Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Hungary and delivering a Council opinion on the 2016 convergence programme of Hungary
Date: 2016-05-18
Institutions: European Commission, Secretariat-General
Subjects: Hungary, aid to disadvantaged groups, budget deficit, economic policy, educational reform, employment policy, fiscal policy, migratory movement, public contract, stability programme

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   EUROPEAN COMMISSION  Brussels, 18.5.2016  COM(2016) 337 final   Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Hungary  and delivering a Council opinion on the 2016 convergence programme of Hungary  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2016 national reform programme of Hungary 

and delivering a Council opinion on the 2016 convergence programme of Hungary 

THE COUNCIL OF THE EUROPEAN UNION, 

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

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 9(2) thereof, 
Having regard to the recommendation of the European Commission2, 
Having regard to the resolutions of the European Parliament3, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

(2) 

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On  26  November  2015,  the  Commission  adopted  the  Annual  Growth  Survey4, 
marking  the  start  of  the  2016  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on 17-18 March 2016. On 26 November 2015, on the basis of Regulation (EU) No 
1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report5,  in  which  it 
identified Hungary as one of the Member States for which an in-depth review would 
be carried out.  
The  2016  country  report  for  Hungary6  was  published  on  26  February  2016.  It 
assessed  Hungary’s  progress  in  addressing  the  country-specific  recommendations 
adopted by the Council on 14 July 2015 and Hungary's progress towards its national 
Europe  2020  targets.  It  also  included  the  in-depth  review  under  Article  5  of 

OJ L 209, 2.8.1997, p. 1. 
COM(2016) 337 final. 
P8_TA(2016)0058, P8_TA(2016)0059, and P8_TA(2016)0060. 
COM(2015) 690 final. 
COM(2015) 691 final. 
SWD(2016) 85 final. 

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(3) 

(4) 

(5) 

(6) 

Regulation  (EU)  No  1176/2011.  On  8  March  2016,  the  Commission  presented  the 
results of the in-depth review7. The Commission’s analysis leads it to conclude that 
Hungary is experiencing no macroeconomic imbalances. In particular, although high 
external debt rollover needs and the share of non-performing loans remain a concern, 
risks linked to external and internal liabilities have been reduced. 

On  29  April  2016,  Hungary  submitted  its  2016  national  reform  programme  and  its 
2016  convergence  programme.  To  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

recommendations  have  been  addressed 

Relevant  country-specific 
the 
programming  of  the  European  Structural  and  Investment  Funds  for  the  2014-2020 
period.  As  foreseen  in  Article  23  of  Regulation  (EU)  No  1303/2013,  where  it  is 
necessary  to  support  the  implementation  of  relevant  Council  recommendations,  the 
Commission may request a Member State to review and propose amendments to its 
Partnership  Agreement  and  relevant  programmes.  The  Commission  has  provided 
further  details  on  how  it  would  make  use  of  this  provision  in  guidelines  on  the 
application of the measures linking the effectiveness of the European Structural and 
Investment Funds to sound economic governance8. 

in 

The convergence programme indicates that the budgetary impact of the exceptional 
inflow  of  refugees  is  significant  and  an  addendum  of  6  May  provides  adequate 
evidence  of  the  scope  and  nature  of  these  additional  budgetary  costs.  According  to 
the Commission's assessment, the eligible additional expenditure amounted to 0.04% 
of GDP in 2015 and currently no further incremental costs are expected in 2016. The 
provisions  defined  in  Article  5(1)  and  Article  6(3)  of  Regulation  (EC)  No  1466/97 
allow  catering  for  this  additional  expenditure,  in  that  the  inflow  of  refugees  is  an 
exceptional  event,  its  impact  on  Hungary`s  public  finances  is  significant  and 
sustainability would not be compromised by allowing for a temporary deviation from 
the  adjustment  path  towards  the  medium-term  budgetary  objective.  Therefore,  the 
required adjustment towards the medium-term budgetary objective for 2015 has been 
reduced  to  take  into  account  these  costs.  Regarding  2016,  a  final  assessment, 
including  on  the  eligible  amounts,  will  be  made  in  spring  2017  on  the  basis  of 
observed data as provided by Hungary's authorities. 

Hungary  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth  Pact  and 
subject to the debt rule. In its 2016 convergence programme, the government plans 
the  headline  deficit  to  increase  to  2.4%  of  GDP  by  2017  and  then  to  decrease 
gradually  to  1.2%  by  2020.  The  government  plans  a  gradual  improvement  of  the 
structural balance in order to reach its revised medium-term budgetary objective – a 
deficit  of  1.5%  of  GDP  in  structural  terms  –  by  2019.  However,  the  recalculated9 
structural  deficit  would  remain  higher  than  the  medium-term  budgetary  objective. 
According  to  the  convergence  programme,  the  government  debt-to-GDP  ratio  is 
expected to decline  gradually  from 75.3%  in  2015 and to  below 67% in 2020. The 
macroeconomic  scenario  underpinning  these  budgetary  projections  is  broadly 
plausible  until  2017  and  becomes  increasingly  favourable  thereafter.  The  measures 
needed  to  support  the  planned  deficit  targets  from  2017  onwards  have  not  been 

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COM(2016) 95 final. 
COM(2014) 494 final. 
The structural balance as recalculated by the Commission based on the information in the convergence 
programme, following the commonly agreed methodology. 

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(8) 

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sufficiently specified, in particular after 2017. Based on the Commission 2016 spring 
forecast, there is a high risk of a significant deviation from the required adjustment in 
2016 as well as, under unchanged policies, in 2016 and 2017 taken together. At the 
same time, Hungary is forecast to comply with the debt reduction benchmark in 2016 
and in 2017. Based on its assessment of the convergence programme and taking into 
account the Commission 2016 spring forecast, the Council is of the opinion that there 
is  a  risk  that  Hungary  will  not  comply  with  the  provisions  of  the  Stability  and 
Growth  Pact.  Therefore  further  measures  will  be  needed  in  both  years  to  ensure 
compliance.  

Internal financial imbalances have been reduced and the banking system has become 
less  vulnerable,  but  challenges  remain.  Considerable  progress  has  been  made  in 
reducing  private  sector  debt,  previously  mostly  denominated  in  foreign  currencies. 
Lending  to  households  showed  signs  of  recovery  but  a  turnaround  in  corporate 
lending  has  yet  to  take  place.  The  profitability  of  the  banking  sector  has  started  to 
recover, helped by the improving economic environment and by a moderation in the 
previous  policies  towards  taxes  on  banks.  Nevertheless,  banks  remain  cautious  in 
their  lending,  even  though  they  are  well  capitalised  and  highly  liquid.  The  main 
remaining  challenge  for  banks  is  to  reduce  the  still  high  share  of  non-performing 
loans  that  hinder  new  lending  and  put  pressure  on  profits.  The  contingent  liability 
risks  linked  to  the  increased  ownership  of  the  state  in  the  banking  sector  are  still 
high.  

Despite considerable recent improvements in tax policies and the tax administration, 
Hungary’s reliance on sector-specific taxes remains a potential barrier to investment. 
The  selective  design  of  these  taxes  causes  distortions  across  sectors.  While  several 
other  sector-specfic  taxes  remain  in  place,  the  levy  on  credit  institutions  has  been 
reduced significantly and the progressive rates in the food inspection fee have been 
repealed.  The  labour  tax  wedge  for  low-income  earners  is  still  high,  especially  for 
those without children. This can have a negative impact on  their employability and 
can  also  hamper  investment.  Steps  have  been  taken  to  reduce  the  tax  wedge 
(including a one percentage point cut in the uniform tax rate of the personal income 
tax  and  an  increase  of  the  family  tax  allowance  for  earners  with  two  children). 
However, measures are not sufficiently well targeted to have a significant effect for 
low-income  earners.  There is  a potential  for shifting tax away from labour  to areas 
less distortive to growth. Several measures have been taken to improve compliance 
and  reduce  compliance  costs,  although  tax  compliance  costs  remain  high.  Despite 
improvements in recent years, Hungary still faces challenges regarding the efficiency 
of tax collection. The Hungarian government announced a major institutional reform, 
to be launched in 2016, targeting efficiency in the tax administration.  

Limited progress has been made as regards promoting competition and transparency 
in public procurement (for example by adopting the new Public Procurement Act, the 
compliance  of  which  with  EU  law  has  still  to  be  assessed),  while  unpredictable 
regulatory  changes  and  administrative  burden  hamper  private  business  and 
investment.  The  high  number  of  negotiated  procedures  without  publication  and 
contract  awards  with  a  single  bid  show  that  a  low  level  of  competition  in 
procurement persists. A comprehensive e-procurement strategy aiming at improving 
efficiency  and  transparency  has  not  yet  been  developed  and  the  risk  of  corruption 
remains high. Changes would be needed to make the new National Anti-Corruption 
Action  Programme  (NAP)  2015-2018  more  effective  in  preventing  corruption  in 
public  institutions  and  applying  dissuasive  sanctions.  The  government  has  not 

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(10) 

(11) 

renewed its earlier commitment to revise the 2013 whistle-blower law, which lacks 
provisions that adequately protect whistle-blowers from retaliation. The NAP's plans 
to revise the asset declaration system lack ambition and new legislative amendments 
passed in 2015 introduced some further restrictions to public access to information. 
The government has taken steps to reduce the administrative burden, but Hungary’s 
restrictive regulations in service sectors and a volatile regulatory environment remain 
concerns for businesses and thus create uncertainty for investors. Establishment and 
operational restrictions on the retail sector constitute significant barriers to entry and 
expansion.  Mark-ups  in  the  Hungarian  retail  sector  are  the  third  highest  in  the  EU 
and  have  been  increasing  continuously  for  the  last  decade  while  the  allocative 
efficiency indicator is among the lowest in the EU. 

Recent labour market developments are favourable in Hungary, with unemployment 
having  fallen  to  pre-crisis  levels.  Employment  creation  in  the  private  sector  is 
picking  up,  but  the  public  works  scheme  has  also  contributed  to  reducing 
unemployment. The scheme is the main active labour market policy in Hungary. Its 
budgetary cost more than quadrupled over the last five years. However, the scheme 
does not seem sufficiently to improve the reintegration of participants into the open 
labour market. In the first half of 2015, the rate of successful exit from the scheme to 
regular employment was 13.1 %, but around 60 % of the participants who left it in 
that period returned to the scheme within 180 days. This significantly risks locking 
participants  into  the  scheme,  particularly  low-skilled  workers  and  people  in 
disadvantaged regions. Although the scheme targets the long-term unemployed, the 
low-skilled  and  unemployed  people  living  in  disadvantaged  areas,  47  %  of 
participants  in  2015  had  secondary  or  tertiary  education.  The  proportion  of 
unemployed  people  involved  in  public  works  is  also  significant  in  counties  with 
well-performing labour markets. The recent reform of the public employment service 
is likely to make it less effective. The administrative complexity of the management 
arrangements  –  currently  the  responsibility  over  the  public  employment  service  is 
spread  between  four  ministries  –  may  significantly  compromise  effective  steering 
and  an  increased  result  orientation.  The  maximum  duration  of  unemployment 
benefits (three months) is the lowest in the  EU and is significantly shorter than the 
average  time  necessary  to  find  a  job.  Poverty  indicators  are  improving,  but  they 
remain  high,  especially  among  the  most  disadvantaged,  in  particular  Roma  and 
children.  The  adequacy  and  coverage  of  social  assistance  remains  a  challenge  and 
recent reforms could further restrict the conditions for access to a number of benefits.  

The  average  performance  of  Hungarian  students  in  basic  skills  was  below  the  EU 
average in the 2012 OECD Programme for International Student Assessment (PISA) 
and the proportion of low-achievers increased between 2009 and 2012. The influence 
of the socioeconomic background and school location on educational performance is 
among  the  strongest  in  the  EU.  The  selectivity  of  the  education  system  deepens 
performance  gaps  among  students  in  different  school  types  and  these  gaps  widen 
over  time.  The  lack  of  equal  access  to  quality  mainstream  education  is  particularly 
acute  for  Roma.  With  the  exception  of  early  childhood  education,  where  there  has 
been significant improvement in recent years, gaps remain wide between completion 
rates of Roma and non-Roma on all other educational levels, i.e. primary, secondary 
and tertiary education. Early school leaving remains high among Roma. Hungary has 
introduced  a  number  of  measures  that  aim  to  address  low-achievement  more 
effectively. However, important details on the implementation of these measures are 
not  available,  making  it  difficult  to  assess  their  potential  impact.  A  systemic 
approach to promoting inclusive mainstream education has yet to be developed. The 

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announced  implementation  plan  for  the  early  school  leaving  strategy  has  yet  to  be 
published.  The  transition  between  different  forms  and  stages  of  education  remains 
difficult and recent reforms in vocational education might further hinder transitions. 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive analysis of Hungary’s economic policy and published it in the 2016 
country  report.  It  has  also  assessed  the  convergence  programme  and  the  national 
reform  programme  and  the  follow-up  given  to  the  recommendations  addressed  to 
Hungary  in  previous  years.  It  has  taken  into  account  not  only  their  relevance  for 
sustainable  fiscal  and  socio-economic  policy  in  Hungary  but  also  their  compliance 
with  EU  rules  and  guidance,  given  the  need  to  strengthen  the  overall  economic 
governance of the European Union by providing EU-level input into future national 
decisions.  The  recommendations  under  the  European  Semester  are  reflected  in 
recommendations 1 to 3 below. 

(13) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  convergence 
programme, and its opinion10 is reflected in particular in recommendation 1 below. 

HEREBY RECOMMENDS that Hungary take action in 2016 and 2017 to: 

1. 

2. 

3. 

In  view  of  the  high  risk  of  a  significant  deviation,  achieve  an  annual  fiscal 
adjustment of 0.3 % of GDP towards the medium-term budgetary objective in 2016 
and  of  0.6  %  of  GDP  in  2017,  unless  the  medium-term  budgetary  objective  is 
respected with a lower effort, by taking the necessary structural measures.  

Further  reduce  sector-specific  taxes  and  reduce  the  tax  wedge  for  low-income 
earners.  Strengthen  transparency  and  competition  in  public  procurement  through  e-
procurement,  increased  publication  of  tenders  and  further  improvement  of  the  anti-
corruption framework. Improve the regulatory environment in the services sector and 
in the retail sector by addressing restrictive regulations and ensuring predictability. 

Facilitate the transition from the public works scheme to the primary labour market 
and  reinforce  other  active  labour  market  policies.  Improve  the  adequacy  and 
coverage of social assistance and unemployment benefits. Take measures to improve 
educational  outcomes  and  to  increase  the  participation  of  disadvantaged  groups,  in 
particular Roma, in inclusive mainstream education. 

Done at Brussels, 

For the Council 
The President 

10 

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

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