COMMISSION STAFF WORKING DOCUMENT Country Report Hungary 2017 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2017 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}
Date: 2017-02-22
Institutions: European Commission, Secretariat-General
Subjects: EU employment policy, EU investment, Hungary, economic development, economic recovery, euro area, fiscal policy, macroeconomics, multilateral surveillance, structural adjustment

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 22.2.2017  SWD(2017) 82 final   COMMISSION STAFF WORKING DOCUMENT Country Report Hungary 2017 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP  2017 European Semester: Assessment of progress on structural reforms,  prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011  {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}    
 
 
CONTENTS 

Executive summary 

1. 

Economic situation and outlook 

2. 

Progress with country-specific recommendations 

3. 

Reform priorities 

3.1.  Public finances 

3.2. 

Financial sector 

3.3. 

Labour market, education and social policies 

3.4. 

Investment 

3.5. 

Sectoral policies 

3.6.  Public administration 

A.  Overview Table 

B.  MIP Scoreboard 

C. 

Standard Tables 

References 

LIST OF TABLES 

1.1. 

2.1. 

Key economic, financial & social indicators — Hungary 

Summary Table in 2016 CSR assessment 

3.2.1.  Financial soundness indicators, all banks 

B.1. 

The MIP scoreboard for Hungary 

C.1. 

Financial market indicators 

C.2. 

Labour market and social indicators 

C.3. 

Labour market and social indicators (continued) 

C.4. 

Product market performance and policy indicators 

C.5.  Green growth 

LIST OF GRAPHS 

1.1. 

1.2. 

1.3. 

Contributions to real GDP growth 

Export market shares 

Unit labour cost developments in Hungary 

1 

4 

11 

14 

14 

18 

21 

26 

31 

34 

38 

43 

44 

49 

10 

12 

18 

43 

44 

45 

46 

47 

48 

4 

4 

5 

 
 
 
 
1.4. 

1.5. 

1.6. 

1.7. 

1.8. 

1.9. 

Contributions to HICP inflation 

Activity, employment and unemployment 

Decomposition of credit flows 

Net lending / borrowing by institutional sector 

Per capita GDP in PPP terms 

Average annual rate of real convergence 

1.10.  Contributions to potential growth 

3.1.1. 

Tax wedge of a single worker earning 67% of average wage 

3.1.2.  Gross government debt ratio: the baseline scenario and alternative trajectories 

3.2.1.  Non-performing loans, 90-day+ ratios 

3.2.2.  Net NPLs to own funds (%) 

3.2.3.  Growth rate of outstanding loans 

3.2.4. 

Lending conditions in the corporate sector 

3.3.1.  Relative dispersion of employment rates by education level, 2010, 2014 and 2015 

3.3.2.  Main poverty indicators, 2005-2015 

3.4.1.  Private and public investment in HU and the EU 

3.4.2. 

Investment volumes, index 2008=100 

3.4.3.  Greenfield FDI inflows into Hungary 

3.5.1. 

The evolution of R&D intensity by sectors 

3.5.2.  Performance of Hungarian SMEs in selected innovation indicators – measured in standard 

deviations (EU average=0) 

3.6.1.  Hungary: Quality of institutional performance - 2005-2015 

LIST OF BOXES 

1.1. 

2.1. 

The minimum wage increase and tax reform 

Contribution of the EU budget to structural change in Hungary 

3.2.1.  House price developments 

3.4.1.  Hungary's weak post-crisis productivity growth hinders competitiveness 

3.4.2. 

Investment challenges and reforms in Hungary 

3.6.1.  Selected highlights 

5 

6 

7 

7 

8 

8 

8 

15 

16 

18 

18 

19 

19 

21 

23 

26 

26 

27 

31 

31 

34 

9 

13 

20 

28 

30 

37 

 
 
 
 
EXECUTIVE SUMMARY 

This  report  assesses  Hungary’s  economy  in  the 
light  of 
the  European  Commission’s  Annual 
Growth  Survey  published  on  16 November 2016. 
In the survey the Commission calls on EU Member 
States  to  redouble  their  efforts  on  the  three 
elements  of  the  virtuous  triangle  of  economic 
policy — boosting investment, pursuing structural 
reforms and ensuring responsible fiscal policies. In 
so  doing,  Member  States  should 
focus  on 
enhancing  social  fairness  in  order  to  deliver  more 
inclusive growth. 

The  performance  of  the  Hungarian  economy 
remains  solid,  increasingly  driven  by  domestic 
demand.  Real  GDP  has  surpassed  its  pre-crisis 
peak. Potential growth however still remains a full 
percentage  point  lower  than  before  the  crisis, 
despite the recovery in recent years. In 2016, GDP 
is estimated to have increased by 1.9 %, supported 
by  strengthening  private  consumption  and  net 
in  EU-funded 
exports.  A 
investment reduced growth in 2016, but continuing 
support  from  private  consumption,  a  gradual 
recovery  in EU-funded  investment,  and  expansive 
fiscal  policy  is  likely  to  accelerate  growth  to 
around 3.5 % as of 2017. Higher energy prices and 
significant  minimum  wage  increases  are  expected 
to  push  up  inflation  towards  the  central  bank’s 
target rate of 3.0 % by the end of 2018. 

temporary  decline 

The 
labour  market  situation  continues  to 
improve,  but  with  growing  signs  of  tightening. 
Unemployment  fell  below  its  pre-crisis  level, 
despite  a  rapidly  increasing  activity  rate.  Long-
term unemployment also fell. The supply of labour 
rose, due to restrictive policies on social transfers, 
early retirement and increasing statutory retirement 
age.  Owing  to  the  increasing  activity  rate,  labour 
has  become  a  positive  contributor  to  the  potential 
growth  rate  despite  population  ageing.  However, 
shortages  of  both  skilled  and  unskilled  workers 
have  emerged  in  various  sectors  and  companies 
find it increasingly difficult to fill vacancies. 

to 

recover 

to  a  halt  as  EU-funded 

After  a  significant  drop  in  2016,  investment  is 
progressively.  The 
forecast 
considerable  investment  growth  in  2013-2014 
investment 
came 
temporarily 
addition,  private 
investment  is  hampered  by  still-cautious  lending 
activity and frequent changes to the regulatory and 
tax  environment.  Factors  adversely  affecting  the 
business  environment  are  linked  particularly  to 

subsided. 

In 

in 

weaknesses 
institutional  performance  and 
governance. An increase in productive investment, 
especially  in  equipment  and  machinery,  would 
improve 
productivity 
increase 
help 
competitiveness.  

and 

Lending to the private sector is improving, but 
credit  growth  remains  modest.  While  banks’ 
lending capacity is close to a historical high, their 
willingness  to  lend  remains  limited,  especially  to 
the corporate sector. Lending is also dampened by 
their  sizeable  amount  of  non-performing  loans. 
The  central  bank  launched  various  schemes  to 
promote  lending  to  small  firms,  which  picked  up 
significantly  in  2016.  Lending  to  households  also 
improved in 2016, as the new government housing 
support  scheme  and  growing  property  prices 
started  to  spur  households’  borrowing.  However, 
overall  credit  growth  is  not  yet  strong  enough  to 
support economic growth. 

Fiscal  policy  has  been  prudent  but  the  fiscal 
stance is expected to loosen, posing a risk for a 
medium-term debt reduction. The budget deficit 
decreased  to  a  historical  low  of  1.6 %  of  GDP  in 
2015,  but  is  forecast  to  rebound.  The  headline 
deficit  is expected  to  have  reached 1.8 % of GDP 
in  2016  and  projected  to  rise  further  to  2.4 %  in 
2017 and 2.5 % in 2018, due to planned measures 
such  as  tax  cuts  and  spending  increases.  Since  its 
peak  in  2011,  the  public  debt  ratio  has  declined 
continuously, helping improve Hungary’s financial 
the  absence  of  fiscal 
stability.  However, 
adjustment,  the  deterioration  of  the  structural 
balance  may  jeopardise  the  goal  of  steadily 
reducing debt in the medium term. 

in 

the 

2016 

Overall, Hungary has made limited progress in 
addressing 
country-specific 
recommendations. Some progress has been made 
in reducing the tax wedge for low-income earners, 
but  progress  in  reducing  sector-specific  taxes  and 
improving  transparency  and  competition  in  public 
procurement  has  been  limited.  The  latter  is  to  a 
large extent due to a delay in the development and 
implementation  of  e-procurement.  Some  progress 
has  been  made  in  facilitating  the  transition  from 
the  public  works  scheme  to  the  primary  labour 
market  and  reinforcing  other  active  labour market 
policies.  Limited  progress  has  also  been  made  in 
improving  the  adequacy  and  coverage  of  social 
and  unemployment  benefits;  and  educational 
outcomes  and  participation  by  disadvantaged 

1 

 
 
Executive summary 

  Low  corporate 

investment 

is  however 
holding  back  productivity  growth  and 
thereby 
competitiveness  and  potential 
growth.  Productivity  is  comparatively  low. 
Without  productivity  gains,  there  is  a  risk  of 
Hungary  becoming  less  competitive  in  the 
medium 
in 
minimum wages are intended to trigger a shift 
towards higher productivity jobs. Innovation is 
not  yet  embedded  in  the  economy  reflected  in 
wide productivity gaps between foreign-owned 
and domestic companies. Regulatory barriers in 
services,  including  retail,  tend  to  limit  market 
dynamics and hamper investment.  

term.  The 

increases 

recent 

improving 

  Recent tax measures go in the right direction 
but  challenges  in  the  tax  system  remain. 
Hungary’s  total tax-to-GDP ratio  remains  well 
above its regional peers’, though the 2017 cuts 
in  social  security  contributions  and  corporate 
income  tax  have  reduced  the  tax  burden  by 
some  1.5  pps., 
the  country’s 
competitiveness. The tax wedge on labour costs 
is  set  to  decrease  gradually,  but  remains  high 
low-income 
for  several  groups,  especially 
workers  without  children.  Despite  a  declining 
trend since 2013, sector-specific taxes still tend 
to  complicate  the  tax  system  and  weaken 
investor confidence. The complexity of the tax 
system  and  associated  administrative  burdens 
pose a continuing challenge. While there is still 
room 
tax 
collection and tax compliance, policy efforts to 
combat  tax  evasion  and  fraud  have  produced 
tangible results. 

the  efficiency  of 

improve 

to 

  Despite 

still 

significant 

improvements, 

the 
faces 
labour  market 
Hungarian 
challenges.  The  main  active  labour  market 
policy  remains  the  public  works  scheme.  The 
government is strengthening efforts to reinforce 
other active labour market policies. The system 
of  childcare  services  has  been  reformed  to 
tackle the persistently wide gender employment 
gap  and  the  impact  of  parenthood on women's 
employment.  Some  poverty  indicators  have 
fallen back to pre-crisis levels, but remain high 
in  comparison  with  other  EU  Member  States. 
Poverty  among  children  and  Roma  has 
declined,  but  remains  at  a  high  level  and  the 
adequacy and coverage of social assistance and 
limited. 
unemployment  benefits 

still 

is 

groups, 
mainstream education. 

in  particular  Roma, 

in 

inclusive 

Regarding  the  progress  on  reaching  the  national 
targets under the Europe 2020 Strategy, Hungary is 
performing  well 
in  reducing  greenhouse  gas 
emissions,  increasing  renewable  energy,  tertiary 
education  and  the  employment  rate;  while  more 
effort is needed to increase R&D expenditure and 
reduce early school leaving and poverty. 

The  main  findings  of  the  analysis  in  this  report, 
and the related policy challenges, are as follows:  

  External  balances  continued  to  strengthen 
both  in  terms  of  stocks  and  flows.  Net 
external  liabilities  declined  from  116 %  of 
GDP in 2009 to 61 % by 2015, and the ratio is 
estimated to have declined further in 2016. The 
economy  has  been  rebalanced  by  maintaining 
large  current  and  capital  account  surpluses, 
which reflect private sector debt reduction and 
a 
funds.  The 
inflow  of  EU 
improvement in the external balance continued 
despite a pick-up in domestic demand, showing 
the strength of the underlying adjustment. 

sizeable 

  Internal 

financial  balances  have  also 
strengthened  further.  Hungary  entered  the 
crisis  burdened  with  a  relatively  high  level  of 
private  sector  debt,  mostly  denominated  in 
foreign  currencies.  The  biggest  systemic  risk 
this  foreign  currency  exposure  was 
from 
removed  by  converting  households’  foreign 
currency  mortgages 
years.  
This helped reduce private sector debt from its 
peak  117 %  of  GDP  in  2009  to  83.9 %  by 
2015.  

recent 

in 

  The  banking  system  has  also  strengthened 
substantially  in  the  past  two  years.  The 
sector’s  profitability  has  been  helped  by  the 
improving  economic  environment  and  by  a 
reduction  in  taxes  on  banks.  The  funding 
structure  and  capital  position  of  Hungary’s 
banks are adequate. The biggest challenges are 
(i)  the  proper  management  of  the  decreasing 
but  still  sizeable  amount  of  non-performing 
loans,  (ii)  restarting  market  lending,  especially 
the  corporate  segment,  and  (iii)  moving 
sustainable profitability levels towards regional 
averages. 

2 

 
 
Performance  in  providing  basic  skills  remains 
weak by international standards and the impact 
of  pupils’  socio-economic  background  on 
education outcomes is one of the highest in the 
EU. The concentration of disadvantaged pupils, 
in  particular  Roma,  in  certain  schools  is 
becoming  more  pronounced.  Finally,  labour 
by 
market 
comparatively  weak  health  outcomes  and 
unequal access to healthcare.  

participation 

affected 

is 

  Weaknesses 

in 

institutional  performance 
weigh on the business climate and reduce the 
growth  potential  of  the  economy.  The 
unstable  regulatory  environment  is  one  of  the 
biggest  barriers  to  doing  business  in  Hungary, 
with  insufficient  stakeholder  engagement  and 
evidence-based 
The 
policy 
transparency  and  predictability  of  the  budget 
process  remain  limited.  Public  procurement  is 
still  characterised  by  limited  competition  and 
transparency. Corruption risks remain high and 
there are notable gaps in the measures taken to 
address the issue. 

making. 

Executive summary 

3 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth 

growth 

temporarily 

Following  a  strong  performance 
in  2015, 
in 
economic 
eased 
Hungary,  as  EU-funded  investments  dipped. 
Stoppages  in  production  in  a  major  automotive 
company  also  added  to  the  slowdown.  Overall 
investment  is  estimated  to  have  contracted  by 
9.6 % in 2016, following a 1.9 % growth in 2015. 
Despite this contraction, domestic demand growth 
remained  dynamic,  holding  up  GDP  growth  at 
in  2015 
1.9 % 
(Graph 1.1). Private consumption grew by a robust 
5.0 %  supported  by  accelerating  wage  growth, 
growing  employment  and  low  inflation.  Trade 
flows  remained  strong  as  net  exports  contributed 
0.9  pps.  to  GDP  in  2016.  On  the  production  side, 
an  exceptionally  good  performance  by  agriculture 
is  estimated  to  have  generated  an  above-average 
contribution to GDP growth. 

in  2016,  down  from  3.1 % 

Graph 1.1:  Contributions to real GDP growth 

until  now,  is  expected  to  ease  as  the  economy 
reaches full employment. 

After  a  significant  fall  in  2016,  investment  is 
forecast  to  progressively  recover  as  of  2017. 
Real  investment  is  expected  to  grow  at  around 
10 % in 2017 and 5 % in 2018. This is mainly due 
to an increased absorption of EU funds, improving 
domestic  demand  prospects,  increasing  household 
investment  and  several  large  planned  investments 
in  the  automotive  sector.  The  low  interest  rate 
environment  and  a  recovery  in  corporate  lending 
are also expected to boost investment. 

improved 

Reflecting 
competitiveness,  net 
exports  boosted  growth  until  2016,  but 
strengthening  import  demand  is  projected  to 
gradually  counterbalance  this  effect  in  2017. 
This  is  mainly  due  to  the  expected  pick-up  in 
domestic demand, which will boost import growth 
towards  7 %.  Exports  are  expected  to  continue  to 
grow  at  a  relatively  stable  rate,  around  5.5 %. 
Hungary’s export market shares grew in the last 3 
years  (Graph  1.2)  and  the  country’s  exporters  are 
expected to keep gaining market share in the near 
future.  However,  increasing  unit  labour  costs  will 
weigh on Hungary’s relative trade performance. 

Graph 1.2: 

Export market shares 

Source: DG ECFIN, Winter Forecast 2016 

Economic  growth  is  forecast  to  accelerate  to 
3.5 %  in  2017  and  3.2 %  in  2018.  The  dynamic 
growth  in  household  consumption  is  projected  to 
continue.  This  is  supported  by  accelerating  wage 
growth, consumer confidence at a post-crisis high, 
in  household 
further  positive  developments 
following 
lending  and  second-round  effects 
improvements  in  the  housing  market.  However, 
employment  growth,  which  boosted  consumption 

Source: Eurostat 

Hungary's  unit  labour  costs  (ULC)  increased 
considerably  in  2016.  Nominal  ULC  grew  by 
1.1 %  in  2016,  which  is  4 pps.  above  the  EU 

4 

-10-8-6-4-2024606070809101112131415161718%, ppsInventoriesInvestment (GFCF)ConsumptionNet exportsReal GDP growthforecast-15-10-505101501020304050607080910111213141516Rate of change y-o-y (%)Contribution to EMS: goodsContribution to EMS: servicesExport market share growth yoy 
 
 
 
1. Economic situation and outlook 

fiscal  loosening  in  2017  and  2018,  mainly  linked 
to the minimum wage and tax reforms (Box 1.1). 

Graph 1.4:  Contributions to HICP inflation 

average.  This  increase  was  mainly  driven  by 
dynamic  wage  growth,  but  also  by  a  slight 
deterioration  in  productivity  (Graph  1.3).  Real 
ULC  developments,  however,  appear  stronger  as 
Hungary’s  real  ULCs  have  been  on  a  downward 
trend  since  2010.  Nevertheless,  looking  forward, 
real  wage  growth  is  forecast  to  significantly 
outpace  productivity.  This  is  expected  to  reduce 
price  and  cost  competitiveness  in  the  near  future. 
Competitiveness  is  discussed  in  more  detail  in 
section 3.4. 

Graph 1.3: 

Unit labour cost developments in Hungary 

Source: Commission's calculations based on Eurostat data, 
Winter Forecast 2016 

Labour market 

The Hungarian labour market has improved in 
the  recent  years.  The  unemployment  rate  fell 
below  5 %  in  2016.  The  employment  rate  has 
increased significantly since the recovery started in 
2013,  while  activity  rates  have  been  steadily 
increasing  since  2008  (Graph  1.5).  Employment 
reached 4.4 million in 2016, supported also by the 
employed 
public  works 
approximately  220 000  persons  on  average  in 
2016.  Private  sector  job  creation  amounted  to 
around  130 000 
the  same  year.  As  a 
consequence,  full-time  equivalent  employment  in 
the  domestic  private  sector  has  come  close  to  the 
pre-crisis  level.  Rates  of  long-term  and  youth 
unemployment, as well as the rate of young people 
out  of  both  employment  and  education/training, 
largely returned to their pre-crisis levels. 

scheme,  which 

in 

There are however growing indications that the 
labour market is tightening. Employment growth 
is expected  to slow  in  the  coming  years  as labour 
supply  becomes  more  limited.  There  are  skill 
shortages 
is 
increasingly difficult to match both the skilled and 
vacancies. 
unskilled 
Consequently,  there  is  a  significant  pressure  on 

in  numerous 

force  with 

sectors  and 

labour 

it 

Source: Eurostat 

Inflation 

in  2016,  but 

is 
Inflation  remained  muted 
forecast  to  gradually  approach  the  central 
bank’s  medium-term  target  of  3 %  by  2018. 
Headline inflation has remained around zero since 
2014  as  falling  energy  prices  fully  offset  limited 
inflation  in  services  and  food.  However,  core 
inflation,  which  excludes  energy  and  unprocessed 
food  prices,  remained  stable  at  around  1.3 %. 
Inflation  is  forecast  to  accelerate  towards  the 
Hungarian central bank’s target of 3.0 % by 2018. 
Price  growth  is  expected  to  be  broad  based,  as 
energy  prices  grow  again  and  prices  of  services 
accelerate  on  the  back  of  strong  wage  growth 
(Graph 1.4). Gross wages  are  forecast  to  grow by 
8.7 %  in  2017  and  by  7.5 %  in 2018.  As  labour 
shortages have already started to limit production – 
mainly  in  industry,  construction  and  services  – 
to  appear, 
risks  are  expected 
overheating 
contributing to ‘demand-pull’ inflation. These risks 
are  expected  to  be  exacerbated  by  the  projected 

5 

-6-4-202468100607080910111213141516*Rate of change y-o-y (%)Inflation (GDP deflator growth)Real Compensation per EmployeeProductivity Contribution (negative sign)Nominal unit labour costULC in EU28-2-101234567890203040506070809101112131415161718ServicesProcessed food (incl. Alcohol and tobacco)Unprocessed foodEnergyNon-energy industrial goodsHICPCore inflationforecast% 
 
 
1. Economic situation and outlook 

wage  growth,  which 
tightening labour market. 

is  another 

indicator  of 

services,  such  as  education  and  health  care, 
negatively affecting in particular the Roma. 

Graph 1.5:  Activity, employment and unemployment 

Public finances 

The budget deficit decreased to historically low 
levels  in  recent  years,  but  the  fiscal  stance  is 
expected  to  loosen  in  the  short  term.  After 
reaching  1.6 %  of  GDP  in  2015,  the  headline 
deficit is expected to have increased to 1.8 in 2016 
and  forecast  to  rise  further  to  2.4  %  in  2017  and 
then  to  2.5 %  in  2018.  The  country’s  fiscal 
recovery, 
tax-rich 
from  a 
situation  benefits 
declining 
in  social 
interest  outlays,  savings 
transfers  and  considerable  temporary  revenues. 
The increased fiscal leeway, however, is expected 
to  be  more  than  offset  by  deficit-increasing 
measures, 
tax  cuts  and 
spending  increases.  As  a  result,  the  structural 
deficit  is  estimated  to  deteriorate  considerably, 
reaching around 3 ½ % of GDP in 2017 and 2018. 

including  substantial 

The  public  debt  ratio  continued  on  a  declining 
path,  helping  to  improve  financial  stability. 
Following  the  outbreak  of  the  financial  crisis,  the 
government  debt-to-GDP  ratio  increased  sharply, 
reaching  almost  81 %  in  2011.  Since  then,  it  has 
decreased by more than 6 pps., falling below 75 % 
by  2015.  The  reduction  of  debt  was  supported  by 
the  takeover  of  the  assets  of  mandatory  private 
pension  schemes  (so-called  second  pillar),  fiscal 
consolidation efforts and the subsequent economic 
recovery. Although the current public debt ratio is 
still  well  above  that  of  regional  peers,  Hungary's 
sovereign 
receded 
significantly.  Looking  ahead,  the  debt  ratio  is 
forecast  to  decrease  further  in  2017  and  2018. 
However,  in  the  absence  of  fiscal  measures,  the 
deterioration  of  the  structural  balance  points  puts 
at risks the objective of ensuring a firmly declining 
debt-reduction  path, 
rule 
towards 
reference level of 60 % of GDP. 

the  debt 

financing 

risks 

have 

Financial sector 

Financial  sector  assets  have  continued  to 
contract, in line with further deleveraging in the 
private sector. Private debt was reduced to about 
84 %  of  GDP  in  2016,  from  its  peak  of  close  to 
120 %  of  GDP  in  2009.  While  credit  flows 
remained negative for households, credit growth to 
non-financial  corporations  remained  marginally 
positive  (including  inter-company  loans  and  loans 

(1) Activity and employment rates (% of population), 
unemployment rate (% of labour force). Data available do 
not allow decomposition between employment rate and 
employment w/o PWS before 2011. 
Source: HCSO 

Social developments 

(ECB  2016).  Market 

Inequality  increased  during  the  recovery  but 
remains  below  the  EU  average.  The  S80/S20 
indicator — which compares the proportion of the 
income of the richest 20% of households to that of 
the poorest 20% — increased from 3.4 in 2010 to   
4.3 in 2015. This is well below the EU average of 
5.2.  The  available  data  indicate  that  inequality  in 
net  wealth  (1)  was  within  the  range  observed  in 
other  EU  countries  for  which  data  were  collected 
income 
in  2013-2014 
inequality  (before 
transfers  and 
benefits are taken into account) is close to the EU 
average. It is driven by increasing wage dispersion 
and  faster  wage  growth  by  higher  earners.  While 
the  benefit  system  is  effective  in  reducing  market 
inequality,  the  introduction  of  a  flat  tax  in  2011 
made  the  tax  system  less  progressive,  which  has 
had  a  negative  impact  on  inequality.  A  strong 
spatial  dimension  also  plays  a  role,  with  the 
incomes of rural households at only 73 % of urban 
households.  This  figure  is  well  below  the  EU 
average of 83 %. Inequality also exists in access to 

taxes,  social 

(1)  Difference between total assets and total liabilities. 

6 

 00 02 04 06 08 10 12 14 45 47 49 51 53 55 57 59 61 6306Q106Q307Q107Q308Q108Q309Q109Q310Q110Q311Q111Q312Q112Q313Q113Q314Q114Q315Q115Q316Q116Q3% of labour force% of populationUnemployment rate (rhs)Activity rateEmployment rateEmployment w/o PWS 
 
                                                           
1. Economic situation and outlook 

from  foreign  financial  institutions,  Graph  1.6). 
Credit  growth  remains  limited  by  banks’  cautious 
lending  strategies,  especially  to  the  corporate 
sector. The central bank launched various schemes 
to promote lending to small firms, which picked up 
significantly  in  2016.  Lending  to  households  also 
started to improve in 2016, as the new government 
housing  support  scheme  and  growing  property 
prices  started  to  spur  households’  interest  in 
borrowing.  

Graph 1.6:  Decomposition of credit flows 

the 

rate 

latter 

regime,  as 

reflect  private 

surpluses.  The 
sector 
deleveraging  and  a  high  inflow  of  EU  funds.  The 
external  adjustment  was  helped  by  Hungary’s 
real 
floating  exchange 
depreciation of the forint helped improve the trade 
balance.  Hungary’s  strong  net  lending  position 
remained  stable  over  the  last  4  years,  despite  the 
pick-up  in  domestic  demand  (Graph  1.7).  Even 
though  EU  fund  inflows  temporarily  declined  in 
2016,  the  country’s  net  lending  remained  high  (at 
6 % of GDP). It is projected to remain at this level 
in 2017 and 2018. 

Graph 1.7:  Net lending / borrowing by institutional sector 

Source: Eurostat 

Real convergence & potential growth 

Despite  an  improving  performance  since  2013, 
Hungary’s  real  convergence  still  lags  behind 
most  of  its  regional  peers  (Graphs  1.8  and  1.9). 
Over a 20-year period, Hungary’s per capita GDP 
in  terms  of  purchasing-power-parity  (PPP)  rose 
from  half  to  two  thirds  of  the  EU  average.  The 
country started this period as the third highest per 
capita  GDP  among 
the  emerging  market 
economies  in  the  central-eastern  European region. 
By  the  end  of  the  period,  however,  it  had  fallen 
back to the 7th position. While the convergence of 
most  of  its  peers  slowed  after  the  2008/09  crisis, 
Hungary’s  convergence  had  already  decelerated 
significantly before the crisis (Graph 1.9). 

Source: Eurostat 

strengthening 

The financial sector has yet to fully benefit from 
the improvement in macroeconomic conditions. 
Some encouraging signs appeared in 2016, such as 
improved  profitability, 
capital 
positions, and a decrease in non-performing loans. 
A key measure for the return to profitability was a 
close  to  50 % reduction  in  the  bank  levy  in  2016. 
Improved  profitability  also  led  to  strengthening 
capital positions. Prompted by regulation, financial 
institutions  continued  cleaning  up  their  portfolios 
of  non-performing  loans.  The  financial  sector  is 
discussed in more detail in section 3.2. 

External position 

Hungary’s  external  position  has  continued  to 
improve in terms of both stocks and flows. Net 
external  liabilities  declined  to  61 %  of  GDP  in 
2015 (from 76 % in 2014 and the peak of 116 % in 
2009). They are estimated to have declined further 
in  2016.  The  economy  was  rebalanced  by 
maintaining  high  current  and  capital  account 

7 

-15-10-50510152025300304050607080910111213141516% of GDPFinancial corporationsHouseholdNon financial corporationsGovernmentPrivate sector-15-10-5051015050607080910111213141516% of GDPHouseholds and NPISHGeneral governmentCorporationsTotal economy 
 
 
1. Economic situation and outlook 

Graph 1.8: 

Per capita GDP in PPP terms 

Graph 1.10:  Contributions to potential growth 

(1) PPP = purchasing power parities; calculated as the 
percentage of the EU28 average. 
Source: Eurostat 

Graph 1.9:  Average annual rate of real convergence 

Source: DG ECFIN, Winter Forecast 2016 

Potential growth recovered, but similar to most 
of its regional peers, it still lags behind the pre-
crisis years.  Potential growth in 2016 is estimated 
at 2 %, which is more than 1 pp. below Hungary's 
pre-crisis  average  (2000-2008).  While  potential 
growth  was  driven  by  total  factor  productivity 
before the crisis, this factor disappeared thereafter. 
The  post-crisis  recovery  was  labour-intensive, 
which  is  also  reflected  in  a  growing  labour 
contribution  to  potential  growth.  The  key  to 
elevated  potential  growth  lies  in  enhancing  total 
factor  productivity,  based  on  well-designed 
structural policies (section 3.4). 

Source: Commission's calculation based on Eurostat data 

8 

20406080100BulgariaCzech RepublicBaltics (EE, LV, LT)HungaryPolandRomaniaSloveniaSlovakia-10123456LTEELVROPLSKBGHUSICZAvg1995-20151995-20082008-2015-2.0-1.00.01.02.03.04.05.0040506070809101112131415161718% of GDPLabour Contr.Capital Contr.TFP Contr. 
 
 
 
 
 
1. Economic situation and outlook 

9 

 Box 1.1: The minimum wage increase and tax reformIn November 2016, the government agreed with the social partners to increase substantially the minimum wage and to decrease employers' social security contributions both in 2017 and 2018 (section 3). The gross monthly minimum wage is set to increase by 15 % in 2017 from the current HUF 111 000, and by another 8% the following year. The minimum wage of skilled workers is set to increase by 25 % in 2017 from the current HUF 129 000 and by an additional 12 % in 2018. Employers will be partly compensated for the increased labour costs through a 5 p.p. decrease in employers' social contribution in 2017 and a further decrease of 2-2.5 p.p. in 2018. Moreover, the corporate income tax will be cut from the current two-tier rate of 19 % for large companies and 10 % for SMEs to a single rate of 9 % for all companies.  The measures aim at supporting economic growth via strengthened domestic demand and productivity. The government expects the wage increase to encourage low income earners to improve their skills and companies to improve their productivity. This would facilitate the transition of workers from low to higher-productivity sectors. Higher domestic wages would also decrease the incentives for workers to take up a job abroad and, in combination with the tax cuts, would boost consumption and investment. After the announcement of the measures, the government updated its forecast for 2017-2020. The new forecast includes the impact of the measures, but also other factors. Compared to the convergence programme, the government now expects higher GDP growth by around 1.0 p.p. in both 2017 and 2018, lower employment growth in 2017 by 0.3 p.p. but higher employment growth in 2018 by 0.5 p.p. (MoNE, 2016). The official deficit path remained unchanged, since higher wages and domestic demand are expected to generate additional revenues which compensate for the revenue shortfall of the tax cuts. According to the central bank’s recent inflation report the incremental effect of the minimum wage increase on private sector wages is 2.5% in 2017, because wages would have increased at a fast pace due to the tight labour market.  According to simulations using the European Commission's QUEST model, the measures add 0.3% to GDP in 2017 and there is no further positive growth effect in 2018. The positive growth effect comes from the higher consumption driven by elevated wages and from higher investments. The investment is spurred by the tax cuts. In addition the increase in minimum wages raises investment also, since it drives firms to substitute capital for workers. While the higher investment lifts employment, the minimum wage increase, which exceeds productivity growth, will weigh on employment and more than offset the favourable employment effect of higher investment. Overall, the simulations suggest that the measures have a negative net effect on employment, but it raises average labour productivity in the economy. Nominal wages and inflation will rise and trigger a gradual tightening in monetary conditions. The set of measures are not self-financing and without offsetting measure, would lead to budgetary deterioration. The QUEST model excludes some channels that might generate positive economic effects. In particular, the model does not incorporate labour migration and consequently excludes the possibility that higher domestic wages lead to a partial reversal of outward labour migration and, hence, an increase in domestic labour supply. Furthermore, the model does not generate skill improvement as a possible response to higher minimum wages, or asymmetric market power of employers (monopsony) in parts of the labour market that could generate more positive employment effects of a minimum wage.   The measures affect companies unevenly. The impact of the minimum wage increase is stronger in sectors and companies with low labour productivity where employees are paid around the minimum wage. For such companies, the higher labour costs resulting from the wage increases more than offset the positive impact of the reduction in employers' contribution. The corporate income tax cut benefits predominantly large companies, while the cut in the employers' social security contribution affects all companies. While higher wage costs may deter foreign direct investment inflows in low-productivity sectors, the decrease in the corporate tax rate and employers' contribution is expected to have the opposite effect. The corporate tax rate is the lowest in the EU, and very low compared to Hungary's regional peers (19% in the Czech Republic and Poland, 21% in Slovakia). At the same time, the overall tax burden on companies may also include sector-specific taxes. The measures would spur wages more in the lower income categories, which reduces inequality among wage-earners and is favourable for consumption due to the generally higher consumption rate of low-income earners.  
 
 
 
 
 
 
 
1. Economic situation and outlook 

Table 1.1: 

Key economic, financial & social indicators — Hungary 

(1) Sum of portfolio debt instruments, other investment and reserve assets 
(2,3) Domestic banking groups and stand-alone banks. 
(4) Domestic banking groups and stand-alone banks, foreign (EU and non-EU) controlled subsidiaries and foreign (EU and 
non-EU) controlled branches. 
(*) Indicates BPM 5 and/or ESA 95 

Source: European Commission, ECB 

10 

2004-20082009201020112012201320142015201620172018Real GDP (y-o-y)2.9-6.60.71.7-1.62.14.03.11.93.53.2Private consumption (y-o-y)1.3-6.7-2.70.7-2.10.32.53.45.04.83.9Public consumption (y-o-y)0.61.4-0.40.2-1.54.14.51.02.01.02.0Gross fixed capital formation (y-o-y)3.4-8.3-9.5-1.3-3.09.89.91.9-9.610.05.0Exports of goods and services (y-o-y)14.7-11.411.36.5-1.84.29.87.76.74.95.9Imports of goods and services (y-o-y) 12.1-14.710.24.4-3.54.510.96.16.46.86.7Output gap3.0-4.4-3.7-2.0-3.8-2.7-0.70.30.21.42.2Potential growth (y-o-y)2.50.2-0.10.10.21.01.92.12.02.32.4Contribution to GDP growth:Domestic demand (y-o-y)1.7-5.2-3.70.2-2.02.94.32.30.84.53.3Inventories (y-o-y)-0.1-4.03.1-0.4-0.8-0.80.0-1.00.20.00.0Net exports (y-o-y)1.42.61.32.01.30.0-0.21.80.9-1.0-0.1Contribution to potential GDP growth:Total Labour (hours) (y-o-y)-0.5-1.0-0.7-0.30.10.51.01.11.10.80.6Capital accumulation (y-o-y)1.40.80.40.30.20.50.80.80.30.60.7Total factor productivity (y-o-y)1.60.30.20.10.00.00.10.30.60.91.0Current account balance (% of GDP), balance of payments-7.3-0.80.30.81.83.82.03.2...Trade balance (% of GDP), balance of payments-0.94.15.36.16.87.06.98.9...Terms of trade of goods and services (y-o-y)-0.81.30.1-1.4-1.00.80.70.71.70.10.2Capital account balance (% of GDP)0.61.71.82.42.53.63.84.5...Net international investment position (% of GDP)-92.2-115.5-108.8-106.3-94.0-83.5-75.8-60.8...Net marketable external debt (% of GDP) (1)-37.8-56.1-54.1-51.4-45.8-37.1-33.7-24.2...Gross marketable external debt (% of GDP) (1)78.7111.4113.8116.9100.588.886.075.3...Export performance vs. advanced countries (% change over 5 years)45.622.411.86.6-11.9-15.3-9.4-6.01...Export market share, goods and services (y-o-y)4.7-3.3-7.9-4.0-10.61.74.80.7...Net FDI flows (% of GDP)-2.2-0.5-3.0-1.6-2.10.0-2.7-1.6...Savings rate of households (net saving as percentage of net disposable income)3.93.43.44.12.64.35.74.3...Private credit flow, consolidated (% of GDP)13.26.0-4.2-4.4-6.0-1.0-0.5-3.0...Private sector debt, consolidated (% of GDP)86.6117.0115.6115.0102.095.591.083.8...of which household debt, consolidated (% of GDP)27.237.739.737.631.728.125.621.5...of which non-financial corporate debt, consolidated (% of GDP)59.479.375.977.470.367.465.462.3...Corporations, net lending (+) or net borrowing (-) (% of GDP)-1.44.95.15.23.66.83.04.23.75.17.1Corporations, gross operating surplus (% of GDP)24.024.024.725.424.525.726.426.626.826.727.1Households, net lending (+) or net borrowing (-) (% of GDP)0.50.61.53.53.03.14.85.24.53.12.7Deflated house price index (y-o-y)-3.1-9.0-5.9-6.9-9.3-4.33.211.6...Residential investment (% of GDP)4.34.23.12.22.01.82.11.9...GDP deflator (y-o-y)4.24.02.32.23.42.93.41.72.32.83.2Harmonised index of consumer prices (HICP, y-o-y)5.74.04.73.95.71.70.00.10.42.23.1Nominal compensation per employee (y-o-y)7.1-1.30.63.12.01.61.31.65.06.15.6Labour productivity (real, person employed, y-o-y)3.5-4.21.81.7-1.81.0-0.81.0...Unit labour costs (ULC, whole economy, y-o-y)3.53.0-1.11.43.90.62.10.75.13.02.6Real unit labour costs (y-o-y)-0.7-1.0-3.4-0.80.4-2.3-1.2-1.12.70.2-0.5Real effective exchange rate (ULC, y-o-y)2.1-9.7-1.2-0.3-3.0-1.7-2.5-2.03.92.70.8Real effective exchange rate (HICP, y-o-y)3.1-5.31.6-0.4-2.2-1.4-3.6-2.00.70.2.Tax rate for a single person earning the average wage (%)36.137.831.235.035.134.534.534.5...Tax rate for a single person earning 50% of the average wage (%)20.4*23.823.826.834.534.534.534.5...Total Financial sector liabilities, non-consolidated (y-o-y)22.6-0.8-0.37.1-6.7-5.08.20.6...Tier 1 ratio (%) (2).13.114.113.816.017.014.613.8...Return on equity (%) (3).16.33.78.07.37.1-15.3-0.9...Gross non-performing debt (% of total debt instruments and total loans and advances) (4).7.710.912.814.114.014.211.0...Unemployment rate7.210.011.211.011.010.27.76.85.24.84.5Long-term unemployment rate (% of active population)3.34.25.55.25.04.93.73.1...Youth unemployment rate (% of active population in the same age group)18.326.426.426.028.226.620.417.3...Activity rate (15-64 year-olds)61.361.261.962.463.764.767.068.6...People at risk of poverty or social exclusion (% total population)30.329.629.931.533.534.831.828.226.3..Persons living in households with very low work intensity (% of total population aged below 60)11.511.311.912.813.513.612.89.48.2..General government balance (% of GDP)-6.4-4.6-4.5-5.5-2.3-2.6-2.1-1.6-1.8-2.4-2.5Tax-to-GDP ratio (%)38.039.237.536.938.638.138.339.239.037.836.7Structural budget balance (% of GDP)..-3.4-4.2-1.2-1.3-2.0-1.7-2.2-3.4-3.6General government gross debt (% of GDP)64.177.880.580.778.276.675.774.773.572.371.2forecast 
 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

the 

2016 

longer 

implementing 

(2) 
Progress 
recommendations for Hungary has to be seen in 
a 
the 
term  perspective 
introduction of the European Semester in 2011). 
Over  the  six  year  period  recommendations  have 
focused on the issues of public finances, taxation, 
the labour market and the business environment. 

(since 

progress 

considerable 

Over the 2011-2016 period the government has 
achieved 
with 
strengthening  public  finances.  Structural  reform 
measures  were  included  in  the  2011  Convergence 
Programme  and  further  saving  measures  were 
adopted  as  part  of  the  2012  budget.  Moreover,  a 
new package of consolidation steps, concentrating 
mainly on the revenue side, was announced in the 
2012  Convergence  Programme  with  the  ambition 
to  attain  the  deficit  targets  in  2012  and  2013.  In 
June  2013,  the  Council  of  the  European  Union 
decided  to  abrogate  the  decision  on  the  existence 
of an excessive deficit in Hungary. 

In 

recent  years 

Recommendations  regarding  labour  taxation, 
labour  market  policies  and  social 
active 
assistance  have  been  adopted  every  year  since 
2011. 
the  authorities  have 
implemented  several  measures  to  reduce  the  tax 
wedge,  especially  tax  credits  for  families  and 
targeted  social  security  contribution  cuts  for 
selected groups and have achieved some progress. 
However,  the  Hungarian  tax  wedge  remains  high 
in  international  comparison,  especially  for  low 
income  earners.Similarly,  some  progress  can  be 
observed  regarding  active  labour  market  policies. 
For  years,  the  authorities'  main  focus  was  the 
public  works  scheme  with  growing  number  of 
participants;  however,  its  efficiency  was  limited. 
Recently  the  expansion  of  the  scheme  halted  and 
no  further  increase  of  the  budgeted  amount  is 
expected. In fact the number of the public workers 
started  to  decline  reflecting  improving  labour 
market  conditions.  Further  activation  measures 
were adopted such as the reimbursement of travel 
costs.  The  recent  increase  of  the  minimum  wage 
also may further encourage public workers to enter 
the open labour market. A number of programmes 
have  recently  been  launched  with  the  support  of 
the  European  Social  Fund  (ESF)  and  the  Youth 
Employment Initiative (YEI). (see Section 3.3). 

(2)  Other major reforms taken are described in section 3. 

the 

Semester 

European 

A  third  area  of  recommendations  has  been 
centred  on  barriers  to  business.  Hungary  has 
received a recommendation in this area every year 
started. 
since 
Recommendations  cover  several  fields  including 
high  administrative  burdens;  public  procurement; 
the 
legislative  process;  competition;  a  stable 
regulatory  environment;  tax  compliance  costs  and 
supporting the SME sector. Several measures were 
developed  in  response.  For  example  the  Funding 
for  Growth  Scheme,  a  program  of  the  Central 
Bank helped SMEs by subsidiaries loans. Another 
very successful measure was linking cash registers 
online to the tax authority. 

emphasised 

Between  2013  and  2015  Hungary  received 
yearly  recommendations  to  take  measures  to 
restore  lending  to  the  real  economy.  This 
included 
reducing  burdens  on  banks  and 
decreasing  state  ownership  in  the  banking  sector. 
In 2015, the Hungarian authorities announced their 
plans to reduce the financial burden on banks. This 
was 
of 
understanding  signed  with  the  European  Bank  for 
Reconstruction and Development. The government 
committed itself to gradually reduce bank taxes, to 
reprivatise  two  lenders  recently  acquired  by  the 
Hungarian  state,  and  to  assist  in  reducing  non-
performing loans. It also committed to refrain from 
implementing new laws or measures with potential 
negative impact on the profitability of the banking 
sector. 

a  memorandum 

in 

Following  the  2016  country  report  and  the  in-
depth  review,  Hungary  was found  to  no longer 
experience macroeconomic imbalances. Hungary 
was  assessed  to  be  on  a  balanced,  albeit  still 
relatively  moderate  growth  path,  gradually 
reducing  its  imbalances.  External  imbalances  had 
been significantly reduced and the public debt ratio 
declined  since  the  beginning  of  the  decade.  The 
indicators  of  net  international  investment  position 
had  rapidly  improved.  The  country  also  repaid  its 
debt  under  the  2008  balance  of  payment  assistant 
programme. 

the 

2016 

Overall, Hungary has made limited progress in 
addressing 
country-specific 
recommendations (Table 2.1). Some progress has 
been  made  in  reducing  the  tax  wedge  for  low-
income  earners,  but  progress  in  reducing  sector 
specific taxes and strengthening transparency and  

11 

 
 
                                                           
2. Progress with country-specific recommendations 

coverage  of  social  assistance  and  unemployment 
benefits,  as  well  as  in  increasing  the  participation 
of  disadvantaged  groups,  in  particular  Roma,  in 
inclusive mainstream education.  

competition 
in  public  procurement  has  been 
limited.  The  latter  is  to  a  large  extent  due  to  a 
delay in the development and implementation of e-
procurement. On the regulatory environment in the 
services  and  retail  sector,  no  progress  has  been 
achieved. Regarding labour market, education and 
social  policies  (CSR3),  some  progress  has  been 
made in introducing incentives towards supporting 
the transition from the Public Work Scheme to the 
primary labour market and reinforcing other active 
labour  market  policies.  Limited  progress  has  also 
the  adequacy  and 
been  made 

improving 

in 

Table 2.1: 

Summary Table in 2016 CSR assessment 

Source: European Commission 

12 

CSR1: 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.  CSRs related to compliance with the Stability and Growth Pact will be assessed in spring once the final data are available. CSR2: 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.  Hungary has made limited progress in addressing CSR2*:  Limited progress has been made regarding sector specific taxes.   Some progress has been made on reducing the tax wedge of low income earners.  Limited progress has been made on strengthening transparency and competition in public procurement.  No progress has been made on improving the regulatory environment in the services sector and in the retail sector.  CSR3: 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. Hungary has been made limited progress in addressing CSR3*:  Some progress has been made to facilitate the transition from the public works scheme to the primary labour market and reinforce other active labour market policies.  Limited progress has been made in improving the adequacy and coverage of social assistance and unemployment benefits  Limited progress has been made to improve educational outcomes and to increase the participation of disadvantaged groups, in particular Roma, in inclusive mainstream education.   
 
 
 
 
 
 
2. Progress with country-specific recommendations 

13 

 Box 2.1: Contribution of the EU budget to structural change in HungaryHungary is a major beneficiary of the European Structural and Investment Funds (ESI Funds) with an allocation of EUR 25 billion for the period 2014-2020. This is equivalent to 3.1% of GDP annually (over 2014-2017) and 39% of the expected national public investment1. Out of the EU financing, EUR 2.3 billion is planned for delivery via financial instruments (a substantially higher amount than in the 2007-2013 period). By 31 December 2016, EUR 13.1 billion, which represents about 52 % of the total allocation for ESI Funds, have already been allocated to concrete projects. Financing under the European Fund for Strategic Investments, Horizon 2020, the Connecting Europe Facility and other directly managed EU funds is additional to the ESI Funds. By end 2016, Hungary has signed agreements for EUR 1 billion for projects under the Connecting Europe Facility. The EIB Group approved financing under EFSI amounts to EUR 26 million, which is expected to trigger nearly EUR 626 million in total investments (as of end 2016). In addition to that, administrative reforms support is available through targeted financing under the European Social Fund, advice from the Structural Reform Support Service and, indirectly, through technical assistance. ESI Funds helped progress on a number of structural reforms in 2015 and 2016 via ex-ante conditionalities2 and targeted investment. Examples include targeted investments in R&D via smart specialisation by creating a framework for constant dialogue among stakeholders; coordinating environmental investments with water basin management plan; the development of the transport plan which facilitates the development of mature road and railway projects; as well as the improvement of public employment services through the profiling system, the targeting of labour market policies and the quality of education, training and health systems. These reforms have prepared the ground for better implementation of public investment projects in general including those financed from national sources and from other EU instruments. Fulfilment of the remaining ExACs is on track. Only one action of the ex-ante conditionality related to public procurement is at risk of non-fulfilment.  The relevant CSRs focusing on structural issues were taken into account when designing the 2014-2020 programmes. Funds are targeted at the modernisation of the public education system, the combatting early-school leaving, the promotion of inclusive education and to balancing labour market mismatches through enhancing employability of disadvantaged groups, vocational education and lifelong learning. Early childhood care and social inclusion measures, particularly for Roma also constitute important areas for investment. The funding will also support Hungary's efforts to improve the quality of its public administration. To combat youth unemployment, Hungary received support from the Youth Employment Initiative (YEI) – to date over 32 000 young people have benefitted from it. A substantial share of ESI Funds will be devoted to ensure the sustainability of Hungary's transport infrastructure: emphasis is put on rail investments (sub) urban connections and regional connectivity. A further development goal is the shift to a low carbon economy, via improving energy efficiency and an increasing share of renewable energy sources. In addition to challenges identified in the past CSRs, ESI Funds address wider structural obstacles to growth and competitiveness and provide a financial basis for Hungary’s medium and long-term development. ESI Funds will also help stimulate growth by investments focusing on enhanced innovation activity and the competitiveness of enterprises, also through better access to finance. The improvement of the competitiveness of agricultural holdings, investments in processing activities and food chain organisations, supporting biodiversity, better soil management are also promoted. In the waste and water sectors, some investments are still needed to make sure EU environmental requirements are fulfilled (see section 3.5). https://cohesiondata.ec.europa.eu/countries/HU                                                            1 National public investment is defined as gross capital formation + investment grants + national expenditure on agriculture and fisheries. 2 Before programmes are adopted, Member States are required to comply with a number of ex-ante conditionalities, which aim at improving framework and conditions for the majority of public investments areas. For Members States that did not fulfil all the ex-ante conditionalities by the end 2016, the Commission has the possibility to propose the temporary suspension of all or part of interim payments.  
 
 
 
 
 
 
 
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES 

Taxation 

The government has introduced new reforms to 
tackle  the  persistently  high  overall  tax  burden 
in  Hungary.  The  total  tax-to-GDP  ratio  hovered 
around  38-39 %  in  recent  years,  which  was  the 
highest among the country's peers at a similar level 
of  development.  There  have  been  marked 
improvements  in  tax  composition.  The  weight  of 
direct taxes declined significantly (by 7 pps.) over 
the past ten years, along with a parallel increase in 
the  share  of  indirect  taxes.  This  shift  mainly 
reflected the phasing-in of a new flat rate personal 
income  tax  regime.  Nevertheless,  the  tax  burden 
on  labour  income  still  remained  substantial  on 
account  of  high  social  security  contributions. 
Systemic changes also included the introduction of 
some relatively distortive forms of taxation such as 
sector-specific 
levies.  The  government's  most 
recent  tax  package  of  November  2016  aims  at 
reducing 
tax  burden,  while  also 
the  overall 
lowering the tax wedge on labour.  

in  2016, 

Despite  some  recent 
improvements,  sector-
specific  taxes  still  play  a  prominent  role, 
weighing  on  the  business  environment.  The 
introduction  of  these  taxes  was  motivated  by  the 
goal  to  increase  tax  proceeds  from  areas  where 
profitability  was  perceived  to  be  high.  Revenues 
from sector-specific taxes were estimated at about 
1.5 %  of  GDP 
including  banking, 
insurance, utilities, energy, telecommunication and 
retail  sectors.  The  decline  from  the  peak  in  2013 
(close  to  2 %  of  GDP)  reflects  in  particular  the 
halving of the banking tax in 2016. However, apart 
from  an  additional  marginal  decrease  in  taxes  on 
the banking sector, no further reductions in sector-
specific  taxes  are  implemented  in  2017.  These 
surcharges are usually based on turnover or assets 
and  in  some  cases involve progressive  rates. As  a 
consequence,  intermediate  goods  and  services  are 
also  part  of  the  tax  base,  which  results  in  a 
distortionary  effect.  Given  that  many  of  the 
sectorial  levies  could  not  be  fully  passed  on  to 
customers, they also decrease the rate of return to 
investment  (Deloitte,  2015).  Even  though  the 
magnitude  of  the  direct  distortive  effects  may 
differ,  the  presence  of  selective  extra  taxes  itself 

creates  regulatory  unpredictability,  weighing  on 
investor confidence. 

those 

thus  benefits  mostly 
that  had 

The  general  corporate  income  tax  rate  was 
lowered  markedly  from  2017  onwards,  mostly 
benefiting  large  companies.  The  new  tax  rate  of 
9 %  has  replaced  the  previous  scheme  of  10 %, 
increasing  to  19 %  above  a  particular  threshold. 
larger 
reduction 
The 
companies,  especially 
fewer 
opportunities  to  use  the  available  extensive  tax 
allowances.  The  lowest  corporate  income  tax  rate 
in  the  EU will  improve Hungary's  competiveness, 
tax 
but  could  make 
optimisation  purposes  by  foreign  companies.  At 
the  same 
tax  regime  for 
the  overall 
companies remains complex. Sector-specific taxes 
and  other  smaller  taxes  on  enterprises  are  bigger 
sources of tax revenue than the standard corporate 
income tax.  

it  more  attractive  for 

time, 

The high tax wedge on  labour,  particularly  for 
low-income  earners,  can  negatively  affect  the 
employability  of  low  productivity  workers  and 
hamper  investment.  In  2015,  the  last  year  with 
comparable  figures,  Hungary  belonged  to  the 
group of countries with the highest tax burden for 
several taxpayer categories. In particular, Hungary 
had the highest tax wedge within the EU for single 
earners  earning  50 %  of  the  average  wage;  the 
second  highest  at  67 %  of  the  average  wage  and 
the fourth highest at the average wage. 

A  number  of  measures  adopted  before  2016 
reduced the tax wedge for targeted groups, but 
these  had  a  limited  effect  on  low  earners 
overall.  Family  tax  credits  reduce  the  tax  wedge 
for  low-earners  with  children.  However,  even  for 
these  household  types,  the  tax  wedge  remains 
above the EU average, especially for families with 
less  than  three  children  at  low  incomes.  Targeted 
social  security  allowances,  introduced  under  the 
Job  Protection  Act  (JPA)  in  2013,  reduce  the  tax 
wedge  for  several  groups  such  as  unskilled 
workers,  certain  age  groups  or  carrier  starters. 
However,  the  estimated  effect  of  such  allowances 
– 3.5 pps. in 2016 for a typical beneficiary earning 
67 %  of  the  average  wage  –  has  not  substantially 
changed  Hungary's  comparative  position  (see 

14 

 
 
3.1. Public finances 

Graph  3.1.1).  Measures  adopted  since  2013 
include  the  lowering  of  the  flat  personal  income 
tax  rate  by  1  pp.  and  the  further  extension  of  the 
family tax credit. 

increases in the minimum wage, the net impact of 
the  package  is  likely  to  be  an  increase  in  total 
labour  costs  regarding  workers  at  low-income 
levels, at least in the short term. 

Graph 3.1.1:  Tax wedge of a single worker earning 67% of 

average wage 

Note 1: The tax wedge is an indicator of total labour tax 
burden. It is calculated as the ratio of all taxes and total 
labour cost.  
Note 2: Predicted average wage developments are based 
on European Commission Forecast. 
Note 3: EU mean is the unweighted average of EU28. 
Source: OECD and European Commission calculations. 

In  autumn  2016,  the  Government  launched  a 
major  multiannual  reform  package,  which 
reduces  the  tax  wedge  for  low-wage  earners  as 
well.  Employers'  social  security  contributions  are 
set to decrease by 5 pps. in 2017, and by a further 
2  pps.  in  2018.  For  single  earners  at  67 %  of  the 
average  wage,  the  measure  is  estimated  to  reduce 
the  tax  wedge  by  2  pps.  in  2017,  and  then  by 
around  1  pp.  in  2018,  reaching  a  level  just  above 
45 %.  For  workers  eligible  for  the  contribution 
allowances  under  the  JPA,  the  reduction  will  be 
lower as the targeted allowances were also cut in a 
parallel  measure.  Their  tax wedge  is calculated  to 
decline from 45 % in 2016 to about 43 % by 2018 
(Graph  3.1.1).  Despite  the  noticeable  reduction, 
the  tax  wedge  for  low-income  earners  without 
children  will  remain  considerably  higher  than  the 
EU  average  of  37 %.  By  contrast,  for  households 
with two children, the reduction in the tax wedge is 
more substantial due to an on-going increase of the 
family  tax  credit.  As  a  consequence,  for  this 
household category, the tax wedge will be close to 
the EU average by 2018.(3) With the simultaneous 

(3)  For  example,  the  tax  wedge  for  a  single  earner  at  67%  of 
the  average  wage  with  two  children  is  estimated  to 
decrease  from  25.5%  in  2016  to  less  than  21%  in  2018, 

taxes 

Growth friendly taxes such as environmental or 
property  taxes  play  a  relatively  moderate  role. 
The  tax  system  is  already  strongly  reliant  on 
consumption taxes with the highest standard VAT 
rate  (27 %)  in  the  EU.  At  the  same  time,  studies 
show  there  is potential  to  increase  the  reliance  on 
environmental 
(including  vehicle  and 
pesticides  taxes  or  congestion  charges)  (Eunomia, 
2016).  The  effective  excise  rates  on  unleaded 
petrol  and  diesel  are  among  the  lowest  within  the 
EU  (European  Commission,  2016a).  Finally,  the 
level of recurrent property taxes is also low (0.6 % 
of GDP), well below the EU average. The recovery 
of  the  property  market  seems  to  provide  better 
conditions for shifting taxes towards property. 

The  complexity  of  the  tax  system  generates 
important administrative and compliance costs. 
The time and costs required to meet tax obligations 
are  higher  than  in  most  neighbouring  and  OECD 
countries  (World  Bank,  2017).  High  compliance 
costs weigh in particular on SMEs. The simplified 
regimes KATA (small business lump sum tax) and 
KIVA  (small  business  tax)  aim  at  reducing  the 
administrative  burden  on  SMEs.  The  costs  of 
administering  taxes  are  estimated  to  be  ten  times 
higher  for  these  firms  than  for  larger  companies 
(OECD,  2016a).  The  tax  system  includes  a 
multitude  of  small  taxes  generating  only  minimal 
proceeds.  Sector-specific  taxes  also  add  to  the 
complexity  of  the  system.  Several  goods  and 
services  are  subject  to  more  than  one  levy,  often 
using  different  tax  bases.  Tax  policies  are  still 
subject  to  sudden  changes  imposing  adjustment 
transaction  costs  on  businesses.  The 
and 
government 
a 
comprehensive  review  in  order  to  reduce  the 
administrative burdens of taxation and to simplify 
the tax structure. 

announced 

recently 

has 

Measures  to  combat  tax  avoidance  and  fraud 
have significantly contributed to more effective 

only  some  2  pps.  above  the  EU-average  for that  category. 
With eligibility for a JPA allowance, the tax wedge for the 
same  household  type  would  be  already  somewhat  below 
the current EU average. 

15 

01020304050        Standard caseBelow 25 and above 55 years,unskilled and agriculture2015201620172018EU max 2015EU mean 2015EU min 2015 
 
                                                           
                                                                                   
3.1. Public finances 

Graph 3.1.2:  Gross government debt ratio: the baseline 

scenario and alternative trajectories 

Source: European Commission calculations 

to  be  more 

than  offset  by 

The  debt  ratio  is  projected  not  to  remain  on  a 
decreasing path in the medium term, starting to 
increase  again  at  the  end  of  this  decade.  Based 
on  the  Commission's  no-policy-change  baseline 
scenario, government debt is projected to rebound 
to around 74.5 % of GDP by 2027, i.e. to the level 
seen  in  2015  (Graph  3.2).  The  debt  trajectory 
benefits from the estimated decrease in age-related 
public  spending  reflecting  the  impact  of  recent 
parametric pension reforms. However, this effect is 
projected 
the 
deterioration of the underlying primary balance to 
its structural level and the negative effect related to 
the  country's  moderate  potential  growth  coupled 
with 
interest  rates. 
Overall,  Hungary's  medium-term  debt  trajectory 
has  flattened  markedly  compared  to  a  similar 
projection  presented  in  the  last  year's  Country 
Report  (European  Commission,  2016c).  Apart 
from  the  forecast  deterioration  of  the  primary 
balance,  this  reflects  the  adverse  impact  of  the 
wide  positive  output  gap  estimated  for  2018,  the 
year serving as the initial position for the medium-
term  projection (5).  The  level  of  the  output  gap, 
however,  is  subject  to  considerable  estimation 
uncertainty. Therefore the projection results should 
be treated with caution. 

the  assumed  rebound  of 

(5)  With the assumed closing of the output gap and the cyclical 
component,  both  the  primary  deficit  and  the  snowball 
effect are adversely affected with a negative impact on the 
debt-reduction path. 

tax collection. Recent policy initiatives such as the 
introduction  of  online  cash  registers  in  retail  and 
the  Electronic  Public  Road  Trade  Control  System 
(EKAER)  have  produced  visible  results.(4)  The 
VAT  gap,  which  shows  the  magnitude  of  tax 
avoidance, decreased sharply, by 4 pps. to 18 % in 
2014,  although  it  still  remains  above  the  EU 
average  (14 %)  (European  Commission,  2016b). 
The  2017  budget  counts  on  sizeable  yields  from 
curbing  tax  evasion  with  the  help  of  additional 
measures.  These  include  a  further  extension  of 
online  cashiers  to  services  and  introducing  online 
invoicing for inter-company transactions. 

Public debt sustainability 

The  government  debt-to-GDP  ratio  has  been 
steadily  declining  since  the  beginning  of  the 
decade.  The  pace  of  debt  reduction  received  an 
impetus  from  the  takeover  of  mandatory  private 
pension assets by the State. In parallel, the primary 
deficit turned to a surplus (of around 2 % of GDP 
between  2012  and  2015).  More  recently,  debt 
reduction  benefited  also 
favourable 
"snowball"  effect  (i.e.  the  combined  effect  of 
growth  rate  and  interest)  thanks  to  economic 
recovery  and  declining  interest  rates.  The  debt 
ratio is expected to decrease further from 74.7 % in 
2015  to  around  71%  by  2018.  However,  the 
structural primary balance is forecast to move into 
deficit  (of  -1.0 %  of  GDP  in  2018)  reflecting  the 
estimated widening of the positive output gap. This 
poses some risk for Hungary's debt reduction path. 

from  a 

Public  debt  is  still  high  for  a  middle-income 
economy,  but  sovereign  financing  risks  have 
been  considerably  reduced  since  the  crisis 
years.  On  the  basis  of  the  Commission's  short-
term risk indicator, the country faces a low risk of 
an immediate fiscal distress. This is also confirmed 
by  the  recent  upgrades  of  the  country's  sovereign 
risk  ratings.  The  maturity  structure  of  debt  has 
improved. The initially high proportion of foreign 
exchange-denominated  public  debt  has  been 
decreasing,  supported  by  the  central  bank's  self-
financing programme. 

(4)  The  introduction  of  the  electric  road  cargo  monitoring 
system also created administrative burdens as regards intra-
EU  trade.  This  highlights  the  trade-off  between  tax 
collection efficiency and compliance costs.  

16 

5055606570758085901112131415161718192021222324252627% of GDPNo-policy change scenario without ageing costsConvergence Programme scenarioBaseline no-policy change scenario 
                                                           
 
                                                           
 
3.1. Public finances 

The  medium-term  budgetary  framework  has 
not  yet  had  its  desired  effect  of  making  the 
budgetary  process  more 
transparent  and 
predictable.  The  medium-term  framework  was 
adopted  in  2013.  A  key  feature  of  this  planning 
mechanism  is  that  differences  between  plans  and 
the  draft  budget  must  be  formally  justified  by  the 
government. The first medium-term resolution was 
issued  only 
in  December  2015.  It  detailed 
expenditure  and  revenue  plans  for  budgetary 
chapters  over  a  two-year  period.  The  deliberation 
of  the 2017 budget  therefore served  as  a  test case 
for  the  new  framework.  For  several  budgetary 
chapters,  the  differences  between  appropriations 
and  the  respective  medium-term  figures  were 
sizeable (at 0.5 %-1 % of GDP), although this was 
only  four  months  after  the  publication  of  the 
resolution.  The  written 
the 
differences  were  often  unavailable.  Moreover,  the 
medium-term  plans  were  not  based  on  the  most 
appropriate  information,  since  some  explanations 
explicitly  referred  to  decisions  taken  already  in 
autumn 2015. 

justifications  for 

Domestic  numerical  rules  are  an  imperfect 
guide  for  budgetary  policy.  While  the  overall 
objective  of  debt  sustainability  is  underpinned  by 
constitutional  provisions,  there  are  some  design 
weaknesses  in  the  way  it  has  been  implemented 
through numerical fiscal rules. The debt reduction 
formula does not provide an effective constraint in 
practice  due  to  a  very  broad  escape  clause 
introduced  in  2015.  The  nominal  and  structural 
budget balance rules are binding only for the draft 
budget. However, they do not apply for the budget 
law  as  adopted  by  Parliament  and  for 
the 
budgetary execution stage.  

The  role  of  the  Fiscal  Council  in  scrutinizing 
and  shaping  fiscal  policies  remains  weak.  The 
Fiscal  Council  has  continued  to  increase  the 
number  of  published  external  studies.  However, 
this  has  not  been  sufficient  to  ensure  a  strong 
analytical  basis  commensurate  with  the  Council's 
uniquely strong constitutional veto power over the 
budget. The Fiscal Council focuses rather narrowly 
on  the  budget  bill  and  its  amendments,  whereas 
there  have  been  several  examples  of  significant 
fiscal  decisions  and  policy  initiatives  outside  the 
the 
annual  budget 
importance  of  systematically  evaluating  fiscal 
policies throughout the entire year. 

cycle.  This  highlights 

The 
debt 
Commission's  medium-term 
projection  highlights  the  risks  to  the  goal  of 
placing  Hungary's  public  debt  firmly  on  a 
declining  path.  The  primary  balance  forecast  by 
the  Commission  on  a  no-policy-change  basis  for 
2018 is significantly below the planned level in the 
latest Convergence Programme (by almost 1 % of 
GDP).  If  the  fiscal  trajectory  remains  in  line  with 
the plans in the Convergence Program up to 2020, 
the  debt  ratio  would  decrease  relatively  fast 
towards the 60 % of GDP benchmark level (Graph 
3.2).  However,  there  are  negative  risks  to  the 
medium-term  fiscal  plans.  Without  offsetting 
measures,  the  planned  "Paks  II."  nuclear  power 
plant project is estimated to result in a considerable 
debt  increasing  effect  (European  Commission, 
their 
2015a; 
performance  is  improved,  the  expanding  role  of 
state-owned  companies,  especially  in  the  loss-
making  regulated  energy  sector,  can  increase 
contingent liability risks (see section 3.5). 

2014).  Unless 

Romhányi, 

Hungary  appears  to  face  medium  level  debt 
sustainability  risks.  The  country's  medium-term 
sustainability gap referred to as the S1 indicator is 
currently  estimated  at  1.5 %  of  GDP.  This  shows 
the  required  fiscal  adjustment,  which  would  need 
to  be  achieved  during  the next  five  years  in order 
to  bring down the  debt ratio to  60 %  by  2031. At 
the same time, the long-term sustainability gap S2 
is  at  3.3 %  of  GDP.  This  is  the  sufficient  upfront 
adjustment  ensuring  that  the  debt  ratio  would  not 
move on an ever-increasing path in the long term. 
About one half of the adjustment need reflects the 
projected 
public 
in 
expenditure  after  2030  (European  Commission, 
2015b). 

age-related 

rebound 

Fiscal framework 

Despite a solid fiscal performance, there are still 
in  Hungary's  fiscal  governance 
weaknesses 
framework. The repeated overachievement of the 
deficit  targets  and  the  steady  reduction  of  the 
public debt ratio reflected conservative planning. It 
also  evidenced  a  strong  policy  commitment  to 
intervene  with  corrective  steps  in  case  of  an 
emerging  slippage.  The  adopted  improvements  in 
the  fiscal  framework,  most  notably  strict  rules  of 
layers  of  general 
debt  control  across  all 
government, also contributed to the observed fiscal 
discipline.  However,  some  noteworthy  gaps  still 
remain in the fiscal framework. 

17 

 
3.2.  FINANCIAL SECTOR 

system 

banking 

The  Hungarian 
has 
strengthened  substantially  over  the  past  two 
years  (Table  3.2.1).  The  funding  structure  and 
capital  position  of  banks  are  adequate.  Following 
several  years  of  deleveraging,  the  banking  system 
is  mainly  deposit-funded  –  customer  deposits 
accounted for 57 % of the banks’ total liabilities at 
the  end  of  2015.  The  loan-to-deposit  ratio  was 
80.9 %.  The  full  conversion  of  the  large  foreign 
currency-denominated  loan  book  (in  2014  and 
2015)  into  Hungarian  forint  reduced  both  foreign 
exchange funding needs and short term refinancing 
risks.  

for  expected  losses.  A  sustainable  rise  in  profits 
would  be  possible  only  when  interest  rates  start 
rising again. 

Graph 3.2.1:  Non-performing loans, 90-day+ ratios 

The  shock-absorption  capacity  of  the  banking 
system  remains  strong.  Capital  adequacy  at 
system level amounts to 20 % while Tier 1 eligible 
capital  represents  close  to  14 %.  In  the  stress  test 
scenario  designed  by  the  Hungarian  central  bank, 
banks’  solvency  levels  seemed  sufficient  both  at 
sector and individual bank level. Liquidity reserves 
in  stressed  conditions  are  adequate,  though  some 
banks  move  away  from  the  regulatory  minimum 
after the theoretical shock. 

Table 3.2.1: 

Financial soundness indicators, all banks 

(1) ECB aggregated balance sheet 
Source: ECB, CBD 

Bank  profitability  has  been  improving  but  still 
lies  below  that  of  regional  peers.  Before  2015, 
the  authorities  had  implemented  a  number  of 
measures  with  largely  negative  effects  on  the 
banking system’s profitability. These included the 
highest bank tax in the EU, a financial transaction 
tax  and  a  set  of bills to  help  mortgage borrowers. 
Since  2015,  the  authorities  have  announced  a 
number of policy measures to support the domestic 
financial  sector,  including  a  reduced  bank  levy 
(from 0.53 % to 0.24 % in 2016, and to 0.21 % in 
2017  and  2018).  The  first  levy  reduction  was 
already  reflected  in  the  positive  2016  profitability 
data,  after  breaking  even  in  2015.  However, 
Hungary  still  lags  behind  regional  peers,  who 
recorded an average profitability of 6.7 % in 2015. 
Profitability  in  2016  was  also  driven  by  the 
stabilised  environment.  Yet,  much  of  the  2016 
profits  derive  from  the  reversal  of  past  provisions 

Source: MNB 

Graph 3.2.2:  Net NPLs to own funds (%) 

(1) No data available for GB and SK for Q2 - 2016 and for 
RO, HR, CZ, LU and FI for Q4 – 2012. 
Source: ECB (consolidated banking data) 

Although declining, the level of non-performing 
loans (NPL) remains high. The NPL ratio peaked 
in 2014 (Graph 3.2.1). Following the conversion of 
foreign-currency  mortgages  and  a  pick-up  in 
economic  growth,  also  reflected  in  real  estate 
valuations, banks’ asset quality has been gradually 
improving. NPL ratios stood at 16.9% and 7.1% in 
the retail and corporate sectors respectively in the 
first  half  of  2016.  Although  the  absolute  level  is 
still  high  in  comparison  to  other  Member  States, 
they  are  well  provisioned  (coverage  ratio  of 
63.4 % in June 2016). The loss absorbing capacity 
and the remaining spill-over risks to the sector are 

18 

5.010.015.020.02010Q1Q2Q3Q42011Q1Q2Q3Q42012Q1Q2Q3Q42013Q1Q2Q3Q42014Q1Q2Q3Q42015Q1Q2Q3Q42016Q1Q2HouseholdsCorporates%050100150200250CYGRPTITIEBGSIHUROESLTHRDKCZLVMTATBEFRNLPLDESEFIEELU2016 Q22012 Q4 
 
 
 
 
 
 
 
3.2. Financial sector 

comparatively  limited  as  net  NPLs  to  own  funds 
represented 43.6 % in June 2016 (Graph 3.2.2). 

Graph 3.2.3:  Growth rate of outstanding loans 

Measures  have  been  taken  to  address  bad 
household  debt.  Delinquency  rates  are  high 
among  household  mortgage  borrowers  (close  to  a 
quarter  of  mortgages  are  classified  as  NPL).  The 
Hungarian  Asset  Management  Company,  with 
capacity to purchase a total of 35 000 dwellings, is 
targeting  non-performing  debtors  in  the  most 
difficult financial situation. Mortgage holders who 
are  excessively  indebted  can  also  initiate  a  debt 
Personal 
settlement 
Bankruptcy Act adopted in 2015. Debtors have in 
general  improved  cooperation  with  lenders.  This 
was  helped  by  a  recommendation  issued  to  credit 
latter 
institutions  by 
determined  the  expected  minimum  framework  of 
cooperation between debtors and creditors.  

the  central  bank.  The 

procedure 

under 

the 

corporate 

loans.  The 

Important  steps  were  also  taken  to  tackle  non-
performing 
asset 
management  company  established  by  the  central 
bank (MARK) officially started operating in 2016. 
It aims to tackle the sizeable number of distressed 
commercial real estate loans and more generally to 
initiate  the  clean-up  of  banks’  balance  sheets  by 
selling  their  non-performing  portfolios  on  the 
market. The central bank is also working on a new 
recommendation  which  will  set  out  best  practice 
guidelines  on  out-of-court 
restructuring  and 
consensual  settlement  of  NPLs  in  the  corporate 
to 
sector.  The 
encourage lenders to adopt a more cooperative and 
coordinated  approach  where  more 
than  one 
financial  creditor  is  involved.  It  could  become  an 
important  tool  for  resolving  such  loans  and 
improve  the  depth  of  the  market  for  distressed 
assets in Hungary.  

recommendation 

is  designed 

Lending  to  the  private  sector  is  improving  but 
both  lenders  and  borrowers  remain  cautious. 
The  recent  trend  in  bank  lending  to  the  private 
sector  is  positive  (Graph  3.2.3).  The  domestic 
banking  sector’s  lending  capacity  is  close  to  a 
record  high.  Yet,  willingness  to  lend  is  only 
gradually  improving  (Graph  3.2.4).  Households 
and  businesses  also  remain  cautious  about  taking 
on  new  debt.  In  2015,  lending  to  the  corporate 
segment  decreased  by  4.3 %,  while  household 
loans dropped by 5.8 % (excluding the effect of the 
legal settlement of household mortgage loans). 

Source: MNB 

Graph 3.2.4:  Lending conditions in the corporate sector 

Source: MNB 

In  2016,  several  factors  led  to  a  gradual 
increase  in  appetite  for  borrowing.  On  the 
supply  side,  competition  between  lenders  and 
lending conditions improved. On the demand side, 
wages and home prices rose, also supported by the 
Home  Purchase  Subsidy  scheme  (Box  3.2.1).  The 
volume  of  new  household  loans  grew  by  38 %  in 
2016. Yet the total value of outstanding household 
loans  declined  by  4.5 %  as  repayments  outgrew 
new  lending.  Growth  of  domestic  corporate  loans 
turned  positive  in  2016  but  remained  restrained 
due to firms’ still large self-financing capacity and 
frequent  use  of  cross-border  loans.  In  addition, 
confidence  surveys  indicate  that  borrowers  are 

19 

-18-16-14-12-10-8-6-4-202462010 Q1Q2Q3Q42011 Q1Q2Q3Q42012 Q1Q2Q3Q42013 Q1Q2Q3Q42014 Q1Q2Q3Q42015 Q1Q2Q3Q42016 Q1Q2%Loans to NFCLoans to SMEsLoans to households-50-40-30-20-1001020304050607080901002008 H12009 Q1Q32010 Q1Q32011 Q1Q32012 Q1Q32013 Q1Q32014 Q1Q32015 Q1Q32016 Q1%TIGHTENINGEASING 
 
 
 
3.2. Financial sector 

the  risk  of  their  commercial  real  estate  NPLs. 
Hungary has a minimum foreign exchange funding 
adequacy  ratio  in  place,  which  requires  banks  to 
hold a sufficient amount of stable foreign currency 
funds in proportion to their foreign currency assets. 
In  addition,  there  is  also  a  foreign  exchange 
coverage  ratio,  which  imposes  a  limit  on  the 
degree of currency mismatches between assets and 
liabilities. 

in  2015  when 

The  National  Bank  has  expanded  its  area  of 
action  beyond  monetary  policy  and  purchased 
the  Budapest  Stock  Exchange  (BSE).  The  latter 
the  MNB 
was  nationalised 
purchased  68.8  %  of  the  BSE  from  Austrian 
stakeholders. The BSE then adopted a new strategy 
to  boost  capital  market  access,  growth,  liquidity 
and improve the financial culture in Hungary. The 
BSE  aims  to  become  an  alternative  to  bank 
financing  for  local  companies.  The  new  BSE 
management aims to reach market capitalisation of 
30 % GDP, build a market for small firms with at 
least  30  participants,  and  attract  at  least  5  stock 
market launches (IPOs) a year. 

conservative  about  longer-term  investments.  This 
is partly due to the high dependency on EU funds 
(more details in section 3.4). 

initiatives 

Policy 
to  boost  small  business 
financing  start  to  bear  fruits  in  loan  growth. 
The  Funding  for  Growth  Scheme  (European 
Commission 2015a and 2016c) was substituted by 
the  new  Market-Based  Lending  Scheme  designed 
to  boost  SME  financing.  It  provides  interest  rate 
swaps  to  participating  banks,  which  cover  part  of 
the  interest  rate  risks  generated  by  new  loans.  In 
the  first  half  of  2016,  loan  growth  in  the  SME 
segment  was  up  by  5 %  y-o-y.  At  the  same  time, 
aggregate net lending to Hungarian firms increased 
by 0.3 %. 

improve 

financial 

Hungary  announced  a  number  of  macro-
prudential  measures  in  2016,  which  should 
further 
stability.  The 
Hungarian  central  bank  (MNB)  identified  nine 
systemically  important  financial  institutions  and 
introduced  relevant  risk  buffers,  applicable  from 
2017.  It  also  announced  its  intention  to  introduce 
institution-specific  systemic  risk  buffers  linked  to 

20 

 Box 3.2.1: House price developmentsThe previous decline in real house prices reversed sharply as prices surged in 2015. While such a development may involve potential macroeconomic risks, house prices have just returned to their pre-crisis levels in nominal terms and the subsequently introduced debt cap rules should help limit the risks of market overheating. In addition, the revival of the property market improves the dynamics of the domestic credit market and can also help resolve the problem of the still high non-performing mortgage loans of households.  The uptake of the housing market stimulus offered by the Home Purchase Subsidy scheme for families since the beginning of 2016 has been slower than anticipated, but is expected to pick up next year. The number of construction permits issued doubled compared to the first half of last year. The work of construction companies is becoming more difficult due to the shortage of suitable labour. While nominal housing prices increased by 14.4 % in year-on-year terms, from 2014 to 2015, the Central Bank forecast for the third quarter of 2016 was for it to slow to 9% in annual terms. The slowdown in price increases is visible in monthly data. The housing market also displays marked regional variation, with the highest price growth in the capital.  Excessive house price and credit growth is being curbed with the application of debt cap rules. To tackle vulnerabilities in the property sector, Hungary had previously introduced loan-to-value and loan-to-income limits. New stricter loan-to-value limits were recently applied to new mortgages and limits were further differentiated according to the currency of a loan. These limits restrict the available loan amounts compared to the value of the property, hence mitigating housing demand and curbing lenders' potential losses in the event of falling house prices. Loan-to-income limits restrict the amount of monthly instalments compared to the income of borrowers, thus lowering their probability of default. Both types of limits apply to individual credit contracts; hence they are very effective in tackling over-indebtedness. In a pro-active manner, the central bank introduced comprehensive debt cap rules in time for the cyclical upturn in 2015. Lenders have integrated the rules into their lending practices and the room for competing in risk-taking has thus diminished. Even though the housing market has not yet overheated, house prices have exhibited rapid growth for the past two years and the ratio of borrowers with higher levels of indebtedness has slightly increased since the regulation was introduced. These developments warrant the close monitoring of housing and credit market indicators.  
 
 
 
 
 
3.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

LABOUR MARKET 

The  Hungarian  labour  market  has  improved 
significantly  since  the  recovery  started  in  2013 
but  still  faces  challenges.  While  unemployment 
has significantly decreased for all skill groups, it is 
still high for low-skilled workers. There are major 
disparities in labour market outcomes across high, 
medium  and  low-skilled  workers.  These  have 
fallen  significantly  in  the  last  five  years,  but 
remain high in 2015 (Graph 3.3.1). One reason for 
such disparities may be the high tax burden on low 
wages.  In  this  regard,  new  measures  lowered  the 
tax wedge introduced in January 2017 will reduce 
tax/social  security  contributions  (see  Section  3.1). 
At the same time, surveys reported that businesses 
in certain sectors face increasing labour shortages. 
According  to  the  European  Business  Survey,  the 
share of firms in industry reporting that labour is a 
‘factor 
increased 
significantly since 2013 (surpassing 50 % in 2016) 
and  is  now  the  highest  in  the  EU.  Labour 
productivity growth has been weak in recent years 
(see  Section  3.4).  Low  participation  in  adult 
learning  as  well  as  insufficient  support  via  active 
labour  market  policies  may  contribute  to  skills 
mismatches  and  low  productivity  growth.  The 
employment  rates  of  older  workers  and  people 
with  disabilities  are  very  low  and  the  duration  of 
working life is one of the shortest in the EU. (6)  

limiting  production’  has 

Recent  wage  developments  are  symptomatic  of 
a  tightening 
labour  market.  Wage  growth 
accelerated  in  2015  and  especially  in  2016, 
indicating  an  increasingly  tight  labour  market 
(National  Bank  of  Hungary,  2016b,  p.  30-33).  In 
2016, wages are projected to have increased faster 
than  expected,  due  to  inflation,  productivity  and 
unemployment  developments 
the 
original calculations by Arpaia and Kiss, 2015, see 
also section 1.). 

(update  of 

(6)  The  employment  rate  for  older  workers  was  45.3  %  in 
2015,  substantially  below  the  EU  average  (53.3  %).  The 
duration of working life is the second lowest in the EU at 
31.8 years, about 3.5 years lower than the EU average. The 
employment rate for people with disabilities was 34.2 % in 
2014, against the EU average of 48.7 %. 

Graph 3.3.1:  Relative dispersion of employment rates by 

education level, 2010, 2014 and 2015 

Source: Update of calculations by European Commission 
(2013) and Kiss and Vandeplas (2015). European 
Commission calculations based on Eurostat data. 

A  significant  increase  in  the  minimum  wage  is 
being introduced in 2017 and 2018. In November 
2016  the  government  reached  an  agreement  with 
social  partners  to  increase  the  minimum  wage  by 
15 %  in  2017  and  an  additional  8 %  in  2018  (see 
details  in  Box  1.1).  Increases  in  the  minimum 
wage have the potential to reduce in-work poverty 
and  reduce  wage  inequality.  At  the  same  time, 
available  evidence  about  past  minimum  wage 
increases  in  Hungary  points  to  a  small  negative 
effect on employment in the small enterprise sector 
(5  to  20  employees).  There  is  also  evidence  of 
adverse  effects  on  the  job-loss  and  job-finding 
probabilities of low-wage workers in the short run 
(Kertesi and Köllő, 2003; 2004). Possible negative 
effects may be counterbalanced to some extent by 
the 
in  employers’  social  security 
contributions and ongoing labour market dynamics 
(see sections 1, 3.1 and 3.4). 

reduction 

Measures aiming to improve the transition from 
the  public  works  scheme  to  the  open  labour 
market are being worked out. The public works 
scheme  (PWS)  is  the  largest  active  labour  market 
policy  measure  (ALMP)  in  Hungary  (for  over 
200 000  participants,  around  5 %  of  the  labour 
force). Yet, despite some improvement recently, its 
effectiveness  in  facilitating  transitions  to  the open 
labour  market  continues  to  be  limited.  According 
to  the  data  compiled  by  the  Ministry  of  Interior, 
the  rate  of  successful  exit  from  the  scheme  was 
12.2 %  in  2015  and  14.5 %  during  the  first  five 
months  of  2016.  The  aim  of  the  authorities  is  to 

21 

0.00.10.20.3UKPTATNLEEDKDELVSICZSEFIELEU28LUROCYPLESFRMTHRHUSKITLTIEBG201520142010 
 
                                                           
 
3.3. Labour market, education and social policies 

mothers  with  young  children  is  particularly  low 
(14.8 % for women with children below three, and 
39.4 %  for  women  with  children  below  six  in 
2015).  This  makes  the  impact  of  parenthood  on 
women’s  employment  one  of  the  highest  in  the 
EU. In previous years, the gender employment gap 
could  mainly  be  explained  by  long  parental  leave 
lack  of  childcare  services. 
benefits  and  a 
Enrolment in formal childcare for children aged 0 
to  3  is 15%, well  below  the  EU  average of  28 %. 
From  January  2017,  new  forms  of  childcare 
facilities  have  been  introduced  and  a  capacity 
increase  has  been  announced  (8).  The  rate  of 
women  not  in  the  labour  market  due  to  caring 
responsibilities  is  26.5 %  compared  to  the  EU 
average  of  18.7 %.  Support  schemes  for  people 
with  dependent  relatives  are  underdeveloped. 
Furthermore,  there  is  a  significant  inactivity  trap 
for  second  earners.  (9)  The  gender  gap 
in 
employment is especially high among Roma, with 
only  26 %  of  Roma  women  in  employment, 
compared  to  45 %  of  men  (Fundamental  Rights 
Agency, 2016). (10)  

The  participation  of  social  partners  in  policy 
making is limited. Since the 2011 reforms, social 
dialogue  lacks  a  formal  feedback  mechanism  for 
government  proposals  regarding  employment  and 
social  policies.  Tripartite  negotiations  are  mostly 
limited  to  the  minimum  wage  and  wage  increase 
recommendations.  

SOCIAL INCLUSION & POVERTY 

Some  poverty  indicators  are  back  to  pre-crisis 
levels but remain high relative to the rest of the 
EU.  After  a  significant 
in  poverty 
the  situation  has 
between  2008  and  2013, 
improved  as  the  labour  market  started  to  recover 

increase 

(8)  The  new  measures  provide  that  nurseries,  mini  nurseries, 
family  nurseries,  nurseries  at  workplace  or  day-care 
facilities need to be available in any municipality where the 
number of  children  between  age  0-3  reaches  40,  or where 
there is a request for such facilities for at least 5 children. 
(9)  Second  earners  face  a  36 %  marginal  effective  tax  rate 
(considering  the  second  earner  earns  67 %  of  the  average 
wage, and the first earner 100 %). 

(10)  The  2016  survey  by  the  Fundamental  Rights  Agency 
(FRA)  improved  the  sampling  and  weighting  methods 
developed  for  the  2011  Roma  survey,  so  the  results  are  a 
more  accurate  representation  of  the  situation  of  Roma  in 
the  countries  covered.  Indicators  used  are  a  close 
approximation  to  those  applied  in  standard  European 
surveys (EU SILC, EU LFS) but full comparability was not 
intended. For more details see FRA 2016. 

decrease  gradually  the  spending  on  public  works 
and  to  increase  the  budget  allocation  for  other 
ALMPs  in  the  coming  years.  This  is  already 
visible in 2017: after having increased significantly 
in  the  past  years,  the  budgetary  allocation  for 
public  works  is  set  to  stabilize  broadly.  In  recent 
years, the authorities adopted a set of measures to 
facilitate  the  transition  from  the  PWS  to  the 
primary 
financial 
incentives  and  enhanced  training  (see  European 
Commission,  2016c).  As  of  January  2017  further 
activation  measures  were  introduced,  such  as  the 
reimbursement of travel costs or the increased gap 
(7)  between  the  minimum  wage  and  the  public 
incentivise 
employment  wage  which  may 
transitions 
labour  market,  The 
authorities are considering a more ambitious set of 
measures but details are not yet available.  

labour  market; 

the  open 

including 

to 

Other  active  labour  market  policies  are  also 
being reinforced, partly with the support of EU 
funds.  Planned  spending  on  ALMPs  is  to  be 
increased in 2017. A number of programmes have 
recently  been  launched  with  the  support  of  the 
European  Social  Fund  (ESF)  and  the  Youth 
Employment  Initiative  (YEI).  Since  2015  two 
large scale programmes exist. They aim to improve 
the employability and supporting the labour market 
entry  for  jobseekers  and  inactive  people.  Smaller 
programmes provide supplementary support. More 
than  34  000  PWS  participants  received  ESF  co-
financed training in 2016, and a mentoring service 
has been introduced to improve efficiency.  

The  profiling  system  for  the  unemployed  is 
operational. As required in the YEI and other ESF 
programmes  the  compulsory  use  of  Individual 
Action  Plans  has  recently  been  extended  to  all 
jobseekers.  However, 
the  public  employment 
service  faces  organisational  and  staff  capacity 
constraints  that  might  not  allow  for  the  intensive 
use  of  face-to-face  meetings  or  personalised 
counselling.  

services 

The  childcare 
system  has  been 
reformed  to  tackle  the  still  high  impact  of 
parenthood on women's employment. While the 
employment rate for men reached 75.9 % in 2015, 
the rate for women stood at 62.1 % - a gap that has 
increased in recent years. The employment rate of 

(7)  The public employment wage was increased by 3 %, while 

the minimum wage was increased by 5 %. 

22 

 
                                                           
                                                           
3.3. Labour market, education and social policies 

It 

levels. 

(11),  close 

to  pre-crisis 

(Graph 3.3.2). The rate of people at risk of poverty 
or    social  exclusion  (AROPE)  fell  to  28.2 %  in 
2015 
is 
nevertheless still among the ten highest in the EU. 
In 2015 severe material deprivation fell by 4.6 pps. 
but  at  19.4 %  it  was  still  more  than  twice  the  EU 
average 
(8.1 %).  Severe  housing  deprivation 
among  the  poor  and  in  particular  among  children 
living  in  poverty  is  still  high  while  the  social 
housing  stocks  are  very  narrow:  only  3 %  of  the 
total  housing  stocks,  concentrated  mainly  in  big 
cities.  In-work  poverty  increased  significantly, 
reaching 9.3 % in 2015, close to the EU average of 
9.5 %  although  the  minimum  wage  increase  will 
likely improve the situation. 

Graph 3.3.2:  Main poverty indicators, 2005-2015 

than for non-Roma, according to various statistics 
(12).  This  rate  is  comparable  with  other  Member 
States with a sizable Roma minority (BG, CZ, SK, 
RO)  where  the  rate  of  poverty  for  Roma  is 
estimated  to  be  between  three  to  more  than  six 
times higher than for the general population (FRA, 
2016).  According  to  Hungarian  data  around  two 
thirds  of  Roma  suffer  from  severe  material 
deprivation.  (13)  This 
the  high 
to 
is 
residential  concentration  of  Roma 
in  areas 
characterised  by  lack  of  access  to  drinking  water 
(29 %)  and  basic  amenities  (43 %),  which  remain 
high  in  regional  comparison,  further  worsening 
their 
(FRA,  2016)  The 
employment  of  Roma  is  one  of  the  highest  in  the 
EU (36%, FRA 2016), but a significant proportion 
(41.6 %)  of  Roma  in  employment  work  in  the 
public works scheme. Their effective integration in 
the open labour market thus remains so far limited.  

conditions 

linked 

living 

The adequacy and coverage of social assistance 
and  unemployment  benefits  is  limited.  The 
duration  of  unemployment  benefits  is  still  the 
lowest  in  the  EU  at  3  months  (see  European 
impact  of  social 
Commission,  2016c).  The 
transfers (other than pensions) in reducing poverty 
has  been  declining  since  2008,  falling  to  42 %  in 
2015,  but  it  remains  higher  than  the  EU  average. 
The  nominal  level  of  three  types  of  targeted  cash 
benefits  increase  slightly  in  2017,  while  the 
minimum income benefit remains unchanged. The 
2015  social  assistance  reform  streamlined  the 
benefits  system  but  it  does  not  yet  seem  to  have 
guaranteed  a  uniform  and  minimally  adequate 
living  standard  for  those  in  need.  Studies  suggest 
that  the  majority  of  entitlements  remain  in  place, 
albeit  with  a  high  degree  of  discretion  in  the 
eligibility criteria  for  the benefits  administered by 
municipalities (Mózer, 2016). Public works play a 
significant  role  in  social  policy,  particularly  in 
disadvantaged  areas  of  the  country.  But  in  those 
areas  it  may  create  a  risk  of  benefit  dependency 
and  an 
trap  for  social  assistance 
beneficiaries who tend to transit between living on 
benefits and participating in public works.   

inactivity 

(12)  According  to  the  Hungarian  Central  Statistical  Office  the 
AROP  rate  was  63.1 %  for  Roma  and  13.7 %  for  non-
Roma  in  2015.  Based  on  the  2016  survey  of  the 
Fundamental  Rights  Agency,  75 %  of  Roma  are at  risk  of 
poverty (AROP). 

(13)  67.8 %  in  2015  (Hungarian  Central  Statistical  Office). 
According  to  the  Hungarian  research  institute  TARKI  it 
was 87 % in 2014.  

Notes: AROPE: "At-risk-of-poverty  or social exclusion" rate (% 
of  total  population).  People  who  are  "at-risk-of  poverty" 
(AROP)  and/or  suffering  from  severe  material  deprivation 
(SMD). AROP: At-risk-of  poverty  rate  (%  of  total population), 
i.e.  people  who  have  an  equivalised  disposable  income 
below 60% of the national equalised median income. 

Source:  Eurostat,  EU-SILC  [ilc_peps01,  ilc_li02,  ilc_mddd11, 
ilc_lvhl11]  

Poverty  among  children  and  Roma  is  also 
declining but remains particularly high. Despite 
a  significant  decrease  since  2013,  36.1 %  of 
children  were  still  at  risk  of  poverty  or  social 
exclusion  in  2015,  above  the  EU  average  of 
26.9 %. Improved access to childcare services will 
help decrease child poverty further. The at-risk-of-
poverty  rate for  Roma  is almost five  times  higher 

(11)  International  comparison  is  based  on  the  latest  available 
Eurostat data. National data available for 2016 shows some 
further improvement. 

23 

051015202530354020052006200720082009201020112012201320142015% of populationAt-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivationPeople living in low work intensity households 
 
 
 
                                                           
                                                           
3.3. Labour market, education and social policies 

that  in  all  countries  the  share  of  low  achievers  is 
smaller  among  students  who  participated  in  pre-
primary  education.  The  Roma  participation  in 
early  childhood  education  is  one  of  the  highest. 
However, there is no monitoring system for young 
people  who  have  already  dropped  out  of  school 
with  a  view  to  re-integrate  them  into  society  and 
the labour market.  

The  distribution  of  disadvantaged  pupils 
between schools is uneven. As highlighted in the 
2016  Country  Report,  national  data  indicates 
growing  school  segregation,  calculated  on  the 
basis  of  possible  contacts  between  disadvantaged 
and  non-disadvantaged  pupils  in  primary  schools 
(Hungarian  Academy  of  Sciences,  2015).  This 
development  has  also  an  ethnic  dimension: 
national  and  European  surveys 
that 
increasing  shares  of  Roma  children  attend  Roma-
majority  schools  and  classes.  This  phenomenon 
the  higher 
can  be  partially  explained  by 
concentration  of  Roma  population  in  certain  parts 
of the country. However, separate education exists 
not  only  in  remote  settlements,  but  also  in  towns 
with  several  schools,  which  also  reflects  parental 
choice (Kertesi–Kézdi, 2013). (15)   

indicate 

to 

aiming 

changes 

implemented.  Some 

Legislative 
prevent 
segregation have been tabled, but remain to be 
adopted  and 
specific 
measures  (16)  supporting  teacher  training,  early 
education,  school  achievement  and  fighting  early 
school-leaving  of  Roma  are  in  place.  However, 
comprehensive  and  system-level  measures 
to 
address segregation are lacking.  

Teachers’  salaries  have  increased  since  2013, 
but they remain low. They correspond to around 
71%  of  the  salaries  of  other  tertiary  graduates 
(OECD,  2016,  p.  422).  Despite  an  increase  in 
enrolments for teacher training in recent years, the 
number  of  teacher  training  applicants  is  still 
insufficient 
in 
particular  in  science  subjects,  despite  dedicated 
scholarships  for  trainee  teachers  to  address  the 
shortage  of  teachers.  More  generally,  following  a 
decrease  in  the  previous  three  years,  public 

teachers, 

retiring 

replace 

to 

(15)  61%  of  6  to  15  year  old  Roma  children  attend  schools 
where all or most children are Roma, FRA 2016. Of course 
the choice of the parents might be already biased. 

(16)  The  authorities  have  drawn  up  a  "Roadmap  on 
desegregation and measures to support school achievement 
of disadvantaged" (including Roma children). 

EDUCATION AND SKILLS 

on 

The  2015  PISA  survey  of  educational  systems 
showed  significantly  worsening  results  for 
Hungary  and  a  very  high  impact  of  the  socio-
economic  status  on  students’  performance.  
Performance  in  reading  and  science  worsened 
significantly  compared  to  2012.  Results  remained 
stable,  but  low,  in  mathematics.  Hungary  saw  the 
one of the highest increase in the EU in the share 
of low achievers in science. The impact of pupils' 
socio-economic 
education 
background 
outcomes is one of the highest in the EU. Also the 
impact of the school type on education outcomes is 
very  significant.  Pupils  are  tracked  into  different 
schools  according  to  their  performance  starting 
from  the  age  of  10.  This  leads  to  significant 
variations  in  performance  by  school  type.  The 
choice of school type is in turn heavily influenced 
by 
socioeconomic  background 
(Education  Authority,  2016a,  2016b).  PISA 
performance  was  above  the  OECD-average  in 
general upper secondary schools. It was below the 
OECD-average  in  vocational  secondary  schools 
and  much 
in  vocational  schools.  The 
reduction  of  teaching  hours  of  science  subjects  in 
vocational grammar schools since 2016 is likely to 
amplify Hungary’s bottleneck in science skills. 

the  parents’ 

lower 

The  share  of  early  school  leavers  remained 
stable in 2016, but varied widely by region and 
school  type.  The  percentage  of  early  school 
leavers  stood  at  11.6%  in  2015,  close  to  the  EU 
average, but unlike the latter it has not fallen in the 
last five years. The level varies by region, with the 
highest  rates  in  the  north-east  of  the  country,  the 
region  most  affected  by  poverty.  Despite  some 
improvement  since  2011,  early  school  leaving 
remains  particularly  high  among  Roma  at  59.9% 
compared with 8.9 % among non-Roma. (14) Only 
28% of Roma in upper secondary education attend 
school at the level corresponding to their age (FRA 
2016).  46.9%  of  all  early  school  leavers  drop  out 
of vocational schools, 33% from vocational upper 
secondary  schools  and  12.9%  from  general  upper 
secondary schools (Fehérvári, 2015). The decision 
to  lower  the  compulsory  age  for  participation  in 
early  childhood  education  and  care  from  five  to 
three years was a positive step, as evidence shows 

(14)  Data  provided  by  the  Hungarian  Central  Statistical  Office 
based  on  the  2015  Labour  Force  Survey.  A  high  early 
school  leaving  rate  was  also  observed  by  the  2016  survey 
by the Fundamental Rights Agency (68%).  

24 

 
                                                           
                                                           
3.3. Labour market, education and social policies 

expenditure  in  education  increased  by  12.5 %  in 
2014. 

the  system  (European  Commission  and  Economic 
Policy Committee, 2016). 

for  highly-skilled 
The  growing  demand 
workforce is not matched by a sufficiently large 
pool  of  applicants  to  tertiary  education  and 
adequate  completion  rates.  Hungary’s  tertiary 
educational  attainment  rate  for  30  to  34  year-olds 
stood at 34.3% in 2015. The rate was thus in line 
with the EU2020 national target of 34%, but below 
the EU average (38.7%). There has been a decline 
in  applications  and  enrolment  rates  for  tertiary 
programmes since 2011 but the drop-out rate from 
(17).  This  may 
higher  education is  higher 
negatively  affect 
in 
Hungary  over  the  next  decade.  The  low  relative 
number  of  researchers  and  tertiary  graduates  is 
considered to be one of the main challenges of the 
Hungarian 
system 
(European Commission, 2016d).  

tertiary  attainment  rates 

research  and 

innovation 

A  recent  reform  has  changed  the  structure  of 
vocational education and training. The different 
secondary school types were renamed in 2016 with 
the  intention  to  make  vocational  education  more 
attractive.  However,  the  revised  curricula  seem 
unlikely  to  lead  to  an  improvement  in  basic  skills 
and competencies (see also European Commission 
2015a, 2016c). The proportion of VET students in 
work-based  learning  is  one  of  the  highest  in 
Europe  (about  70%).  Adult  participation  in  life-
long learning has increased but remains below the 
EU average (7.1% in 2015 vs 10.7%). 

HEALTHCARE 

Public expenditure on health is low in Hungary, 
by EU standards. The share of public expenditure 
on  health  was  67.1 %  in  2014  (EU  average 
76.2 %). Public current expenditure on health as a 
share  of  GDP  was  also  below  the  EU  average  in 
2014 and has not increased since 2000. The goals 
of  the  Healthy  Hungary  2014-2020  Strategy  are 
unlikely  to  be  attained  without  increased  strategic 
investment  in  the  health  care  sector.  At  present, 
weaknesses  in  care  coordination  and  the  lack  of 
incentives to provide definitive care lead to a high 
number  of  referrals  to  specialists  and  hospitals, 
which has implications on the cost-effectiveness of 

(17)  National data from 2015 indicates drop-out rates of 36.4 % 
in the first cycle, 17.8 % in the second cycle and 38.7 % in 
undivided programmes. 

for 

implications 

Hungary  shows  weak  health  outcomes,  with 
negative 
labour  market 
participation.  Despite  recent  improvements,  life 
expectancy at birth ranks amongst the lowest in the 
EU  for  both  men  and  women.  Amenable  and 
preventable  mortality  remain  higher  than  the  EU 
average.  Hungary  also  has  the  one  of  the  highest 
mortality  rates 
to  non-
communicable  diseases  among  the  working  age 
population.  (18)  This  leads  to  a  reduction  of  the 
available workforce. While disease prevention and 
healthy  lifestyles  have  been  promoted  in  recent 
years,  current  investments  in  these  areas  appear 
insufficient to improve health outcomes in the long 
run. Wide inequalities in access to healthcare also 
contribute to the poor health outcomes.  

the  EU  relating 

in 

to 

hamper 

The  shortage  of  labour  in  the  health  sector 
continues 
accessibility.  A 
comprehensive  residence  support  programme  was 
introduced in 2011 and announced again in 2016 to 
reduce  shortages  of  medical  staff.  In  addition, 
wages  of  health  professionals  have  increased 
substantially 
a 
comprehensive  human  resource  strategy,  focusing 
on  primary  care  staff  and  taking  into  account 
regional disparities, is not yet in place to ensure an 
adequate  workforce  (European  Commission  and 
Economic Policy Committee, 2016). 

2012.  Nevertheless 

since 

Out-of-pocket payments remain high. The share 
of  out-of-pocket  payments,  which  include  the 
estimated amount of informal payment as well, has 
decreased  but  remains  high  by  EU  standard 
(26.5 % vs. 17.6  %). The lack of a clear consistent 
legal  framework  creates  uncertainty  and  leaves 
room  for  legalising  post-treatment  acceptance  of 
gratitude payments.  

(18)  Cardiovascular  diseases  continue  to  be  the  main  cause  of 
mortality  due  to  the  high  prevalence  of  risk  factors 
(smoking,  obesity,  high  alcohol  consumption).  Cancer 
mortality  remains  the  second  cause  of  death  and  it  is  the 
highest in the EU (30 % higher than the EU average). 

25 

 
                                                           
                                                           
3.4. INVESTMENT 

Investment trends 

The private investment share in GDP has fallen 
since  the  crisis.  While  total  investment  stood  at 
around  a  quarter  of  GDP  before  the  crisis,  it 
dropped below 20% thereafter. This drop has been 
driven  by  a  contraction 
in  private  business 
investment, which dropped below the EU average 
in  2015.  This  continuous  decline  was  due  to 
investment  contractions  in  both  the  corporate  and 
the  household  sector  (Graph  3.4.1).  Business 
investment remains 10% below the pre-crisis level 
in  real  terms  and  is  forecast  to  keep  contracting.  
However,  household  investment  is  set  for  a 
progressive  recovery  after  a  decade  of  weakness. 
Government 
in 
recent  years,  reflecting  an  increasing  level  of  EU 
fund absorption. It is expected to keep growing in 
the years ahead, after a temporary pullback in EU-
funded investment in 2016 (Graph 3.4.1).  

investment  grew  dynamically 

Graph 3.4.1:  Private and public investment in HU and the EU 

(1) private investment = corporations + households 
(2) private + public investment = total investment 

Source: European Commission, staff calculations based on 
the 2017 winter forecast 

The  sizeable  decline  in  private  investment 
reflected  a  drop  in  construction  activity  as 
house prices dropped. The peak-to-trough decline 
in construction investment was 36 % (2005-2012). 
It  was  especially  marked 
in 
dwellings,  which  contracted  by  63 %  between  its 
peak  in  2004  and  its  ebb  in  2013.  Household 
investment  started  to  recover  thereafter,  and  is 
expected to receive a boost from recovering house 

investment 

in 

investment 

prices  (Box  3.2.1).  Productive 
in 
equipment  did  not  contract  as  much  and  outgrew 
the  pre-crisis  peak  already  in  2014.  Yet,  it  is 
estimated  to  have  fallen  considerably  in  2016,  as 
EU  disbursements  declined.  Total 
investment 
remains below its pre-crisis levels in terms of both 
GDP and absolute volume (Graph 3.4.2). 

Graph 3.4.2:  Investment volumes, index 2008=100 

Source: Eurostat 

investment 

Equipment  and  machinery 
is 
important  for  making  the  economy  more 
productive  and  competitive.  Hungary’s  high 
funds  creates 
dependency  on  EU 
risks  of 
postponing  business 
investment,  which  could 
happen  without  external  support,  as  companies 
wait for new funding opportunities or outcomes of 
their  applications  for  EU  funds.  This  leads  to  a 
dependency  culture,  which  may  be  hard  to  break. 
Grants  or  co-financing  support  from  EU  funds 
involves  much  less  risk  for  the  recipient,  but 
greater risks that the funds are not used on higher 
productivity- or growth-enhancing investment. 

From a macroeconomic perspective, the decline 
in  private  investment  can  be  explained  by 
deleveraging, banks’ limited willingness to lend 
and 
low  domestic  demand.  Deleveraging 
pressures  have  started  to  ease  but  continue  to 
constrain  firms’  capacity  to  invest.  The  debt  of 
non-financial  corporations  decreased  from  79.3 % 
of GDP in 2009 to 62.3 % in 2015. Yet, it remains 
relatively  high  and  limits  the  appetite  of  those 
firms  to  borrow,  as  they  seek  improvements  in 
their  balance  sheets.  In  addition,  the  crisis  was 

26 

24681012141620022003200420052006200720082009201020112012201320142015201620172018Business inv. HUBusiness inv. EUHousehold inv. HUHoushold inv. EUPublic inv. HUPublic inv. EU% ofGDPforecast6070809010011020002001200220032004200520062007200820092010201120122013201420152016TotalConstructionMachinery and equipment 
 
 
 
 
 
3.4. Investment 

investment.  More 

followed  by  several  years  of  subdued  domestic 
demand  and  tight  financing  conditions,  which 
limited 
recently,  domestic 
demand  has  been  recovering  and  the  lending 
capacity  of  banks  has  increased  substantially. 
However, the willingness of banks to lend remains 
limited (section 3.2). 

Net  foreign  direct 
investment  (FDI)  flows 
decreased  in  2015  but  greenfield  FDI  inflows 
remained  stable.  Net  FDI  flows  amounted  to 
1.6 %  of  GDP  in  2015,  down  from  2.7 %  in  the 
preceding  year.  The net  flows  amounted  to  2.3  % 
of  GDP  in  the  first  three  quarters  of  2016.  The 
stock  of  net  FDI  was  at  35 %  of  GDP  in  2015, 
which is about 6 pps. below the weighted average 
of  the  regional  peers  (Czech  Republic,  Slovakia, 
Poland).  Greenfield  FDI  inflows  remained  stable 
in  2015  at  2.2 %  of  GDP  (Graph  3.4.3).  FDI  can 
be an important source of technology transfer and 
productivity growth. It is also a source of non-debt 
financing  of 
thus 
enhances the country’ shock absorption capacity.  

the  external  position  and 

Graph 3.4.3:  Greenfield FDI inflows into Hungary 

Source: Financial Times FDI Markets database, WEO 
database Oct2016, European Commission 

accumulation to potential growth and productivity 
growth will remain moderate. Private investment is 
particularly  important  as  EU-funded  investment 
gradually subsides. 

Low investment limits productivity gains, which 
may  make  Hungary  less  competitive  in  the 
medium  term.  The  cost  competitiveness  of  the 
Hungarian  economy  has  improved  in  the  recent 
years  due  to  the  depreciation  of  the  real  effective 
exchange  rate.  This  led  to  a  partial  reversal  of 
previous  market  share  losses,  as  the  automobile 
industry  and  an  export-oriented  service  sector 
expanded rapidly.  However, recent and forecasted 
wage  growth  is  significantly  above  productivity 
growth.  This  is  expected  to  result  in  deteriorating 
cost  competitiveness  in  the  medium  term,  unless 
productivity  increases  significantly.  In  addition, 
there  has  been  little  improvement  in  Hungary’s 
non-cost  competitiveness  (more  information  in 
Box 3.4.1 and section 3.4.2) 

The  minimum  wage  reform  is  planned  to 
increase  labour  productivity  but  its  outcome  is 
uncertain.  The  reform  was  discussed  in  box  1.1 
and  section  3.3.  The  increase  in  minimum  wage 
risks  eliminating  some  low-productivity  jobs  and 
shifting labour to more productive jobs. In a closed 
economy,  if  labour  becomes  more  costly,  capital 
can  substitute  part  of  the  labour  as  production 
input. However, in an open economy, the situation 
may  be  different.  If  labour  costs  increase  or  there 
are  labour  shortages,  capital  can  move  to  other 
countries  where  labour  is  cheaper.  This  can  be 
illustrated  by  the  recent  decision  by  a  major 
multinational  company  to  move  their  low-skilled 
production  factory  from  Hungary  to  Ukraine.  In 
real  world,  a  mix  of  the  above  may  happen. 
Nevertheless,  traditional  structural  measures  to 
enhance productivity, such as upskilling the labour 
force  and  promoting  entrepreneurship,  may 
achieve more predictable results. 

Low  investment  has  a  dampening  impact  on 
Hungary’s  potential  growth  (Graph  1.10).  The 
low  rate  of  potential  growth  was  discussed  in 
Section  1.  It  mainly  reflects  low  total  factor 
productivity growth, which in turn is linked to the 
low  level  of  innovation  in  the  economy.  Without 
sustained  growth  in  market-driven  private  sector 
capital 
investment, 

contribution 

the 

of 

27 

0123456789Total Intra EU flowsTotal Extra EU flows 
 
 
 
3.4. Investment 

(Continued on the next page) 

28 

 Box 3.4.1: Hungary's weak post-crisis productivity growth hinders competitivenessLabour productivity growth in Hungary has fallen markedly over the past 15 years, to a level which is very low for a catching-up economy. While labour productivity (in terms of gross value added per hour worked) in the Hungarian economy grew by an annual average of 4% between 2000 and 2008, its growth rate dropped to 0.6% in the post-crisis years 2010-2015. With this performance, Hungary belongs to the small group of countries where both the level and the growth rate of labour productivity are below the EU average (Graph 1, LHS). This mirrors the nature of the post-crisis recovery, which has been characterised by dynamic employment growth, while investment remained moderate. The employment dynamics have been strongly shaped by the expansion of the public works scheme. When the effect of the public works scheme is filtered out, the estimated labour productivity growth amounts to an annual average of 1.1% between 2010 and 2015: this is somewhat above the EU average, but remains below the growth rates which have been recorded in other catching-up countries (distance from the regression line in Graph 1, LHS). Graph 1: LHS: Grouping of countries by labour productivity level (2015) and growth (2010-2015).  RHS: Labour productivity growth in the 10 new Member States (2005-2014)  Source: Commission's calculations, Eurostat, OECD The observed decline in labour productivity growth during the post-crisis years is closely related to a significant deterioration in total factor productivity (TFP) growth in the Hungarian economy. The estimated TFP for Hungary has not yet returned to its pre-crisis level after a deep drop in 2009.1 Analysis by sector suggests that the service sector has been a drag on Hungarian productivity growth (Graph 1, RHS). Hungary appears to perform less well than the EU average and its regional peers with respect to labour productivity improvements in all key service sectors. In particular, labour productivity has been declining for marketable services and in construction. In manufacturing, Hungary's estimated productivity growth is close to the EU average, but lags behind most of the other catching-up economies. Firm level analysis reveals increasing productivity differentials among Hungarian firms operating in the same sector, both in services and manufacturing (OECD, 2016c). This divergence may reflect an insufficient diffusion of knowledge across firms, in particular between foreign and domestically owned companies                                                            1  In a simple growth-accounting framework, taking the 2008 level of the TFP component in the economy-wide production function as 100%, TFP is estimated to have reached only 97% by 2015. The estimate improves somewhat, to 98.5%, when filtering out the effect of the public works scheme (European Commission calculation). Based on a different methodology, the Conference Board (2016) estimates negative annual TFP growth for the whole post-crisis period (2009-2014).  -5-4-3-2-1012345678EU28HUSICZLVBGEEPLSKROLTALL SECTORSManufacturingConstructionMarketable ServicesICT Services%BEDEEEELESFRITCYLVLTLUNLATPTSISKFIBGCZDKHRHUPLROSEUKEU-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%050100150200250Average yearly labour productivity growth, 2010-15Labour productivity, 2015 (EU =100) 
 
 
 
 
 
3.4. Investment 

cost  regulated  end-user  prices  coupled  with  the 
burden of sector-specific taxes significantly reduce 
the  return  on  investment.  The  lack  of  a  guiding 
framework for companies wishing to transfer their 
registered  offices  across  borders 
is  also  a 
constraining factor. 

to 

continue 

rankings 

flag 
International 
challenges  in  the  business  environment  and 
competitiveness.  The  World  Economic  Forum’s 
global  competitiveness  index  ranks  Hungary  69th 
out  of  138  countries,  a  deterioration  in  the 
country’s relative position over the past ten years. 
Hungary appears to perform particularly weakly on 
institutional  soundness.  The  World  Bank’s  2017 
Doing Business Report, which sheds light on how 
easy  it  is  for  entrepreneurs  to  open  and  run 
businesses,  places  Hungary  21st  among  all  EU 
Member  States  (World  Bank,  2016).  The  2016 
IMD  world  competitiveness  scoreboard  ranks 
Hungary  46th  among  the  61  economies.  While 
Hungary’s  ranking  has  stabilised  in  the  last  5 
years,  indicators  related  to  government  efficiency 
have been on a declining trend. 

Box (continued) 

Business environment 

(see 

section 

3.6).  The 

linked  to  weaknesses 

the  business 
Factors  adversely  affecting 
environment  are 
in 
institutional  performance  and  governance.  The 
effectiveness  of  Hungary’s  public  administration 
appears  to  be  relatively  low  by  international 
total 
standards 
administrative  burden  for  businesses  is  estimated 
to  be  significantly  above  the  EU  average  (OECD, 
2015a).  An  unpredictable  regulatory  environment 
with  frequent  changes  increases  uncertainty  and 
high  compliance  costs  that  weigh  on  investment. 
Some aspects of the competition framework, such 
the  application  of 
as  exception  clauses 
regulatory 
increase 
also 
competition 
uncertainty.  In  addition,  inefficiencies  in  public 
procurement  generate  corruption  risks 
the 
detriment of the business climate. 

law, 

to 

in 

are 

Business  dynamics 
constrained  by 
institutional  and  regulatory  obstacles.  Hungary 
displays  a  relatively  high  share  of  fast-growing 
companies.  At  the  same  time,  the  level  of  entry 
remains  moderate  as  measured  by  the  birth  and 
survival  rates  of  new  firms  (Eurostat,  2016). 
Overall, Hungary’s level of entrepreneurship ranks 
below  the  EU  average  (European  Commission, 
2017a).  Firm  entry  and  exit  are  hampered  by  the 
high  costs  of  resolving  insolvency  (European 
Commission 
ibid;  World  Bank,  2016).  The 
availability of alternative financial sources to bank 
lending  such  as  venture  and  seed  capital  is  about 
on  par  with  the  EU  average,  however  a  higher 
volume  of  venture  capital  would  help  more 
innovative firms to enter into the market and grow. 
Regulatory barriers introduced in recent years have 
made market entry more difficult in service sectors 
(see  section  3.5).  In  the  energy  sector,  below-the-

29 

 (Bisztray, 2016). The productivity differentials mainly reflect a dual economic structure with larger and typically foreign owned companies alongside a firm structure heavily dominated by SMEs with a very limited involvement in global value chains (Palocz, 2016). The persistence of wide productivity differences also highlights potential obstacles to shifting resources to more productive, frontier firms. Regulatory restrictions and entry barriers affecting retail, professional services or public utilities are among such potential obstacles. Existing structural problems in the innovation system, the labour market, education and health care also weigh on productivity growth (see Sections 3.4 and 3.5). Given the unfavourable demographic outlook, improving productivity is crucial for the catching up process, for securing Hungary's international competitiveness and for maintaining growth.  
 
 
 
 
3.4. Investment 

30 

 Box 3.4.2: Investment challenges and reforms in HungarySection 1. Macroeconomic perspective Total investment in Hungary (measured as gross fixed capital formation) fell following the crisis and has failed to return above its pre-crisis level. Private investment started to decrease in 2008 and its share in GDP has continued to shrink since then. To date, it remains markedly below the EU average. Public investment has played a stabilising role, owing to a strong EU fund support, but dropped in 2016 as EU disbursements slowed (see Section 3.4.1). The post-crisis sizeable decline in total investment largely reflected a sharp drop in construction investment, mainly residential construction. In contrast, productive investment in machinery and equipment showed more resilience. Over the years after the crisis weak consumption and unfavourable financial conditions hindered investment, while since 2013 these factors are rather supportive. Section 2. Assessment of barriers to investment and ongoing reforms  Barriers to private investment in Hungary are overall relatively high as confirmed by the European Commission assessment (2015c). Hungary made limited progress is assessing most of the relevant investment barriers addressed to it in the country specific recommendation. Reforms have been adopted in the area of labour market and corporate taxation (see Section 1. and 3.3).  Main barriers to investment and priority actions underway 1) According to a survey conducted by Kopint-Tárki (2017), commissioned by the Commission to assess investment barriers, labour shortage in both skilled and unskilled categories is deemed to be the most important investment barrier in Hungary as stated by company managers. The dynamic wage increase could ease the obstacle created by the tight labour market among other things by decreasing incentives for foreign job taking. Nevertheless, structural measures would be needed to facilitate the process. 2) The survey also highlights that administrative burden, low efficiency of tax administration and high tax wedge generate additional cost for investment. The tax administrative cost to net revenue ratio is relatively high compared to the EU average. The gradual cut in social security contribution will decrease the high tax wedge and the transformation of the Tax Authority into a client-friendly service is a step in the right direction. 3) The quality of the business environment remains important barrier to investment, mainly due to instability of the regulatory and tax environment. Despite considerable recent improvements in tax policies and tax administration, Hungary's reliance on sector-specific taxes remains a barrier to investment. (see Section 3.2).  
 
 
 
 
 
3.5. SECTORAL POLICIES 

Research and Innovation 

Total  spending  on  R&D  increased  in  recent 
years,  but  public  R&D  intensity  is  falling. 
Although  R&D  spending  in  the  business  sector  is 
still  below  the  EU  average,  it  has  doubled  as  a 
percentage of GDP over the past ten years (Graph 
3.5.1).  However,  business  innovation  is  highly 
concentrated  in  a  handful  of  large  foreign-owned 
companies.  At  the  same  time,  public  R&D  has 
been  decreasing,  leaving  Hungary  in  the  bottom 
group of EU Member States on this account. This 
weakens  the  science  base  which  provides  the 
knowledge  and  human  resources  for  business 
development.  The  low  quality  of  the  public 
research  and  innovation  system  contributes  to 
insufficient  cooperation  between  higher  education 
institutions,  public  research  organisations  and 
businesses. 

Graph 3.5.1:  The evolution of R&D intensity by sectors 

Source: Eurostat 

represents 

Overall, innovation is not sufficiently embedded 
in  the  Hungarian  economy.  Hungary  has  been  a 
major  beneficiary  of  foreign  direct  investments 
over  the  past  25  years.  This  brought  in  high-
technology  production,  which 
a 
significant proportion of manufacturing. However, 
domestically-owned  firms  have  not  been  able  to 
benefit from technological spill-overs from foreign 
owned  enterprises,  and  their  productivity  has 
remained  weaker.  The  limited  knowledge  transfer 
can  be  partly  linked  to  the  orientation  of  foreign 
their  global  production 
companies 
networks,  while  relying  on  low  labour  costs 
locally.  The  very  low  innovation  propensity  of 
small-  and  medium-size  enterprises  (SMEs)  in 
terms of adopting new technologies and processes 
also  reduces  the  scope  for  technological  spill-
fraction  of 
overs.  Similarly,  only  a  small 
in-house 
in 
involved 
Hungarian  SMEs  are 

towards 

The 

including 

constraints, 

(Graph  3.5.2).  Human 
innovation  activities 
resource 
weak 
entrepreneurship,  play  a  major  role  in  hampering 
highly-skilled 
lack 
innovation. 
professionals  is  a  major  obstacle  that  puts  at  risk 
investments  in  knowledge-intensive  activities.  (19) 
Based  on  the  European  Innovation  Scoreboard, 
which  reflects  the  above  factors,  Hungary  ranks 
21st  of 
innovation 
the  28  EU  countries 
performance (European Commission, 2016d).  

of 

in 

Graph 3.5.2:  Performance of Hungarian SMEs in selected 

innovation indicators – measured in standard 
deviations (EU average=0) 

(*) Data bars pointing left show weaker performance than 
the EU average. Data refer to 2015 or 2012.  
Source: European Commission 

National 

Research 

The  government's  economic  strategy  puts 
emphasis  on  promoting 
innovation,  but 
weaknesses  in  policy  coordination  tend  to  limit 
results.(20)The 
and 
Development and Innovation Strategy (2013-2020) 
laid  down  policies  explicitly  targeting  innovation 
in SMEs. However, there are mismatches between 
the  planned  measures  and  the  actual  situation  of 
SMEs.  Hungarian  R&D,  especially  in  the  small 
busines  sector, 
is  heavily  dependent  on  EU 
Structural  Funds  and  other  external  sources.  Yet, 
R&D  grants  do  not  appear  to  have  the  desired 
broad  effect  in  stimulating  innovation  across  the 
economy.  Considerable  funds  are  available  to 
support  business  R&D  during  the  2014-2020 
programming  period.  Yet,  appropriate  evaluation 
and  monitoring  mechanisms  to  safeguard  the 
effective utilisation of these resources are missing. 
There is only limited policy coordination to ensure 

(19)  The  number  of  new  graduates  in  science  and  engineering 
per  thousand  of  population  aged  25-34  was  at  10.8 %  in 
2014, 7 pps. below the EU average – placing Hungary 25th 
in the EU. 

(20)  At  the  request  of  the  Hungarian  authorities,  a  peer review 
was  conducted  on  the  country's  research  and  innovation 
system  under  the  Horizon  2020  Policy  Support  Facility, 
which  concluded  in  drawing  up  several  recommendations 
(European Commission, 2016e). 

31 

0.300.400.500.600.700.800.901.001.1000010203040506070809101112131415Public R&D intensityBusiness R&D intensity% of GDP-2.0-1.5-1.0-0.50.00.51.0National R&D available to SMEsFirms providing ICT skills training to their employeesEmployees with ICT specialist skillsTurnover from e-commerceSMEs purchasing onlineShare of SMEs selling onlineSales of new-to-market and new-to-firm innovations *Share of Innovative SMEs collaborating with others *SMEs innovating in-house *SMEs introducing marketing/organisational innovations *SMEs introducing product/process innovations * 
 
 
 
                                                           
3.5. Sectoral policies 

include 

tobacco 

areas 
retail, 
retail  outlets, 
pharmacies,  waste  management  public  service, 
textbook  publishing  and  distribution  or  mobile 
payment  systems.  During  2016,  no  substantial 
steps were taken to ease the recently erected entry 
barriers  in  service  sectors.  On  the  contrary,  the 
government adopted new, tighter requirements for 
by 
passenger 
independent 
Increasing 
restrictions  to  entry  in  certain  service  sectors 
hinder  the  efficient  allocation  of  resources  and 
innovation-enhancing  business  dynamics,  while 
also generating uncertainty for investors. 

dispatching 

transport 

operated 

services 

centres. 

Regulation in the retail sector is restrictive and 
the  transparency  of  rules  is  relatively  low. 
Hungary is the only Member State where the level 
of  restrictiveness  in  retail  has  more  than  doubled 
over  the  past  decade  and  is  currently  above  EU 
average  (OECD,  2016a).  However,  the  OECD 
indicator  does  not  capture  all  the  restrictions  that 
were  recently  introduced.  Unclear  application  of 
the  rules  on  setting  up  stores  above  a  certain  size 
(21)  and  the  ban  on  loss-making  are  significant 
barriers  to  market  entry  and  to  the  expansion. 
Hungary  is  one  of  the  few  countries  in  the  EU 
where  mark-ups  in  the  retail  sector  have  not 
declined  since  2000  (Thum-Thysen  and  Canton, 
the 
2015).  Regulatory  restrictions  weigh  on 
sector's  productivity  and  also  reduce  incentives  to 
invest (European Commission, 2015d). 

Regulation  on  professional  services  remains 
restrictive.  Based  on  an  indicator  developed  by 
the European Commission (2016f;g), the degree of 
regulatory  restrictiveness  in  Hungary  exceeds  the 
EU  average  for  several  professions  examined, 
especially for tourist guides, civil engineers, estate 
agents  and  patent  agents. 
for 
accounting  and  legal  services  business  the  churn 
rate  (22)  was  found  to  be  comparatively  low.  This 
suggests  a  relatively  weak  market  dynamism  and 
competition  in  these  services.  In  November  2016, 
the  authorities  submitted  an  action  plan  to  review 
the  existing  regulatory  provisions  for  professions. 

In  addition, 

(21)  Permissions  are  required  to  open  outlets  larger  than  400 
m2.  However,  the  permission-granting  powers  have  been 
moved  from  a  ministerial  committee  to  one  single  local 
government  official  with  wide  discretion 
in  giving 
derogations from the rule (LawNow, 2015).  

(22)  Churn  rate  is  the  ratio  of  the  sum  of  newly  founded  and 
closed  companies  to  the  total  number  of  companies  in  a 
given year.  

the  complementarity  and  continuity  of  different 
programmes. 

Digital economy 

While  Hungary  scores  close  to  the  EU  average 
in  broadband  connectivity,  significant  gaps 
in  mobile  services.  Fixed  broadband 
exist 
networks  now  are  accessible  for  95 %  of  homes, 
close  to  the  EU  average.  At  the  same  time,  in 
2015,  already  75 %  of  households  had  a  fixed 
broadband  subscription,  compared  with  the  EU 
average  of  74 %.  However,  Hungary  performs 
relatively poorly on mobile services. Take-up rates 
are  by  far  the  lowest  within  the  EU  for  mobile 
subscriptions  and  particularly  for  mobile  internet 
subscriptions (42.7 % vs. the EU average of 60 %). 
This does  not stem  from  infrastructure  constraints 
as  coverage  is  already  extensive  for  basic  mobile 
and  4G  services.  At  the  same  time,  prices  for 
mobile phone users are considerably higher than in 
the rest of the EU (Van Dijk 2016; OECD 2016a). 
This  can  be  linked  to  the  existing  regulatory  and 
market structure. The high price level also reflects 
the effect of the tax burden imposed on the sector, 
including  the  sector-specific  telecommunication 
tax (Deloitte, 2015). 

by 

and 

businesses 

The  use  of  information  and  communications 
technologies 
public 
administration  stands  below  the  EU  average. 
The  proportion  of  firms  relying  on  technologies 
such  as  electronic  information  sharing  (16 %), 
cloud  services  (8 %)  or  social  media  (13 %)  is 
among the lowest in the EU. Hungarian businesses 
also  take  limited  advantage  of  e-commerce.  Very 
few  Hungarian  SMEs  sell  online  (12  %  in  2016), 
and  even  fewer  sell  online  to  other  EU  Member 
States  (4.5 %).  The  reluctance  of  consumers  to 
engage in electronic transactions is a factor behind 
this  (Eurostat  2017).  The  latest  e-Government 
that  Hungary 
Benchmark  Report 
underperforms  in  all  key  dimensions  of  digital 
public administration (Capgemini et al. 2016).  

reveals 

Regulation in the service sector 

Although  product  market  regulation  is  not 
particularly  strict  in  general,  access  to  several 
service sectors continues to be constrained. Over 
the  past  years,  several  segments  of  the  service 
sector  saw  the  introduction  of  new  regulatory 
barriers  in  previously  open  markets.  The  affected 

32 

 
                                                           
3.5. Sectoral policies 

It  indicated  intentions  to  reform  regulation  for 
professions in the tourism and construction sectors.  

Energy and environment 

imports.  Electricity 

Hungary 
is  heavily  dependent  on  energy 
imports, particularly crude oil and natural gas. 
Some  62 %  of  the  country's  energy  needs  are 
covered  by 
and  gas 
interconnector  projects  between  Hungary  and  its 
neighbours  have  a  beneficial  impact  on  energy 
security  and  the  energy  import  bill.  However, 
without  a  commonly  agreed  solution  for  the 
definition  of  appropriate  bidding  zones  in  Central 
and  Eastern  Europe,  limitations  to  cross-border 
electricity  trade  are  still  frequent,  with  negative 
consequences for the internal electricity market. 

On the retail side, regulated electricity and gas 
prices  for  households  are  not  cost  reflective, 
resulting  in  financial  losses  to  the  service 
providers.  Below-cost  regulated  prices  have 
prompted  energy  retailers  to return  their universal 
supply  licences  for  household  costumers,  and  the 
service  has  been  increasingly  taken  over  by  state-
owned  companies.  One  state-owned  company 
(Főgáz Ltd.) is now practically the sole provider of 
natural gas to households. This results in a lack of 
consumer  choice  and  competition.  Below-cost 
prices  do  not  subsidise  only 
the  vulnerable 
households,  but  also  all  the  wealthier  customers. 
The  accumulating  potential  financial  losses  in  the 
balance  sheet  of  state-owned  energy  retailers  are 
not sustainable in the long run and may eventually 
burden the state budget (OECD, 2016a). 

Hungary  is  on  the  right  track  to  meet  its 
greenhouse emission targets, but the economy is 
still  characterised  by  high  energy  intensity.  In 
2015, the level of Hungary's greenhouse emissions 
was 35 % less than in 1990 and expected to decline 
further.  Energy  consumption  also  decreased  over 
the  past  decade  linked  to  the  economic  downturn 
during  the  crisis.  The  energy  intensity  of  the 
Hungarian  economy still  significantly  exceeds  the 
EU  average. (23)  The  current  volume  of  final 
energy  consumption  remains  above  the  indicative 
is 
2020 
target 
in 
considerable 

(by  around  13 %).  There 
energy 

potential 

saving 

district 

heating 

systems 

modernising 
and 
renovating the residential building stock. However, 
there is a risk that this saving potential will not be 
properly  exploited  as  EU  funds  initially  allocated 
to  support  residential  housing  renovation  are 
intended 
the 
modernisation of public buildings. 

to  be  re-channelled 

to  finance 

central 

regulation 

The  waste  management  sector  has  experienced 
increased 
involving 
measures,  which  pose  risks  to  its  long  term 
viability. The scope for competitive arrangements 
has  been  reduced  by  restricting  the  presence  of 
privately  owned  operators.  As  of  2013,  waste 
collection  fees  for  households  were  capped  and 
reduced  generating  financial  losses  for  several 
municipal  service  providers.  In  2016,  a  new 
nationwide  system  was 
introduced  for  waste 
collection.  Under  the  new  regime,  uniformly  set 
fees  are  collected  by  a  national  holding  company, 
which  then  redistributes  the  revenues  between 
local  operators.  There  is  a  danger  that  this  highly 
centralised  setup  will  not  be  able  to  ensure  the 
right  incentives  and  prices  to  cover  the  costs  of 
locally  differentiated 
in 
waste  management 
markets.  

circular 

economy 
existing 

remains 
Hungary's 
economic 
The 
underdeveloped. 
instruments  do  not  effectively  support 
the 
achievement  of  the  EU’s  2020  and  2030  waste 
management  targets.(24)  The  tax  system  does  not 
facilitate  eco-friendly  solutions.  The  landfill  tax 
has  remained  at  a  low  level  since  2013,  and  no 
incineration  tax  exists,  which  could  help  prevent 
waste  from  being  shifted  to  incinerators.  The 
selective  door-to-door  collection  of  municipal 
waste  and  the  extended  producer  responsibility 
schemes  are  not  well  developed  (European 
Commission,  2016h).  The  national  strategic 
framework  for  waste  management  does  not  cover 
all relevant parts of the circular economy and lacks 
regional plans. 

(24)  The  overall  waste  recycling  rate  reached  only  31 %  in 
2014,  significantly  below  the  EU  average  of  43 %.  The 
landfilling  of  municipal  waste  currently  amounts  to  57%, 
well above the EU average of 28 %.  

(23)  In  2014,  the  Hungarian  energy  consumption  per  1  million 
euro  gross  value  added  amounted  to  201  tonnes  of  oil 
equivalent, while EU average was at 114.4 tonnes. 

33 

 
                                                           
                                                           
3.6. PUBLIC ADMINISTRATION 

Regulatory quality and administrative reform 

Internationally  collated  scoreboard  indicators 
point  to  a  low  and  deteriorating  quality  of 
The  Worldwide  Governance 
institutions. 
Indicators  data  show  that  Hungary’s  performance 
has declined in all the six broad dimensions related 
to  the  quality  of  policy  making  over  the  past  ten 
years  (Graph 3.6.1).  Since  2010,  the deterioration 
is  particularly  noteworthy 
in  accountability, 
regulatory  quality  and  rule  of  law.  The  slide  in 
executive  capacity  and  executive  accountability  is 
Institute’s 
also  shown  by 
governance 
2016). 
Institutional  quality  tends  to  be  closely  related  to 
the  level  of  economic  development.  However, 
based  on  these  accounts,  Hungary  is  not  only 
amongst  the  group  of  lowest  performing  EU 
Member States, but also lags behind most regional 
peers. (25) The weak institutional framework could 
be a drag on the economy's growth potential. 

the  Bertelsmann 

(Bertelsmann, 

indicators 

to 

reveals 

to  doing  business 

Policy uncertainty is one of the most important 
barriers 
in  Hungary. 
According 
the  World  Economic  Forum, 
Hungary  ranks  136  of  138  countries  in  the 
transparency  of  policy  making  (WEF,  2016). 
Empirical  research  on  the  Hungarian  legislative 
process 
several  critical  aspects  of 
regulatory  quality  (CRCB,  2015;  2016;  2017).  It 
finds  that,  despite  a  legal  requirement,  regulatory 
impact  assessments  are  not  available  for  a 
significant  number  of  laws.  Publicly  accessible 
impact  assessments  typically  contain  only  a  short 
assessment 
quantitative 
information  on  the  effects  of  proposed  policies. 
in 
The 
research  also  highlights  a  deficit 
For 
appropriate 
government  initiated  proposals,  consultations  tend 
to be limited to very short time periods, around 4.5 
days  in  the  last  three  years.  Transition  periods 
allowing  the  affected  parties  to  prepare  for  policy 
implementation  are  often  inadequate.  In  2014-
2016, on average only 45 days elapsed between the 
submission of a draft bill and the publication of the 
adopted  new  law,  significantly  shorter  (by  around 
20 days) than in the previous decade. 

sheet  with 

engagement. 

stakeholder 

little 

To address these problems, the government has 
launched  an  ambitious  reform  programme  to 

and 

administration 

public 
to 

improve regulatory quality, but results are still 
to be seen. In 2015, the government adopted a new 
services 
public 
increase 
development  strategy.  This  aims 
administrative effectiveness through organisational 
integration, 
costs, 
resource  management  and 
improving  human 
The 
public 
digitising 
Commission  has  set  a  deadline  (31  December 
2016)  to prepare  a  detailed  action  plan  in  relation 
to  the  implementation  of  the  strategy,  which  will 
be assessed in early 2017. 

administration. (26) 

administrative 

reducing 

Graph 3.6.1:  Hungary: Quality of institutional performance - 

2005-2015 

(1) Higher score values indicate better performance on a 
scale from 0 t0 100. Dark bars show the 90% confidence 
intervals. 
Source: The Worldwide Governance Indicators, 2016 Update 

A  range  of  justice  system  reforms  have  also 
been recently adopted or initiated. These include 
reforms  of  the  civil,  administrative  and  criminal 
procedural  code,  new 
for  electronic 
communication between public administration and 
courts  and  a  new  regime  for  attorneys  at  law.  At 
the same time, plans to set up a new administrative 
court system raised important concerns on the part 

rules 

(25)  Based  on  the  composite  governance  quality  indicator  by 
Bertelsmann, Hungary is placed on the 26th position in the 
EU with a score somewhat above Greece and Romania. 

(26)  Under  this  program,  Hungary  plans  to  invest  over  €935, 
including  €795  million  from  EU  funding  in  the  next  five 
years. 

34 

020406080100201520102005201520102005201520102005201520102005201520102005201520102005governmenteffectivenesscontrol ofcorruptionvoice andaccountabilityregulatoryqualityrule of lawpoliticalstabilityIndicatorYear 
 
                                                           
 
                                                           
3.6. Public administration 

in 

and 

transparency 

there was no significant improvement in the share 
of contracts above the threshold that attracted only 
a single bidder. In 2016, 36% of tenders (excluding 
frameworks) belonged to this category, while 37% 
in  2015.  This  value  is  the  6th  highest  in  the 
European Economic Area compared to an average 
of 17% (European Commission, 2017c). To assure 
the effective and efficient use of EU Structural and 
Investment Funds in 2014-2020, Hungary drew up 
an  action  plan  where  it  committed  itself  to 
undertake  several  measures  to  increase  legality, 
competition 
public 
that  context,  a  new  public 
procurement.  In 
procurement act was adopted in November 2015 to 
ensure  compliance  with  EU  directives  in  the 
area. (28)  The  new  framework  gave  also  an 
enhanced role to the Public Procurement Authority 
in checking the legality of direct award procedures 
and  increased  the  minimum  number  of  invited 
in  case  of  certain  negotiated 
participants 
has 
procedures.  More 
introduced  a  possibility  to  cancel  procurement 
procedures that only attracted a single bidder. It is 
too  early  to  draw  a  firm  conclusion  regarding  the 
impacts  of  the  new  regime  and  the  subsequent 
changes. One of the reasons is a significant drop in 
the  number  of  calls  for  tenders  in  2016  due  to  a 
temporary fall in spending EU funds.(29)  

recently,  Hungary 

is 

in 

experiencing  delays 

Hungary 
the 
implementation  of  its  e-procurement  strategy. 
Overall, this is likely to have a negative effect on 
the  timely  introduction  of  e-procurement  and 
thereby on the goal to strengthen transparency and 
increase  competition.  In  the  action  plan,  Hungary 
made  a  commitment  to  develop  an  e-procurement 
system and to test the system in a pilot project by 
the  end  of  2016.  Hungary  submitted  a  revised 
version  of  the  technical  and  professional  concept 
document 
e-
the 
procurement.  However,  as  the  system  is  not  yet 
developed, the pilot project could not be launched. 
The implementation is behind schedule. 

transition 

outlining 

to 

(28)  The  correct  transposition  of  the  new  public  procurement 
directives  will  be  evaluated  by  the  Commission  for  all 
Member States in parallel. The assessment is expected for 
the 3rd Quarter of 2017. 

(29)  The implementation of the action plan will be assessed by 
the Commission on the basis of a report that Hungary has 
to submit by mid-2017. 

of  the  judiciary  (OBT,  2016)  and  have  been 
postponed.  The  impact  of  these  reforms  on  the 
effectiveness  of  the  Hungarian  justice  system 
requires  close  monitoring.  Challenges  remain,  as 
businesses' perception of judicial independence has 
worsened  over  the  last  three  years  (European 
Commission, 2017b). The performance of the legal 
system is also adversely affected by the excessive 
length of civil procedures and the lack of effective 
domestic  legal  remedies  as  established  by  a  pilot-
judgment of the European Court of Human Rights. 
An  adequate  response  by  the  government  to  this 
judgment is still awaited. (27) 

Public procurement 

Public  procurement  consistently  suffers  from 
limited competition and transparency. Empirical 
research  on  Hungarian  public  procurement  
showed  that  the  intensity  of  competition  declined 
in  2009-2015,  while  in  that  period  the  share  of 
contracts  awarded  to  a  single  bidder  remained 
high, at around 30 % on average (Tóth and Hajdú, 
2016;Tóth,  2016).  The  study  documented  that  the 
transparency of procedures had decreased in recent 
years  andthere  was  also  a  detectable  tendency 
towards  price  distortion.  This  analysis  also  found 
that  procurements  involving  EU  funds  had  worse 
funded  ones. 
than  domestically 
performance 
Comparable data across countries on tenders above 
the  EU  threshold  value  reveal  that  single-bid 
contract awards and negotiated procedures without 
prior  publication  of  the  tender  have  been  more 
extensively  used  in  Hungary  than  in  most  other 
Member  States  (European  Commission  TED 
database).  Limited  competition  and  transparency 
in  public  procurement  generates  corruption  risks 
and social losses in terms of value for money. 

following 

the  adoption  of 

Data  on  public  procurement  procedures  for 
2016 
the  new 
procurement act show some improvements, but 
challenges still remain. In 2016, the proportion of 
tenders  without  prior  publication  above  the  EU 
threshold  decreased  to  9 %  from  13 %  in  2015. 
the  proportion  of  such 
Despite 
procedures  still  remained  above  the  European 
Economic  Area  average  (5%).  At  the  same  time, 

the  decline, 

(27)  In December 2016, the Council of Europe's Committee of 
Ministers noted that the Hungarian authorities had not met 
the deadline set in the pilot-judgment to take the necessary 
measures  (see  also  European  Court  of  Human  Rights, 
2015).  

35 

 
                                                           
                                                           
3.6. Public administration 

2013  average (30).  The  proportion  of  suspended 
total  number  of  final 
sentences  out  of 
the 
convictions  was  86%.  Concerns  about 
the 
independence  of  prosecution  and  prevention  of 
corruption with respect to members of parliament, 
judges  and  prosecutors  have  not  yet  been 
addressed (GRECO, 2015). (31) 

improved 

Transparency  and  access  to  information  in 
certain  areas  remains  restricted.  In  the  2015 
Open  Budget  Survey,  Hungary 
its 
ranking  from  the  60th  to  the  49th  place  out  of  102 
last 
countries.  However,  Hungary  still  ranks 
among  EU  countries.  With  a  score  of  45/100,  the 
Open  Budget  Index  classifies  Hungary  as  a 
country  in  which  the  government  provides  the 
public  with  limited  budgetary  information  (IBP, 
2015).  The  Constitutional  Court  has  rebuffed 
repeated  attempts  to  restrict  access  to  information 
by  legislative  modifications.  Recent  legislation 
allows  data  owners  a  considerable  degree  of 
discretion  in  granting  access  and  requesting  fees 
for releasing lengthy documents (GoH, 2016). The 
legal 
redress 
measures, but their impact with respect to ensuring 
freedom  of  access  to  information  still  requires  an 
assessment.  

safeguards  and 

include 

rules 

(30) 314  investigations  were  opened  in  2014,  compared  to  an 
average of 503 per year in the period 2011-2013 (European 
Commission calculations). 

(31) Hungary  should  respond  to  the  GRECO  recommendations 

by 30 December 2016. 

Fight against corruption 

on 

(WEF, 

2016).  Based 

Corruption  risks  weigh  on  Hungary’s  business 
environment.  According  to  the  World  Economic 
Forum, corruption is the second most problematic 
factor  for  doing  business  in  Hungary  after  policy 
instability 
the 
Transparency  International  corruption  perception 
index, Hungary's score has continued to deteriorate 
over  the  past  few  years  (TI,  2017).  Empirical 
research  shows  that  corruption  contributes  to 
allocative  inefficiencies  adversely  affecting  the 
country's  productivity  (Gamberoni  et  al.,  2016). 
The government's anti-corruption framework relies 
on  an  integrity  management  system,  professional 
ethics  training  and  risk-control  systems  in  public 
institutions.  The  impact  of  these  policy  tools  on 
curbing  corruption  has  not  yet  been  evaluated.  In 
2016, 
to 
streamline  the  integrity  management  and  internal 
control  processes.  Yet,  no  legal  measures  have 
been  taken  to  improve  protection  for  whistle-
blowers. According to the 2016 Global Corruption 
Barometer, only 21 % of respondents would report 
corruption, while 23 % would expect retaliation for 
doing  so  (TI,  2016).  No  specific  measures  have 
favouritism 
been 
among 
government  officials. 
that  category  of 
corruption  risk,  Hungary  shows  a  deteriorating 
trend over time with a score of 1.9 (on a scale from 
1  to  7)  and  a  global  rank  of  135  of  138  countries 
(WEF, 2016). The previously announced reform of 
the asset declaration system for public officials has 
not yet been launched.  

the  government  passed 

reduce 
In 

legislation 

taken 

to 

that 

concerns 

regarding 

Some 
the 
remain 
effectiveness  of  prosecution  of  corruption.  The 
results  of  the  internal  inquiry  by  the  Prosecutor 
General's  Office  show 
the  number  of 
corruption  complaints registered  and  not followed 
by  an  investigation  has  been  steadily  declining 
(Ügyészség,  2016).  Yet,  there  does  not  appear  to 
be  a  focus  on  prosecuting  high-level  corruption 
cases.  This  is  reflected  in  business  perceptions. 
While 56 % of survey respondents agree that petty 
corruption  is  appropriately  punished,  only  27 % 
believe  this  to  be  the  case  with  senior  officials 
(European  Commission,  2015e).  According  to  the 
most 
the  number  of 
investigations  opened  for  bribery  of  national 
officials decreased in 2014 compared to the 2011-

recent  available  data, 

36 

 
                                                           
3.6. Public administration 

37 

Box 3.6.1: Selected highlightsOnline cash registers in retail services From 2014, Hungary introduced the mandatory use of online cash machines to several retail services, such as retail shops, pharmacies, restaurants and accommodation services. Online cash registers are connected to the tax authority. They submit, on a regular basis, sales information, which permits a continuous monitoring of transactions and VAT collection. The government provided financial support for businesses to cover part of the purchase costs of the new registers.  The mandatory use of the online cash registers has been effective in reducing the grey economy. It contributed significantly to better VAT collection and helped reduce tax evasion in the sectors concerned. Since the introduction of the online cash registers, VAT revenue has grown at a higher pace than private consumption expenditure, which indicates the effectiveness of the measure. According to the estimates of the government online cash registers and the Electronic Public Road Trade Control System (EKAER) augmented VAT revenues by approximately 1.2 pp. of GDP since their introduction. In addition, the VAT gap (the difference between the theoretical and the actual VAT revenue) also decreased sharply.  From January 2017, the government extended the use of online cash registers to additional services, such as car repair and maintenance, taxi services, cosmetic surgery, clubs and beauty care services (solariums, wellness centres, etc.). State Aid Monitor Office (SAMO) The SAMO is a dedicated office to ensure compliance with state aid rules in public administration. It facilitates the dialogue between the European Commission and public entities (aid grantors) as a one voice communication channel. The SAMO provides assistance to these entities, reducing the resources necessary to obtain specific knowledge on state aid rules and engage in separate communication with the EU. It operates within the Prime minister's office. This arrangement is also beneficial for the EU, since the Commission contacts always with the same professional body, which enables a more efficient negotiation on state aid issues. The operation of the SAMO is regulated by legislation. Aid grantors are obliged to notify the SAMO of their planned grants. The SAMO assesses compatibility with the EU state aid rules and may provide assistance for aid grantors to make grant schemes compatible. It gives approval if General Block Exemption Regulation or de minimis regulation is applicable, and informs the Commission. Otherwise it submits the grant to the Commission for approval.  
 
 
 
 
 
ANNEX A 

Overview Table 

Country specific recommendations (CSRs) 

Commitments  

Summary assessment (32) 

CSR1:  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 
the  medium-term 
budgetary  objective  is  respected  with  a  lower 
effort,  by  taking  the  necessary  structural 
measures. 

in  2017,  unless 

The  compliance  assessment  with  the  Stability 
and  Growth  Pact  will  be  included  in  Spring 
when final data for 2016 will be available. 

CSR2:  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 
anti-corruption 
improvement 
framework. 
regulatory 
environment  in  the  services  sector  and  in  the 
restrictive 
by 
retail 
regulations and ensuring predictability. 

addressing 

Improve 

sector 

the 

the 

of 

Further reduce sector-specific taxes 

Hungary  has  made 
addressing CSR2: 

limited  progress 

in 

  Hungary  has  made 

limited  progress 

in 
addressing  the  first  subpart  of  CSR  2  as 
regards  the  further  reduction  of  sectorial 
taxes.  By  means  of  measures  adopted 
(published)  on  15.6.2016  and  implemented 
with effect from 1.1.2017, the bank levy on 
the taxable base in excess of HUF 50 billion 
is  reduced  from  0.24%  to  0.21%  of  the 
balance 
reflects  a 
downward  trend  as  the  bank  levy  was  first 
reduced  as  of  1.1.2016  from  0.53%  to 
0.24%.  At  the  same  time,  some  distortive 
sectorial  taxes  remain,  in  particular  in  the 
telecommunications  sector  (utilities  tax, 
telecommunications  tax,)  and  the  energy 
sector (Robin Hood tax, utilities tax).  

total.  This 

sheet 

(32) The  following  categories  are  used  to  assess  progress  in  implementing  the  2016  country-specific  recommendations: 
No progress: The Member State has not credibly announced nor adopted any measures  to address the CSR. Below a number of 
non-exhaustive typical situations  that could be covered under this, to be interpreted on a case by case basis taking into account 
country-specific conditions: 

•  no  legal,  administrative,  or  budgetary  measures  have  been  announced  in  the  National  Reform  Programme  or  in  other  official 
communication  to  the  national  Parliament  /  relevant  parliamentary  committees,  the  European  Commission,  or  announced  in 
public (e.g. in a press statement, information on government's website);  
• no non-legislative acts have been presented by the governing or legislator body;   
•  the  Member  State  has  taken  initial  steps  in  addressing  the  CSR,  such  as  commissioning  a  study  or  setting  up  a  study  group  to 
analyse possible measures that would need to be taken (unless the CSR explicitly asks for orientations or exploratory actions), 
while clearly-specified measure(s) to address the CSR has not been proposed. 

Limited progress: The Member State has: 
• announced certain measures  but these only address the CSR to a limited extent;    
and/or 
• presented legislative acts in the governing or legislator body but these have not been adopted yet and substantial non-legislative 

further work is needed before the CSR will be implemented;  

• presented non-legislative acts, yet with no further follow-up in terms of implementation which is needed to address the CSR. 
Some progress: The Member State has adopted measures that partly address the CSR  
and/or  
the Member State has adopted measures that address the CSR, but a fair amount of work is still needed to fully address the CSR as 
only  a  few  of  the  adopted  measures  have  been  implemented.  For  instance:  adopted  by  national  parliament;  by  ministerial 
decision; but no implementing decisions are in place. 

Substantial progress: The Member State has adopted measures that go a long way in addressing the CSR and most of which have 

been implemented. 

Full implementation: The Member State has implemented all measures needed to address the CSR appropriately. 

38 

 
 
 
 
 
 
                                                           
A. Overview Table 

  Hungary  has  made  some  progress 

in  November  2016 

in 
addressing  the  second  subpart  of  CSR  2  as 
regards  the  reduction  of  the  tax  wedge  for 
low-income earners. By means of measures 
announced 
and 
implemented with effect from 1.1.2017, the 
employers' social  security contributions are 
cut  from  27%  to  22%  and  are  set  to  be 
further  reduced  to  20%  from  2018.  This 
general measure reduces the tax wedge for 
all  employees.  Personal 
tax 
allowance  for  families  with  two  children  is 
further  increased.  The  tax  wedge  of  low-
income  earners  however  remains  higher 
than the EU average and in regional peers. 

income 

  As  regards  anti-corruption,  Hungary  has 
made 
limited  progress.  New  measures 
taken  streamline  the  internal  control  and 
the  integrity  management  functions.    The 
real  impact  of  the  national  anti-corruption 
programme's  approach  on  preventing  and 
curbing  down  corruption  has  not  been 
evaluated yet. No legal measures have been 
taken to improve the protection of whistle-
blowers  or  to  reduce  favouritism  among 
government  officials.  Prosecution  of  high-
level corruption remains limited and affects 
deterrence. Limited progress can be seen as 
regards  public  procurement.  Revised 
versions  of  the  e-procurement  strategy 
were  sent  in  the  second  half  of  2016. 
Although  the  document  is  a  solid  basis  for 
future 
also 
developments.  Hungary 
committed  to  develop  an  e-procurement 
system,  and  test  it  through  a  pilot  project. 
So  far,  no  pilot  project  has  been  launched, 
nor  did  Hungary  draw  up  a  concrete 
concept  of  what  it  intends  to  do  in  this 
regard. 

  Regarding  service  sector  in  the  field  of 
energy, the concentration of household gas 
customers 
into  one  gas  supplier  and 
regulated  end-user  prices  eliminates  retail 
competition  and  does  not  contribute  to 
attract  investments  in  the  energy  utility 
sector.  No  progress  has  been  made  on 
improving  the  regulatory  environment  in 
the services sector and in the retail sector. 

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 
anti-corruption 
framework. 

the 

of 

Improve  the  regulatory  environment  in  the 
services  sector  and  in  the  retail  sector  by 
addressing  restrictive  regulations  and  ensuring 

39 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
predictability. 

CSR3:  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. 
improve  educational 
Take  measures 
outcomes  and  to  increase  the  participation  of 
disadvantaged  groups,  in  particular  Roma,  in 
inclusive mainstream education. 

to 

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. 

A. Overview Table 

Hungary  has  made 
addressing CSR3: 

limited  progress 

in 

  Hungary  has  made  some  progress 

than 

in 
reinforcing  active  labour  market  policies 
the  public  work  scheme. 
other 
PWS 
Following 
changes 
legislative 
participants  are  now  entitled 
to  a 
placement  benefit  if  they  find  employment 
in  the  primary  labour  market.  The  training 
component of the PWS has been enhanced. 
As  of  January  2017 
further  activation 
measures were introduced. From 2016, the 
ESF co-financed “Training of Low-skilled and 
Public  Workers’”  programme 
supports 
training  for  among  others  public  workers. 
PWS  participants  also  receive 
training 
supported  by  funds  from  the  Ministry  of 
Interior. During the first ten months of 2016 
almost  20  thousand  public  workers  were 
involved 
(and  YEI) 
trainings.  ESF 
supported ALMP programmes started to roll 
out  in  2015  and  2016.  The  two  major 
programmes  are  the  “Path  to  the  labour 
market” and the Youth Guarantee. Until the 
end  of  October  2016,  more  than  39,000 
people  have  been  involved  in  the  first 
programme,  and  more  than  41,000  young 
people  in  the  YG.  The  national  expenditure 
for active labour market policies is planned 
increased,  whereas 
to  be 
expenditures  of  the  public  work  schemes 
will be decreased in the upcoming years. In 
2017  the  budgetary  allocation  for  public 
works  is  set  to  stabilize  while  spending  on 
other ALMPs is set to increase. 

gradually 

in 

of 

social 

improving 

assistance 

  Limited progress was observed with regards 
the  adequacy  and 
the 
to 
coverage 
and 
unemployment  benefits.  The  duration  of 
unemployment benefits is still the lowest in 
the  EU  at  3  months.  The  budget  for  2017 
foresees  an  increase  (by  about  5%)  of  the 
nominal  value  of  some  benefits:  elderly 
support,  care  assistance,  child  support 
benefit.  There  has  been  a  12%  increase 
regarding  the  so  called  "home-acquisition" 
support  provided  for  those  young  people 

40 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
A. Overview Table 

who leave institutional care. The level of the 
other entitlements is not planned to change 
in 2017. 

  Hungary  made 

limited 

progress 

in 
improving  educational  outcomes 
and 
increasing  participation  of  disadvantaged 
groups  in  inclusive  mainstream  education. 
Recent PISA results show a deterioration of 
educational  outcomes.  The  distribution  of 
disadvantaged  pupils  between  schools  is 
uneven  and  the  corresponding  corrective 
mechanisms  are  insufficient.  National  and 
European  surveys  indicate  that  increasing 
shares  of  Roma  children  attend  Roma-
majority  schools  and  classes.  Legislative 
changes  aiming  at  addressing  this  have 
been tabled, but remain to be adopted and 
implemented. 

to 

Take  measures 
improve  educational 
outcomes  and  to  increase  the  participation  of 
disadvantaged  groups,  in  particular  Roma,  in 
inclusive mainstream education. 

Europe 2020 (national targets and progress) 

Europe 2020 national targets  

Assessment 

Employment rate target: 75%. 

  The employment rate continued to improve 

and reached 68.9% in 2015. 

Greenhouse  gas  (GHG)  emissions  target:  +10% 
compared to 2005 emissions (ETS emissions not 
covered by this national target). 

  Hungary  is  on  track  in  achieving  its  GHG 
reduction  target  in  the  2020  climate  and 
energy package. 

2020 Renewable energy target: 13%. 

 

In 2014 the renewable share reached 9.5%, 
being by 2.6% above the 2013/2014 interim 
target,  so  Hungary  is  currently  on  track  to 
meet its renewable target. However, further 
efforts  need  to  be  made  in  order  to  reach 
the  2020  renewable  energy  target,  as  the 
current  share  is  still  below  by  3.5%  of  the 
target. 

Energy efficiency target: 

Hungary's 2020 energy efficiency target is 24.1 
Mtoe 
energy 
in 
consumption  (14.4  Mtoe  expressed  in  final 
energy consumption.)  

expressed 

primary 

  Hungary  has  to 

its 

increase 

its  effort  to 
decrease 
final  energy  consumption 
further  in  order  to  achieve  its  indicative 
final energy consumption 2020 target (14.4 
Mtoe)  and  to  keep  its  current  primary 
its  primary 
energy  consumption  below 

41 

 
 
 
 
 
 
 
 
R&D target: 1.8% of GDP and 3% by 2030 (34) 

 

A. Overview Table 

energy 2020 target (24.1 Mtoe). (33) 

increase 

In  the  period  2007-2015,  thanks  to  a 
in  business  R&D 
continuous 
expenditures,  overall  Hungarian  R&D 
intensity showed a significant growth with a 
compound  annual growth  rate  of  4.6%  and 
it  reached  a  peak  of  1.39%  GDP  in  2013 
(1.38 % GDP in 2015). However, contrasting 
trends in public and private R&D intensities 
put  into  question  the  sustainability  of  the 
overall growth of the R&D intensity. 

Reducing  the  rates  of  early  school  leaving 
below 10%. 

At  11.6% 
is 
in  2015  early  school 
stagnating and shows strong variation by region 
and school type. 

leaving 

34%  of  30-34–year-olds  completing  third  level 
education (national target 34%) 

  34.4%  of  30-34–year-olds  completing  third 

level education (2005 Eurostat data) 

Target on the reduction of population at risk of 
poverty  or  social  exclusion 
in  number  of 
persons: 450 000. 

  The population at risk of poverty and social 
exclusion was 59 000 lower than in 2008. 

(33) Renewable energy shares for 2015 are approximations and not official data, reflecting the available data (04.10.2016). See the 
the  2016  Report  on  Renewable 

in  Realisation  of 

Öko-Institut  Report:  Study  on  Technical  Assistance 
Energy,  http://ec.europa.eu/energy/en/studies 

(34) A complementary target is that Business R&D intensity would reach 1.2% by 2020 from 0.99% in 2014.   

42 

 
                                                           
ANNEX B 

MIP Scoreboard 

Table B.1: 

The MIP scoreboard for Hungary 

Flags: i: see metadata. na: not available.  
(1) Unemployment rate: for 2008 i = Eurostat back-calculation to include 2011 Population Census results.  
(2) Youth unemployment rate: for 2008 i = Eurostat back-calculation to include 2011 Population Census results. 

Source: Source: European Commission, Eurostat and Directorate General for Economic and Financial Affairs (for Real 
Effective Exchange Rate), and International Monetary Fund 

43 

Thresholds201020112012201320142015Current account balance, (% of GDP) 3 year average-4%/6%-2.50.10.92.12.53.0-35%-108.8-106.3-94.0-83.5-75.8-60.8Real effective exchange rate - 42 trading partners, HICP deflator3 years % change±5% & ±11% -1.2-4.2-1.0-4.0-7.0-6.9Export market share - % of world exports5 years % change-6%3.7-2.0-20.8-22.2-15.8-8.0Nominal unit labour cost index (2010=100)3 years % change9% & 12% 6.13.24.15.96.73.96%-5.9-6.9-9.3-4.33.211.614%-4.2-4.4-6.1-0.9-0.5-3.1133%115.5114.9102.095.491.083.960%80.580.778.276.675.774.7Unemployment rate3 year average10%9.710.711.110.79.68.216.5%-0.26.2-5.9-1.98.50.4-0.2%0.31.22.52.84.64.90.5%2.01.60.8-0.6-1.5-1.92%8.36.51.80.2-5.6-10.9Activity rate - % of total population aged 15-64 (3 years change in p.p)Long-term unemployment rate - % of active population aged 15-74 (3 years change in p.p)Youth unemployment rate - % of active population aged 15-24 (3 years change in p.p)External imbalances and competitivenessNew employment indicatorsNet international investment position (% of GDP)Deflated house prices (% y-o-y change)Total financial sector liabilities (% y-o-y change)Private sector credit flow as % of GDP, consolidatedPrivate sector debt as % of GDP, consolidatedGeneral government sector debt as % of GDPInternal imbalances 
 
 
 
 
 
 
ANNEX C 

Standard Tables 

Table C.1: 

Financial market indicators 

Notes:  
1) Latest data Q2 2016. 
2) Quarterly values are not annualised 
* Measured in basis points. 

Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

44 

201120122013201420152016Total assets of the banking sector (% of GDP)119.6119.0114.3108.2102.599.5Share of assets of the five largest banks (% of total assets)54.654.051.952.553.3-Foreign ownership of banking system (% of total assets)54.650.046.239.940.5-Financial soundness indicators:1)              - non-performing loans (% of total loans)12.814.114.014.211.010.3              - capital adequacy ratio (%)13.816.317.417.016.916.8              - return on equity (%)2)-12.0-5.1-0.4-21.90.37.6Bank loans to the private sector (year-on-year % change)-13.1-5.5-4.1-3.5-8.10.4Lending for house purchase (year-on-year % change)-18.9-9.4-5.4-6.1-10.3-1.2Loan to deposit ratio128.0110.6102.194.880.978.3Central Bank liquidity as % of liabilities0.40.73.13.84.95.4Private debt (% of GDP)114.9102.095.491.083.9-Gross external debt (% of GDP)1) - public47.552.047.446.942.137.1    - private78.479.575.678.971.970.0Long-term interest rate spread versus Bund (basis points)*502.7639.6435.3364.6293.7305.3Credit default swap spreads for sovereign securities (5-year)*342.5418.0269.8179.2139.1131.3 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Labour market and social indicators 

Notes:  
1) The unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within 2 weeks.       
2) Long-term unemployed are those who have been unemployed for at least 12 months.       
3) Not in education employment or training.       
4) Average of first three quarters of 2016. Data for total unemployment and youth unemployment rates are seasonally 
adjusted.       

Source: European Commission (EU Labour Force Survey) 

45 

201120122013201420152016 4Employment rate(% of population aged 20-64)60.461.663.066.768.971.2Employment growth (% change from previous year)0.00.21.14.82.22.7Employment rate of women(% of female population aged 20-64)54.756.256.960.262.164.3Employment rate of men (% of male population aged 20-64)66.467.369.373.575.878.3Employment rate of older workers (% of population aged 55-64)35.336.137.941.745.349.4Part-time employment (% of total employment, aged 15-64)6.46.76.46.05.74.9Fixed-term employment (% of employees with a fixed term contract, aged 15-64)9.19.510.910.811.49.9Transitions from temporary to permanent employment38.835.336.841.836.932.8Unemployment rate1 (% active population, age group 15-74)11.011.010.27.76.85.3Long-term unemployment rate2 (% of labour force)5.25.04.93.73.12.5Youth unemployment rate (% active population aged 15-24)26.028.226.620.417.313.4Youth NEET3 rate (% of population aged 15-24)13.214.815.513.611.6:Early leavers from education and training (% of pop. aged 18-24 with at most lower sec. educ. and not in further education or training)11.411.811.911.411.6:Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)28.229.832.334.134.3:Formal childcare (30 hours or over; % of population aged less than 3 years)7.06.09.09.0:: 
 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market and social indicators (continued) 

Notes:  
1) People at risk of poverty or social exclusion : individuals who are at risk of poverty and/or suffering from severe material 
deprivation and/or living in households with zero or very low work intensity.       
2) At-risk-of-poverty rate : proportion of people with an equivalised disposable income below 60 % of the national equivalised 
median income.        
3) Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay 
their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone.       
4) People living in households with very low work intensity: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months.       
5) For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices = 100 in 2006 (2007 
survey refers to 2006 incomes)       

Sources: Sources:  
For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC. 

46 

Expenditure on social protection benefits (% of GDP)201020112012201320142015Sickness/healthcare5.75.55.04.94.9:Disability1.81.71.61.51.4:Old age and survivors10.210.311.010.810.2:Family/children2.92.72.62.52.3:Unemployment0.90.80.60.50.4:Housing0.50.40.30.30.3:Social exclusion n.e.c.0.10.10.10.10.1:Total22.121.521.220.619.7:of which: means-tested benefits1.11.00.90.90.7:Social inclusion indicators201020112012201320142015People at risk of poverty or social exclusion1 (% of total population)29.931.533.534.831.828.2Children at risk of poverty or social exclusion  (% of people aged 0-17)38.740.441.943.941.836.1At-risk-of-poverty  rate2 (% of total population)12.314.114.315.015.014.9Severe material deprivation rate3  (% of total population)21.623.426.327.824.019.4Proportion of people living in low work intensity households4 (% of people aged 0-59)11.912.813.513.612.89.4In-work at-risk-of-poverty rate (% of persons employed)5.36.25.77.06.79.3Impact of social transfers (excluding pensions) on reducing poverty56.751.447.644.443.642.0Poverty thresholds, expressed in national currency at constant prices5599154595657607544564058577231605976Gross disposable income (households; growth %)1.17.72.83.74.81.8Inequality of income distribution (S80/S20 income quintile share ratio)3.43.94.04.34.34.3GINI coefficient before taxes and transfers51.151.251.050.952.549.9GINI coefficient after taxes and transfers24.026.826.928.028.628.2 
 
 
 
 
 
C. Standard Tables 

Table C.4: 

Product market performance and policy indicators 

Notes:  
1) The methodologies, including the assumptions, for this indicator are shown in detail at : 
http://www.doingbusiness.org/methodology.        
2) Average of the answer to question Q7B_a. '[Bank loan]: If you applied and tried to negotiate for this type of financing over 
the past six months, what was the outcome?'. Answers were scored as follows: zero if received everything, one if received 
most of it, two if only received a limited part of it, three if refused or rejected and treated as missing values if the application is 
still pending or if the outcome is not known.       
3) Percentage population aged 15-64 having completed tertiary education.       
4) Percentage population aged 20-24 having attained at least upper secondary education.       
5) Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail at :  http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       
6) Aggregate OECD indicators of regulation in energy, transport and communications.       

Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation indicators); SAFE (for outcome of SMEs' applications for bank loans). 

47 

Performance indicators201020112012201320142015Labour productivity (real, per person employed, year-on-year % change)Labour productivity in industry19.07-1.772.382.462.617.81Labour productivity in construction9.074.70-4.126.906.251.46Labour productivity in market services13.971.17-0.541.42-3.910.95Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in industry-5.506.955.103.921.54-2.91ULC in construction1.660.676.40-4.83-7.95-2.72ULC in market services0.682.022.340.171.780.63Business environment201020112012201320142015Time needed to enforce contracts1 (days)395.0395.0395.0395.0395.0395.0Time needed to start a business1 (days)5.05.07.07.07.07.0Outcome of applications by SMEs for bank loans2na1.04na0.671.010.39Research and innovation201020112012201320142015R&D intensity1.151.191.271.391.361.38Total public expenditure on education as % of GDP, for all levels of education combined4.904.714.074.13nanaNumber of science & technology people employed as % of total employment333536373636Population having completed tertiary education3171819202021Young people with upper secondary education4848383848584Trade balance of high technology products as % of GDP2.222.980.940.460.28-0.48Product and service markets and competition200320082013OECD product market regulation (PMR)5, overallna1.541.33OECD PMR5, retail0.791.442.06OECD PMR5, professional services2.863.023.05OECD PMR5, network industries63.311.871.73 
 
 
 
 
 
C. Standard Tables 

Table C.5:  Green growth 

Notes:  
All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2005 prices)         
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)         
          Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)         
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR)         
          Waste intensity: waste (in kg) divided by GDP (in EUR)         
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP           
Weighting of energy in HICP: the proportion of 'energy' items in the consumption basket used for the construction of the HICP         
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change)         
Real unit energy cost: real energy costs as a percentage of total value added for the economy         
Environmental taxes over labour taxes and GDP: from European Commission's database, ‘Taxation trends in the European 
Union’         
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR)          
Real unit energy costs for manufacturing industry excluding refining : real costs as a percentage of value added for  
manufacturing sectors         
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP         
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000–100 000 GJ; figures 
excl. VAT.         
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste         
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP         
Proportion of GHG emissions covered by EU Emissions Trading System (ETS) (excluding aviation): based on greenhouse gas 
emissions         
(excl land use, land use change and forestry) as reported by Member States to the European Environment Agency.         
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value 
added (in 2005 EUR)         
Transport carbon intensity: GHG emissions in transport activity divided by gross value added of the transport sector         
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels         
Aggregated supplier concentration index:  covers oil, gas and coal. Smaller values indicate larger diversification and hence 
lower risk.         
Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies 
and solid fuels         
* European Commission and European Environment Agency         

Source: European Commission (Eurostat) unless indicated otherwise 

48 

Green growth performance201020112012201320142015MacroeconomicEnergy intensity kgoe / €0.260.250.240.230.220.22Carbon intensity kg / €0.730.700.670.630.60-Resource intensity (reciprocal of resource productivity)kg / €1.111.090.961.081.311.23Waste intensity kg / €0.19-0.18-0.17-Energy balance of trade % GDP-5.1-6.0-6.3-6.3-6.1-Weighting of energy in HICP%14.7315.4716.7717.0416.9915.97Difference between energy price change and inflation %1.61.90.3-11.7-10.9-2.7Real unit of energy cost% of value added17.619.118.817.717.7-Ratio of environmental taxes to labour taxesratio0.160.150.150.150.15-Environmental taxes% GDP2.82.62.72.62.6-Sectoral Industry energy intensity kgoe / € 0.140.160.170.200.190.19Real unit energy cost for manufacturing industry excl. refining% of value added21.523.123.221.621.2-Share of energy-intensive industries in the economy% GDP10.369.419.328.508.388.49Electricity prices for medium-sized industrial users€ / kWh0.110.100.100.100.090.09Gas prices for medium-sized industrial users€ / kWh0.030.040.050.040.040.04Public R&D for energy % GDP0.000.000.010.040.000.01Public R&D for environmental protection% GDP0.010.010.010.020.010.01Municipal waste recycling rate%19.622.025.526.430.532.2Share of GHG emissions covered by ETS*%35.135.235.433.232.932.4Transport energy intensitykgoe / €1.040.990.930.860.941.00Transport carbon intensitykg / €2.852.702.582.362.59-Security of energy supplyEnergy import dependency%58.251.952.352.461.855.6Aggregated supplier concentration indexHHI57.254.259.163.075.6-Diversification of energy mixHHI0.250.250.240.230.22- 
 
 
 
 
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