2014 spring forecast projects an increase in the debt ratio in
2014 to over 80% of GDP, mainly on account of the revaluation of the foreign
exchange component in public debt. Thereafter, it is projected to decrease to
79.5% of GDP in 2015. Overall, the difference in the projections for 2015
appears to be moderate. 
As
of 2013, Hungary is in the three-year transitory period regarding the debt
reduction benchmark. Despite the planned deterioration in
the (recalculated) structural balance for 2014, Hungary would comply - thanks
to the allowed annual deviation of 0.25 pp. of GDP - with the minimum linear
structural adjustment required for the debt reduction benchmark over the
transition period that, based on the convergence programme  debt 
projections, would permit a deterioration of 1.3 % of GDP in 2014 and 1.2 % in
2015. However, according to the Commission 2014 spring forecast, which is based
on a no-policy-change assumption, the transition towards compliance with the
debt criterion will not be respected in 2014, nor in 2015 (with a forecast
change of the structural balance of -1.4% of GDP against the minimal
requirement of -0.5% in 2014, and the projected no improvement against the
required adjustment of 0.5% in 2015). This would imply a significant breach of
the debt-reduction requirement to be assessed in 2015, based on the validated
2014 budgetary outcome, unless further structural efforts are made.
Hungary has preserved its sound fiscal position in line with the 2013
country-specific recommendation, but has made limited progress in pursuing a
growth-friendly fiscal policy focusing on expenditure savings and in putting
the general government debt ratio on a firm downward path. The official deficit target and the country’s MTO were overachieved
in 2013 by a considerable margin, but the composition of the fiscal
consolidation effort has been far from optimal. This is reflected in the
sustained increase in the primary expenditure ratio (filtering out the
deficit-neutral increase due to the higher absorption of EU funds) both in 2013
and 2014, each year by around 0.75 pps. These developments are partly
compensated by additional non-tax revenues, while the tax burden slightly
exceeds the elevated 2012 level in both of the concerned years (at around 39.2 %-39.5
%). Overall, recent fiscal policy developments, including the structure of the
2014 budget, do not indicate a significant progress towards a more credible
growth-friendly fiscal strategy. Moreover, only a very gradual decrease in the
debt ratio can be expected over the medium-run. 
Fiscal framework
In
the context of the transposition of Council Directive 2011/85/EU on
requirements for national budgetary frameworks, a number of amendments to the fiscal
framework legislation were approved in December 2013.
These cover notably the regular publication of fiscal data at both the central
and local government levels, the accessibility of planning documents, the
introduction of new numerical rules and the enhancement of the medium-term
budgetary framework. The government has thereby made some progress in responding
to the country-specific recommendation. The authorities did not seize this
opportunity, however, to further reinforce the Fiscal Council by broadening its
mandatory remit.
New
numerical rules have been introduced to ensure consistency with the requirements
of the Stability and Growth Pact, but existing design flaws have not been
corrected.
Beyond the constitutionally defined requirement to have a declining debt path
(until the debt-to-GDP ratio reaches 50 %), the deficit target of the projected
budget must now be in accordance with both the 3 % of GDP deficit threshold and
with Hungary’s medium-term objective. However, in case of an officially
projected negative GDP growth rate, the escape clause would exempt the country
from fulfilling the 3 % threshold, while the structural balance must still be
in line, ex ante, with the medium-term objective. Moreover, with the
debt growth rule to be in place from 2016, the previously identified design
weaknesses are not yet addressed, namely the effectiveness of this set of fiscal
rules is reduced by the absence of ex post monitoring and by the lack of
a maximum level of allowed deviation, or a correction mechanism in the event of
a deviation from both domestic and European numerical rules.  
The
long overdue strengthening of the medium-term budgetary framework should help
to improve the future planning horizon, so far narrowly focused on the actual
budget year. The new provisions prescribe that three-year
expenditure and revenue plans (split into a baseline of no change in policy and
the estimated impact of new discretionary measures) would be defined in a
government resolution by 30 April each year (the issuance of this for the fist
time has been delayed linked to the formation of the new government). Changing the
plans would require an official justification by the government in the relevant
resolution. Differences between the medium-term budgetary framework and the
draft budget bill for any given year must be fully justified by changes in the
macroeconomic scenario or other events falling outside the scope of the
government. This ‘comply or explain’ type of rule would exercise constraint on
the government only when introducing its draft budget, but it falls short of
ensuring that the final budget law, as approved by the Parliament, is also in
line with the medium-term budgetary framework.
No
change was adopted to the mandatory tasks of the Fiscal Council. Its analytical
underpinnings, therefore, are still not commensurate with its unprecedented
veto right. Despite the existing broad optional mandate to
comment on any relevant public finance issues, the Council has not sufficiently
used this possibility over the last 30 months. Indeed, it did not publish any own
analysis or opinion beyond what was strictly required by law. Broadening its mandatory
remit would ensure that its work and decisions are based on publicly accessible
detailed calculations and not only on qualitative risk assessments, as it has
been the case so far. Doing so would enhance the accountability of this
institution, and would greatly facilitate enhancing transparency of public
finances; albeit there are other important aspects which could be improved on
this front (e.g. publishing regularly the authorities’ mid-year quarterly cash-flow
forecasts, or making available the government’s obligatory mid-year review on
budgetary execution). 
Long-term sustainability 
Government debt
(79.2% of GDP in 2013 and expected to slightly increase to 79.5% in 2015) is currently
above the 60% of GDP Treaty threshold and the Commission debt sustainability
model projects it to fall by 2030 below the 60%. The full
implementation of the convergence programme would put debt on a further
decreasing path by 2030.
Hungary
appears to face low fiscal sustainability risks in the medium-term. The
medium-term sustainability gap[6],
showing the adjustment effort up to 2020 required to bring debt ratios to
60 % of GDP in 2030, is at -0.8% of GDP, primarily related to the
projected reduction in the ageing costs (contributing with -1.3 pp. of GDP)
until 2030 that more than offsets the debt requirement due to the high level of
government debt (79.5% of GDP in 2015). In the long-term, Hungary appears to face low fiscal sustainability risks. The long-term sustainability gap[7]
shows the adjustment effort needed to ensure that the debt-to-GDP ratio is not
on an ever-increasing path, is at 0.6% of GDP.
The structural
primary balance is expected to deteriorate substantially (by 2.0 pp. of GDP
between 2013 and 2015), entailing high sustainability gaps compared
with the 2013 scenario (i.e. maintaining the 2013 structural balance for the
entire period). Risks would be higher in the event of the structural primary
balance reverting to lower values observed in the past, such as the average for
the period 2004-2013. It is therefore appropriate for Hungary to continue to implement measures to ensure the reduction in the government debt.
Tax system
In 2013, Hungary received
a recommendation on taxation, covering its stability and predictability, sector-specific
taxes, tax wedge on low-income earners and measures to improve tax compliance. The
analysis in this staff woking document leads to the conclusion that Hungary has made limited progress on measures taken to address this recommendation. (For
the full CSR assessment, see the overview table in Section 4).
Hungary’s
tax burden ranks as the 10th highest in the EU and as the highest among countries
in the region, with a total tax-to-GDP ratio, excluding
imputed social contributions, of 39.3 %. The tax burden on low-wage earners (particularly
on single wage earners without a family) is still very high in the regional
context and impedes job creation.[8] According to
the World Bank’s Paying Taxes 2014 report, the time needed to comply with tax
obligations for Hungarian businesses is the 4th longest in the EU. The
multitude of corporate tax regimes and rates in force also adds to the
complexity of business taxation. Hungary still suffers from widespread tax
non-compliance with an elevated level of undeclared work (the size of the
shadow economy is 22.1% of GDP, among the highest ones and undeclared work is
between 15 % and 20 %). With the standard VAT rate at 27 %, i.e. the highest in
the EU, the exposure of Hungary to non-compliance in the VAT area is
particularly high. The VAT compliance gap (i.e. revenue shortfall compared to
the theoretical tax liability) is estimated at around 3% of GDP over the
2000-2011 period (one of the highest in the EU).[9]
According to the IMF, VAT fraud amounts to 1.75 % of GDP.[10]
The 2013
recommendation called for a stable corporate tax system and for minimising
distortions caused by sector-specific taxes. Although few new measures were
introduced last year, corporate surtax rates have further increased. The
Commission has critically assessed the extra taxes levied on specific
industries (see box 3) on account of the unpredictability of their introduction,
the harmful choice of tax bases and the arbitrary way surtaxes affect the
allocation of resources across industries. Given a large revenue shortfall
compared with the budgeted figures, in part due to over-optimistic budgetary
planning, the financial transaction duty (FTD) rates were increased with effect
from August 2013 from 0.3 % to 0.6 % (for cash withdrawal) and from 0.2 % to
0.3 % (for other kinds of transaction). Moreover, the government also levied an
additional one-off FTD charge on banks (amounting to 0.25 % of GDP) and granted
two free cash withdrawals per month to each customer at the expense of banks, starting
from February 2014. The combination of these extra burdens has contributed to a
pick-up in the cash usage of the economy, which entails greater risk of tax
avoidance than the use of electronic payments. While cash in circulation in
real terms increased by around 4% in 2012, it has increased by 6.5 % in 2013
and by 20.5% in Q1 2014, in year on year terms. Finally, as of August 2013, the
rate of mining tax was increased by about one third, the tax rate on interest
revenue by 6 pps (excluding government securities) and the itemised tax on telecommunication
services by 50 % for corporate users. According to the 2014 convergence
programme, alleviating the extra burden from sector specific taxation is not a
government priority, even under a favourable fiscal scenario.
Taxation of labour and potential for tax shifting 
The
2014 AGS priority of pursuing differentiated, growth-friendly fiscal
consolidation explicitly recommends inter alia shifting the tax burden away from
labour. In Hungary, this is also a pressing priority as the
tax burden on labour is high by international comparison,[11] in
particular for low wage earners.
Graph
1: The development of the labour tax wedge for selected low-wage categories
Source: OECD data
and Commission calculations
Despite
the recommendation on refining the eligibility criteria for the Job Protection Act,
the system has remained substantially unchanged.[12] The
tax burden on high-income earners and employees with three or more children declined
significantly, with full abolition of the employment tax credit in 2011-12.
However, the labour tax wedge on single low-income earners (i.e. at 67 % of the
average wage) went up from 43.8 % in 2010 to 47.6 % in 2012, the second highest
rate in the EU. In fact, the low-income tax wedge in general (i.e. for someone
not eligible for the Job Protection Act) is estimated to increase further to 49 %
in 2013 and 2014. For low-income earners covered by the Job Protection Act, the
overall tax burden is lowered to 45.2 %, but still above the level seen in 2010
(see Graph 1). Moreover, beneficiaries include some highly employable and well-paid
people, but not all vulnerable workers (e.g. middle-aged, relatively low-skilled
ones). By December 2013, the Job Protection Act had 735 000 beneficiaries out
of a work force of about four million. Nevertheless, according to the 2014
convergence programme, only some 40 % of all low-income earners are
beneficiaries. 
A new
tax relief measure has been adopted: an extension of the family tax credit benefitting
households with dependent children, but that only indirectly affects low-wage
earners. The government widened the family tax credit, which
as of 2014 can also be deducted from employees’ social security contributions
besides the personal income tax. However, the impact chiefly depends on the
number of children, with a significant tax burden reduction effect only for
families with three or more children, even at relatively high wage levels.[13] Even
though a part of low-wage earners are also indirectly affected via the family
tax credit, a specific measure targeting especially this group is lacking. The 2014
convergence program has indicated that in the medium term, Hungary foresees further reduction in the labour tax burden in case of a favourable fiscal
situation.
Shifting
taxation away from labour, especially from low-income earners, towards less
distortive forms of taxes remains a challenge. VAT is already
at the highest level in the EU. Environmental tax revenues are already around
the EU average. The existing energy sector surtaxes (i.e. levied on the stock
of pipelines and the special extra corporate tax on energy providers) have
distortive effects and do not provide incentives to reduce the high domestic energy
consumption. Hence, a sustainable tax shift could affect the latter, also
because there has been no energy excise duty increase since 2012 and given that
the implicit tax rate on energy is among the lowest in the EU.[14] Recent
environmental measures, such as the introduction of a distance-based, electronic
toll system on heavy duty vehicles and the waste deposit fee, are steps in the
right direction. These can provide considerable additional revenues, while
internalising negative externalities. Revenues from recurrent taxes on
immovable property in Hungary are well below the EU average (0.4 % of GDP
compared to 1.5 %). However, given the depressed state of the housing market and
the high share of distressed mortgage borrowers, resulting in wide-ranging
negative effects on the economy, a cautious approach is warranted.
Tax
compliance
According to the government, all
tax-related elements included in the ‘Cutting Red Tape Programme’ launched in
2011, inter alia to reduce the complexity of the Hungarian tax system, have
been implemented with an estimated annual effect of some HUF 60 billion. These
include a simpler electronic filing for tax returns and the reduction in the
number of documents required and extending online services for taxpayers. However,
there is no methodologically sound, publicly available assessment on the
impacts of these measures and a continuing perception by businesses of high
administrative burden. See also section 3.5.
Within the context of fighting tax fraud, one of the AGS 2014
priorities, Hungary has indicated that it had introduced the VAT reverse charge
mechanism in some of the most affected industries. However, the reverse charge
mechanism is not a long-term solution, notably in the case of goods subject to
final consumption. As a result, there is still
scope for improvement in the functioning of the tax administration in
particular by enhancing conventional control and collection processes. It is
against this background that the Commission recently rejected two requests by Hungary to introduce the reverse charge mechanism (in the pig-farming and animal fodder industry and
for supplies of sugar) as it concluded that the problem of VAT fraud in Hungary is of a more structural nature. In addition, administrative cooperation with other
Member States’ revenue authorities, especially those of neighbouring countries,
could be improved in order to tackle cross-border VAT fraud. According to a
recent report on VAT administrative cooperation in the EU, Hungary tends to reply late to requests for information coming from other Member States.[15] 
In late 2012, the government prescribed the mandatory online connection
to the tax authority of all retail and service sector cash registers. This
aimed at reducing the size of the shadow economy. This
is a commendable initiative: international experiences show its important
revenue-generating potential for the budget. The electronic connection should enable
the tax authority to monitor the daily turnover of each cash register, which may
significantly reduce the possibility of fraud and increase the effectiveness of
tax authority audits. However, the establishment of online links has suffered
repeated delays, partly owing to an unrealistic original timetable. The initial
deadline for the complete switch-over was set for 1 April 2013, while by early
April 2014 only around 65 000 registers were reported to be online by the Tax
Authority. The remaining, approximately 110 000, machines will be operational
by September 2014, according to the National Retail Association. 

3.2.                
Financial sector 

As assessed in the 2014 in-depth review,
financial de-leveraging has been ongoing in Hungary since the start of the financial crisis. On the demand
side, this is due to a high level of household and, to some extent, corporate
debt accumulated before the crisis. On the supply side, decreasing risk
tolerance, a high level of external financing and deterioration in the
operating environment of banks could be mentioned. Although the sector seems
adequately capitalised and its liquidity position relatively strong, the
combination of a high level of tax and regulatory burdens, and a high share of
problematic loans, does not seem to provide incentives for banks to increase
lending. 79 % of mortgage non-performing loans are based on foreign exchange,
but the non-performing loan rate for the non-subsidised HUF segment is equally
high at around 20 %. While the authorities' endeavour to revive lending with a
series of policy initiatives (the central bank’s subsidised lending scheme
‘Funding for Growth’, different programmes financed by the EXIM bank and the
Hungarian Development Bank) is commendable, the challenge to improve normal
(i.e. non-subsidised) lending in a sustainable manner remains.
In
2013, Hungary received a CSR concerning the financial sector with specific
focus on restoring normal lending, improving portfolio quality and enhancing
financial regulation and supervision. After reviewing
the 2014 national reform programme, the analysis in this staff woking document
leads to the conclusion that Hungary has made limited progress on measures
taken to address this recommendation. (For the full assessment, see the
overview table in Section 4).
Restoring
normal lending
The
aggregated balance sheet of the Hungarian commercial banking sector had been
shrinking since mid-2010, but the process ended by the close of 2013. This
reflects on the one hand the allocation of the Funding for Growth scheme,[16] but
possibly also the effect of more structural factors: with a loan to deposit
ratio around 110 % (down from 160 % in early 2009) banks could naturally slow
down their de-leveraging. However, the aggregate picture masks huge differences
in the characteristics of individual banks: a decreasing market share and low
profitability for most foreign-owned big banks, compared with an increasing
market share and better rates of return for the rest of the sector.
Nevertheless, foreign-owned big banks still have a dominant market share in
private sector lending (at 62 % in Q1 2013). 
Net
lending flows in the corporate sector moved temporarily into a positive
territory in Q3 2013 following the first allocation of the Funding for Growth
scheme, but returned to negative values thereafter. Tightening
credit supply contributed primarily to a fall in corporate lending and
particularly in the SME sector since Q4 2008. In addition to decreasing risk
tolerance, the combination of a high share of regulatory burdens and an
increasing share of problematic portfolio are hindering a return to normal
lending. [17]
As highlighted in the 2014 in-depth review, although the central bank’s Funding
for Growth scheme has eased credit conditions to SMEs, this could only bring
temporary relief and it does not substitute usual financial intermediation on a
permanent basis (see box 5). Moreover, the scheme has
certain risk elements, especially if applied on an extended scale. These
include the fiscal costs related to the zero-cost financing provided to banks, and
the capped interest rate margin, which is set at a level much lower than the
average lending margin for the SME sector. In parallel to the central bank’s Funding
for Growth scheme, the government has continued several subsidised lending
programmes targeted toward SMEs.[18]
Despite
the extension of housing subsidy schemes and a low interest rate environment,
lending to households continued to shrink without interruption. The
loan stock of households stood at 24 % of its pre-crisis level in Q4 2013. As
opposed to the corporate sector, the declining lending stock primarily reflects
a low level of credit demand due to the high share of distressed borrowers, a
still high repayment burden and a depressed housing market.
Capital
accumulation, non-performing assets and moral hazard of relief schemes
Portfolio
quality has declined in both the corporate and household segments since the
start of the financial crisis. Close to 20 % of corporate loans
are classified as ‘delinquent’ and although the stock reached a standstill in
Q2 2012, it is not expected to decrease visibly until 2015. In the case of
households, non-performing credit increased further in 2013 and currently, if
shorter maturity delinquencies (below 90 days) are included, more than one
third of the banking sector’s household portfolio presents some problems. On a
positive note, the coverage ratio of non-performing loans is relatively high
(close to 60%) in international comparison. Nevertheless the high share of
restructured loans (at 16% of the total portfolio in Q4 2013) raises some
questions regarding the true quality of the loan portfolio, especially given that
24,6% of restructured loan became non-performing again. Given that provisioning
rules are relatively loose[19]
the coverage ratio behind restructured loans is relatively low (at 20%). In
general, portfolio cleaning is also hindered by the weak efficiency of in-court
and out-of-court resolution proceedings: the average time to settle disputes is
high in international comparison, while the expected recovery is relatively
low.[20]
As a response to the high share of problematic loans in the corporate sector,
the central bank has opened the possibility in the Funding for Growth Scheme to
buy commercial real estates that served as collateral of non-performing loans.
Although
household indebtedness and the share of foreign exchange debt have declined, foreign
exchange indebtedness of households is still the major reason behind the
continued increase in non-performing loans. This reflects
on the one hand the weak economic situation of the country since the start of
the financial crisis, and the fact that most of the foreign exchange relief
schemes adopted so far have not been targeted towards distressed borrowers. At
the same time, the practice of repeated introduction of new foreign exchange
relief schemes has deteriorated the payment culture.[21] One
programme targeted to distressed borrowers is the set-up of the National Asset
Management Company, which could purchase around 25 000 flats owned by
distressed borrowers. However this falls short of the number of flats owned by problematic
borrowers; in the magnitude of 150 000. In November 2013, the government
extended the exchange rate cap scheme to delinquent borrowers. In addition, it
communicated the need for a final solution of the foreign exchange problem, but
has been waiting for a clear legal picture before adopting any new package. Depending
on the coverage or possible retroactive nature, a new scheme could endanger financial
stability, especially if not consulted with relevant stakeholders.[22] In
May 2014, the foreclosure moratorium was extended until a new, comprehensive FX
relief scheme is adopted by the government.
The
capital accumulation environment for the banking sector deteriorated due to
further regulatory burdens and increasing non-performing loans. New
measures include the increase in the financial transaction duty and the request
to banks to allow two free monthly cash withdrawals. After negative
values in 2011 and 2012, the return on equity of banks re-entered positive
territory (i.e.
around 2 % in
2013),
however this improvement largely reflects the effect of one specific
transaction.[23]
Without one-off effects, the banking sector would have produced a slightly
negative return on equity.
Financial
supervision
There
has been some progress in regulatory changes to the supervisory environment;
preparatory work for a bank resolution regime has started. The
Hungarian Financial Supervisory Authority was integrated into the central bank
structure on 1 October; this may lead to positive synergies. The Hungarian
National Bank has been equipped with the right to use macro-prudential tools
and is now responsible for macro-prudential oversight. As one of the major
reasons behind the widespread increase in foreign exchange lending was an
inefficient macro-prudential set-up,[24] this
seems a step in the right direction.[25]
Moreover, the preparatory work for a swift and accurate implementation of the
Directive on bank resolution and recovery has already started and is expected
to be completed by 2014 (submission to the Parliament in 2014, taking effect
from January 2015).

3.3.                
Labour market[26], education and social policies

Hungary
faces significant labour market challenges due to a
number of structural problems and low economic growth. In
particular, despite visible improvements in recent years, the overall employment
rate is still well below the EU average (63.2 % against 68.3 %) and far from
the Europe 2020 target of 75%. Major challenges remain concerning the
employment rate of: young career starters (i.e. 20-29 years old; 52.3 % in
Hungary against an EU average of 59.5%); low skilled (38.2 % vs. 51.4% in the
EU); Roma (29 %); women with young children (37.1% vs. 61.6%) and the share of
long-term unemployed (i.e. 12 months or more) among unemployed people is 48.6%.
In recent years, Hungary introduced a number of reforms to address the
persistently low activity rate, including: increasing retirement age and
restricting early retirement, a review of the disability pension and benefit
system, changes in unemployment and social assistance system, widened public
work and easing return from parental leave. Thanks to the measures, the
activity rate has been rising and this is expected to continue. While many of
these reforms go in the right direction, there have been few attempts to assess
their actual effects on labour market outcomes and poverty. The
education system does not prepare people for continuous improvement of their
skills or for
future labour market transitions. Low achievements in
basic competences hinder participation in higher education and
training. A considerable mismatch still exists between the
offer of the education and training system and labour market needs. Participation
in
lifelong learning is low, contributing to a poor quality supply to the labour
market. Since the start of the crisis, the social
situation has
continued worsening
with an increasing number of people living at risk of poverty and social
exclusion;
this affects children
and the Roma in particular.  
In 2013, Hungary received CSRs concerning
the labour market, training, the public works scheme, social policies and
education.
The analysis in this staff woking document
leads to the conclusion that Hungary has made some progress on measures taken
to address the CSR on labour, while it only made limited progress on the
education and social issues CSR. (For the full assessment, see the overview
table in Section 4).
Labour Market
Hungary still faces
significant labour market challenges because of a number of structural
problems.
Labour
taxation
that is not employment-friendly
for certain employee categories constitutes an important barrier,
particularly for low-wage earners (see section on taxation). The short length
of unemployment benefit (at three months) is in contrast with the average time
required to find employment for job seekers (over one year). While lowering the
level of unemployment benefit can enhance job search, such a short period of
the entitlement could result in a low-income trap as well as labour market
mismatches. It is because the unemployed, facing the limited benefit duration
and not having adequate financial savings, may be forced as a last resort to
join the public works scheme. As the outflow from this scheme to the open
labour market is limited, the unemployed easily find themselves outside of the open
labour market for long periods. To
avoid this outcome, some of the unemployed may be forced to accept job offers
which do not fit their qualifications, which results in inferior labour-market
matching, or could be left without any social assistance.
The youth unemployment rate has
decreased, also thanks to a number of government measures,
but is
still above the EU average, while the rate of youth NEET (young people not in
employment, education or training) increased. In 2013, youth
unemployment decreased to 27.2 % from 28.1 % in 2012, while the NEET rate of
the relevant population increased to 15.4 % from 14.7 % in 2012. This is at
least partially due to the decreasing number of students enrolled in tertiary
education and to a simultaneous increase in the number of early school leavers.
As described in the 2014 NRP, some measures have been undertaken in the last
years to promote labour market integration of young people: such as retargeting
Active Labour Market Policy resources to young job seekers, support schemes for
young entrepreneurs or a new type of wage subsidy for career starters below 25
years-old within the framework of the First Job Guarantee Programme. Previously
launched apprenticeship programmes were reformed in 2013 to better respond to employers'
needs. Moreover in 2013 Hungary presented a Youth Guarantee Implementation
Plan.
 
Box 4: The
delivery of a Youth Guarantee in Hungary
Important
challenges to deliver a Youth Guarantee (YG)[27] in Hungary are:
- Limited
capacity of the Public Employment Service, foreseen as the main Youth Guarantee
service provider,
in
particular to set up a profiling system for steering the provision of
individualised services and the immediate implementation of the planned
capacity development of youth mentor network;
- Efficient
coordination of Public Employment Service branch offices -serving as only Youth
Guarantee entry point- with educational institutions and youth NGOs active at
local level to reach out to NEETs the furthest away from the labour market;
- Improvement of
the quality and preventive mechanism in education and training
particularly to the very low skilled, including a large share of Roma people;
The
bulk of the national budget available for employment measures is still used for
the public works scheme, while according to the NRP, EU resources have been
used for financing other types of active labour market policies and adult
training programmes to improve lifelong learning
participation of both employed and unemployed people, particularly low
skilled. However, the up-skilling and re-skilling measures would need to be
rigorously assessed to improve efficiency of active labour market policies and
lifelong programmes and to reduce existing mismatches.
As a targeted measure to decrease entry costs
in the labour market, the government prepared the assessment of the whole
Hungarian secondary vocational qualification system. As a result of
the Action Plan approved in December 2013, 43 qualification requirements are
planned to be eliminated and 90 more simplified by August 2014. 
The
capacity building in the public employment service is ongoing and the introduction
of a profiling system has been postponed. An IT system is
under preparation, but a client profiling system will only be available as from
2016.
An accelerated launch could ease the administrative burden of public employment
service caseworkers and improve the personalised service provision to achieve
better results and target resources on active labour market policies more efficiently.
Despite last year’s recommendation
calling for a reduction in the dominance of the public works scheme, its size has
further increased. Its budget allocation has increased[28] and
the scheme has continued providing temporary work-related income for almost 390 000
people in 2013 (9.6 % of the workforce), compared with  316 262 in 2012, with
some 30 % of them working for one year or more. Labour Market research indicates
that the outflow from public work to market employment stood around 5%, while
close to 60% remained in the scheme, 30% returned to inactivity and 7% returned
to registered unemployment.[29] The
authorities own data, which could be subject to a potential multiple
accounting, shows that in 2013, 13.3% of fostered workers who had left the PWS
could find a job on the private market within 180 days after leaving the scheme.
Even this higher figure demonstrates that the scheme cannot improve
significantly the employability of enrolled workers.  In 2013, the activation
element has been strengthened mainly through a one-off measure providing
training opportunities for 100 000 participants during the winter months.[30]
While this can be considered as a positive development, such short-term,
non-personalised training opportunities do not fill the skills gap of participants
and have little long-term impact on their employability outside the public work
scheme.
The
labour market in Hungary is marked by low employment levels of women,
particularly with young children. Given the long
parental leave scheme still represents a disincentive for young mothers to
return to the labour market, the government has taken steps to improve
the flexibility of the paid parental leave system. As
presented in the 2014 NRP, modification of the childcare benefit (GYED) allows
mothers (or fathers) of young children to work and to receive the allowance at
the same time while their child is between 1
and 2 year-old. The capacity of crèches and family day care centres has been
gradually increased in the last few years[31] and
it is set to expand further in 2014-20, according to the NRP. However, at
present family support is still more focused on cash benefits, while a
relatively low share of spending is devoted to in-kind benefits (e.g. childcare).

Education and Training
Tackling
early school-leaving is a challenge, as shown by an increasing share of students
leaving school early (from 10.5 % in 2010 to 11.9 % in 2013),
being particularly high in vocational schools. Since the reduction of the
school-leaving age from 18, pupils are now allowed to leave the education
system at 16, while the new, shorter three-year vocational training model
normally provides a qualification only at the age of 17. The announced early
school-leaving strategy is still under preparation.
The
government is implementing a far-reaching reform, while basic skills attainment
is declining. The 2012 OECD Programme for International Student
Assessment shows that Hungary performs below the EU average in achievements on
basic skills and that the correlation between socio-economic status and
performance appears very strong.[32]The
poor performance of disadvantaged pupils in primary and secondary education
thus also explains their low rate of application to higher education. In order
to ensure early childhood education, the government plans to introduce
obligatory pre-school attendance from the age of three, which is a positive
step, but its implementation has been postponed to 2015. The government is
implementing an ambitious and contested reform concerning the governance of the
education and training system, which addresses: financing, quality evaluation,
curriculum regulation (including limited choice for textbooks), human resources
management and teachers’ career paths. The impact of all these measures, including
developments for the textbook market (see section 3.4), needs close monitoring.
The
segregation of Roma pupils increased during the last decade and access to
inclusive mainstream education has not improved. In Hungary, 45 % of Roma children attend segregated classes (where all or most classmates are
Roma). At
present, the drop-out rate for Roma pupils is more than seven times higher than
that for the non-Roma and less than one in five completes secondary education, whether
general or vocational, while a mere 0.5 % completes tertiary education.[33] A
major challenge is to improve effective and equal
access to quality, inclusive, mainstream
education and to foster continued education for disadvantaged students, in
particular for the Roma. The
National Social Inclusion Strategy identifies a number of positive measures for
desegregation, but their outreach remains limited and a systematic approach is
missing. As stated in the 2014 NRP, the application of “the equal opportunities
of public education institutions programme" has been available for every
public education institution from kindergarten to secondary school since 2003.
The programme supports integrated education in those institutions educating at
least 15 % children with multiple disadvantages; 25 % of schools were
participating.
To
improve labour market skills, the government enacted a new law on vocational education
in September 2013 by introducing a shift to a 'dual model' accompanied
by a
reform of the qualification system. This is a
positive development. However, while focus on training related to the labour market
is important to acquire job-related skills, the reduced curriculum content and
the shorter time devoted to basic competences (such as mathematics and languages)
in the shortened school models hinders students' chances for further education
and future jobs. This is particularly the cause of concern for disadvantaged
students, who are over-represented in these schools. The implementation of the
'dual model' thus deserves close monitoring.
Participation rates in higher education show
a significant increase in the past 13 years but the level of tertiary
educational attainment is still substantially below the EU average. Changes
in higher education introduced since 2012 focus on cost-effectiveness,
accompanied by an approach supporting mainly the most talented students
(competence-oriented approach). As a consequence, government expenditures on education
decreased in real terms in 2012 by 6.1 %, while in the EU overall by only 1.1 %.
[34] The
number of students applying to Hungarian universities has dropped by 6% in
2012/2013,[35]
which is related to the uncertain policy environment and, to a certain extent,
to demographic changes. The results of the scholarships priority setting for
certain disciplines, such as science, engineering and informatics, have also
contributed to a reduction in the number of students and the introduction of a
new student loan system has not curbed this development either. [36] 
The rate of disadvantaged pupils
applying to higher education is very low. This is mainly
due to their poor performance in the primary and secondary education, showing
that mainstream education is not able to compensate disadvantages stemming from
family background. In the NRP 2014 it is stated that the support of
disadvantaged students has priority in order to increase the share of the
people with tertiary or equivalent educational qualifications. However the
documents states also that the institutions can only reach 3% of the students
with multiple disadvantages. It is important to monitor carefully the impact of
measures on vulnerable groups and to adapt policy as needed.
Social polices
The
overall social situation continues deteriorating for various reasons. People
living at risk of poverty and social exclusion already represents one third of
the population, affecting in particular children and the Roma.[37] Those
people affected by severe material deprivation are the fastest growing
sub-group. In 2013, it affected more than a quarter of all Hungarian
residents (more than a third of all children). Housing deprivation among
children is growing and despite some improvement in 2013 the share of children
living in low work intensity households is still higher than EU average. The
stagnating economy is one cause. The other main causes were: the inability of
the social protection system to respond to social needs; a persistent level of
unemployment; frozen social transfers since 2008; reduced amount of employment
substitute benefit (HUF 22 800 per month) with tightened eligibility criteria;
and a reduction in the maximum duration of unemployment benefit to three months
(the shortest in the EU). Social assistance benefits are among the lowest in
the EU, while the capacity of the social safety net to alleviate poverty
decreased significantly between 2007 and 2012.[38] This
is reflected in increasing relative poverty rates after cash transfers are
accounted for, despite decreasing relative poverty rates before cash transfers.
Poverty
continues to affect disadvantaged regions and communities disproportionately,
in particular the Roma. There are considerable sub-regional
socio-economic disparities in Hungary, not only in terms of GDP per capita, but
also in terms of access to public services (e.g. healthcare, early childhood
education,
etc.). Roma are particularly affected by unemployment,
discrimination in the labour market and poor living
and health conditions, with 60 % living without basic
amenities. Since 2011, the government has taken a number of measures in order
to improve social inclusion under the guidance of the Hungarian National Social
Inclusion Strategy, but results have been insufficient to date. The strategy
and its action plan have been recently revised. 
In the meantime, the government has not
taken steps to mainstream the objectives of the National Social Inclusion
Strategy into all policy fields to reduce poverty, as recommended last year. In
particular, the previous steps taken by the government in recent years on
social transfers and allowances, fail to meet the objectives set out in the
Strategy, and were not repealed.
Healthcare
Despite
an improving trend, Hungary ranks systematically low in terms of headline
health status indicators, such as life expectancy at birth.
Also, the capacity of the health system to improve the health status of the
population is suboptimal, as can be derived from indicators such as early
life health
outcomes,[39] which
are less related to population lifestyle factors. Although estimates of
healthcare spending efficiency are subject to considerable uncertainty, Hungary was singled out amongst the five countries where margins for improving health
outcomes without increasing spending are the largest.[40] Evaluations
of the recent comprehensive reform of the healthcare sector are not available
yet. 
The
disproportionately high level of out-of-pocket payments, coupled with widespread
informal payments,[41] is a
particular cause of concern, especially from an access to care point
of view.
This
translates in health inequalities affecting especially vulnerable groups. Moreover,
the role of primary and outpatient secondary care seems to be under-developed and
to suffer from a suboptimal geographic distribution of doctors (including GPs)
and nurses.

3.4.                
Structural measures
promoting sustainable growth and competitiveness

Hungary is currently
experiencing a relatively low growth potential.
This is
partly a consequence of debt overhang and de-leveraging,
reflecting
a very low rate of total factor productivity growth but also a
weak business environment, which contributed to tightening credit supply
and reduced
investment in sectors burdened by excessive and distortive taxation. A number
of regulatory steps were taken in the last years, but usually without
consultation of affected stakeholders. In
several instances, these have reduced competition in the
service sector. Hungary is a ‘moderate
innovator’
according to the Innovation Union Scoreboard 2014 and its companies are
generally poorly integrated in the value chain of big multinational ones active
in the country. Inefficient public transport weighs on the budget and reforms
have
been
delayed.
In 2013, Hungary received CSRs concerning
the business environment, energy and state- owned enterprises in transport. The analysis
contained in this staff working document leads to the conclusion that the
country has made limited progress on measures taken to address these
recommendations. (For the full assessment, see the overview table in
Section 4).
Overall, the business environment in Hungary has not improved. In addition to
increased sector-surtaxes, no barrier in the service
sector has been removed, whereas new ones were
introduced and competition in previously open markets has been cut
back.
Examples include: household waste treatment, pharmacies, mobile payment
services, retail
tobacco, savings
banks sector and publication of school textbooks. Coupled with previously
introduced (e.g. retail, meal vouchers)
measures, these steps have artificially limited the
presence of economic actors in the service sector, thus
substantially restraining competition.
The deterioration in
the business environment partially explains why, despite a substantial inflow
of EU funds (at 3% of Gross
National Income per year), the Hungarian investment rate
declined in the 2007-12
period. Although
investment picked up again in 2013, partly
thanks to an increasing absorption of EU funds, so far the investment rate is
still well below pre-crisis levels (at 17.5 % of GDP as opposed to around 23-24
%).
As
explained in the 2014 in-depth review, a major challenge for Hungary is to attract foreign direct investment (FDI) and to boost the number of domestic
SMEs incorporated into the supply chain of large foreign investors, thereby
increasing their capacity to innovate and to internationalise. Although the
level of the FDI stock in Hungary is already relatively high in international
comparison, in the last decade the country has lagged behind in terms of FDI
inflows and has also been performing worse than other Visegrád countries in
terms of the depth of the value chain. [42]
Although
inward FDI flows increased in 2011-2013, these to a large extent reflected the
effect of capital in transit and the recapitalisation needs of the banking
sector. Correcting
for these effects, and for another one-off factor,[43] FDI
inflows stood at around 2.5 % and 1.7 % of GDP in 2012 and 2013, which is well
below pre-crisis levels. Moreover, a substantial part of this increase was due
to investment in the automobile industry, whose decisions were already made around
2008-2010. 
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.[44]
Market
competition and the stability of the regulatory framework
Frequent legislative changes have led to
legal uncertainty. Policy instability, together with taxes
and government over-regulation, is cited as one of the most prominent obstacles
to doing business in Hungary.[45]
In several cases, stakeholders had little time to react to legislative changes.
Many of the affected investors are foreigners, with possible further repercussions
on country attractiveness to foreign direct investment.[46] An
empirical analysis based on the QUEST model indicates that closing half of the
competition difference in the service sector compared to the level of the most
performing EU Member States could add as much as 1 % of GDP in the next ten
years (see
  box 6). 

 Box 5: Conclusions from the March 2014 In-Depth Review of Hungary (IDR) The third in-depth review on Hungary under the Macroeconomic Imbalance Procedure was published on 5 March 2014.[47] Based on this review, the Commission concluded that Hungary continues to experience macroeconomic imbalances that require monitoring and decisive policy action. In particular, the ongoing adjustment of the highly negative net international investment position (NIIP), the high level of public and private debt in the context of a fragile financial sector and deteriorating export performance deserve close attention to reduce the risks of adverse effects on the economy. The IDR found that: ·         Despite a lacklustre export performance (a cumulative 16 % fall in market share in the 2008-13 period), the NIIP has been improving and is expected to continue. In the past, this mainly reflected private sector de-leveraging. Looking ahead, as the output gap closes, improvements in the structural balance compared to its pre-crisis levels are expected to further support the process. Nevertheless, despite recent encouraging signs in the automobile industry, export performance is predicted to remain rather weak. Therefore, a NIIP improvement is expected on account of contained domestic demand rather than strong external competitiveness. ·         A high government debt is a primary source of concern. Despite substantial one-off capital transfers at 7 % of GDP used for debt reduction in the 2011-2013 period and improvements in the structural fiscal balance, the debt has remained broadly constant because of a weakened exchange rate, poor growth potential and elevated financing costs. In the baseline scenario, the debt is forecast to decline slowly; in case of a more negative external environment or a negative shock to domestic confidence, it will start increasing again. ·         The imbalance and risks related to private sector indebtedness still persist. Although the level of debt has declined, a high share of distressed borrowers, a depressed housing market, a fragile financial sector, a substantial share of loans in foreign currency and prevailing business uncertainty all contribute to fragilities. ·         The situation in the financial sector continues to raise concerns. Although the sector seems adequately capitalised and its liquidity position is relatively strong, the combination of a high level of burdens and problematic loans does not provide the right incentives to banks to increase their lending activity. While the central bank’s subsidised lending scheme gave some temporary relief in access to credit for SMEs, financial intermediation conditions have not improved on a sustainable basis. The IDR also discusses possible policy responses: ·         Improving export performance would require more foreign direct investment inflows as well as a broadening of the value chain in the export sector. ·         Continued fiscal consolidation efforts combined with a more growth-friendly structure of the adjustment would also be warranted. ·         The negative feedback loop between households, banks and the housing market could possibly be tackled by a final debt relief scheme targeted to insolvent borrowers, while mitigating risks of moral hazard and limiting the additional tax burden on the financial sector. ·         Improving capital accumulation possibilities and giving incentives to portfolio cleaning are essential to ease supply-side conditions in bank lending. In addition to a better operating environment for the financial sector, a more predictable and competitiveness-oriented policy and regulatory framework would be warranted. 
Hungary continues restricting the
establishment of new, large-scale retail stores, having introduced a general
prohibition lasting at least until the end of 2014. [48] Such
restrictive regulation can also impede an efficient allocation of resources in
the economy, and the allocative efficiency indicator (measuring the extent to
which the most productive firms have the largest market shares) for wholesale
and retail trade in Hungary is among the lowest in the EU.[49] While
the size of mark-ups in the retail sector were among the highest in the OECD
even before the crisis[50],
 barriers to entry in the sector increased continuously between 2008 and 2013 as
evidenced by the OECD's Product Market Indicator's for the service sector. 
In July 2013, a law was adopted which
restructured the savings cooperative sector. The state has
obtained a majority stake in Takarékbank, the central bank of the savings banks
sector and set-up a new unified institutional fund with state support. These
measures has been criticised by local stakeholders claiming that they were
stripped from ownership rights. Lawsuits are currently in the court process. In
January 2014, the government launched a tender to sell its majority stake,
although legal disputes have delayed the deal.
Other market segments have also been restricted
and several new market entry barriers have been introduced in the service
sector in recent years, usually with short notice. Strict
shareholding requirements for pharmacies have been introduced as from 2014, requiring
incumbents to sell a significant portion of their investments. A licensing
system for tobacco sales was introduced in July 2013, thereby artificially reducing
and redistributing market positions, with no compensation paid to those who
ceased business. Companies operating in the household waste management sector had
to sell the majority of their shares to the state or to local government or to
continue as sub-contractors. The government decided in September 2013 to switch
to a centralised system of textbook development, publishing and distribution thereby
limiting the number of authorised textbooks used in public schools to two per
subject.
In November 2013, amendments to the
Hungarian competition law were adopted. These include a provision according to
which mergers regarded as of ‘strategic national interest’ are exempt from
scrutiny by the Hungarian competition authority.[51] The government
can declare merger as of "strategic national interest" and relieve
the competition authority of its supervisory competence. In 2014, the government
declared three mergers (in the energy, financial and IT sectors) to be of
strategic national interest, thereby bypassing competition analysis, which may
negatively affect competition and the functioning of the internal market.
While some steps have been taken to
increase the use of regulatory impact assessments (RIA) and public
consultations in the regulatory process, these can be circumvented. The RIA
system that has been introduced in 2011 is operational, but assessments are often
carried out rapidly and without incorporating evidence-based supporting documents.
RIAs and public consultations are often pressurised because of very rapid
legislation procedures, hence their quality varies widely.[52]Research,
development and innovation
R&D activities are highly
concentrated regionally[53]
and into large foreign companies active in high-tech and
medium-tech sectors. Hungary could profit more from
the presence of multinationals to promote an effective
national R&D ecosystem. The country has just
started preparing a ‘smart
specialisation’ strategy to improve research capacities in all
regions.   
The
rather modest level of innovation in the business sector, particularly among
SMEs, remains an obstacle to increased competitiveness. The
innovation capacity of SMEs is limited[54] and
the repeal of the state’s contribution to the Innovation Fund two years ago has
reduced incentives for R&D activities. As from January 2014, Hungary reintroduced some forms of financial support, namely deductibility of R&D
carried out by linked enterprises and an increase of tax relief applicable on
SMEs investment loans. Two strategies adopted in 2013-2014 plan to stimulate
R&D demand and support measures, including for SMEs. However, the
Smart Specialisation Strategy, a pre-requisite to obtain EU Structural funds in
2014-20, has not been approved yet.
Box
 6: Potential impact of structural reforms
on growth – a benchmarking exercise
Structural reforms are
crucial for boosting growth. It is therefore important to know the potential
benefits of these reforms. Benefits of structural reforms can be assessed with
the help of economic models. The Commission uses its QUEST model to determine
how structural reforms in a given Member State would affect growth if the
Member State narrowed its gap vis-à-vis the average of the three best EU
performers on key indicators such as labour market participation or the degree of
competition in the economy. Improvements on these indicators could raise Hungary's GDP by about 5 % in a 10-year period. Some reforms could have an effect even
within a relatively short time horizon. The model simulations corroborate the
analysis of Sections 3.3 and 3.4, according to which the largest gains would
likely stem from increasing the participation rates of women and the elderly.
This outcome supports the priority placed by the authorities on labour market
reforms such as the Job Protection Action Plan and the new Labour Code. The
growth impact of measures to reduce final goods mark-ups (e.g. via increased
competition on product markets) is also significant. In
the very long run, moreover, improving education could also have a noticeable
impact on GDP, yielding a potential benefit of 6.5% over a 50-year
horizon (see note).
Table:
Structural indicators, targets, and potential GDP effects[55]

Source:
Commission services. Note: Simulations
assume that all Member States undertake reforms which close their structural
gaps by half. The table shows the contribution of each reform to total GDP
after five and ten years. If the country is above the benchmark for a given
indicator, we do not simulate the impact of reform measures in that area;
however, the Member State in question can still benefit from measures taken by
other Member States.[56]
*The long-run effect of increasing the share of high-skilled
labour in the population could be 4 % of GDP and of decreasing the share of
low-skilled labour could be 2.5 %. **EU average is set as the benchmark.
The
emergence of an effective national R&D environment
requires a strong public research system, but public
R&D
decreased from 0.48 % in 2009 to 0.43 % in
2012
—
below
the level of most Central and Eastern European
countries. This
threatens an already weak supply of human resources for science and technology, and
the quality of the science base.[57] Moreover,
the allocation of institutional funding to higher education institutions and
research organisations has
until now not been based on performance.[58] 
Energy
Energy price regulation was maintained
over the last year, contrary to the 2013 recommendation. During
2013, the government implemented two rounds of price reductions in final retail
prices of electricity and gas for households, while other customers also
benefited from the reductions forced on network tariffs. In February 2014, the
Parliament adopted a third legislative package for utility price cuts.[59] 
Retail
end-user price cuts, in combination with the high tax burdens, have had a severely
negative impact on companies’ capacity to recover costs. Already
ahead of the 2013 price cuts, corporations operating in the ‘universal service provider’
consumer segment produced severe losses, especially in the gas sector.[60] Most
companies used to recover losses under public service obligations on their
distribution system operations (DSO), but given that most of the recent government-mandated
price cuts have directly affected DSO tariffs, this kind of cross-subsidisation
is becoming less possible.  
Repeated
regulatory steps have worsened the overall investment climate in Hungary with repercussions on the corporate sector’s competitiveness in general. Energy
companies in the regulated energy provision markets can no longer rely on
distribution tariffs to generate profits. This has resulted in relatively
higher industrial prices compared to household prices than in most of the EU,
pointing to a cross-subsidisation from industries to households. The ratio
of industrial to household prices for medium-level gas consumers is the 2nd highest
in the EU (and 44 % above the EU28 average). For the same segment in electricity,
it is the 5th
highest (24 % above the EU28 average), whereas it was 10th at
the end of 2012.[61]
Regulatory
independence has not improved as the national
energy regulator cannot autonomously set tariffs. No amendment to
the law adopted in March 2013 on the national energy regulator was introduced
to
reinforce the independence of the authority. Therefore, decision on setting
network access conditions and key parameters of network tariffs is still
subject to ministerial approval. 
Further challenges — energy
efficiency and renewables
Energy intensity remains high by EU
standards, especially for households. The country's
final energy consumption in 2012 was already lower than the Europe 2020 target,
but the "business as usual" scenario used in the 2014 NRP by the
government would actually project an abnormal 53% increase in consumption to
22.5 Mtoe by 2020. Government-imposed reductions of energy bills are a potential
further disincentive for energy efficiency. Households have a share of 35 % of all
energy consumption — among the highest in the EU — mainly due to inefficient
buildings and transports, which have one of the highest (and still increasing) energy
intensity rates in the EU. Combined heat and power generation is not supported
as required by EU legislation. Also because of these factors, the energy dependency
of the country and the deficit in Hungary’s energy trade balance are high.  Several
key actions announced in the 2011 National Energy Efficiency Action Plan are
still delayed and the new plan, required by the Energy Efficiency directive,
has not been approved yet. 
Hungary
has reached its interim renewable energy target, but the level of consumption
from renewable energy decreased. The proportion of renewable
energy sources in energy consumption fulfilled the 2011-12 interim target and has
reached 9.6 %. However, this was achieved only by a decrease in the overall
energy consumption, as this was 10% lower in 2012 than in 2011 (down from 16.8
Mtoe to 15.4 Mtoe), while consumption of renewable energy sources (in the
electricity and transport sectors) in 2011-12 contracted. Although Hungary plans to substantially increase its financial support in this field, so far a
consistent and comprehensive programme to support energy efficiency and
renewables is lacking. 
Transport
Reform of state-owned
enterprises in transport has started but the tariff system has not
substantially changed. Steps have been taken to streamline the
organisation of MÁV (state railways) and Volán (interurban bus) groups. The
year 2013
was the first when there was no need to provide additional state financing to
MÁV,
and its
debt stock is now on a downward path. The current 24 Volán companies will be consolidated
into seven
regional ones in 2015. No substantial
changes have been adopted to the tariff system, although a systematic review was
announced in the Széll Kálmán Plan and the NRP acknowledges that revenues can
be increased by increasing the number of paying passengers. The express train
supplements introduced in 2013 do not appear to be the appropriate substitute
for a tariff reform.
Sustaining an adequate level of public
service continues to be a challenge. Annual
operational costs of the Budapest transport company (BKV) are expected to
increase by 5.6 %, mostly due to the launch of the new metro line (March 2014).
In this context, the 10 % reduction in
the price of monthly tickets from January 2014 does not seem to be well justified.
For
2013, BKV’s
financing need from the central state budget was HUF 24 billion,
that is broadly
the same as in previous years. Their own revenue-generating
capacity is expected to be reinforced only after the introduction of a new
electronic ticketing system in 2017. At the
same time, although preparatory works have been completed, the decision on the
introduction of congestion charging is still being delayed. The
fact that, in Budapest, a third of commuters travel more than an hour to work[62]
emphasises the need for efficient (public) transport, if the city is to
preserve its competitiveness. While the NRP gives no indication on
plans for local transport, government decision on Budapest public transport (1164/2014)
may be linked to the preparation of revenue increasing measures. For rail, the
direct award of public service contracts for the entire network will de facto
prevent competition in the sector for the next decade. [63]
The maintenance of transport
infrastructure and rolling stock, causing high operating costs and
pollution, is an issue of increasing concern. The state of the
rail and waterway infrastructure continues to be a barrier to competitiveness
and the implementation of EU programmes supporting them are considerably
delayed. Furthermore, Hungary intends to reduce drastically the support to
urban transport in the next programme phase. An important step to raise
revenues was the introduction of distance-based charging of heavy goods
vehicles, but it does not provide incentives for fleet renewal. The draft
Hungarian National Transport Strategy identifies an
increase of navigable days among measures offering
outstanding utility; there seem to be no plans to ensure stable fairway
dimensions for the Danube throughout the year, resulting in significantly reduced transport volumes.
Environment
Recycling is not adequately developed in
  Hungary.
In 2012, Hungary landfilled as much as 65 % of its municipal waste and recycled
only 21 %; this
latter figure is below the EU average.[64]
Managing waste efficiently and fulfilling the obligations under the
EU Directives on waste remains a challenge.[65]

Environmental protection can
substantially reduce public contributions. Between 2002
and 2013, the
total direct costs recorded for the 10 major floods were at least € 1 400
million. Air
pollution in Hungary is responsible for 11 400 premature deaths a year with
total external costs in the range of € 5-17 billion/year and a substantial part
of this is attributable to road traffic.[66] While
the details of the electro-mobility plan announced in the NRP are not known
yet, it may only be considered as part of a possible long-term solution to the
problem.

3.5.                
Modernisation of public administration

Low
levels of government effectiveness and high administrative burden have been
long-standing problems in Hungary. As assessed in the 2014 in-depth
review, Hungary's position in international competitiveness rankings continues
to deteriorate over time and the institutional set up plays a role in this.[67] As
from 2011, the government has been tackling some of these challenges by
implementing the Magyary programme in the area of public administration modernisation
and the Cutting Red Tape programme. Corruption is perceived as a widespread
problem, while public procurement lacks transparency and competition. Moreover,
  Hungary was called by the Council to strengthen its judiciary.
In
2013, Hungary received a CSR concerning public administration, competition in
public procurement, corruption and the judiciary. The
analysis in this staff woking document leads to the conclusion that Hungary has fully addressed the recommendation on judiciary, made some progress on measures
taken to address the administrative burden reduction and limited progress on
the other elements of this recommendation.
Administrative
burden
The
Magyary programme brought about significant improvements in the responsiveness
of public administration and further improvements are planned in
the 2014 NRP which announced a tenfold extension of the one-stop shops
(“government windows”). On the other hand, administrative capacities,
especially human resources skills, could be further improved to increase public
administration effectiveness. The development of the public service career
model, the continuation of which is announced in the 2014 NRP, is a key element
in this area[68].
The NRP also announces the development of a new Magyary programme 2014-20 to
provide a strategic framework of the public administration modernisation in
parallel with the EU development policy cycle. 
The
Cutting Red Tape programme was introduced to reduce the administrative burden
on businesses. Most of the planned measures have been implemented and the
government has announced that the initial target of a 25 % reduction of
administrative burden has been achieved. Nevertheless, the business sector
continues to report a high level of administrative burden.[69] Moreover,
the estimation of programme results is based on an ex-ante estimate and
there are neither publicly available data from the
monitoring phase nor evaluations to support it. Most
notably, the estimated impact does not take into account newly emerging burdens
and compliance costs stemming from the introduction of new regulations, e.g. a
number of new corporate surcharges. The government has announced a new
simplification package, but details are still unknown. The main measure
announced is an expansion of the business portal, but its first version is
still under development. A well-structure portal could contribute significantly
to the reduction of the administrative burden on businesses, especially SMEs.
Online public services in Hungary are in general not very user-friendly and it is
possible to further improve e-governance services.[70]
Currently, take-up by citizens and businesses is reasonable, reflecting their
interest in the digitalisation of paper-based public services. Recently,
improvements have been introduced in the Point of Single Contact portal, but it
is still far from realising its full potential in terms of administrative
simplification, in particular because of the low number of electronic
procedures that can be completed online. Due to the limited information
available to non-Hungarian speakers, it is of limited usefulness for Foreign
Service providers.
The country has significant potential to
improve its performance with customs. The time
taken to process imports and exports could be reduced to cut business costs and
facilitate trade.[71]
Corruption
Corruption
in public administration remains a matter of concern. A
few studies have examined corruption in Hungary. [72] The
Anticorruption Report points to a long-lasting presence of ‘institutionalised
legal corruption’ driven primarily by political cycles.
Such corruption does not involve direct bribery; rather ‘it operates through
contractual relationships which benefit the highest echelons of the political
and business elite.’[73]
Earlier research examining local government corruption shows a similar
picture: business and government corruption has become institutionalised, it is
spreading and getting more complex, i.e. "simple bilateral relations"
have been replaced by chains with many actors. The political elite and the
government in particular, have a determining role in the development of
corruption and its fight.[74]
In the 2013 Transparency International Corruption
Perception Index,[75]
  Hungary ranks 20th among EU Member States. Among the most
prominent cited weaknesses, there is legislation often serving political
interests instead of the common good and favouritism towards certain economic
interest groups. These outcomes can partially be explained by shortcomings in
the system of financing to political parties and by the low effectiveness of
control mechanisms, especially for public procurement.
At
local level, there are persistent concerns related to close informal relations
between businesses or individuals and members of the public administration. The
EU Anti-corruption Report shows that corruption is perceived as widespread
(89 % of respondents). A high number of people (the 3rd highest in the EU)
indicate that they have had personal experience of bribery in Hungary, but with a clear concentration on a limited number of sectors, namely
healthcare (which provides the bulk of instances of bribery), construction,
water and waste management and training services.[76] Such
informal ties could influence procurement outcomes. For example, a recent study
has shown that bid-rigging is encountered relatively frequently in Hungary.[77]
Regarding the EU's Structural Funds, the
current project selection procedures are in general compliant with the rules
but are rather complex and not transparent. In the first
place, there is a high concentration of priority projects in Hungary, under which competition is restrained.[78]
Since July 2012, following a limited absorption of EU funds under the 2007-13
programmes, important decisions on the use of EU funds, in particular grant decisions
for projects of national or regional importance, are taken by the government's
National Development Committee. This reorganisation of the implementation
system coupled with the ambitious spending targets for 2014-15 could
considerably weaken transparency in terms of selecting the best quality
projects. EU audit findings provide evidence of cases where EU funds in Hungary
in the 2007-13 programming period have been used not in accordance with the
rules, for example through consortia or companies with unclear ownership
structures which were set up only to obtain a contract.[79]
Some
steps have been taken to implement integrity strategies and to promote better
transparency standards within the public administration, but implementation may
be complicated. Hungary has approved the Code of
Professional Ethics and is implementing an integrity and prevention-oriented
programme within its public administration. It also took steps to promote
higher transparency standards. Moreover, a whistle-blower act was approved, but
it lacks adequate measures to support whistle-blowers.[80] The
NRP 2014 proposes a new, secured, electronic whistleblowing system to protect
the anonymity of whistle-blowers. The two announced measures, an information
campaign and the examination of corruption risks as part of the mandatory
impact assessments, are steps in the right direction, but their usefulness will
have to be proved in practice.
Judiciary
Hungary has
addressed the concerns raised in the 2013 European Semester process in relation
to the judiciary. It has removed from the Fundamental law
the clause on European Court of Justice judgments entailing payment obligations
and the clause giving powers to the President of the National Judicial Office
to transfer cases from one court to another. Hungary has also taken measures
following the judgment of the European Court of Justice[81] in
which the Court ruled that the sudden lowering of the mandatory retirement age
for judges, prosecutors and public notaries violated EU equal treatment rules. 
Public
procurement
A
low level of competition in public procurement persists. Although
the new Public Procurement Act has repealed a non-transparent and
discriminatory rule according to which only SMEs could be invited to submit
offers below a certain procurement threshold, the implementation still suffers
from significant shortcomings. Available evidence suggests that direct
award of contracts continue to be extensively used, in some cases on questionable
grounds.[82] It
significantly raises costs of procurement, reduce value for money, and distort
the functioning of the market by excluding potential contractors. This is of
particular concern as it prevents the Single Market for public procurement from
delivering its full economic potential and from ameliorating the current
Hungarian fiscal situation. A ‘soft law’ instrument is currently being drafted
by the Ministry of National Development and may enhance transparency in low-value
procurements.[83]
Public procurement plays a crucial role
in EU-funded projects but it is not effective enough in preventing corruption. The
administrative burden on tenderers is highin Hungary and this results in a low
number of bids per public tender. In fact, Hungary
ranked 4th lowest
in market competitiveness according to the ‘Cost-effectiveness study’ with an
average of 3.5 bids per tender (EU average 5.4). The high frequency
of tenders obtained by some specific contractors and bidding by consortia
involving the major actors of the market are signs for limited or distorted
competition that materialise in investment costs being often higher in Hungary
than the EU average, as assessed by JASPERS experts.
In
fact, empirical analysis of public procurement under EU funds in Hungary[84]
suggests that, on average, a fifth of available public procurement budget is
lost, with corruption explaining 69 % of this direct public loss. Such
direct public losses are due to limited performance of projects, and are mostly
due to a high occurrence of cost overruns (77 % of all available cases), but can
also be caused by delays in implementation or loss of effectiveness (including
inferior quality and questionable usefulness).
E-procurement
could generate significant cost savings, improve the transparency of public
procurement and increase competition. Overall, the
introduction of e-procurement would be an opportunity to rethink the way public
procurement is organised and a key element for leveraging smart procurement. Hungary is one of the few EU Member States in which the electronic submission of tenders is
not used in practice, although theoretically available. Since July 2013, a
public procurement database is available online and must be updated by all
tenderers. However, it is not completely transparent, as due to design
weaknesses data is sometimes not coherent and the database does not allow for
meaningful searches or researches.[85]

4.        
Conclusions  

Following a long
period of low or negative GDP growth rates started already before the financial
crisis, the Hungarian economy is experiencing positive growth in recent
quarters. The
weak growth until end 2012 was mainly due to subdued
domestic demand on account of a rapid pace of
de-leveraging and an uncertain business environment. The latter
mainly concerns certain subsectors of the service sector, where specific taxes
have been extended and restrictions to competitions increased. Economic
activity has picked up again in 2013, propelled by a substantial inflow of EU
funds, and unemployment has started decreasing. At the same time, the general
government deficit reached 2.2% of GDP in 2013 and the debt-to-GDP ratio
declined to 79.2 %, but the latter is not on a firm decreasing path yet. 
The analysis in
this staff working document leads to the conclusion that Hungary has made limited overall progress in addressing the 2013 country-specific
recommendations. Challenges identified in July 2013 remain broadly
valid. Even though some progress has been made regarding fiscal consolidation,
the composition of the fiscal adjustment has not been restructured towards more
growth friendly policies. A sustained increase in the primary expenditure ratio
was partly compensated by additional non-tax revenues, while the tax burden
slightly exceeded the 2012 level. Fiscal policy heavily relies on surtaxes in
few service sectors, affecting firms providing intermediate inputs for most
corporates, thus hampering the competitiveness of the Hungarian economy and
diverting investments. In the financial sector, the tax burden, coupled with a
high share of non-performing loans has discouraged banks from expanding lending
activities. The Funding for Growth scheme has brought temporary relief, but
cannot substitute for a normal operating environment on a permanent basis.
Overall, corporate taxation remains complex and high in regional
terms.
The still high tax burden on low-income earners constitutes a disincentive to
employ low-skilled workers. The Public Work Scheme aims at employing long-term
unemployed, including low skilled people. This Scheme, together with economic
growth and steps taken to increase women's participation into the labour
market, has helped curbing unemployment and raising the country's persistently
low employment rate. However, the expansion of the Public Work Scheme is not a
sustainable policy approach as it absorbs the majority of resources for active
labour market policies, without being an efficient measure for open labour
market integration. Despite an improved employment rate, the social protection
system, including tightened social transfers and the very short entitlement period
for unemployment benefit, has a limited effect on reducing poverty. To address
the existing skills mismatch on the labour market, and therefore sustainably improve
employment level, the government introduced a new dual vocational education
system and increased training opportunities. In the business environment, while
entry costs in the service sector have further increased, measures to tackle
corruption were enacted and steps were taken to increase transparency of public
procurement and to reduce the administrative burden. An effective
implementation of those measures will be required to increase efficiency of
public spending, also for programmes to be co-financed by EU funds.
The 2014 national
reform and CPs contain a detailed assessment of reform measures as well as
macroeconomic and fiscal projections. However, the
documents rather give account of previous reform efforts, while proposing
future reform plans only in very few cases. The CP headline deficit targets
have been significantly revised upwards since last year; Hungary now aims to bring the deficit down from 2.9% of GDP in 2014 to 1.9% in 2017 mainly
through a policy of general expenditure containment. 

Overview table
 
 2013 commitments || Summary assessment[86] 
 Country-specific recommendations (CSRs) 
 CSR 1: 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 and enhance the transparency 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. || Hungary has made some progress in addressing CSR 1:   ·  Some progress in fiscal consolidation. In 2013, the deficit target and the country’s medium-term objective were overachieved by a considerable margin. The deficit is expected to be kept below the 3% of GDP deficit threshold in subsequent years as well, but it is projected to rebound close to 3% with the structural balance deviating significantly from the medium-term objective. Decreasing only very gradually, the debt ratio is not yet on a firm downward path. The composition of fiscal adjustment remained largely unchanged. Primary expenditures show an increase both in 2013 and 2014, while the tax burden slightly exceeds the elevated 2012 level   ·  Some progress on fiscal governance. Amendments approved to the fiscal framework in December 2013 include, among others, new numerical rules to ensure compliance with the Stability and Growth Pact provisions and the long overdue strengthening of medium-term budgetary framework as well. Design flaws with domestic rules, however, still exist and the effectiveness of the new set-up is yet to be ensured. Further reinforcement of the Fiscal Council by broadening its mandatory remit is still lacking and not intended to change for the time being, which does not conducive to improving the transparency of public finances.. 
 CSR 2: 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. || Hungary has made limited progress in addressing CSR 2:    ·  Limited progress on restoring normal lending. Net lending flows to the corporate sector became positive in Q3 2013 purely due to influence of Funding for Growth scheme; they returned to negative levels in Q4 2013 and Q1 2014. Net lending flows toward households remained negative. Hence, normal lending has not yet been restored.   ·  No progress on reducing the regulatory burden on the financial sector, as it was actually increased.   ·  Limited progress on removing bad assets. Portfolio quality declined for households. The government has opened the possibility for borrowers overdue by 90 days to enter into the exchange rate cap scheme. The central bank has announced it will start a project to investigate obstacles to portfolio cleaning. As a response to the high share of problematic loans in the corporate sector, the central bank has opened the possibility in the Funding for Growth Scheme to buy commercial real estates that served as collateral of non-performing loans.   ·  No progress on moral hazard. Government has announced it will prepare a ‘final’ foreign exchange relief scheme. However, details are not yet available.   ·  Substantial progress on supervision. A law was adopted to merge the Hungarian Financial Supervisory Authority and the central bank (MNB). The new MNB law equips the central bank with macro-prudential policy tools, as it has become the dedicated macro-prudential authority. Under the new law, the MNB is equipped with the ‘comply or explain principle'. Work on a bank resolution regime is in progress, expected to be adopted in 2014. 
 CSR 3: Ensure a stable, more balanced and predictable corporate tax system. Streamline corporate taxation and minimise distortions of resource allocation created by sector-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. || Hungary has made limited progress in addressing CSR 3:      ·  No progress on corporate taxation. No sector-specific taxes (e.g. energy, telecoms and finance sectors) have been phased out or reduced, and no streamlining has taken place in the corporate taxation area, with all existing corporate tax regimes which were maintained. Moreover, a significant increase in the rate of the financial transaction duty (FTD) was adopted in 2013 and a one-off charge has been levied on economic actors affected by FTD.   ·  Limited progress on labour taxation. Very marginal modification has been made for improving labour market participation of parents with three or more children returning to the labour market in the Job Protection Act. No other step to refine the eligibility has been taken. Extension of the family tax credit to employees’ social security contribution helps in reducing the tax burden of families who could not previously use the benefits of the family tax credit. However, it is not specific to low income earners. On environmental taxation: although Hungary is already in line with the EU average, there is still potential for additional revenue from it, especially in view of the fact that the implicit tax rate on energy is significantly below the EU average. Hungary has made some progress in addressing the recommended tax shift to environmental taxes: in the waste sector, procedures for paying landfill as contribution fees entered into force.   ·  Some progress on tax compliance. According to the government, all tax-related elements announced in the administrative burden reduction programme launched in 2011 have been implemented, but there is no methodologically sound, publicly available assessment on the impacts of these measures. Although the government has started the online connection of all retail and service sector cash registers to the tax authority, in order to reduce the size of the shadow economy, the establishment of online links has suffered repeated delays. Measures were supposed to be fully rolled out by 1 April 2013, but by early April 2014, only some 30 % of cash registers were online.   
 CSR 4: 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 childcare 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. || Hungary has made some progress in addressing CSR 4:    ·  Some progress has been made in the field of youth employment. The government has taken a number of measures to increase their participation in the labour market, including The Youth Guarantee implementation plan which has been launched. Some fine-tuning of the implementation and monitoring system is needed and acceleration of the full launch is to be considered.   ·  Some progress on active labour market policies as further resources have been earmarked coming from EU funds for service provision, training and capacity development of the public employment service. Launch of profiling system needs to be accelerated.   ·  Limited progress in strengthening activation (training) elements of the public works scheme; further improvement is needed to provide better services and differentiated training pathways.   ·  No progress in reducing public works scheme dominance, as its size was even increased.   ·  Substantial progress in expanding childcare facilities. Sufficient funding should be scheduled in the coming years, and results are to be assessed in the longer term.   ·  Limited progress in implementation and alignment of the National Social Inclusion Strategy into other policies. Poverty situation calls for further efforts. 
 CSR 5: 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 full implementation of measures envisaged to reduce the administrative burden, improve competition in public procurement and take further adequate measures to tackle corruption. Strengthen further the judiciary. Remove recently introduced barriers in the services sector, including in retail services. Provide targeted incentives to support innovative enterprises. || Hungary has made limited progress in addressing CSR 5:   ·  The business environment has not improved as indicated inter alia by most recent international competitiveness surveys.   ·  No progress was achieved on services, including retail. No barrier was removed; on the contrary new ones were introduced in 2013 and early 2014.   ·  Some progress on administrative burden reduction. Implementation of the Cutting Red Tape programme has been started in ten areas (e.g. taxation, administrative procedures, public procurement, statistical data collection, etc.). While the Cutting Red Tape programme is a step in the right direction, the desired impact is yet to be felt by businesses. Hungary’s ranking in international competitiveness reviews is deteriorating..   ·  Limited progress on corruption. Corruption is a long-lsting problem in the country, and government's efforts to tackle corruption have to be consistently supported in the medium term, as so far only limited progress has been made by implementing elements of the anti-corruption programme.   ·  Some progress on public procurement. Concerns regarding the rule according to which below certain thresholds only SMEs could participate have been partially addressed. A ‘soft law’ instrument is also planned to be adopted. The situation regarding direct awards and overall transparency of public procurement has not improved, including under EU funds financed programme.   ·  Some progress on innovation. Research and Development expenditures in Hungary have constantly increased in the last 3 years and Hungary seems more or less in line with its 2020 target. However, the public R&D intensity (public sector expenditures on R&D, as % of GDP) decreased from 0.48 % in 2009 to 0.43 % in 2012. Some positive signs linked to the approval of National Research and Development and Innovation Strategy (2013-2020) ‘Investment into the Future’ (RDI strategy 2013-2020). However, there is clearly still a possibility to improve the framework conditions to support young and fast-growing innovative companies, and to exploit the presence of large multinational companies active in high-tech and medium-tech sectors in Hungary. The smart specialisation strategy  is considerably delayed as well as the market failure analysis for identifying financing needs of innovative enterprises.   ·  Fully implemented the recommendation on judiciary. Hungary has adopted the Fifth Amendment to the Hungarian Fundamental law, which inter alia removed from the Fundamental Law the clause on Court of Justice judgments entailing payment obligations and the clause giving powers to the President of the National Judicial Office to transfer cases from one court to another. Hungary has also taken measures following the judgment of the Court of Justice in case C-286/12 in which the Court ruled that the sudden lowering of the mandatory retirement age for judges, prosecutors and public notaries violated EU equal treatment rules.   
 CSR 6: 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, for those with disadvantages, in particular 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. || ·  Hungary has made limited progress in addressing CSR 6:   ·  No progress on Early School Leaving. The approval of the national strategy on early school-leaving is still delayed, so there was real no possibility to implement it. The rate of early school leavers increased in 2013, yet again.   ·  Some progress on labour-market-relevant skills, competences and qualifications. Vocational and educational training reform has been launched to ensure better labour market skills for students through a dual model. Monitoring of the changes is essential for timely intervention if needed. Schools do not equip their pupils with the basic skills needed to join the labour market and to participate in lifelong learning programmes.   ·  No progress on access to inclusive mainstream education, in particular for Roma. Equal access to mainstream quality education is still a major problem for disadvantaged children. The number of Roma majority schools has increased.   ·  Limited progress on higher-education reform that enables greater tertiary attainment. Hungary would need to do more to ensure that implementing the higher education reform improves access to education for disadvantaged people.   
 CSR 7: 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 operating costs and increasing revenues. || ·  Hungary has made limited progress in addressing CSR 7:   ·  No progress on energy. Regulated energy prices were cut by 20 % in 2013 and further cuts in the regulated price are scheduled in 2014, for both electricity and gas. In combination with other measures (e.g. taxes in the energy sector), these price cuts have had a negative impact on the investment climate in Hungary in the energy sector and possibly beyond. They have resulted in a more concentrated energy sector with less competition and opportunity for investment and in higher industrial costs in relative terms.   ·  The independence of the national regulator has not improved in practice, as the minister can dismiss its proposals.   ·  Limited progress on state-owned transport enterprises. Some progress in restructuring the state-owned enterprises (MÁV and Volán), in harmonising their operations through the elimination of competition between rail and bus services, but only limited progress was achieved on the implementation of potentially revenue increasing measures. 
 Europe 2020 (national targets and progress) 
 Policy field target ||  Progress achieved 
 Employment rate target: 75% || Employment rate 60.7 % in 2011, 62.1 % in 2012 and 63.2 % 2013. The employment rate has further increased in 2013, but the pace of improvement is still not enough to achieve the Europe 2020 target and substantially reduce the difference from the EU average. Open labour market participation is still a concern. Youth unemployment is still worrying. 
 Early school-leaving target: 10 % || Early leavers from education and training (percentage of the population aged 18-24 with at most lower secondary education and not in further education or training): 2010 - 10.5 %, 2011 - 11.2 %, 2012 - 11.5 %, 2013 - 11.8%. The figures are particularly high among vocational school students (30 %) and among Roma (seven times higher than in the non-Roma population; i.e. 82 %). 
 Tertiary education target: 30.3 % || Tertiary educational attainment: 28.1 % in 2011, 29.9 % in 2012 and 31.9 % 2013. Therefore, Hungary has already overachieved the national target, which is one of the lowest among EU Member States. Risks stem from a declining number of applicants to higher education due to policy uncertainties. 
 R&D target: 1.8% of GDP and 3% by 2030 || Hungary seems on track to reach its R&D intensity target for 2020, thanks to an increasing trend in business expenditure on R&D. However, public R&D intensity (public sector expenditures on R&D, as % of GDP) decreased from 0.48 % in 2009 to 0.43 % in 2012. Data for 2013 are not available yet. R&D intensity grew in 2007-12 by 5.7 % a year reaching 1.3 % in 2012. The average annual growth required to hit the 2020 target is slightly lower at 4.2 %. According to the commitments (new Research and Development and Innovation strategy), Hungary will increase its research and development expenditures to 1.8 % of GDP by 2020 and 3 % by 2030. A complementary target is that business expenditure on R&D will reach 1.2 % by 2020. 
 Target on the reduction of population at risk of poverty or social exclusion in number of persons: 450 000 || 3.05 million People were at risk of poverty or social exclusion in 2011, close to 3.19 million in 2012 and  3 285 in 2013 (against a 2008 baseline of 2.83 million). The trends are worsening; even more people are at risk of poverty than before. No improvement was achieved in this target. 
 Greenhouse gas (GHG) emissions target: +10 % (compared to 2005 emissions, ETS emissions not covered by this national target) || Change in non-ETS greenhouse gas emissions between 2005 and 2012: -21 %.   According to the latest national projections and taking into account existing measures, the target is expected to be achieved: -16 % in 2020 compared to 2005 (with a margin of 26 percentage points). 
 2020 renewable energy target: 14.65 %  Share of renewable energy in all modes of transport: 10 % || Proportion of renewable energy sources in 2012: 9.6 % Proportion of renewable energy sources in transport in 2012: 4.6 % 
 Energy efficiency target:     By 2020: level of 26.6 million tonnes of oil equivalent (Mtoe) primary consumption and 18.2 Mtoe final energy consumption.   || Hungary’s primary energy consumption was 23.57 Mtoe in 2012, and its final energy consumption was 14.74 Mtoe, according to preliminary data from Eurostat. Hungary notified the policy measures it plans to adopt to implement Article 7 of the Energy Efficiency Directive. However, the National Energy Efficiency Action Plan and the Building Renovation Strategy (both due on 30 April 2014) are still missing.   In the 2014 NRP, the government has revised from 10 % to 18% its energy saving target, but compared to the 2012 consumption, the target actually allows a 24% increase. This appears as "saving" because the "business as usual" scenario forecasts a worrying 53% increase in 8 years. 

Annex

Standard tables
Table
 I. Macro-economic indicators
Table
II. Comparison of macroeconomic developments and forecasts 
Table
III. Composition of the budgetary adjustment 
Table
IV. Debt dynamics 
Table
V. Sustainability indicators
Table
VI. Taxation indicators
Table
VII. Financial market indicators
Table
VIII. Labour market and social indicators
Table
IX. Product market performance and policy indicators
Table X. Green Growth
List of indicators used
in on
  Box 6
on
the
potential impact on growth of structural reforms. 
Final goods sector mark-ups: Price-cost
margin, i.e. the difference between the selling price of a good or service and
its cost. Final goods mark-ups are proxied by the mark-ups in selected services
sectors (transport and storage, post and telecommunications, electricity, gas
and water supply, hotels and restaurants and financial intermediation but
excluding real estate and renting of machinery and equipment and other business
activities[87]).

Source: Commission services estimation
using the methodology of Roeger, W. (1995). "Can imperfect
Competition explain the Difference between primal and dual Productivity?" Journal
of Political Economy Vol. 103(2) pp. 316-30, based on
EUKLEMS 1996-2007 data. 
Entry costs: Cost of
starting a business in the intermediate sector as a share of income per capita.
The intermediate sector is proxied by the manufacturing sector in the model. 
Source: World Bank, Doing Business
Database. www.doingbusiness.org; 2012 data.
Implicit consumption tax rate:
Defined as total taxes on consumption over the value of private consumption. In
the simulations it is used as a proxy for shifting taxation away from labour to
indirect taxes. The implicit consumption tax-rates are increased (halving the
gap vis-à-vis the best performers) while labour tax-rates are reduced so that
the combined impact is ex-ante budgetary neutral.
Source: European Commission, Taxation
trends in the European Union, 2013 edition, Luxembourg, 2013. 2011 data.
Shares of high-skilled and low-skilled: The
share of high skilled workers is increased, the share of low-skilled workers is
reduced (halving the gap vis-à-vis the best performers). Low-skilled correspond
to ISCED 0-2 categories; high-skilled correspond to scientists (in mathematics
and computing, engineering, manufacturing and construction). The remainder is
medium-skilled. 
Source: EUROSTAT. 2012 data or latest
available. 
Female non-participation rate: Share
of women of working age not in paid work and not looking for paid work in total
female working-age population
Source: EUROSTAT. 2012 data or latest
available.
Low-skilled male non-participation rates:
Share
of low-skilled men of working age not in paid work and not looking for paid
work in total male working-age population
Source: EUROSTAT. 2012 data or latest
available.
Elderly non-participation rates (55‑64
years): Share
of the population aged 55‑64 years not in paid work and not looking for paid
work in total population aged 55‑64 years.
Source: EUROSTAT. 2012 data or latest
available.
ALMP: Active Labour
Market Policy expenditures as a share of GDP over the share of unemployed in
the population. 
Source: EUROSTAT. 2011 data or latest
available.
Benefit replacement rate:  Share
of a worker's pre-unemployment income that is paid out by the unemployment
insurance scheme. Average of net replacement rates over 60 months of
unemployment. 
Source:
OECD, Benefits and Wages Statistics. www.oecd.org/els/benefitsandwagesstatistics.htm.
2012 data.
[1] COM(2013) 800 final.
[2] COM(2013) 790 final.
[3] Aside from the 16 Member States identified
in the AMR, Ireland was also covered by an in-depth review, following the
conclusion by the Council that it should be fully integrated into the normal
surveillance framework after the successful completion of its financial
assistance programme. See http://ec.europa.eu/economy_finance/economic_governance/macroeconomic_imbalance_procedure/index_en.htm 
[4] 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.
[5] In particular, the gradual phasing-in of the teachers' new wage
system together with the piecemeal take-up of the Job Protection Act's simplified
taxation schemes would increase the deficit annually by 0.1-0.2% of GDP in 2015
and beyond, while the temporary savings due to the lower initial costs are to
be absorbed by other budgetary measures in 2014. By contrast, the 2013 convergence
programme assumed that the full costs of the new wage system and the Job
Protection Act would materialise by 2014.
[6] See
Table V in Annex. The medium-term sustainability gap (S1) indicator shows the
upfront adjustment effort required, in terms of a steady improvement in the
structural primary balance to be introduced until 2020, and then sustained for
a decade, to bring debt ratios back to 60% of GDP in 2030, including financing
for any additional expenditure until the target date, arising from an ageing
population. The following thresholds were used to assess the scale of the
sustainability challenge: (i) if the S1 value is less than zero, the country is
assigned low risk; (ii) if a structural adjustment in the primary balance of up
to 0.5 p.p. of GDP per year until 2020 after the last year covered by the
autumn 2013 forecast (year 2015) is required(indicating an cumulated adjustment
of 2.5 pp.), it is assigned medium risk; and, (iii) if it is greater than 2.5
(meaning a structural adjustment of more than 0.5 p.p. of GDP per year is
necessary), it is assigned high risk.
[7] See
Table V. The long-term sustainability gap (S2) indicator shows the immediate
and permanent adjustment required to satisfy an inter-temporal budgetary
constraint, including the costs of ageing. The S2 indicator has two components:
i) the initial budgetary position (IBP) which gives the gap to the debt
stabilising primary balance; and ii) the additional adjustment required due to
the costs of ageing. The main assumption used in the derivation of S2 is that
in an infinite horizon, the growth in the debt ratio is bounded by the interest
rate differential (i.e. the difference between the nominal interest and the
real growth rates); thereby not necessarily implying that the debt ratio will
fall below the EU Treaty 60% debt threshold. The following thresholds for the
S2 indicator were used: (i) if the value of S2 is lower than 2, the country is
assigned low risk; (ii) if it is between 2 and 6, it is assigned medium risk;
and, (iii) if it is greater than 6, it is assigned high risk.
[8] In 2013, the tax-to-GDP ratio in Hungary was 38.9 %, compared with
35.4 % in the Czech Republic, 32 % in Poland and 29.2 % in the Slovak Republic. Regarding the tax wedge on a low- income earner, in 2012 it was 47.6 %,
i.e. the highest in the EU except for Belgium (for an analysis of the effect of
reduced social security contributions under the Job Protection Act for selected
categories of workers, see section "Taxation of labour and potential for
tax shifting"  ).
 See:   http://ec.europa.eu/economy_finance/publications/european_economy/2013/pdf/ee5_en.pdf.

[9] CPB (2013): Study to quantify and analyse the VAT Gap in the EU-27
Member States – Final report. Web:
http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/vat-gap.pdf
[10] IMF (2013), IMF Country Report No. 13/85): Hungary: 2013 Article IV Consultation and Third Post Program
Monitoring Discussions—Staff Report. p. 27.
[11] According to the latest available international statistics, in 2012,
  Hungary had the fifth highest implicit tax rate on labour in the EU — 39.8 %
in 2012, despite a considerable decrease from its peak level of 42.3 % in
2008.   
[12] There are only slight modifications. One modification is related to
an extension of the duration of the social security contribution allowance to
five years for parents with at least three young children. The other relates to
the introduction of a tax deduction for those employees of companies under the
newly introduced small business tax (KIVA) who otherwise would be eligible for
an extra social security contribution allowance (i.e. former long-term
unemployed, women returning from maternity leave and career starters).
[13] In practice, there is no effect on families with one child. Among
families with two children, it has some very marginal effect only for the very
low wage earners (3 percentage points reduction in the labour tax wedge for
minimum wage earners which fades at 120 % of the minimum wage).
[14] http://ec.europa.eu/economy_finance/publications/european_economy/2013/pdf/ee5_en.pdf.

[15] European Commission (2014) Commission Staff Working Document
accompanying the document Report from the Commission to the Council and the
European Parliament on the application of Council Regulation (EU) No 904/2010
concerning administrative cooperation and combating fraud in the field of VAT,
SWD(2014)39 final. 
[16] In April 2013, the Hungarian National Bank (MNB) approved the Funding
for Growth scheme (FGS) which is built around three pillars. Pillar 1: granting
new loans to SMEs — the MNB offers commercial banks funds at 0 % interest rate,
which banks can lend to SMEs at a maximum of 2.5 %. Pillar 2: conversion of
existing foreign currency loans into forint loans, with interest rates capped at
2.5 %. Pillar 3: decrease the outstanding amount of two-week MNB bills by 20 %
to reduce Hungary’s gross external debt. In the first phase of the FGS, HUF 701bn
were utilised (of a total available of HUF 750bn), out of which HUF 290bn (1 %
of GDP) was recorded as new credit; the rest was used to refinance debt (of
which HUF 229bn was foreign currency). After the first phase, the FGS was
expanded to a maximum potential size of HUF 2.75 trillion (i.e. close to 10 %
of GDP or two thirds of the 2012 SME loan stock) running until end-2014. However
as a first step a HUF 500 bn envelope was announced in the second phase, where
only 10 % of loans could be used for refinancing. Eventually in this second
phase of the program (until March 2014) only a limited amount (HUF 85 bn) was
allocated. Possibly as a response to this the MNB loosened some criteria of the
scheme in early April. See details at: http://english.mnb.hu/Monetaris_politika/funding_for_growth_scheme
[17] According to composite indicators devised by Cuerpo et. al. (2013),
credit supply pressures in Hungary are among the strongest in the EU. Moreover,
the magnitude of extra taxes and regulatory burdens on financial corporations stands
in the range of 1.25-1.5 % of GDP while the sector has a value added of less
than 4 % of GDP. For a more detailed analysis see the 2014 in-depth review.
[18] These include: (i) the Szechenyi -card programme which provides
credit-card based, low-interest loans for SMEs. Moreover, it has also made
available EUR  0.75bn for export credit refinancing. (ii) programmes of the
Hungarian EXIM bank in the magnitude of HUF 500 bn for export financing. (iii)
special subsidized schemes for agricultural financing. Venture capital
continues to be available mostly via the JEREMIE programme.
[19] See box 6 in the 2011 April issue of the central bank's Report on
Financial Stability.
[20] See box 8 in the 2012 April issue of the central bank's Report on
Financial Stability.
[21] For example, based on the Report on Financial Stability of November
2013 by MNB, 25 % of the respondents who did not apply for the exchange rate
cap system said that they are waiting for a newer and better scheme.  http://english.mnb.hu/Root/Dokumentumtar/ENMNB/Kiadvanyok/mnben_stabil/stabilmnben_stab_jel_201311/Report%20on%20Financial%20Stability%20November%202013.pdf 

[22] See more details in the 2014 in-depth review on Hungary at box 3.2.
[23] This one-off effect is related to one bank, which has converted
parent bank funding to equity. http://www.portfolio.hu/vallalatok/penzugy/titokzatos_akcio_miatt_taltosodott_meg_a_magyar_bankszektor.195773.html.
[24] Magyar Nemzeti Bank (2013) "Report on Financial
Stability", November
[25]While generally being supportive of a unified macro- and micro-prudential
authority, the European Central Bank (ECB) expressed some concerns about the
way the new integrated supervisory framework was implemented. The critical
opinion was driven by the insufficient time allowed to the ECB to examine the
draft legislative provisions and by the lack of time for the transfer of
supervisory tasks for the HFSA. The ECB also raised its concerns about the
central 'bank's financial independence and issues related to the prohibition of
monetary financing after its merger with the HFSA. See details at http://www.ecb.europa.eu/ecb/legal/pdf/en_con_2014_15_f_sign.pdf
and http://www.ecb.europa.eu/ecb/legal/pdf/en_con_2013_71_f_sign.pdf.
[26] For further details, see the 2014 Joint
Employment Report, COM(2013)801, which includes a scoreboard of key employment
and social indicators.
[27] Pursuant to the Council Recommendation of 22 April 2013 on
establishing a Youth Guarantee (2013/C 120/01):
"ensure that all young people under the age of 25 years receive a
good-quality offer of employment, continued education, an apprenticeship or a
traineeship within a period of four months of becoming unemployed or leaving
formal education". Hungary presented a Youth
Guarantee Implementation Plan in December 2013, updated in April 2014.
[28] From HUF 64 billion in 2011; HUF 132 billion in 2012; to HUF 171 bn
in 2013. The allocation for 2014 is set at HUF 183.3 bn 
[29]  Károly Fazekas (et al.), The Hungarian Labour Market 2013 - Centre
for Economic and Regional Studies, Hungarian Academy of Sciences & National
Employment Non-profit Public Company Ltd.
[30] Half of the training participants received basic training in competence
development, one third become semi-skilled worker and 20 % gained a professional
qualification, responding to the needs of the public work employers. Altogether
200 000 people have been involved in the winter scheme between 1/11/2013 and
30/04/2014.
[31] In 2009, the capacity was 29 449, rising to 44 464 (+51 %) in 2012.
The capacity of crèches increased by 39 % and that of family day care centres
by 167 % (source: Central Statistical Office of Hungary).
[32]
http://ec.europa.eu/education/policy/strategic-framework/doc/pisa2012_en.pdf 
[33] FRA (2014), Poverty and Employment: The situation of Roma in 11 EU
Member States. Roma Survey and the National Social Inclusion Strategy.
[34] http://ec.europa.eu/europe2020/pdf/themes/01_public_finances_growth_friendly_expenditure.pdf
   
[35] http://www.kormany.hu/download/8/f9/b0000/Oktat%C3 %%%A1si_%C3 %%%89vk%C3 %%%B6nyv_2011_2012.pdf http://www.kormany.hu/download/c/93/21000/Oktat%C3 %%%A1si_%C3 %%%89vk%C3 %%%B6nyv_2012.pdf.
[36] Number of higher education students decreased from 359.824 in 2012
to 338.467 in 2013. 
[37] 43%
of the 0-17 age-group population is at risk of poverty or social exclusion (33.5%
for the total population in 2013) and 81 % of Roma. See also FRA (2014), Poverty
and Employment: The situation of Roma in 11 EU Member States.
[38] Employment and Social Development in Europe 2013(European
Commission)
[39] Hungary ranks among the seven worst performing Member State in the following areas: perinatal mortality, avoidable mortality (which includes
colon cancer, cancer of cervix uteri, cerebrovascular disease and ischaemic
heart disease), and breast cancer screening. (Source: Eurostat, ECDC, OECD,
WHO, Commission services).
[40] OECD (2010), Health Care Systems: Efficiency and Policy Settings,
OECD Publishing.
[41] According to the 2014 Special Eurobarometer on corruption, bribery
and informal payments are particularly prevalent in Hungary’s healthcare sector: http://ec.europa.eu/public_opinion/archives/ebs/ebs_397_en.pdf.
[42]The so called Visegrád
countries (V4) are: Poland, The Czech Republic, Slovakia and Hungary. Based on UNCTAD data on inward FDI stock to GDP, the country stood at the 42nd
place among the 198 countries in the sample. Although these figures are also
affected by the effect of capital in transit, Hungary’s net FDI to GDP position
was also relatively high at the 53rd place.
[43] The effect of the purchase of E.ON’s stakes by the Hungarian
state-owned energy company MVM, which increased FDI outflows in 2013.
[44] Calculations based on the Hungarian Central Statistical Office's
STADAT database.
[45] Those are cited by 75% of the interviewed CEOs as the main threats
to their businesses: http://www.pwc.com/hu/hu/kiadvanyok/magyarorszagi_vezerigazgato_felmeres/2014/assets/ceo-survey-2014-en-online.pdf.
Moreover, in the World Economic Forum 2013-2014 Global Competitiveness Report,
the most problematic factors for doing business reported by CEOs are: i) Access
to financing (16.3 % of respondents); ii) policy instability (15.9 %); iii) Tax
rates (12.1 %); iv) Tax regulations (10.7 %); v) Inefficient government
bureaucracy (9.9 %); and Corruption (9.4 %).
[46] For example, in 2012, the annual survey carried out by the
Hungarian-German Chamber of Commerce showed the lowest level ever of
respondents who would ‘again choose Hungary as preferred location for their
investment’ and Hungary now ranks as the 10th most attractive country for
German entrepreneurs in the Central and Eastern European region, whereas it
used to be among the top four investment destinations until 2008.
[47] See http://ec.europa.eu/economy_finance/publications/occasional_paper/2014/op180_en.htm. 

[48] On 16 April 2014, the Commission launched an infringement procedure
over this restriction, see:  http://ec.europa.eu/eu_law/eulaw/decisions/dec_20140416.htm#hu
[49] See European Commission (2013): ‘"Product Market Review 2013:
Financing the real economy’, DG ECFIN.
[50] See Bottini, N. –Molnár, M. (2010) "How Large are Competitive
Pressures in the Service Sector Markets?" OECD Journal: Economic Studies
2010/1. In addition allocative efficiency indicator (measuring the extent to
which the most productive firms have the largest market shares) for wholesale
and retail trade in Hungary is among the lowest in the EU. See European
Commission (2013): ‘"Product Market Review 2013: Financing the real
economy’, DG ECFIN.
[51] It is worth recalling that already in 2012 Hungary
adopted another amendment, which essentially prevents the Hungarian competition
authority from sanctioning cartels on agricultural products. On 16 April 2014,
the Commission issued a reasoned opinion on this case, and has formally requested
  Hungary to comply with its antitrust obligations under EU law. See: http://europa.eu/rapid/press-release_MEMO-14-293_en.htm 
[52] See for example, Martin József Péter (ed.), Transparency
International Magyarország,
"Mit választunk? Az
intézményrendszer és a költségvetés átláthatósága Magyarországon",
Budapest 2014 or http://www.crcb.eu/wp-content/uploads/2014/02/trvh_2013_riport_140214_1410.pdf.
[53] 65 % of aggregate research, development and innovation (RDI)
expenditure and 66 % of corporate RDI expenditure is concentrated in the
Central Hungary region, almost exclusively in Budapest.
[54] Only 13 % of Hungarian SMEs carry out innovation activities as opposed
to an EU average of 30 %. http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/performance-review/files/countries-sheets/2013/hungary_en.pdf
[55] Final goods sector mark-ups are the difference between the selling
price of a good/service and its cost. Entry cost refers to the cost of starting
a business in the intermediate sector. The implicit consumption tax rate is a
proxy for shifting taxation away from labour to indirect taxes. The benefit
replacement rate is the % of a
worker's pre-unemployment income that is paid out by the unemployment scheme.
For a detailed explanation of indicators see Annex.
[56] For a detailed explanation of the transmission mechanisms of the
reform scenarios see: European Commission (2013), "The growth impact of
structural reforms", Chapter 2 in QREA No. 4. December
2013. Brussels; http://ec.europa.eu/economy_finance/publications/qr_euro_area/2013/pdf/qrea4_section_2_en.pdf
[57] Low levels of new
graduates in science and engineering and of new doctoral graduates, place Hungary well below the level of countries with similar business R&D intensity, such as the Czech Republic. Only 5 % of Hungarian scientific publications are in the top 10 % most-
cited scientific publications, compared with the EU average of 11 %.
[58] The allocation of institutional funding for higher education
institutions and research organisations has until now been based on student
numbers, disciplines taught and the number of professors; funding allocation
was not based on competition. The draft Higher Education Strategy, planned for
adoption in autumn 2014, would raise the level of performance-based funding up
to 30 %.
[59] This further decreases gas prices by 6.5 % (as from 1st April 2014),
electricity prices by 5.7 % (as from 1st September 2014) and district heating
prices by 3.3 % (as from 1st October 2014) for households.
[60] 2012 Mérleg és Eredménykimutatás: Tigaz, GDF Suez, FOGÁZ Zrt., E.ON
Közép-Dunántúli és  Dél-dunántúli Gázhálózati,  ÉMÁSZ, EDF DÉMÁSZ, Elmu, E.ON
Hungária Energetikai Zrt.
[61] Commission study based on "Eurostat — Electricity prices for
domestic and industrial consumers and Gas prices for domestic and industrial consumers,
(2007-2013) — bi-annual data excluding VAT and other recoverable taxes and
levies". For Gas ratio we used I3 and D2 bands, while for electricity IC
and DC were used.
[62] With this, Budapest ranks among the worst performing cities in Europe: http://ec.europa.eu/public_opinion/flash/fl_277_en.pdf. 
[63] The contracts signed with MÁV START and GYSEV run for 10 years
starting 1 January 2014 and are supposed to provide a predictable operational
framework compatible with existing  EU law but their duration is not in line
with the Commission Proposal as regards the opening of the market for domestic
passenger transport services by rail (COM(2013) 28 final).
[64] http://epp.eurostat.ec.europa.eu/portal/page/portal/waste/key_waste_streams/municipal_waste

[65] Full implementation of the existing EU waste legislation could
create more than 13 300 jobs in Hungary and increase the annual turnover of the
waste sector by €1.4 billion, source: estimate based on
http://ec.europa.eu/environment/waste/studies/pdf/study%2012%20FINAL%20REPORT.pdf
[66] The calculations on floods are based on RPA (2014) "Study on
Economic and Social Benefits of Environmental Protection and Resource
Efficiency related to the European Semester". The remaining ones in the
paragraph are derived from the Impact Assessment for the Commission Integrated
Clean Air Package (2013), see: http://ec.europa.eu/environment/air/clean_air_policy.htm.
[67] The country has lost five places in the International Institute for
Management Development’s in the World Competitiveness Yearbook (down to 50th
from 45th in the 2012 report); three places in the Global Competitiveness
Report 2013-2014 (63rd from 60th); two places in the Doing Business ranking (54th 
from 52nd in 2013). According to the last World Economic Forum’s Global
Competitiveness Report 2013-2014, Hungary performs poorly in a number of
institutional indicators: Burden of Government Regulation (Hungary is 25th in
the EU); Efficiency of Legal Framework in Challenging Regulations (27th in the
EU); Favouritism in Decision of Government’s Officials (116th); Wastefulness of
Government Spending (110th); and Diversion of Public Funds (110th). Most of the
deterioration in these indicators took place until 2009; while since then these
indicators have remained broadly stable. See Chapter 4 of the 2014 in-depth
review.
[68] The development of the career model was already announced in the
2013 NRP, However only certain elements have been completed. Recent
reorganisations of the public administration (e.g. moving of competencies from
local authorities to government offices together with transfer of staff) have
resulted in important pay discrepancies.
[69] See the ‘3rd
Hungarian CEO Survey’ by PWC and in particular the assessment by businesses
that the costs of regulation they incur outweigh the social benefits. 
[70]  The results from the eGovernment Benchmark Survey (2012-2013) show
that public services in Hungary are either not yet entirely online,
disconnected or not very user- friendly: the User-Centric indicator, summarising
these characteristics, scores 45 % vs. 70 % for the EU-28.
[71] World Bank (2013). Doing Business 2014: Understanding Regulations
for Small and Medium-Size Enterprises. Washington, DC: World Bank Group.
[72] See for instance, http://www.crc.uni-corvinus.hu/index_e.html;
http://anticorrp.eu/wp-content/uploads/2013/09/Hungary-Corruption.pdf

[73] Controlling Corruption in Europe: The Anti-corruption Report —
Volume 1. See http://anticorrp.eu/wp-content/uploads/2013/09/Hungary-Corruption.pdf. 
[74] Szántó, Zoltán - Tóth, István János - Cserpes, Tünde: Local
Government Corruption in Hungary. In: Dallago, Bruno -
Guglielmetti, Chiara (eds.): Local Economies and Global Competitiveness. Palgrave Macmillan, UK, Houndmills, Basingstoke, 2011.
[75] http://www.transparency.org/research/cpi/overview

[76] COM(2014) 38 final —- EU Anti-corruption Report. Report from the Commission to the Council and the European
Parliament. 
[77] Bid- rigging is when a contract is promised to one party, although
for the sake of appearance other parties also present a bid. For further
information on Hungary, see PWC and Ecorys (2013): ‘"Identifying and
reducing corruption in public procurement in the EU’, Report commissioned by
OLAF.
[78] EU Funds Watch Project Hungary – 2013 Report. Supported by the
European Union Programme Hercule II (2007 – 2013).  For more information see http://ec.europa.eu/anti_fraud/about-us/funding/index_en.htm.
[79] Audit findings of the European Commission and the European Court of
Auditors; COM(2014) 38 final - EU anti-corruption report. Report from the
Commission to the Council and the European Parliament (3 February 2014);
Transparency International Hungary: EU Funds Watch Project Hungary (June 2013); Controlling Corruption in Europe: The Anticorruption Report - Volume 1. See
http://anticorrp.eu/wp-content/uploads/2013/09/Hungary-Corruption.pdf. 
[80] For instance, in case of their illegal dismissal or court suits
following whistle-blowers' declarations and to shelter them and their family
members.
[81] 6 November 2012 case C-286/12. See also Commission press release on
the closure of the case: IP/13/1112.
[82]  The only one category of direct awards for which information is
available, i.e. the negotiated procedure without prior publication of the
notice, was more frequently used in Hungary than in the EU in general. In 2013,
  Hungary had 12.1% of negotiated procedures without publication for above
threshold tenders, compared to an EU average of 5%. This is the 5th highest
proportion in the EU.
[83] Guidelines are currently being drafted and —– for example -
according to them — contracting authorities should publish their contract notices
on their website.
[84]Identifying and Reducing Corruption in Public Procurement in the EU,
available at http://ec.europa.eu/anti_fraud/documents/anti-fraud-policy/research-and-studies/identifying_reducing_corruption_in_public_procurement_en.pdf. 
[85] http://www.crcb.eu/?cat=6 
[86] The following categories are used to assess progress in
implementing the 2013 country specific recommendations. 
No progress: The Member State has neither announced nor adopted any measures to
address the CSR. This category also applies if a Member State has commissioned
a study group to evaluate possible measures. 
Limited progress: The Member State has announced some measures to address the CSR,
but these measures appear insufficient and/or their adoption/implementation is
at risk. 
Some progress: The Member State has announced or adopted measures to address the
CSR. These measures are promising, but not all of them have been implemented
yet and implementation is not certain in all cases. 
Substantial progress: The Member State has adopted measures, most of which have been
implemented. These measures go a long way in addressing the CSR. 
Fully addressed: The Member State has adopted and implemented measures that address
the CSR appropriately.
[87] The real estate sector is excluded because of statistical difficulties
of estimating a mark-up in this sector. The sector renting of machinery and equipment
and other business activities is conceptually part of intermediate goods
sector.