Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Hungary and delivering a Council opinion on the 2017 Convergence Programme of Hungary
Date: 2017-05-22
Institutions: European Commission, Secretariat-General
Subjects: Hungary, budget deficit, economic policy, economic reform, education, employment policy, fiscal policy, invitation to tender, social assistance, stability programme

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   EUROPEAN COMMISSION  Brussels, 22.5.2017  COM(2017) 516 final   Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Hungary  and delivering a Council opinion on the 2017 Convergence Programme of Hungary  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2017 National Reform Programme of Hungary 

and delivering a Council opinion on the 2017 Convergence Programme of Hungary 

THE COUNCIL OF THE EUROPEAN UNION, 

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

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies,1 and in particular Article 9(2) thereof, 
Having regard to the recommendation of the European Commission,2 
Having regard to the resolutions of the European Parliament,3 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

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

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

(2) 

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On  16 November  2016,  the  Commission  adopted  the  Annual  Growth  Survey,4 
marking  the  start  of  the  2017  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  9-10 March  2017.  On  16 November  2016,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report,5  in  which  it 
did not identify Hungary as one of the Member States for which an in-depth review 
would be carried out. 
The  2017  country  report  for  Hungary6  was  published  on  22 February  2017.  It 
assessed  Hungary’s  progress  in  addressing  the  country-specific  recommendations 
adopted by the Council on 12 July 2016, the follow-up given to the recommendations 
adopted in previous years and Hungary’s progress towards its national Europe 2020 
targets.  

OJ L 209, 2.8.1997, p. 1. 
COM(2017) 516 final. 
P8_ TA(2017)0038, P8_ TA(2017)0039, and P8_ TA(2017)0040. 
COM(2016) 725 final. 
COM(2016) 728 final. 
SWD(2017) 82 final/2. 

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(3) 

(4) 

(5) 

(6) 

On  2  May  2017,  Hungary  submitted  its  2017 National  Reform  Programme  and  its 
2017  Convergence  Programme.  To  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

The relevant country-specific recommendations have been taken into account in the 
Member States' programmes for the European Structural and Investment Funds (ESI 
Funds) covering the 2014-2020 period. As foreseen in the legislation governing the 
ESI Funds,7 where it is necessary to support the implementation of relevant country-
specific  recommendations,  the  Commission  may  request  a  Member  State  to  review 
and  amend  its  relevant  ESI  Funds  programmes.  The  Commission  has  provided 
further guidelines on the application of those rules.8 

Hungary  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth  Pact  and 
subject to the debt rule. In its 2017 Convergence Programme, the government plans a 
deterioration  of  the  headline  deficit  from  1.8%  in  2016  to  2.4%  in  both  2017  and 
2018 and a gradual improvement thereafter to 1.2% of GDP by 2021. The medium-
term  budgetary  objective  —  a  structural  deficit  of  1.7%  of  GDP  until  2016  and 
revised to 1.5% of GDP as of 2017 — is planned to be met by 2020. However, based 
on the recalculated9 structural balance, the medium-term budgetary objective would 
not  be  reached  over  the  programme  horizon.  According  to  the  Convergence 
Programme,  the  general  government  debt-to-GDP  ratio  is  expected  to  decline 
gradually  to  close  to  61%  by  the  end  of  2021.  The  macroeconomic  scenario 
underpinning  these  budgetary  projections  is  favourable,  which  poses  risks  to  the 
implementation of the deficit targets.  

The  2017  Convergence  Programme  indicates  that  the  budgetary  impact  of  the 
exceptional  inflow  of  refugees  and  security-related  measures  in  2016  and  2017  is 
significant,  and  provides  adequate  evidence  of  the  scope  and  nature  of  these 
additional  budgetary  costs.  According  to  the  Commission,  the  eligible  additional 
expenditure  in  2015  amounted  to  0.04%  of  GDP  for  the  exceptional  inflow  of 
refugees and there is no additional eligible expenditure in relation to refugee inflows 
in  2016.  The  eligible  additional  expenditure  concerning  security-related  measures 
amounted to 0.04% of GDP in 2016. In 2017, no further increase in expenditure is 
expected due to the exceptional inflow of refugees, whereas the additional budgetary 
impact of the security-related measures is currently estimated at 0.14% of GDP. The 
provisions  set  out  in  Article  5(1)  and  Article  6(3)  of  Regulation  (EC)  No  1466/97 
cater  for  this  additional  expenditure,  in  that  the  inflow  of  refugees  as  well  as  the 
severity  of  the  terrorist  threat  are  unusual  events,  their  impact  on  Hungary's  public 
finances is significant and sustainability would not be compromised by allowing for 
a temporary deviation from the adjustment path towards the medium-term budgetary 
objective.  Therefore,  the  required  adjustment  towards  the  medium-term  budgetary 
objective for 2016 has been reduced to take into account additional security-related 
costs. Regarding 2017, a final assessment, including on the eligible amounts, will be 

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Article  23  of  Regulation  (EU)  No  1303/2013  of  the  European  Parliament  and  of  the  Council  of  17 
December  2013  laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the 
European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and 
the  European  Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European 
Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime 
and  Fisheries  Fund  and  repealing  Council  Regulation  (EC)  No  1083/2006,  OJ  L  347,  20.12.2013,  p. 
320. 
COM(2014) 494 final. 
The structural balance as recalculated by the Commission based on the information in the Convergence 
Programme, following the commonly agreed methodology. 

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(7) 

(8) 

(9) 

(10) 

made  in  spring  2018  on  the  basis  of  observed  data  as  provided  by  the  Hungarian 
authorities. 

On  12  July  2016,  the  Council  recommended  Hungary  to  achieve  an  annual  fiscal 
adjustment of 0.6% of GDP towards the medium-term budgetary objective in 2017. 
Based  on  the  Commission  2017  spring  forecast,  there  is  a  risk  of  a  significant 
deviation from that requirement in 2017.  

In  2018,  in  light  of  its  fiscal  situation  and  notably  of  its  debt  level,  Hungary  is 
expected  to  further  adjust  towards  its  medium-term  budgetary  objective  of  a 
structural  deficit  of  1.5%  of  GDP.  According  to  the  commonly  agreed  adjustment 
matrix  under  the  Stability  and  Growth  Pact,  that  adjustment  translates  into  a 
requirement  of  a  nominal  growth  rate  of  net  primary  government  expenditure10  
which does not exceed 2.8% in 2018. It would correspond to a structural adjustment 
of 1.0% of GDP. Under unchanged policies, there is a risk of a significant deviation 
from that requirement in 2018. At the same time, Hungary is forecast to comply with 
the  debt  rule  in  2017  and  2018.  Overall,  the  Council  is  of  the  opinion  that  further 
measures  will  be  needed  as  of  2017  to  comply  with  the  provisions  of  the  Stability 
and  Growth  Pact.  However,  as  foreseen  in  Regulation  (EC)  No  1466/97,  the 
assessment of the budgetary plans and outcomes should take account of the Member 
State’s  budgetary  balance  in  light  of  the  cyclical  conditions.  As  recalled  in  the 
Commission 
country-specific 
recommendations,  the  assessment  of  2018  budget  outcomes  will  need  to  take  due 
account of the goal to achieve a fiscal stance that contributes to both strengthening 
the ongoing recovery and ensuring the sustainability of Hungary’s public finances. In 
that  context,  the  Commission  intends  to  make  use  of  the  applicable  margin  of 
appreciation in light of the cyclical situation of Hungary. 

Communication 

accompanying 

these 

low  productivity.  Factors  adversely  affecting 

Hungary’s  competitiveness  and  potential  growth  is  held  back  by  low  private 
investment  and 
the  business 
environment  and  corporate  investment  are  linked  particularly  to  weaknesses  in 
institutional performance and governance. Frequent changes in the regulatory and tax 
environment  are  one  of  the  biggest  barriers  to  doing  business  in  Hungary,  with 
insufficient  stakeholder  engagement  and  evidence-based  policy-making.  Regulatory 
barriers  in  services  also  tend  to  limit  market  dynamics  and  hamper  investment. 
Restrictive  regulations,  including  in  retail,  limit  competition  in  the  services  sector 
and weigh on the business climate. 

Hungary’s total tax-to-GDP ratio remains well above those of its regional peers and 
challenges  in  the  tax  system  remain.  The  government  has  decreased  employers' 
social  security  contributions  by  5  percentage  points  in  2017,  and  a  further  2 
percentage  points  reduction  is  planned  for  2018.  This  measure  has  significantly 
reduced  the  tax  wedge  for  low-income  earners  but  it  remains  high.  This  is 
particularly the case for low-income earners without children, where it is still among 
the  highest  in  the  EU.  The  tax  system  remains  complex.  Despite  a  declining  trend 
since 2013, sector-specific taxes — some of which remain highly distortive  — still 
tend to complicate the tax system and weaken investor confidence. The complexity 

10 

Net  government  expenditure  is  comprised  of  total  government  expenditure  excluding  interest 
expenditure,  expenditure  on  Union  programmes  fully  matched  by  Union  funds  revenue  and  non-
discretionary  changes  in  unemployment  benefit  expenditure.  Nationally  financed  gross  fixed  capital 
formation  is  smoothed  over  a  4-year  period.  Discretionary  revenue  measures  or  revenue  increases 
mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted 
out. 

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and  uncertainty  of  the  tax  system,  associated  with  high  compliance  costs  and 
administrative burdens, continue to weigh on investor confidence in Hungary. 

(11)  Weaknesses  in  institutional  performance  are  weighing  on  the  business  climate  and 
reducing the economy’s growth potential. In particular, despite recent improvements 
and  the  amendment  to  the  Public  Procurement  Act,  progress  on  strengthening 
transparency and competition in public procurement is still limited and no concrete 
evidence  is  available  yet.  The  current  e-procurement  strategy  is  a  solid  basis  to 
enhance  transparency,  but  its  implementation  and  impact  on  efficiency  and 
transparency  need  to  be  monitored.  Corruption  risks  remain  high,  adversely 
impacting the business climate, and there are notable gaps in the measures taken to 
address the issue. Hungary is also experiencing delays in the implementation of its e-
procurement  strategy.  This  is  slowing  the  timely  introduction  of  e-procurement  in 
Hungary  and  undermining  the  goal  of  strengthening  transparency  and  increasing 
competition. 

(12) 

(13) 

(14) 

The situation in the services sector including retail remains particularly challenging 
in Hungary. Over the past year, the Hungarian government continued to intervene on 
markets  previously  open  to  competition  and  adopted  new,  tighter  requirements  for 
passenger  transport  services  operated  by  independent  dispatching  centres.  The 
Hungarian government took no substantial step to ease the regulatory environment in 
the services sector, in particular regarding retail, waste management public services, 
textbook publishing and distribution or mobile payment systems. In the retail sector, 
clear guidelines on the granting of authorisation to open new shops larger than 400 
m2 are missing. This adds to the lack of transparency and predictability in the sector. 
The continuing existence of the regulatory barriers in services, including in retail, is 
limiting  market  dynamics  and  hampering  investment,  while  also  generating 
uncertainty for investors, notably international investors.  

To  support  Hungary’s  competitiveness  and  potential  growth  in  the  medium  term, 
structural reforms to promote investment in human capital, particularly in education 
and healthcare, and to continue improving the functioning of the labour market will 
be  key.  Enhancing  social  fairness  will  be  also  essential  to  deliver  more  inclusive 
growth. 

Performance in providing basic skills remains weak by international standards. The 
2015 PISA survey of educational systems showed significantly worsening results and 
the impact of pupils’ socioeconomic background on education outcomes is one of the 
highest  in  the  EU.  The  impact  of  the  school  type  on  education  outcomes  is  very 
significant.  The  reduction  in  teaching  hours  for  science  subjects  in  vocational 
grammar schools since 2016 is likely to amplify Hungary’s backlog in science skills. 
The share of early school leavers has been stagnating for the last 5 years and remains 
especially  high  among  Roma  people.  The  distribution  of  disadvantaged  pupils 
between  schools  is  uneven,  and  Roma  children  increasingly  attend  Roma-majority 
schools  and  classes.  Measures  are  in  place  to  support  teacher  training,  early 
education and school achievement and to combat early school leaving among Roma. 
However, comprehensive and systemic measures to address segregation are lacking. 
The growing demand for a highly skilled workforce is not matched by a sufficiently 
large  pool  of  applicants  to  tertiary  education  and  adequate  completion  rates.  The 
modification of the Act on higher education adopted in 2017 may further deteriorate 
the situation. 

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(15) 

(16) 

(17) 

(18) 

The  labour  market  has  developed  favourably  in  recent  years,  with  unemployment 
returning to its pre-crisis level. Employment reached historical high levels thanks to 
private  sector  job  creation  and  the  public  work  scheme,  which  is  still  the  largest 
active  labour  market  policy  in  Hungary  with  over  200 000  participants.  In  recent 
years,  a  set  of  measures  have  been  adopted  to  facilitate  the  transition  from  the 
scheme  to  the  primary  labour  market.  However,  the  scheme  is  still  not  sufficiently 
targeted and its effectiveness in reintegrating participants into the open labour market 
continues  to  be  limited.  At  the  same  time,  certain  sectors  face  increasing  labour 
shortages.  Other  active  labour  market  policies  are  being  reinforced,  partly  with  the 
support  of  EU  funds,  but  further  efforts  are  needed  to  facilitate  transitions  to  the 
primary  labour  market  effectively.  The  profiling  system  for  the  unemployed  is 
operational but not yet fully effective. The gender employment gap has increased in 
recent  years  and  the  impact  of  parenthood  on  women’s  employment  is  one  of  the 
highest  in  the  EU.  Labour  market  participation  is  affected  by  comparatively  weak 
health  outcomes  and  unequal  access  to  healthcare.  The  participation  of  social 
partners in policy-making is limited. 

Some  poverty  indicators  are  back  to  pre-crisis  levels  but  remain  above  the  EU 
average.  Poverty  among  children  and  Roma  remains  particularly  high,  although 
declining. A significant proportion of Roma in employment work in the public works 
scheme.  Their  effective  integration  into  the  open  labour  market  remains  limited  so 
far. 

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,  below  the  average  time  required  by  job  seekers  to  find  employment.  The 
2015 social assistance reform streamlined the benefits system but it does not seem to 
have guaranteed a uniform and minimally adequate living standard for those in need. 
With regards to the benefits administered by municipalities, there is a high degree of 
discretion  in  the  eligibility  criteria  and  the  level  of  entitlements,  which  creates 
uncertainty for beneficiaries. The minimum income benefit remains frozen at a low 
level  but  the  authorities  are  planning  to  gradually  increase  the  level  of  the  targeted 
cash  benefits  in  the  coming  years.  Already  in  2017  three  of  these  benefits  were 
slightly  increased.  Additional  targeted  measures  would  help  alleviate  material 
deprivation of the most disadvantaged groups, in particular children and Roma. 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive analysis of Hungary’s economic policy and published it in the 2017 
country  report.  It  has  also  assessed  the  Convergence  Programme  and  the  National 
Reform  Programme  and  the  follow-up  given  to  the  recommendations  addressed  to 
Hungary  in  previous  years.  It  has  taken  into  account  not  only  their  relevance  for 
sustainable  fiscal  and  socioeconomic  policy  in  Hungary,  but  also  their  compliance 
with EU rules and guidance, given the need to strengthen the EU’s overall economic 
governance by providing EU-level input into future national decisions.  

(19) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  Convergence 
Programme and its opinion11 is reflected in particular in recommendation 1 below, 

HEREBY RECOMMENDS that Hungary take action in 2017 and 2018 to: 

1. 

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Pursue  its  fiscal  policy  in  line  with  the  requirements  of  the  preventive  arm  of  the 
Stability and Growth Pact, which translates into a substantial fiscal effort for  2018. 

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

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2. 

3. 

When taking policy action, consideration should be given to achieving a fiscal stance 
that  contributes  to  both  strengthening  the  ongoing  recovery  and  ensuring  the 
sustainability of Hungary’s public finances. 

Complete the reduction of the tax wedge for low-income earners and simplify the tax 
structure,  notably  by  reducing  the  most  distortive  sector-specific  taxes.  Strengthen 
transparency  and  competition 
implementing  a 
comprehensive  and  efficient  e-procurement  system,  and  strengthen  the  anti-
corruption  framework.  Strengthen  regulatory  predictability, 
transparency  and 
competition in particular in the services sector, notably in retail. 

in  public  procurement,  by 

Better target the public works scheme to those furthest away from the labour market 
and  provide  effective  support  to  jobseekers  in  order  to  facilitate  transitions  to  the 
labour market, including by reinforcing active labour market policies. Take measures 
to  improve  education  outcomes  and  to  increase  the  participation  of  disadvantaged 
groups,  in  particular  Roma,  in  inclusive  mainstream  education.  Improve  the 
adequacy  and  coverage  of  social  assistance  and  the  duration  of  unemployment 
benefits. 

Done at Brussels, 

For the Council 
The President 

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