COMMISSION STAFF WORKING DOCUMENT Country Report Hungary 2018 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 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
Date: 2018-03-07
Institutions: European Commission, Secretariat-General
Subjects: Hungary, economic situation, education, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 7.3.2018 SWD(2018) 215 final  COMMISSION STAFF WORKING DOCUMENT Country Report Hungary 2018 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 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(2018) 120 final}   
 
 
CONTENTS 

Executive summary 

1.  Economic situation and outlook 

2.  Progress with country-specific recommendations 

3.  Reform priorities 

3.1.  Public finances and taxation 

3.2.  Financial sector 

3.3.  Labour market, education and social policies 

3.4.   Investment 

3.5.   Sectoral policies 

Annex A: Overview Table 

Annex B: Macroeconomic Imbalance Procedure Scoreboard 

Annex C: Standard Tables 

References 

LIST OF TABLES 

Table 1.1: 

Key economic and financial indicators - Hungary 

Table 2.1: 

Summary table in 2017 CSR assessment 

Table 3.2.1: 

Financial soundness indicators, all banks 

Table B.1: 

The Macroeconomic Imbalance Procedure Scoreboard for Hungary (AMR 2018) 

Table C.1: 

Financial Market Indicators 

Table C.2: 

Headline Social Scoreboard indicators 

Table C.3: 

Labour market and education indicators 

Table C.4: 

Social inclusion and health indicators 

Table C.5: 

Product market performance and policy indicators 

Table C.6: 

Green growth 

LIST OF GRAPHS 

Graph 1.1: 

Contributions to real GDP growth 

Graph 1.2: 

Export market shares 

1 

4 

8 

11 

11 

16 

19 

27 

35 

40 

44 

45 

51 

7 

9 

16 

44 

45 

46 

47 

48 

49 

50 

1 

1 

 
 
 
 
 
Graph 1.3: 

Unit labour cost developments in Hungary 

Graph 1.4: 

Contribution to inflation 

Graph 1.5: 

Activity, employment and unemployment 

Graph 1.6: 

Labour as a limiting factor in industry 

Graph 1.7: 

Breakdown of Credit Flows by sector 

Graph 1.8: 

Net international investment position 

Graph 1.9:  GDP per capita based on purchasing power parity (% of EU average) 

Graph 1.10:  Development of potential GDP growth 

Graph 2.1: 

Hungary - Level of implementation today of 2011 - 2017 CSRs 

Graph 3.1.1: 

The evolution of tax wedge for a single worker earning 67% of average wage 

Graph 3.1.2:  Evolution of public expenditure as share of GDP 

Graph 3.1.3:  Composition of general government spending in the average of 2013-2015 

Graph 3.1.4:  Gross government debt ratio: the baseline scenario and alternative trajectories 

Graph 3.2.1:  Development of the NPL ratios 

Graph 3.2.2:  Banking system assets to GDP 

Graph 3.2.3:  Corporate and household loans growth rate (y-o-y) 

Graph 3.3.1:  Change in real productivity, real GDP per capita and real wages (2008-2016) 

Graph 3.3.2:  Wage premium of educational attainment as compared to low education 

Graph 3.3.3:  Main poverty indicators since 2005 

Graph 3.3.4:  Hospitalisations for ambulatory care-sensitive conditions (per 100.000 population) 

Graph 3.4.1:  Private and public investment 

Graph 3.4.2:  Worldwide Governance indicator score: Hungary and regional peers (EU 

average=100) 

Graph 3.4.3:  Risk scores related to low competition and transparency in Hungarian public 

procurement - corruption risk indicators 

Graph 3.4.4:  Share of tenders without prior publication and with only a single bidder above EU 

threshold 

Graph 3.5.1: 

The proportion of SMEs introducing innovations 

LIST OF BOXES 

Box 1.1: Steep wage growth: realignment or overshoot? 

Box 2.1: Tangible results delivered through EU support to structural change in Hungary 

Box 3.2.3: Housing prices in Hungary 

Box 3.3. 1: Monitoring performance in light of the European Pillar of Social Rights 

Box 3.4.5: Investment challenges and reforms in Hungary 

Box 3.4.6: Interfirm productivity differences and the duality of the economy 

Box 3.5.7: Policy Highlights 

2 

2 

3 

3 

4 

4 

5 

5 

8 

11 

13 

13 

14 

16 

17 

17 

19 

21 

22 

25 

27 

31 

33 

33 

35 

6 

10 

18 

20 

29 

30 

39 

 
 
 
 
EXECUTIVE SUMMARY 

Hungary's  steady  economic  recovery  offers  a 
window  of  opportunity  to  ensure  sustainable 
growth  in  the  coming  decade.(1)  The  country's 
financial  vulnerabilities  seen  in  the  aftermath  of 
the  crisis  have  been  markedly  reduced  and    the 
economy has been staging a steady recovery. Real 
GDP surpassed its pre-crisis peak in 2014, whereas 
domestic  demand  and  investment  reached  similar 
levels  by  2017.  The  growth  potential  has  been 
gradually 
remains 
moderate  for  a  catching-up  economy.  Reflecting 
also the costs of economic adjustment, the income 
convergence  of  the  country  has  been  relatively 
slow  lagging  behind  regional  peers.  The  main 
challenge now is to bolster economic convergence 
by  well-designed 
reforms,  while 
maintaining a balanced growth path. 

recovering,  albeit 

structural 

it  still 

and 

environment 

After a temporary lull, the Hungarian economy 
grew strongly in 2017. GDP is estimated to have 
grown  above  potential  helped  by  a  supportive 
external 
accommodative 
domestic  policies.  Household  consumption  was 
boosted  by  double-digit  wage  growth.  Investment 
picked  up  strongly  also  due  to  the  resumption  of 
EU fund absorption. Corporate investment by large 
firms  gained  momentum,  while  household 
investment  increased  sharply  albeit  from  a  low 
level.  Healthy  export  growth  mirrored  global 
developments,  but  the  contribution  of  net  exports 
to  growth  turned  negative  as  imports  grew  even 
faster.  Inflation  increased  and  approached  the 
central bank's  target.  In  2018,  growth  is projected 
to remain strong as supporting factors are expected 
to prevail. 

Employment  reached  record-highs.  While  the 
economic  upturn  is the  main  driving  force, policy 
measures also helped to improve the labour market 
labour  migration  and 
situation.  Cross-border 
adverse  demographic 
trends  however  reduced 
labour supply, particularly among skilled workers. 
The unemployment rate thus fell to its lowest level 
on record in 2017, and in certain segments labour 
shortages emerged.  

(1)  This report assesses Hungary’s economy in the light of the  
European Commission’s Annual Growth Survey published 
on 22 November 2017. In the survey, the Commission calls 
on  EU  Member  States  to  implement  reforms  to  make  the 
resilient  and 
European  economy  more  productive, 
inclusive.  In  so  doing,  Member  States  should  focus  their 
efforts  on  the  three  elements  of  the  virtuous  triangle  of 
economic  policy  —  boosting 
investment,  pursuing 
structural reforms and ensuring responsible fiscal policies. 

1 

Bank  lending  picked  up.  New  lending  grew 
strongly, while banks rapidly reduced the stock of 
non-performing  loans  in  2017.  As  a  result,  credit 
stock grew at a rate close to nominal GDP growth 
and  asset  quality  improved  significantly.  The 
economic  recovery  and  central  bank  measures 
facilitated  the  process.  Banks  comfortably  met 
capital requirements and returned to profitability. 

The  fiscal  stance  is  loosening.  Despite  buoyant 
domestic demand, the headline deficit is forecast to 
increase  from  1.9 %  of  GDP  in  2016  to  around 
2.5 % in 2018. Hence, the structural fiscal balance 
is projected to deteriorate well below the country's 
medium-term  objective.  This  results  mainly  from 
significant  cuts  in  social  contributions  and  taxes. 
The  government  debt-to-GDP  ratio  has  been 
decreasing  gradually  and  is  expected  to  decline 
further  in  the  next  two  years  thanks  to  high 
nominal GDP growth. However, in the absence of 
future  fiscal  adjustment,  this  positive  trend  is  at 
risk in the medium term  

that 

Albeit  contained  at  this  stage,  risks  to  a 
balanced  growth  path  may  start  to  emerge. 
High  capacity  utilisation  suggests 
the 
economy 
is  now  moving  above  potential. 
Particularly,  labour  supply  may  soon  reach  its 
limits,  adding  to  the  already  considerable  wage 
pressure.  House  prices  have  been 
increasing 
rapidly 
since  2014.  Nevertheless,  domestic 
demand  in  real  terms  only  reached  the  pre-crisis 
level  in  2017,  and  real  house  prices  stayed  below 
pre-crisis  levels.  Moreover,  the  current  account 
remained  in  surplus.  However,  the  pressure  on 
consumer  prices  may  accumulate  if  consumption 
growth accelerates further on the back of fast wage 
growth,  falling  precautionary  savings  and  strong 
lending.  

Hungary  made  limited  progress  in  addressing 
the  2017  country-specific  recommendations. 
Whereas some progress was made in reducing the 
tax  wedge  for  low-income  earners,  less  was 
achieved  in  reducing  the  complexity  of  the  tax 
system. Some progress was made in strengthening 
public 
transparency 
competition 
and 
in 
limited 
procurement,  but  progress  was 
in 
strengthening 
framework. 
the  anti-corruption 
Limited  progress  was  made  in  improving  the 
regulatory  environment  in  services.  There  was 
some  progress  in  better  targeting  the  public  work 
scheme and reinforcing other active labour market 

 
 
                                                           
policies. The progress was limited in increasing the 
participation of disadvantaged groups, in particular 
Roma,  in  inclusive  mainstream  education  and  in 
improving  the  adequacy  and  coverage  of  social 
assistance and unemployment benefits. 

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  intensity  and 
reduce early school leaving and poverty. 

Hungary  performs  well  on  a  number  of 
indicators  of  the  Social  Scoreboard  supporting 
the  European  Pillar  of  Social  Rights,  but 
challenges  remain.  The  gender  employment  gap 
merits  attention,  together  with  the  low  share  of 
children  under  the  age  of  3  enrolled  in  formal 
childcare.  The  share  of  early  school  leavers 
increased  further  from  an  already  high  level. 
Employment  outcomes  have  been  buoyed  by  the 
recovery.  Income  inequality  is  relatively  low  and 
the  effectiveness  of  social  transfers  in  reducing 
poverty  remains  comparatively  high  despite  some 
deterioration recently. 

Key structural issues analysed in this report, which 
point 
to  particular  challenges  for  Hungary's 
economy, are the following:  

  Several measures have been implemented to 
improve  the  tax  system,  but  some  problems 
remain. The country's high tax burden is set to 
moderate due to sizable tax cuts. Moreover, the 
lowering  of  social  contributions  helps  to  ease 
the  impact  of  wage  increases  on  labour  costs. 
Nevertheless,  without  offsetting  measures, 
these  tax  cuts  pose  medium-term  fiscal  risks. 
While  decreasing,  the  tax  wedge  on  labour, 
especially  for  certain  low-income  groups,  is 
still high in EU comparison. The complexity of 
the  tax  system,  coupled  with  the  continued 
presence  of  sector-specific  taxes,  remains  a 
tax 
weakness.  Administrative  burdens  of 
collection are still significant, but considerable 
efforts  have  been  made  to  address  this.  Some 
indicators suggest that Hungary's tax rules may 
be  used  by  multinationals  in  aggressive  tax 
planning  structures.  It  is  shown  by  the  large 
capital flows as a share of GDP through special 

Executive summary 

purpose entities, combined with the absence of 
withholding taxes. 

  Hungary  faces  a  pronounced  productivity 
challenge.  Productivity  growth  has  been  slow 
for  a  decade  now  compared  to  peer  countries. 
Although  potential  growth  estimates  show 
some recovery, the challenge is becoming more 
pressing as labour reserves diminish. There are 
wide  and  persistent  productivity  differences 
between  export-oriented,  mainly 
foreign-
owned  companies  and  smaller  domestic  firms, 
with limited positive spill-overs from the high-
productivity segment. The propensity of SMEs 
to  innovate  is  low  and  Hungary  remains  a 
moderate 
technologies. 
Regulatory  barriers  in  services  and  retail  trade 
and  unpredictability  of  regulation  hamper  the 
efficient reallocation of resources. Institutional 
weaknesses  and  human  capital  inadequacies 
also constrain productivity growth. 

digital 

user 

of 

and 

policy 

formulation 

  Weaknesses  in  institutional  soundness  and 
governance  could  weigh  on  the  country's 
economic  convergence.  Limited  transparency 
and  quality  of  policy  making  is  a  source  of 
uncertainty  for  investors.  There  are  deficits  in 
evidence-based 
and 
engagement.  Social  dialogue 
stakeholder 
structures 
remain 
processes 
underdeveloped.  Hungary  performs  weakly  on 
the  accessibility  and  quality  of  public 
the 
information.  Challenges 
functioning  of  the  justice  system  require  close 
monitoring.  Available 
to 
notable  corruption  risks,  and  there  are  gaps  in 
the  anti-corruption 
Important 
regarding  public 
taken 
measures  were 
procurement, but there remains scope to further 
improve 
in 
tendering processes.  

transparency  and  competition 

indicators  point 

framework. 

concerning 

  The education and healthcare systems reveal 
shortcomings  in  fostering  the  development 
of  human  capital.  Education  outcomes  in 
basic  skills  are  significantly  below  the  EU 
average.  The 
socioeconomic 
impact  of 
background  on  education  outcomes  is  among 
the highest in the EU. Disadvantaged students, 
in  particular  Roma,  remain  concentrated  in 
certain schools. The health system is faced with 
high  risks  from  unhealthy  lifestyles,  uneven 

2 

 
 
Executive summary 

limited 

quality of care and disparities in access. While 
showing  improvements,  health  outcomes  lag 
behind most other EU countries reflecting also 
effectiveness  of  healthcare 
the 
provision.  Despite  reform  efforts,  the  setup  of 
service  delivery  remains  strongly  hospital 
centred,  with  weaknesses  in  primary  care  and 
care coordination of chronic disease patients. 

the  number  of 

  Employment  policies  face  the  challenge  of 
mobilising  labour  reserves  fast  enough  to 
meet strong labour demand. While the public 
work  scheme  still  remains  the  main  active 
labour market policy, it has had limited success 
in  bringing  participants  back  to  the  labour 
market.  Nevertheless 
its 
participants  started  to  diminish  thanks  to  the 
strengthened  recovery.  The  government 
is 
taking  further  steps  to  facilitate  this  process, 
while  other  active  labour  market  policies  are 
gradually  expanding.  However,  an  evidenced-
based  system  that  would  help  jobseekers  to 
receive  services  tailored  to  their  particular 
needs  is  not  yet  in  place.  The  high  gender 
employment  gap  points  to  untapped  labour 
reserves. To utilize this reserve, measures were 
taken  to  improve  the  availability  of  childcare 
facilities.  The  low  employment  rate  of  Roma 
remains an important challenge. 

  Overall,  the  situation  regarding  poverty 
improved  notably,  but  vulnerable  groups 
continue  to  face  high  risk  of  poverty.  While 
the  share  of  population  at  risk  of  poverty  and 
social  exclusion  is  falling,  it  is  still  above  the 
EU  average.  Children  and  the  Roma  remain 
much more exposed to the risk of poverty than 
the  rest  of  the  population.  Changes  in  the  tax 
and benefit system contributed to rising income 
inequality.  There  has  been  a  clear  shift  from 
social  benefits  towards  work-related  family 
supports  and  in-kind  benefits,  which  are  not 
sufficiently  targeted  to  the  poor.  At  the  same 
time,  the  adequacy  of  social  assistance  and 
unemployment benefits declined. While home-
ownership  subsidies  expanded,  there  is  no 
improvement in social housing. 

3 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth 

Following  a  temporary  lull  in  2016,  growth 
picked  up  in 2017  due to  a supportive  external 
environment.  GDP  is  expected  to  grow  above 
potential  on  the  back  of  the  resumption  of  EU-
funded  investment,  fiscal  stimulus,  negative  real 
interest rates and the strong recovery of the global 
economy.  As  a  result,  real  GDP  is  expected  to 
have  increased  by  3.8 %  year-on-year  in  2017 
(Graph  1.1).  Economic  growth  continued  to  be 
primarily driven by domestic demand. Gross fixed 
capital formation is expected to have grown above 
20 % in 2017 and household consumption was also 
picking up. Trade flows accelerated in 2017, while 
import growth outpaced export growth. As a result, 
net  exports  contributed  negatively  to  real  GDP 
growth in 2017. 

Graph 1.1:  Contributions to real GDP growth 

Source: DG ECFIN, Autumn 2017 Economic Forecast 

positive 

to  slow 

to  3.1 % 

Strong  growth  is  set  to  continue.  Real  GDP 
growth  is  projected  to  increase  by  3.7 %  in  2018, 
in  2019  as  capacity 
but 
constraints  emerge  on  the  back  of  a  gradually 
widening 
gap.  Household 
output 
consumption  and  investment  are  projected  to 
expand  strongly  in  2018,  boosted  by  government-
initiated  and  market-driven  wage  increases,  and 
supported  by  a  strong  recovery  in  bank  lending. 
Corporate  and  public  investments  are  forecast  to 
continue  to  grow  by  double  digits  as  EU-funded 
projects are implemented. At the same time, strong 
domestic  demand  is  set  to  result  in  rapid  import 

1 

growth  and  thus  the  growth  contribution  of  net 
exports  is  expected  to  remain  negative.  In  2019, 
economic growth is projected to slow as a result of 
a build-up in capacity constraints, slowing growth 
of real disposable income and moderating trade as 
economic recovery matures in the EU. 

Graph 1.2: 

Export market shares 

15

10

5

0

-5

-10

-15

)

%

(

y
-
o
-
y

e
g
n
a
h
c

f
o

e
t
a
R

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Contribution to EMS: goods
Contribution to EMS: services
Export market share growth yoy

Source: Eurostat 

Hungary's  export  market  share  continues  to 
recover.  The  aftermath  of  the  financial  crisis 
resulted  in  a  cumulative  loss  for  the  country's 
export  market  share,  which  totalled  24 %.  Since 
2013,  Hungary  has  increased  its  export  market 
share and by the end of 2016 it regained one third 
of  the  previous  losses  (Graph  1.2).  New  export 
improved  cost  competitiveness 
capacities  and 
supported 
export 
the 
capacities  are  in  the  pipeline,  in  particular  in  the 
automotive  sector,  which  is  expected  to  facilitate 
improvements  in  export  performance.  However, 
increasing unit labour costs pose a risk in the years 
ahead. 

recovery.  Additional 

Hungary's  unit  labour  costs  increased  further 
in 2017. The deterioration in cost competitiveness 
started  in  2016,  when  the  increase  in  labour  costs 
was  coupled  with  relatively  low  GDP  growth. 
cost 
However, 
competitiveness  steadily  improved,  which  may 
provide some room for increasing labour costs. In 
2017,  nominal  unit  labour  costs  grew  by  4.9 %, 

following 

crisis, 

the 

-10-8-6-4-2024610111213141516171819pps.GFCFNet exportsInventoriesGovernment consumptionPrivate consumptionReal GDP (y-o-y%)forecast 
 
 
 
 
 
 
 
 
1. Economic situation and outlook 

which  was  4 pps.  above  the  EU  average.  This 
increase  was  mainly  driven  by  wage  growth. 
Productivity  gains  were  only  about  half  as  strong 
as real compensation gains by employees. Inflation 
also  contributed  to  the  nominal  unit  labour  costs 
increases  (Graph  1.3).  Looking  ahead,  real  wage 
growth is set to slow down. Real unit labour costs 
are therefore expected to stabilise by 2019.  

Graph 1.3: 

Unit labour cost developments in Hungary 

that 

risk 

the  crisis.  Moreover,  wages  are  increasing  from  a 
historically  low  level  (see  Box  1.1),  which  may 
explain the gradual pick-up in consumption. There 
inflation  will  accelerate  as 
is  a 
households'  confidence  raises  and  the  previously 
delayed consumption of durable goods recovers. In 
addition, negative real interest rates may induce an 
increased  take  up  of  loans.  These  risks  are 
expected to be exacerbated by fiscal loosening. 

Graph 1.4:  Contribution to inflation 

Source: Eurostat 

Inflation and monetary policy 

Source: European Commission calculations 

Inflation  picked  up  in  2017  and  is  projected  to 
accelerate  further  as  domestic  price  pressures 
increase.  Headline 
inflation  remained  muted 
between  2014  and  2016  as  falling  energy  prices 
fully  offset  limited  inflation  in  services  and  food. 
However, core inflation remained stable at around 
1.3 %.  Inflation  is  forecast  to  accelerate  towards 
the central bank’s target of 3.0 %. Price growth is 
expected  to  be  broad  based,  as  energy  prices  rise 
further  and  prices  of  services  accelerate  on  the 
back of strong wage growth (Graph 1.4).  

Price  pressure  may  re-emerge  against  the 
backdrop  of  pro-cyclical  fiscal  and  monetary 
loosening.  Gross  wages  grew  by  more  than  12 % 
in 2017 and are expected to growth rapidly in 2018 
as  well,  affected  also  by  minimum  wage  hikes. 
Asset  prices  are  rising,  which  also  improves  the 
wealth  of  households.  All  these  would  point  to 
strong 
2017 
consumption  lagged  behind  wage  developments, 
probably as a result of cautious behaviour rooted in 

consumption.  However, 

in 

Monetary  policy  remains  accommodative.  The 
base rate has been unchanged at 0.9 % since May 
2016. Moreover, the volume of the deposit facility 
was gradually limited to HUF 75 billion by the end 
2017. This gave an impetus to banks to lend, or as 
an alternative buy domestic sovereign debt, which 
now  represents  a  large  share  of  their  assets.  In 
recent  years  unconventional  policy  tools  played  a 
key role to support monetary loosening. As a result 
of  global  developments  and  measures  of  the 
central bank, long-term interest rates declined to a 
historic low, below 2 % by the end 2017.  

Labour market 

The  Hungarian  labour  market  performance 
continued to improve, while the market became 
increasingly  tight.  Employment  continued 
to 
expand  to  hit  new  all-time-highs  in  2017,  and 
unemployment  rate  fell  close  to  4  %  in  2017 
(Graph  1.5).  These  developments  were  due  to 
structural  factors  (the  increasing  education  level, 

2 

-8-6-4-20246810121402030405060708091011121314151617*18*19*Rate of change y-o-y (%)Inflation (GDP deflator growth)Real Compensation per EmployeeProductivity Contribution (negative sign)Nominal unit labour costULC in Euro Area-2-10123456789020304050607080910111213141516171819ServicesProcessed food (incl. Alcohol and tobacco)Unprocessed foodEnergyNon-energy industrial goodsHICPCore inflation% 
 
 
 
 
 
past reforms closing early retirement pathways), as 
well  as  to  improving  cyclical  position  of  the 
economy. Participation in the public works scheme 
(PWS)  declined,  yet  the  scheme  still  employed 
about 4% of the labour force in 2017 (see Section 
3.3).  

Graph 1.5:  Activity, employment and unemployment 

1. Economic situation and outlook 

labour  migration  and  adverse  demographic 
developments withdraw a sizeable amount of well 
qualified workforce from the labour market, which 
has  contributed  to  labour  shortages.  Outward 
labour  migration  started  to  intensify  after  2010 
(Hárs,  2016).  Between  2010  and  2014  the  net 
effect of cross-border migration amounted to a loss 
of around 200 000 people. Labour migrants tend to 
be  more  educated  than  the  average  population  in 
both the home and destination countries (SEEMIG, 
2014).  Demographic developments  reduced active 
population  further  by  100 000  during  the  same 
period.  Scarce  labour  drives  up  wages,  while 
higher wages may ease the tightness of the labour 
market by discouraging emigration. 

Social developments 

The  economic  recovery  and  higher  wages  have 
contributed  to  the  overall  improvement  of  the 
poverty situation. The share of population at risk 
of  poverty  or  social  exclusion  is  decreasing, 
returning to pre-crisis level, but remains above the 
EU  average.  This  positive  development  is  mainly 
driven  by  falling  severe  material  deprivation  and 
decrease  of 
to 
jobless  households, 
increasing  employment  level  and  higher  labour 
related 
the 
incidence  of  poverty  decreased  to  lesser  extent 
compared to the improvement of the labour market 
situation, particularly for children. 

income  of  households.  However, 

thanks 

Income inequalities grew at the beginning of the 
decade  but  have  remained  below  the  EU 
average.  In  2010,  the  richest  20 %  of  households 
had income that was 3.4 times higher than that of 
the poorest 20 %. By 2016 this ratio had increased 
to  4.3.  Over  the  same  period,  the  income  of 
households has not grown as fast as GDP, raising 
questions  about 
inclusiveness  of  growth. 
Changes  to  the  tax  and  benefits  system  also 
inequality  (see 
contributed 
Section 3.3). 

to  rising 

income 

the 

Public finances 

Accelerating economic growth is also supported 
by fiscal loosening. After hitting a historic low of 
1.9 %  of  GDP  in  2016,  the  headline  deficit  is 
forecast  to  increase  to  2.1 %  of  GDP in 2017  and 
then  further  to  2.6 %  in  2018  before  receding  to 

Source: Hungarian Central Statistical Office (HCSO) 

Graph 1.6: 

Labour as a limiting factor in industry 

(1) y-axis: Percentage of managers reporting labour as a 
limiting factor for their business. CEE3: Czech Republic, 
Slovakia and Poland 
Source: European Commission 

Labour shortages generate strong wage growth 
and limit the prospects for further employment 
growth.  The  economic  sentiment  indicator  shows 
that the Hungarian labour market is far tighter than 
in  its  regional  peers  (Graph  1.6).  Cross-border 

3 

02468101214454749515355575961636506Q106Q307Q107Q308Q108Q309Q109Q310Q110Q311Q111Q312Q112Q313Q113Q314Q114Q315Q115Q316Q116Q317Q117Q3% of labour force% of populationUnemployment rate (rhs)Activity rateEmployment rateEmployment w/o PWS010203040506070809006Q106Q307Q107Q308Q108Q309Q109Q310Q110Q311Q111Q312Q112Q313Q113Q314Q114Q315Q115Q316Q116Q317Q117Q3EU28HungaryCEE3 
 
 
 
 
 
 
2.3 % in 2019. These developments mainly reflect 
substantial  tax  cuts  (see  Section  3.1)  and  partly 
also  spending  increases.  The  expansionary  fiscal 
stance is expected to result in a sharp deterioration 
in the estimated structural balance, reaching -3½ % 
of  GDP  in  2018  and  2019,  well  below  the 
country's  medium-term  objective  of  -1.5 %  of 
GDP.  

The  gradual  decline  of  public  debt  is  expected 
to  continue  in  2017-2019.  It  is  supported  by  the 
forecast  for  high  nominal  GDP  growth,  while  the 
pre-financing  needs  of  EU  funds  result  in  a 
temporary debt-increasing  effect.  The government 
debt-to-GDP  ratio  is  projected  to  decrease  from 
73.9 % in 2016 to below 70 % by the end of 2019. 
the  structural 
However, 
balance  poses  a  risk  to  the  debt-reduction  path  in 
the medium term (see Section 3.1) 

the  deterioration  of 

Financial sector 

Graph 1.7: 

Breakdown of Credit Flows by sector 

Source: Eurostat 

of 

loans 

account 

cross-border 

Private sector debt ratios continued to contract 
on 
of 
corporations. Private debt was reduced to around 
78 %  of  GDP  in  2016  from  its  peak  of  117 %  of 
GDP in 2009. The credit flows turned positive for 
households  in  2016  as  the  new  government 
housing support scheme and rising property prices 
started  to  spur  household  borrowing  (Graph  1.7). 
The growth in credit to non-financial corporations 
contracted.  The  contraction  was  due  to  inter-

1. Economic situation and outlook 

company  loans  and  loans  from  foreign  financial 
institutions,  while  the  credit  stock  in  domestic 
financial  institutions  increased.  Overall,  credit 
growth  in  2016  remained  limited  by  banks’ 
cautious lending strategies. However, the situation 
improved  markedly  in  2017.  The  year-on-year 
growth  in  credit  to  non-financial  corporations 
provided  by  domestic  institutions  outpaced  the 
nominal GDP growth in Q3 2017 (see Section 3.2). 

External position 

Graph 1.8:  Net international investment position 

Source: Eurostat 

to 

External  balances  continued 
improve. 
Negative  net  international  investment  position 
(NIIP)  is  expected  to  have  improved  to  around 
58 %  in  2017  from  its  peak  of  115 %  in  2009, 
although  it  remains  above  the  prudential  and 
fundamentally  explained  thresholds  for  NIIP (2) 
(Graph 1.8). Net external debt declined from above 
78 %  of  GDP  in  2009  to  below  10 %  of  GDP  in 
2016,  acting  as  a  mitigating  factor  in  external 
sustainability  risks.  The  economy  was  rebalanced 
by  maintaining  high  current  and  capital  account 
surpluses.  EU  funds  kept  the  capital  account  in  a 
sizeable surplus, while the private investment rate 
and  consumption  of  durable  goods  were  below 

(2)  The country-specific NIIP explained by fundamentals is the 
NIIP level that would occur if a country had run its current 
account  since  1995  in  line  with  its  fundamentals.  The 
country-specific  prudential  threshold  identifies  the  NIIP 
level  at  which  the  risk  of  an  external  crisis  emerges.  The 
threshold varies with relative income per capita. 

4 

-160-140-120-100-80-60-40-20020406008Q4'09Q410Q411Q412Q413Q414Q415Q416Q4% of GDPGeneral GovernmentPrivate sectorMFI (excl central bank)Central Bank (incl reserves)Net int'l investment position (NIIP)-15-10-505101520253004050607080910111213141516% of GDPFinancial corporationsHouseholdNon financial corporationsGovernmentPrivate sector 
 
 
 
 
                                                           
 
1. Economic situation and outlook 

a sustained improvement. Following a sharp fall 
after  2008,  the  recovery  of  the  country's  potential 
GDP growth is expected to accelerate, rising to an 
average of 2.8 % in 2017-2019 (Graph 1.10). It is 
already  close  to  the  average  of  regional  peers, 
albeit  still  remains  some  0.5 pps.  below  the  level 
seen before the crisis. After several years showing 
a  negligible  growth  contribution,  total  factor 
productivity  (reflecting  the  quality  and  efficient 
utilisation of resources) has also started to recover. 
However,  the  estimated  productivity  growth  still 
remains moderate both historically and in regional 
comparison.  As  labour's  contribution  to  potential 
growth  is  expected  to  diminish  in  the  future,  the 
estimated  improvement  in  growth  potential  may 
not  persist  in  the  medium  term  unless  total  factor 
productivity  is  enhanced  further.  Based  on  the 
forecast  trends,  potential  growth  is  projected  to 
drop  to  below  [xx]%  again  after  2019.  (The 
productivity  challenge  is  also  discussed  in  Boxes 
1.1 and 3.4.2, while some key constraining factors 
are highlighted in Sections 3.3, 3.4. and 3.5) 

Graph 1.10:  Development of potential GDP growth 

their  historical  averages.  Hungary’s  strong  net 
lending  position 
to  sustain  as 
is  expected 
supporting factors  remains  in  place. However,  the 
surplus  is  expected  to  fall  slightly  in  2018  and 
2019 as domestic demand will pick up. 

Real convergence and potential growth 

The  convergence  towards  the  average  income 
level  in  the  EU  continued,  albeit  at  a  relatively 
slow  pace.  Hungary's  GDP  per  capita 
in 
purchasing  power  parity  terms  increased  from 
around  half  of  the  EU  average  in  1995  to  two 
thirds by 2016 (Graph 1.9). However, the country's 
real convergence has been lagging behind most of 
its  regional  peers,  even  after  taking  into  account 
differences in starting positions. In 1995, Hungary 
had  the  third  highest  GDP  per  capita  among  the 
EU  countries  in  Central  and  Eastern  Europe,  and 
was  15 %  above  their  average.  By  the  end  of  this 
21-year  period,  the  country  had  fallen  to  the 
seventh  place  with  a  level  somewhat  below  the 
regional average. While the post-crisis period saw 
a  general  deceleration  in  real  convergence  in  the 
region,  Hungary's  catching-up  had  slowed  down 
noticeably  already  after  2003.  Moreover,  wide 
internal  disparities  remained  with  an  increasing 
gap between the most and least developed regions 
in Hungary. 

Graph 1.9:  GDP per capita based on purchasing power 

parity (% of EU average) 

Source: European Commission calculations,  

Source: Eurostat 

Hungary's  growth  potential  is  picking  up,  but 
productivity  growth  still  remains  moderate  for 

5 

-2-10123450304050607080910111213141516171819202122Rate of change y-o-y (%)Labour Contr.Capital Contr.TFP Contr.Potential growth 
 
 
 
 
 
 
1. Economic situation and outlook 

Box 1.1: Steep wage growth: realignment or overshoot? 

In 2017-2018, Hungary is expected to experience sharp increases in nominal wages, due to the tight labour 
market and further propelled by significant minimum  wage hikes. From a historical perspective, the wage 
share (i.e. the ratio of labour cost per employee to the gross value added per total employment) in the total 
economy declined during the post-crisis years and fell below the long-term average. This shows that wages 
were lagging behind productivity developments over this period. In 2016, the wage share started to increase 
sharply and is expected to rise further, reaching its historical average in 2018. It is then expected to stabilise 
as wage dynamics slow and GDP growth remains strong. 

Large firms and foreign-owned firms are likely able to cope well with increasing labour costs as the wage 
share in manufacturing, where many such firms operate, is much lower than in the total economy. A study 
(Palócz,  2016)  found  that  foreign  companies  are  three  times  more  productive  than  domestic  firms,  which 
makes them  more  resilient  against  some  loss  in  price  competitiveness.  Firms  may  also  be  able to  react  to 
increasing wage costs by dislocating part or all of their production. However, wage levels in Hungary are 
still low among peer countries and they also enjoy fast wage growth. 

Graph 1:  Change in the wage share in the total economy in the manufacturing sector 

Source: Eurostat, Commission's calculation  

Less  productive  firms,  in  particular  SMEs,  face  challenges  to  be  able  to  cope  with  rapid  wage  rises.  The 
Hungarian wage share in the total economy is higher than in the regional peers. This suggests that there is 
little room to increase labour costs in SMEs. SMEs could potentially adapt to wage increases with the help 
of preferential and simplified tax schemes for SMEs or informal economy practices. In addition, the rate of 
social contribution was cut by 7.5 pps. in two years, which mitigates the effect of increasing wages. In the 
past,  part  of  salaries  may  have  been  paid  informally,  so  the  effective  increase  in  labour  costs  could  have 
been  smaller  than  indicated  by  wage  statistics.  In  labour-intensive  service  sectors  firms  may  also  pass  on 
rising wage costs in output prices. Inflation in such services jumped to above 4% in 2017.  
Overall,  the  sharp  wage  increases  in  2017-2018  can  be  considered  realignment  rather  than  an  overshoot. 
However, higher labour costs affect firms differently. In manufacturing there may be more room to increase 
wages. Due to the tight labour market, there is a risk of a faster wage rise than forecast, which would lead to 
a further loss in cost competitiveness and price pressure.   

6 

0,50,520,540,560,580,60,620,640,660001020304050607080910111213141516171819HU total economyHistorical averageforecast0,420,470,520,570,620001020304050607080910111213141516CEE3 manufacturingHU manufacturingCEE3 total economyHU total economy 
 
 
 
 
 
1. Economic situation and outlook 

Table 1.1: 

Key economic and financial indicators - Hungary 

(1)  NIIP excluding direct investment and portfolio equity shares 
(2) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
Source: Eurostat and ECB as of 30 Jan 2018, where available; European Commission for forecast figures (Winter forecast 2018 
for real GDP and HICP, Autumn forecast 2017 otherwise) 

7 

2004-072008-122013-1420152016201720182019Real GDP (y-o-y)3.4-1.13.23.42.23.83.73.1Potential growth (y-o-y)2.90.31.52.22.12.62.92.9Private consumption (y-o-y)2.0-2.41.53.64.3...Public consumption (y-o-y)-0.10.64.61.10.8...Gross fixed capital formation (y-o-y)4.0-4.311.11.9-10.6...Exports of goods and services (y-o-y)16.62.06.68.53.4...Imports of goods and services (y-o-y) 13.60.17.76.42.9...Contribution to GDP growth:Domestic demand (y-o-y)2.0-2.13.92.50.0...Inventories (y-o-y)-0.1-0.5-0.4-1.31.5...Net exports (y-o-y)1.51.6-0.42.20.7...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)-0.4-0.50.81.11.20.90.70.5Capital accumulation (y-o-y)1.50.60.60.90.40.81.11.2Total factor productivity (y-o-y)1.80.30.00.30.50.91.11.2Output gap2.8-2.5-1.80.30.41.52.12.4Unemployment rate7.110.29.06.85.14.24.04.0GDP deflator (y-o-y)4.13.43.21.91.02.82.93.1Harmonised index of consumer prices (HICP, y-o-y)5.54.90.90.10.42.42.82.9Nominal compensation per employee (y-o-y)7.32.41.3-1.54.07.67.25.8Labour productivity (real, person employed, y-o-y)3.60.00.20.9-0.4...Unit labour costs (ULC, whole economy, y-o-y)3.62.41.1-2.44.44.94.12.7Real unit labour costs (y-o-y)-0.5-1.0-2.0-4.23.42.01.2-0.4Real effective exchange rate (ULC, y-o-y)2.7-2.7-2.3-5.13.14.83.20.8Real effective exchange rate (HICP, y-o-y)3.1-0.8-2.5-2.00.81.32.0.Savings rate of households (net saving as percentage of net disposable income)4.63.05.04.3....Private credit flow, consolidated (% of GDP)13.30.8-0.5-2.6-3.6...Private sector debt, consolidated (% of GDP)81.6110.593.184.377.0...of which household debt, consolidated (% of GDP)24.836.426.721.320.3...of which non-financial corporate debt, consolidated (% of GDP)56.874.066.463.056.7...Gross non-performing debt (% of total debt instruments and total loans and advances) (2).9.814.111.08.1...Corporations, net lending (+) or net borrowing (-) (% of GDP)-1.43.54.94.13.33.73.43.5Corporations, gross operating surplus (% of GDP)23.824.425.926.426.125.826.027.1Households, net lending (+) or net borrowing (-) (% of GDP)0.81.63.95.25.04.84.63.7Deflated house price index (y-o-y).-6.9-0.613.313.6...Residential investment (% of GDP)4.43.11.92.22.4...Current account balance (% of GDP), balance of payments-7.4-1.02.63.46.14.33.33.2Trade balance (% of GDP), balance of payments-1.24.56.78.910.1...Terms of trade of goods and services (y-o-y)-0.7-0.50.80.91.1-0.60.20.2Capital account balance (% of GDP)0.51.93.64.60.1...Net international investment position (% of GDP)-89.4-104.9-81.7-67.8-65.0...Net marketable external debt (% of GDP) (1)-33.8-49.0-32.7-18.9-12.2...Gross marketable external debt (% of GDP) (1)75.2112.391.477.671.0...Export performance vs. advanced countries (% change over 5 years)47.113.7-13.8-6.4-3.2...Export market share, goods and services (y-o-y)4.9-4.62.91.53.6...Net FDI flows (% of GDP)-2.5-1.6-1.4-2.2-1.9...General government balance (% of GDP)-7.2-4.1-2.7-2.0-1.9-2.1-2.6-2.3Structural budget balance (% of GDP).-2.9-2.0-2.1-2.0-3.2-3.6-3.5General government gross debt (% of GDP)61.877.175.674.773.972.671.569.4Tax-to-GDP ratio (%)37.438.238.138.939.438.737.437.2Tax rate for a single person earning the average wage (%)35.635.534.534.533.5...Tax rate for a single person earning 50% of the average wage (%)19.626.434.534.533.5...forecast 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

the 

implementation  of 

Progress  with 
the 
recommendations  addressed  to  Hungary  in 
2017 has to be seen in a longer term perspective 
since the introduction of the European Semester 
in 2011. Looking at the multi-annual assessment of 
the  implementation  of  the  CSRs  since  these  were 
first  adopted,  64 %  of  all  the  CSRs  addressed  to 
Hungary  have  recorded  at  least  'some  progress'. 
36 %  of  these  CSRs  recorded  'limited'  or  'no 
progress' (see Figure 2.1). Substantial progress has 
been achieved in fiscal policy as the country exited 
from  the  excessive  deficit  procedure  and  the  debt 
ratio  has  been  put  on  a  firm  downward  path. 
Similarly,  substantial  progress  has  been  made  in 
the  financial  sector,  for  instance  improving  the 
asset quality of the banks and access to finance. 

Graph 2.1:  Hungary - Level of implementation today of 

2011 - 2017 CSRs 

* The assessment of the country-specific recommendations 
related to fiscal policy excludes compliance with the 
Stability and Growth Pact 
** The multiannual CSR assessment looks at the 
implementation until 2018 Country Report since the CSRs 
were first adopted. 
Source: European Commission 

the  government  has  achieved 
Since  2011 
considerable  progress  in  strengthening  public 
finances.  The  government  implemented  measures 
including structural reforms to decrease budgetary 
deficit below 3 % of GDP in a durable manner. As 
a  result,  in  2013,  the  decision  on  the  existence  of 
an  excessive  deficit  was  abrogated.  However, 
recently, structural deficit deteriorated.  

The  labour  market  situation  has  improved 
considerably  since  2011  supported  by  the 
implemented  by  the  government. 
measures 
Recommendations  on 
tax 
labour  market  policies, 
compliance, 
education and social assistance have been adopted 
repeatedly  since  the  launch  of  the  European 

taxation, 

labour 

active 

to  reduce 

semester.  In  the  last  7  years  the  authorities  have 
implemented  several  measures 
tax 
burden  on  labour.  The  tax  wedge  has  decreased, 
especially  for  families  and  selected  groups. 
However,  it  remains  high,  in  particular  for  low 
income  earners.  Some  progress  can  be  observed 
regarding active labour market policies. For years, 
the  authorities'  main  focus  was  the  public  works 
scheme,  despite  its  limited  efficiency.  Recently, 
the  number  of  public  workers  started  to  decline 
reflecting  improving  labour  market  conditions. 
tax 
Efforts  of 
compliance yielded significant results, in particular 
due to the introduction of the online cash registers.  

the  government 

increase 

to 

process; 

Semester 

competition; 

the  European 

Hungary  has  received  recommendations  to 
improve  the  business  environment  every  year 
since 
started. 
Recommendations  cover  several  fields  including 
administrative  burdens;  public  procurement;  the 
legislative 
regulatory 
environment  and  corruption.  While  the  complex 
tax  system  and  high  compliance  cost  remains  a 
challenge  for  firms,  several  promising  measures 
were  developed  building  on  digitalisation.  The 
authorities  implemented  a  number  of  measures  to 
strengthen  transparency  and  competition  in  public 
procurement.  Hungary  adopted  a  new  legislation 
and introduced the e-procurement system which is 
a  big step  towards  further  increasing  transparency 
and competition in public procurement.  

improved  and 

The  quality  of  the  banking  sector  assets  has 
greatly 
lending  activity  has 
picked  up  recently.  Between  2013  and  2015 
Hungary received yearly recommendations to take 
measures to restore lending to the real economy to 
reduce  burdens  on  banks  and  improve  asset 
quality.  Since  then  banking  tax  has  been  reduced 
significantly and the level of non-performing loans 
held by banks has dropped considerably.  

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,  while  the  public 
debt  ratio  declined  since  the  beginning  of  the 
international 
indicators  of  net 
decade.  The 
investment position had rapidly improved.  

8 

No Progress8%Limited Progress28%Some Progress30%Substantial Progress17%Full Implementation17% 
 
 
 
2. Progress with country-specific recommendations 

Table 2.1: 

Summary table in 2017 CSR assessment 

Source: European Commission 

the 

2017 

limited  progress 

in 
Hungary  has  made 
addressing 
country-specific 
recommendations (see table 2.1). Whereas, some 
progress has been made in reducing the tax wedge 
for  low-income  earners,  there  has  been  less  so  in 
reducing  the  complexity  of  the  tax  system.  Some 
strengthening 
progress  has  been  made 
transparency 
public 
procurement  as  the  authorities  implemented  a 
number of measures, especially the amendment to 
the  Public  Procurement  Act.  The  new  e-
procurement  system  has  been  introduced  as  of  1 

in 
competition 

and 

in 

transparency  and  competition. 

January 2018,  which  is  a  big  step  towards  further 
increasing 
Its 
efficiency  and  impact  is  still  to  be  seen  in  the 
coming  years.  On  the  regulatory  environment  in 
the services and retail sector, limited progress has 
been 
labour  market, 
education  and  social  policies,  some  progress  has 
been  made  in  better  targeting  the  public  work 
scheme and reinforcing other active labour market 
policies  reflecting 
the 
authorities in this area. 

the  efforts  made  by 

achieved.  Regarding 

9 

CSR1: Pursue a substantial fiscal effort in 2018 in line with the requirements of the preventive arm of the Stability and Growth Pact, taking into account the need to strengthen the ongoing recovery and to ensure the sustainability of Hungary’s public finances.   CSRs related to compliance with the Stability and Growth Pact will be assessed in spring once the final data are available. CSR2: Complete the reduction of the tax wedge for low-income earners and simplify the tax structure, in particular by reducing the most distortive sector-specific taxes. Strengthen transparency and competition in public procurement, by 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.  Limited progress   Some progress has been made on reducing the tax wedge of low income earners.  Limited progress has been made regarding the complexity of the tax structure.   Some progress has been made on strengthening transparency and competition in public procurement.  Limited progress has been made on strengthening anti-corruption framework.  Limited progress has been made on improving the regulatory environment in the services sector.  CSR3: 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. Limited progress   Some progress has been made to better target the public work scheme and reinforce other active labour market policies.  Limited progress has been made to improve educational outcomes and to increase the participation of disadvantaged groups, in particular Roma, in inclusive mainstream education.  Limited progress has been made in improving the adequacy and coverage of social assistance and unemployment benefits.    
 
 
 
2. Progress with country-specific recommendations 

education  system,  including  the  combating  of 
early-school  leaving  and  segregation.  European 
funding  is  also  instrumental  for  supporting  public 
administration  reform  and  the  improvement  of 
efficiency  and  transparency  of  the  public  sector 
(see Box 2.1). 

in  addressing  key  challenges 

European Structural and Investment Funds are 
pivotal 
in 
Hungary.  Notably,  the  funds  support  innovative 
SMEs,  energy  efficiency,  the  promotion  of  R&D 
in  the  private  sector  as  well  as  the  reduction  of 
labour  market  mismatches 
through  enhancing 
employability of disadvantaged groups, vocational 
learning.  They  also 
education  and 
contribute  to  the  modernisation  of  the  public 

lifelong 

Box 2.1: Tangible results delivered through EU support to structural change in Hungary 

Hungary is a beneficiary of significant European Structural and Investment Funds (ESIF) support and can 
receive up to EUR 25 billion until 2020. This represents around 3 % of GDP annually over the period 2014-
2018 and 43% of public investment (1). By 31 December 2017, an estimated EUR 23.5 billion (94 % of the 
total) was allocated to projects on the ground. This has paved the way for 11 000 enterprises to improve their 
capacity and over 200 firms to introduce new products to the markets they operate in; for the increase of the 
urban  transport  system's  sustainability  and  the  decrease  of  annual  primary  energy  consumption  of  public 
buildings.  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).  

ESIF  help  address  structural  policy  challenges  and  implement  country-specific  recommendations.  Actions 
financed  cover  the  promotion  of  R&D  in  the  private  sector  via  targeted  incentive  schemes  to  support 
innovative  SMEs.  A  substantial  share  of  funds  is  devoted  to  ensuring  the  sustainability  of  Hungary's 
transport infrastructure. Funds are targeted to the modernisation of public education (including combatting 
early-school  leaving  and  segregation),  the  reduction  of  labour  market  mismatches  (through  enhancing 
employability of disadvantaged groups, vocational education and lifelong learning) and the improvement of 
the  effectiveness  of  the  justice  system.  Early  childhood  care  and  social  inclusion  measures,  especially  for 
Roma, are also important areas of 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),  which  –  accompanied  by  ESF  funding  under  the  same  project  – 
benefited over 63 000 young people until the end of 2017 in the respective YEI regions. Support is provided 
for  modernising  the  agricultural  and  the  agri-food  sector,  enhancing  environment  friendly  farming  and 
investments in resource efficiency, and fostering local development in rural areas. 

Several reforms were undertaken already as precondition for ESIF support (2). The compliance with the ex-
ante  conditionalities  assured  that  the  necessary  national  structures  exist  to  efficiently  implement  ESIF 
funded projects. This includes targeted investments in R&D via smart specialisation, the improvement water 
pricing policy; the elaboration of a transport plan, the development of an employment profiling system and a 
monitoring system of early school leaving, the enhancement of higher education and health policies as well 
as measures in the area of public procurement.  

Hungary is advancing the take up of the European Fund for Strategic Investments (EFSI). As of December 
2017, overall financing volume of operations approved under the EFSI amounted to EUR 73 million, which 
is expected to trigger total private and public investment of EUR 1.2 billion. No project involving Hungary 
has  been  approved  so  far  under  the  Infrastructure  and  Innovation  Window.  Under  the  SME  Window,  7 
agreements  with  financial  intermediaries  have  been  approved  so  far.  Over  12  000  smaller  companies  or 
start-ups will benefit from this support. Funding under Horizon 2020, the Connecting Europe Facility and 
other  directly  managed  EU  funds  are  additional  to  the  ESIF.  By  the  end  of  2017,  Hungary  has  signed 
agreements for EUR 1.1 billion for projects under the Connecting Europe Facility.  

https://cohesiondata.ec.europa.eu/countries/HU 

(1) Public investment is the sum of gross fixed capital formation, investment grants and spending on agriculture. 
(2)  Before  programmes  are  adopted,  Member  States  are  required  to  comply  with  a  number  of  so-called  ex-ante 
conditionalities, which aim at improving conditions for the majority of public investments areas. 

10 

 
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES AND TAXATION 

Taxation 

substantial 

include  a 

Hungary's  high  tax  burden  is  set  to  moderate. 
According  to  the  latest  data  for  2016,  Hungary's 
total  tax  burden  amounted  to  39.3%  of  GDP, 
somewhat  higher  than  the  EU  average  and  well 
above the level of regional peers. The tax burden is 
forecast  to  decrease  by  some  2 pps.  by  2018 
reflecting  considerable 
tax  cuts.  These  most 
reduction  of 
notably 
employer's social contributions, the lowering of the 
corporate income tax rate to 9% from 19% and the 
application  of  reduced  VAT  rates  for  selected 
goods  and  services.  While  the  tax-to-GDP  ratio 
remained  persistently  high,  there  were  notable 
changes  in  the  tax  structure.    The  share  of  tax 
revenues  from  the  taxation  of  labour  decreased, 
while  the  weight  of  consumption  and  other  forms 
of  indirect  taxes  increased.  With  the  most  recent 
tax  package,  this  trend  continues.  At  the  same 
time,  the  medium-term  fiscal  risks  could  increase 
sufficient  compensating 
in 
measures. 

the  absence  of 

levels.  These 

A long-standing challenge has been the high tax 
wedge  on  labour,  particularly  for  low-income 
earners.  With  the  introduction  of  a  uniform  tax 
rate in 2011 and the phase-out of tax credits at low 
incomes  in  2012,  progressivity  in  the  personal 
income  tax  system  was  eliminated.  At  the  same 
time,  labour  taxation  has  incorporated  various 
elements  that  moderated  the  tax  wedge  on  low 
income 
targeted  social 
security  allowances 
for  certain  groups  of 
disadvantaged  workers  under  the  Job  Protection 
Act  (JPA),  and  family  tax  credits,  which  were 
made  increasingly  generous  (see  also  European 
Commission,  2017a,  pp  14-15).  Nevertheless,  the 
low-income  earners  remained 
tax  wedge  for 
generally  high.  In  2016  (the  last  year  with 
comparable figures), Hungary still had the highest 
tax wedge within the EU for single earners both at 
50 % and 67 % of average wage levels. 

include 

the 

As  part  of  the  multiannual  programme  to 
reduce 
tax  wedge,  employers'  social 
contribution rate was lowered altogether by 7.5 
pps.  in  2017-2018.  With  the  rate  of  19.5% 
applicable from 2018, the measure is estimated to 

reduce the tax wedge of single earners at 67 % of 
the average wage by some 3 pps. to 45 % (and to 
43  %  for  workers  eligible  for  the  contribution 
allowances of the Job protection Act). Despite the 
noticeable reduction, the tax wedge for low income 
earners  without  children  still  remains  well  above 
the EU average of 37% (Graph 3.1.1). At the same 
time,  for  low  income  household  categories  with 
two  children,  the  reduction  in  the  tax  wedge  is 
more substantial due to the continuing increase of 
child  tax  credits.  For  such  households,  the  tax 
wedge decreases to a level around the EU average. 

Graph 3.1.1:  The evolution of tax wedge for a single worker 
earning 67% of average wage 

(1) The tax wedge is calculated as the ratio of all taxes and 
total labour costs. (2) The reduction of the tax wedge in 2016 
reflects a 1 pp. reduction of the personal income tax rate. 
Source: OECD (2017a), European Commission calculations 

the  reliance  on  environmental 

There remains a scope to shift the tax burden to 
relatively  growth-friendly  taxes.  Revenues  from 
environmental taxes stood at around 2.5% of GDP 
in  recent  years,  in  line  with  the  EU  average 
(European  Commission, 
2017b).  Available 
assessments  suggest  that  there  is  a  potential  to 
taxes 
increase 
(Eunomia  2016).  Receipts  from  car 
taxation 
stagnated  in  recent  years,  while  tax-subsidies 
persist favouring the private use of company cars. 
Household  energy  consumption  remains  exempt 
from  energy 
taxes  on 
immovable property amounted to 0.6% of GDP in 
2015 compared to the EU average of 1.6%. As the 
tax  base  typically  does  not  depend  on  market 
value, revenues from property taxes do not benefit 
from recent increases in property prices. 

taxation.  Recurrent 

11 

01020304050        Standard caseJPA (Below 25 and above 55years, unskilled and agriculture)2015201620172018EU max 2016EU mean 2016EU min 2016 
 
 
3.1. Public finances and taxation 

modified  to  increase  the  number  of  eligible 
taxpayers.  From  2018,  draft  tax  returns  for  excise 
duties  will  be  prepared  by  the  tax  authority  and 
taxpayers classified as 'reliable' will benefit from a 
shorter (30 days) refund period for VAT. In 2017, 
the  government 
a  modernisation 
launched 
programme  of  the  tax  authority  to  adopt  a  more 
client-centred  approach  in  tax  collection  through 
digitization and process redesign. 

Measures  implemented  over  the  past  years  to 
reduce  tax  avoidance  and  fraud  produced 
significant  revenue  yields.  In  particular,  the 
introduction  of  online  cash  registers  starting  in 
2014 contributed to increased VAT revenues. The 
VAT  gap  (i.e.  revenue  loss  relative  to  total  tax 
liability) is estimated to decline from 21% in 2013 
to  14%  in  2015,  close  to  the  EU  average  (CASE, 
2017). In 2017, the use of online cash registers was 
extended  to  further  services.  From  July  2018,  a 
system of online invoicing is scheduled to operate, 
which  will  allow  the  real-time  monitoring  of 
invoices issued between businesses.  

There  are  some  indications  that  the  country's 
corporate tax rules are used by companies that 
engage 
in  aggressive  tax  planning  (ATP). 
Hungary  records  relatively  high  capital  inflows 
and  outflows  through  special  purpose  entities, 
which have no or little effect on the real economy 
(OECD  2016a)  (4).  The  absence  of  withholding 
taxes  on  dividend,  interest  and  royalty  payments 
made by companies based in Hungary may lead to 
those payments escaping tax altogether, if they are 
also not subject to tax in the recipient jurisdiction. 
This  may  facilitate  ATP  (ZEW  (2016).  It  is 
important to note that Member States will have to 
the  Anti-Tax 
transpose 
Avoidance Directives into national law by the end 
of  2018  and  2019.  In  that  respect,  Hungary 
modified its rules on controlled foreign companies 
in  2017.  Hungary  recently  revised  its  patent  box 
regime (i.e. preferential treatment of incomes from 
intellectual property), which has been approved by 
the Code of Conduct on Business Taxation Group. 
The  old  regime  will  be  fully  phased  out  by  June 
2021.  While  the  evidence  on  the  effectiveness  of 
patent  boxes  as  a  means  to  encourage  R&D 

the  provisions  of 

(4)  A  new  study  on  ATP  indicators  shows  that  the  country's 
high  inward  and  outward  FDI  stock  (199%  and  155%  of 
GDP  in  2016)  can  only  be  partly  explained  by  real 
economic activities taking place in Hungary (IHS,2018). 

taxes 

imposed  on 

Sector-specific 
several 
businesses  still  complicate  the  tax  system.  Such 
taxes  raise  concerns  on  account  of  creating 
distortions, and weakening the investment  climate 
in  general  (European  Commission,  2017a,  p.  14). 
Some  sector-specific  taxes  have  been  reduced  or 
phased  out  (partly  in  response  to  legal  actions  by 
the Commission). However, revenues from sector-
specific taxes were still around 1.5 % of the GDP 
in  2016  (down  from  the  peak  at  2%  in  2013).  In 
2017, the upper rate of the bank levy was lowered 
further.  At  the  same  time,  the  advertisement  tax 
paid by companies publishing or broadcasting ads 
was  increased.  The  public  utility  tax  is  levied  on 
infrastructure 
thus  creates  a  clear 
disincentive for investments. In addition, this tax is 
not  recognised  in  regulated  prices  as  a  cost  item 
with  a  direct  impact  on  the  profitability  of  the 
concerned companies. 

(3)  and 

The  complexity  of  the  tax  system  generates 
administrative  burdens.  Hungary  operates  some 
sixty  tax  modalities,  with  a  multitude  of  small 
taxes, which yield only minimal proceeds. Several 
goods and services are simultaneously subject to a 
number  of  tax  levies  often  applying  different  tax 
bases. The most recent example is the introduction 
("tourism 
of 
in 
development  contribution")  for  restaurants 
parallel  with  the  reduction  of  the  VAT  rate  on 
restaurant  meals  to  5 %.  While  the  standard  VAT 
rate (at 27 %) is the highest in the EU, reliance on 
reduced  VAT  rates  as  a  way  to  lower  consumer 
prices and boost spending has recently increased.  

sector-specific 

sales 

tax 

a 

Considerable efforts have been made to reduce 
high  compliance  costs.  According  to  a  2015 
Eurobarometer  survey,  39%  of  SMEs  considered 
that  the  costs  of  tax  compliance  posed  a  major 
obstacle  to  their  business  and  55%  reported  that 
dealing  with  tax  administration  became  more 
the  past  five  years  (European 
difficult  over 
Commission, 2015a).  Based on  the  latest estimate 
for 2016, the average time spent to meet main tax 
obligations  amounted  to  277  hours  a  year  for  an 
SME,  the  second  highest  figure  in  the  EU  (WB-
PWC,  2018).  Recent  developments  seem 
to 
indicate  an  improvement  in  this  regard  (GHCIC, 
2017).  Simplified  corporate  taxation  regimes  for 
small  businesses  ('KATA'  and  'KIVA')  have  been 

(3)  This  includes  telecom  and  energy  cables  and  water  and 

sewage pipelines. 

12 

 
                                                           
                                                           
3.1. Public finances and taxation 

benefits (Graph 3.1.3). The latter contributed to the 
weakening  of  social  safety  net  (see  Section  3.3). 
Public expenditure on healthcare has also declined 
since  2005,  albeit  the  most  recent  data  point  to 
some  reversal  of  this  trend  (see  Section  3.4).  The 
largest  fall  occurred  in  the  pharmaceutical  budget 
reflecting  a  series  of  cost-containment  measures. 
Spending on healthcare is markedly lower than the 
EU  average,  which  may  add  to  the  country's 
unfavourable  health  outcomes.  Over 
last 
decade, public expenditure on education decreased 
by around 1 % of GDP to the level of EU average, 
since  2014,  however,  some  increase  took  place. 
This was driven by shrinking government spending 
on  primary  education,  while  administration  costs 
in the sector increased. 

the 

Graph 3.1.3:  Composition of general government spending 

in the average of 2013-2015 

remains limited (CPB, 2014), they may be used as 
a tax competition tool (Alstadsæter et. al. (2017). It 
will be important to assess to what extent the new 
measures,  in  conjunction  with  the  effect  of  the 
transposition 
the  Anti-Tax  Avoidance 
Directives,  will  limit  the  scope  for  aggressive  tax 
planning in Hungary. 

of 

Quality of public expenditure 

the 

Hungary’s public expenditure is high relative to 
its  income  level.  The  government  expenditure-to-
GDP  ratio  was  hovering  around  50%  of  GDP  in 
the  last  decade,  somewhat  above  the  EU  average 
(Graph  3.1.2).  EU  fund  absorption  has  played  an 
increasing  role 
level  public 
in  shaping 
spending since 2004. However, Hungary's level of 
public  expenditure  remained  well  above 
its 
regional peers even after filtering out the effect of 
EU  funds.  At  the  same  time,  public  expenditure 
without EU funds moderated decreasing below the 
level  seen  in  the  pre-crisis  period.  This  was 
primarily  a  result  of  contained  spending  on  social 
transfers  and  the  public  wage  bill.  Declining 
interest outlays also contributed to this trend. 

Graph 3.1.2:  Evolution of public expenditure as share of 

GDP 

(1) General public services exclude interest payments (2) 
CEE3: Czech Republic, Poland and Slovakia 
Source: Eurostat COFOG statistics  

is 

Spending  on  public  administration  and 
economic  affairs 
comparatively  high. 
Expenditure on economic affairs is well above the 
EU  average  and  has  risen  noticeably  since  2010. 
This  development  is  linked  to  increased  state 
involvement  in  the  economy,  the  extension  of  the 
public  work  scheme  and  elevated  infrastructural 
investments.  Extensive  state  involvement  in  the 
economy  may  lead  to  lower  competition  and 
hinder  productivity  improvements  especially  if 
accompanied by a limited effectiveness and quality 
of  public  institutions  (Fournier  and  Johansson, 
2016;  see  also  Section  3.4).  Spending  on  general 
public services is well above the EU and regional 

Source: Eurostat and Commission calculations 

The  Hungarian  budget  spends  relatively  little 
on social protection and health care. Against the 
general  trend  in  the  EU,  spending  on  social 
protection decreased in Hungary in terms of GDP 
on  the  back  of  effective  parametric  pension 
reforms  and  nominal  freezing  of  several  social 

13 

3840424446485052540204060810121416% GDPEU 28HungaryCEE3Hungary without EU funds02468101214161820GeneralpublicservicesSecurityEconomicaffairsSport,culture,religionHealthEducationSocialprotectionHungaryEU28CEE3 
 
 
3.1. Public finances and taxation 

average.  It  has  even 
centralisation of public administration.  

increased  despite 

the 

Graph 3.1.4:  Gross government debt ratio: the baseline 

scenario and alternative trajectories 

Public debt sustainability 

Hungary's public  debt  ratio  has been  declining 
since  2011,  but  remains  high  for  a  middle 
income  economy.  In  2016,  the  government  debt-
to-GDP  ratio  reached  73.9,  decreasing  by  6  pps. 
from the peak in 2011. Sovereign risks have been 
contained  thanks  also  to  the  declining  share  of 
foreign  owned  and  foreign  currency  denominated 
debt.  The  debt  reduction  was  mainly  driven  by 
fiscal  consolidation,  with  the  primary  balance 
reaching  a  healthy  surplus  level  above  1.5  %  of 
GDP.  The  takeover  of  mandatory  second-pillar 
private pension assets (around 10% of GDP) by the 
state  was  also  a  supporting  factor.  However,  its 
impact  was  largely  offset  by  other  below-the-line 
effects,  most  notably  the  revaluation  of  foreign 
currency  debt.  Overall,  the  "snowball"  effect  (i.e. 
the  combined  effect  of  interest  rate  on  debt  and 
nominal  growth)  still  made  a  debt-increasing 
contribution during 2012-2016. 

In  the  short  term,  government  debt  is  forecast 
to  decline  further,  while  the  primary  balance 
deteriorates. The public debt ratio is projected to 
decrease  by  more  than  3 pps.  during  2017-2019, 
falling below 70 %. The decline is primarily due to 
a  supportive  "snowball"  effect  reflecting 
the 
continuing  decline  of 
interest  outlays  and 
accelerating  nominal  GDP  growth.  As  a  result  of 
fiscal  loosening,  however,  the  primary  balance  is 
forecast  to  deteriorate  significantly,  to  a  minimal 
nominal  surplus  and  structurally  into  a  deficit 
position (i.e. -1 % of GDP).  

2019-2028 

the  public  debt  ratio 

The  debt  trajectory  could  flatten  out  in  the 
medium term without further fiscal adjustment. 
According  to  the  Commission's  no-policy-change 
is  projected 
scenario, 
practically  to  stagnate  at  somewhat  below  70% 
(European 
over 
(Graph 
Commission,  2018a).  The  debt  reduction 
is 
hindered by an estimated slightly negative primary 
balance  throughout  the  nine-year  period.  The 
closing  of  the  positive  output  gap  (and  thus  the 
cyclical  fiscal  component)  contributes 
to  an 
increasing primary deficit. 

3.1.4) 

Source: European Commission calculations 

However, the deterioration of the primary balance 
is  projected  to  be  moderated  by  declining  age-
related  public  expenditure.  This  reflects  savings 
due  to  parametric  pension  reforms.  The  debt-
increasing  impact  of  the  primary  balance  is 
calculated  to  be  offset  by  a  favourable,  albeit 
modest  snow-ball  effect.  By  contrast,  if  the 
structural  balance  was  gradually  improved  to  the 
country's  medium-term  objective,  the  debt  ratio 
would  fall  below  60%  by  2028  (see  the  "SGP 
scenario", Graph 3.1.3). 

risks 

sustainability 

the  Commission's  assessment 
Based  on 
framework, 
in 
fiscal 
Hungary are high in the medium term, while in 
the  long  term  they  have  a  medium  level.  The 
country's medium-term sustainability gap (the "S1 
indicator") is estimated at 1.8 % of GDP, pointing 
to  medium-level  risks.  This  is  the  size  of  fiscal 
adjustment  to  be  implemented  over  the  next  five 
years,  which  would  bring  down  the  debt  ratio  to 
60% by 2032. Overall, however, the medium-term 
sustainability  risks  are  assessed  to  be  high  as  the 
debt  ratio  is  expected  to  remain  above  60%  in 
2028  and  still  displays  high  sensitivity  to  shocks. 
The long-term sustainability gap (S2) is at 4.5 % of 
GDP,  implying  medium-level  risks.  This  is  the 
upfront  fiscal  adjustment  ensuring  that  the  debt 
ratio would not move on an ever-increasing path. 

14 

505560657075808590111213141516171819202122232425262728% of GDPNo-policy change scenario without ageing costsStability and Growth Pact scenarioBaseline no-policy change scenario 
 
3.1. Public finances and taxation 

Fiscal framework 

The authorities recently adjusted their domestic 
regulation  to  ensure  compliance  with  the 
budgetary  frameworks  directive.  In  autumn 
2017,  amendments  were  adopted  to  the  Public 
Finance  and  the  Economic  Stability  Acts.  These 
legislative  improvements  have  taken  place,  most 
notably,  in  the  following  areas:  (i)  reinforcing  the 
domestic  budget  balance  rules  by  clarifying  their 
binding effect and ensuring their monitoring by the 
Fiscal  Council  for  the  entire  budgetary  process; 
and (ii) enhancing the multi-annual perspective of 
budgetary planning by the systematic use of a no-
policy change scenario as a numerical benchmark. 
Despite these  steps,  most of  the  gaps  in  the  fiscal 
governance  system  identified  in  previous  Country 
Reports  do  not  appear  to  be  resolved.  Those 
include  the  limited  role  of  the  medium-term 
budgetary framework in fiscal policy decisions and 
the  imbalance  between  the  analytical  remit  of  the 
Fiscal Council and its strong veto competence. 

The  weak transparency of public  finances  does 
not  help  in  improving  the  quality  of  fiscal 
policy-making.  On  the  basis  of  the  Open  Budget 
Indexes  in  2015  and  2017,  which  measure  the 
availability  and  information  content  of  key  fiscal 
planning  and  oversight  documents,  Hungary  had 
consistently  the  lowest  rank  among  the  surveyed 
EU  Member  States  (IBP,  2015;  2018).  Moreover, 
there  are  other  factors  not  covered  by  this  index, 
which  weigh  on  transparency.  Budget  documents 
do  not  contain  the  updated  official  estimates  for 
the  current  year's  expenditure  and  revenue  items 
(i.e.  the  basis  for  next  year's  planning).  There  are 
frequent  within-the-year  amendments  of 
the 
budget  law,  scheduled  on  a  rather  discretionary 
manner.  It  is  worth  pointing  out  that  the  brought 
forward calendar of budget-making (with the final 
vote by mid-June on next year's budget) could not 
fully realise its primary objective of increasing the 
predictability  of  fiscal  policy.  The  government 
repeatedly  announced  new  measures  with  major 
impacts  on  public  finances  outside  this  policy 
cycle. 

15 

 
3.2.  FINANCIAL SECTOR 

insolvency 

Economic risks for the banking sector appear to 
be contained mirroring the improving economic 
situation.  Hungarian  banks  comfortably  meet 
regulatory  requirements.  While  asset  quality  has 
further improved the ratio of non-performing loans 
is still high, bringing to the fore the importance of 
frameworks. 
well-functioning 
improved 
Operating  costs  remain  high.  The 
profitability  in  2016  was  largely  due  to  one-off 
items.  On  account  of  higher  bank  profits  and 
improved credit demand, new loans picked up and 
have  contributed  moderately  to  the  GDP  growth.  
The five largest credit institutions still hold around 
half of total banking sector assets, which gives the 
sector a medium concentration ratio in the EU. The 
domestic  banks  account  for  around  50%  of  total 
banking sector assets. 

Financial soundness indicators across the sector 
further strengthened. The banks' capital position 
was  materially  enhanced  by  major  improvements 
both  in  the  Tier  1  and  overall  capital  adequacy 
ratio  which  amounted  to  15.1 %  and  17.2 % 
respectively  in  June  2017  (see  Table  3.2.1). 
However, these ratios are still rather low compared 
to other EU countries. The loan to deposit ratio has 
been  largely  rebalanced  from  almost  140 %  in 
2010  to  around  75 %  in  June  2017.  Hungarian 
banks'  funding  position  has  shifted  from  market 
funding  in  the  crisis  to  deposits,  which  accounted 
for 62 % of the total assets in June 2017. 

Table 3.2.1: 

Financial soundness indicators, all banks 

(1) * ECB aggregated balance sheet: loans excl to gov and 
MFI / deposits excl from gov and MFI 
Source: ECB, CBD 

Banks are making rapid progress in cleaning up 
their  balance  sheets.  While  the  level  of  non-
performing  loans  (NPLs)  held  by  banks  dropped 
further to 6.9 %, it still exceeds the EU average of 
3.5%. The coverage ratio was around 60 % in mid-
2017 (Graph 3.2.1). The improvement in the NPL 
ratio  was  primarily  due  to  significant  portfolio 
cleaning over the last 24 months. In June 2017, the 
ratios of both corporate and household NPLs were 
half  of  the  overdue  portfolio  held  2  years  before. 
While  the  remaining  NPLs  do  not  pose  a  major 

risk  to  the  stability  of  the  sector,  it  may  still  be 
costly  for  banks  to  divest  them.  These  are  low-
quality  assets  in  general  and  their  book  values 
largely exceed market prices.  

Graph 3.2.1:  Development of the NPL ratios 

(1) Gross non-performing debt instrument, non-performing 
loans with 90+ days delinquency 
Source: ECB 

Hungarian  banks  generated 
large  profits 
thanks  to  one-off  items.  All  major  banks  closed 
2016  and  H1  2017  with  outstanding  profits.  In 
2016,  the  return  on  equity  of  the  eight  largest 
banks reached levels of between 19.6 % and 6.6 %, 
far  exceeding  the  EU  average  of  around  5 %. 
However, profits were mostly made thanks to one-
off items such as reversed provisions and the sale 
of  shares  in  VISA  Europe.  Low  competition  and 
therefore  relatively  high  interest  rates  on  the 
household  credit  segment  contributed  to  the  large 
profits as well. However, recently interest margins 
have started to compress partly on the back of the 
certified  consumer-friendly  housing  loan  scheme   
introduced by the authorities. Moreover, the sector 
booked 
cleaning.  To 
compensate  for  these,  banks  have  increased  their 
revenues on fees and commissions in 2017.  

losses  on  portfolio 

system’s 

total  assets-to-GDP 

Banks  put  an  end  to  a 
long  period  of 
deleveraging  as  new  lending  picked  up.  The 
banking 
ratio 
decreased  from  124%  in  2010  to  100%  in  June 
2017  (see  Graph  3.2.2).  In  2016,  the  decline  in 
outstanding  household  loans  was  halted  and  new 
household  loans  grew  in  annual  terms  by  43%  in 
Q3  2017.  As  a  result,  in  H1 2017,  the  stock  of 
household  loans  expanded  by  3.3%  in  annual 
terms.  Similarly,  the  stock  of  corporate  loans 
increased by more than 8%, with SME lending up 

16 

(%)20102011201220132014201520162017Q2Non-performing loans10,912,814,114,014,211,08,16,9Coverage ratio51,052,259,063,866,062,465,760,1Loan to deposit ratio*136,9128,0110,6102,194,880,973,375,3Tier 1 ratio11,511,313,314,713,813,914,215,1Capital adequacy ratio14,113,816,317,417,016,916,317,2Return on equity-0,3-12,0-5,1-0,4-21,90,312,1-Return on assets0,0-0,9-0,40,0-2,0-0,11,3-0,010,020,030,040,050,060,070,00246810121416200820092010201120122013201420152016NPLsCoverage ratio (rhs) 
 
 
 
 
 
3.2. Financial sector 

average of euro area banks and 20 pps. higher than 
some  of  the  regional  peers. Low  efficiency  of  the 
sector may give rise further consolidation. 

Graph 3.2.3:  Corporate and household loans growth rate 

(y-o-y) 

13%,  in  Q3  2017  (see  Graph  3.2.3).  The  three 
sources  of  financing  most  commonly  used  by 
Hungarian  SMEs  recently  are  credit  lines  (29  %), 
leasing  (21  %)  and  grants  (12  %)  (European 
Commission,  2017c).  Loans  to  Hungarian  firms 
and  household  continued 
from 
supportive  measures.  However,  the  Funding  for 
Growth  Scheme  was  discontinued  to  make  room 
lending.  The  sector's  aggregate 
for  market 
exposure 
real  estate  and 
to 
construction sector has been growing again. In Q3 
2017,  it  accounted  for  25 %  of  total  loans  to 
corporates (still below the record of 36 % in 2011).  

the  booming 

to  benefit 

Graph 3.2.2:  Banking system assets to GDP 

Source: ECB 

The  state  remains  an  active  player  in  the 
financial  sector.  It  maintains  a  high  presence 
across  the  sector  and  is  proceeding  slowly  with 
privatisation.  The  state  continues  to  be  a  majority 
shareholder  in  a  few  local  commercial  banks.  It 
also  owns  the  fast-growing  Eximbank  whose 
lending  business  goes  beyond  its  traditionally 
supported  export  activity  of  corporates.  At  the 
same  time, the Hungarian Development Bank and 
the  financial  arm  of  the  state-owned  Hungarian 
Post  are  expanding  their  lending  activities  by 
targeting  SMEs  and  retail  clients.  The  state 
remains  the  main  shareholder  of  the  Budapest 
Stock  Exchange  (BSE)  through  the  central  bank. 
Given  that  the  BSE  is  also  supervised  by  the 
central  bank,  the  current  ownership  setup  raises 
governance  issues.  As  part  of  its  capital  market 
development  strategy, 
launched  a 
dedicated multilateral trading facility for medium-
sized  companies  in  2017.  It  offers  lower  fees  and 
regulatory requirements. 

the  BSE 

The  government  also  promotes  the  domestic 
ownership  of  banks.  This  process  and  high 
government  involvement  in  the  banking  sector 
create new challenges for the banking supervision. 
As the experiences of other countries in the region 
also  show, 
types  of  banks  are  more 
vulnerable  to  corporate  governance  problems, 
which  in  turn  can  lead  to  problems  with  credit 
allocation, credit risk control and asset quality.  

these 

Source: ECB 

With  a  new  credit  cycle  on  the  horizon,  the 
central  bank  aims  to  improve  the  quality  of 
lending.  It  is  encouraging  banks  to  offer  fixed 
interest  rates  loans  to  households  rather  than 
variable  ones  which  are  considered  less  safe. 
According  to  the  central  bank,  many  corporate 
loans  are  offered  with  too  short  maturity  making 
the  access 
to  credit  by  businesses  more 
burdensome.   

The efficiency of the Hungarian banking sector 
remains  an  issue.  The  banking  sector  has  shed  a 
fourth of its branches since 2008 and operates with 
11 %  less  staff.  However,  the  economy  remains 
overbanked  in  EU  comparison.  The  uptake  of 
digital banking services is one of the lowest in the 
EU. The banking sector struggles to hire experts to 
bolster  their  digital  arms.  The  operating  expenses 
of Hungarian banks amounted to over 3 % of total 
assets  on  average  at  the  end  of  2016,  unchanged 
since  2015.  The  cost-to-income  ratio  is  close  to 
74 %,  over  10  pps.  higher  than  the  already  high 

17 

901001101201301401502008200920102011201220132014201520162017Assets as % of GDP-30-20-100102030402008200920102011201220132014201520162017Loans to NFCLoans to HH 
 
 
3.2. Financial sector 

Box 3.2.3: Housing prices in Hungary 

Hungary experienced the strongest rise in house prices in the EU in 2015 and 2016 with an annual increase 
of  around  13.5%  in  real  terms.  At  the  regional  level,  house  prices  in  Budapest  show  a  much  stronger 
increase than in the rest of the country. In spite of the recent increase, house prices remain below the peak 
reached in 2007 and valuation metrics such as the price-to-income and price-to-rent ratios are below their 
long-term  average.  Taking  into  account  the  various  macroeconomic  fundamentals  driving  house  prices 
(Philiponnet  et  al.,  2017)  over-valuation  risk  appears  limited,  although  recent  price  increases  have  been 
stronger than what fundamentals would suggest. Recent data indicates that house price growth has slowed 
down in the course of 2017, possibly signalling a more mature market. 

Graph 1:  Overvaluation gap with respect to price/income, price/rent and fundamental model valuation gaps 

(1) Long term values are computed over 1995-2016. 
Source: Commission services calculations. 

Beyond  development  in  prices,  the  number  of  building  permits  also  increased  sharply  since  2015.  The 
number  of  building  permits  granted  in  2017  is  now  close  to  the  levels  reached  before  the  financial  crisis. 
Still,  supply  is  very  heterogeneous across  regions.  In  particular, the  number  of  house  built  in  Budapest  in 
2016 is close to three times lower than the pre-crisis level (MNB, 2017), suggesting that lagging supply may 
impact price dynamics in the capital. 

The steep increase in house prices was supported by several factors. The relatively large undervaluation of 
the Hungarian real estate market attracted foreign buyers in a low yield environment. Domestic buyers who 
delayed their purchase for many years after the crisis suddenly stepped in using their accumulated savings. 
In addition, new fiscal measures of the government also boosted the demand. In the first period of the price 
increase,  the  transactions  were  mainly  credit  free.  More  recently  mortgage  loans  play  an  increasing  role. 
However, the ratio of outstanding mortgage to GDP stood at 9% in the second quarter 2017 well below the 
EU average and below peers in the region. 

Overall,  given  the  strong  correction  in  house  prices  recorded  between  2007  and  2013  and  the  recovering 
economic fundamentals, there is limited indication of overvaluation on the residential real estate market at 
the  aggregate  level.  In  addition,  the  consequence  of  a  potential  correction  would  be  mitigated  by  the  low 
indebtedness of households. However, the developments should be carefully monitored.  

18 

-20-15-10-505101520253007080910111213141516Model-based valuations gapPrice to income vs. hist. avg.Price to rent vs. hist. avg. 
 
3.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

Labour Market 

for  Q1-Q3  2017  and 

While the employment is at a record high level, 
some  challenges  remain.  The  Hungarian  labour 
market  has  markedly  improved  since  2013,  with 
the  employment  rate  for  the  age  group  20-64 
reaching  73.0% 
the 
unemployment  rate  falling  to  4.3%.  Increasing 
shortages  in  the  labour  market  are  coupled  with 
large differences in employability of various skills 
groups.  The  Social  Scoreboard  supporting  the 
European  Pillar  of  Social  Rights  (Box  3.3.1) 
suggests a number of challenges: a relatively high 
rate  of  early  school 
leaving,  high  gender 
employment  gap,  and  low  participation  in  formal 
childcare below the age of 3. 

Graph 3.3.1:  Change in real productivity, real GDP per 

capita and real wages (2008-2016) 

Source: European Commission calculations 

Wage  convergence  has  restarted.  The  period 
between  2009  and  2015  saw  strong  wage 
moderation, helping to regain cost competitiveness 
amid the crisis, but making Hungary lag behind in 
terms  of  wage  convergence  (Graph  3.3.1).  Based 
on 2016 data, the compensation of employees was 
significantly  below  EU  average.  The  high  wage 
dynamics, which already started in 2016, signifies 
a 
trend.  However,  wage 
acceleration  carries  the  risk  that  imbalances  start 
building up again, if it does not remain in line with 
productivity over  the  medium term.  Wage  growth 
is  driven  by  labour  market  tightening  and  sharp 
minimum  wage  increases  (15 %  in  2017  and  8 % 
in 2018). To ease the impact of wage increases on 
labour  costs,  social  security  contributions  were 
reduced (see Section 3.1). 

turnaround 

this 

in 

The  duration  of  unemployment  benefits  is  still 
the  shortest  in  the  EU  at  maximum  3  months. 
With  the  average  duration  of  unemployment  is 
close to 12 months, this does not give enough time 
to  find  an  adequate  job  (European  Commission 
2017d, p. 40). The level of unemployment benefits 
(i.e. the net replacement rate at 2 and 12 months) is 
among  the  lowest  in  the  EU,  as  shown  by  the 
benchmarking  exercise  of 
the  Employment 
Committee (European Commission, 2017e).  

in 

steps 

further 

The size of the public works scheme (PWS) has 
started  to  diminish  and  the  government  is 
taking 
this  direction. 
Participation in the PWS dropped by about 15 % in 
the first half of 2017, but the scheme remained the 
dominant  form  of  active  labour  market  policy 
(ALMP).  The  PWS  is  less  effective  than  other 
tools  in  bringing  participants  back  to  regular 
employment  and  may  even  reduce  the  probability 
of finding a job (Molnár et al., 2014; Fazekas and 
Varga, 2015). According to data from  the Interior 
Ministry,  only  12.4 %  of  participants  were  in 
regular  employment  six  months  after  leaving  the 
scheme  in  the  first  quarter  of  2017.  A  recent 
government  decree  aims  to  limit  the  participation 
in the scheme in favour of other ALMP measures. 
The 2018 budget allocation on PWS is reduced by 
around 20%, while still absorbing more than a half 
of all spending on labour market policies. 

Other  active  labour  market  policies,  co-funded 
by  the  European  Social  Fund,  are  progressing 
well.  The  two flagship  ESF  and YEI programmes 
aiming  to  improve  the  employability  and  labour 
market  entry  for  jobseekers  and  inactive  people, 
covered more than 173 000 persons between 2015 
and  2017.  Results  on  the  effectiveness  of  those 
measures are not available yet. 

The Public Employment Service (PES) profiling 
system is improving. Currently, the classification 
of  jobseekers  into  different  profiles  is  strongly 
affected  by  targets  set  for  various  employment 
programmes.  This  distortion  is  likely  to  decrease 
along  with  the  size  of  PWS.  The  system  will  be 
also 
and 
cover 
employability  potential  of  individuals.  However, 
the  dispersed  management  structure  of  the  PES 
hinders  efficiency,  leading  to  difficulties  in  the 
coordination of different ALMPs and insufficiently 
targeted interventions. 

competences 

extended 

to 

19 

-100102030405060BGCZEEHRLVLTHUPLROSISKProducvitiyGDP per capitaReal wage% 
 
 
3.3. Labour market, education and social policies 

Box 3.3. 1: Monitoring performance in light of the European Pillar of Social Rights 

The  European  Pillar  of  Social  Rights,  proclaimed  on  17  November  2017  by  the  European  Parliament,  the 
Council and the European Commission, sets out 20 principles and rights to benefit citizens in the EU. In light 
of  the legacy  of  the crisis and  changes in  our  societies driven  by  population  ageing,  digitalisation  and  new 
ways of working, the Pillar serves as a compass for a renewed process of convergence towards better working 
and living conditions. 

It  has 

remain. 

Hungary  performs  well  on  a  number  of  
indicators of the Social Scoreboard (1) supporting 
the  European  Pillar  of  Social  Rights,  but 
challenges 
relatively  high 
employment,  and  low  unemployment  and  income 
equality.  On  the  other  hand,  the  share  of  early 
leavers  from  education  was  already  at  high  levels 
and increased further in the last period. The shares of 
early  leavers  from  education  and  of  NEETs  are 
particularly  high  for  Roma.  A 
large  part  of 
population faces severe housing deprivation. 

The gender employment gap is the highest for the 
age  group 25  to  39  years,  showing  a  high  impact 
of  motherhood  on  labour  market  participation. 
The  sources of  this problem  include  little  flexibility 
in  working  schedules,  the  low  take  up  of  family 
leaves  by  fathers  and  the  scarcity  of  childcare 
facilities  for  children  under  3  years  of  age.  ESIF 
resources  have  been  allocated  to  address  the  last  of 
those challenges.  

have 

labour  market  programmes  targeting 
Active 
young 
in 
been 
people 
Hungary.   The  Youth  Guarantee  (YG)  and  the 
Youth  Employment  Initiative,  supported  by  the 
European  Social  Fund,  are  delivered  via  the  networkin  of  Public  Employment  Services  (PES)  providing  a 
country-wide coverage. These programmes involved more than 74 thousand young people between January 
2015  and  November  2017  and  most  participants  2016  received  training  or  an  employment  offer  within  4 
months of registering with the PES. Recent government legislation (20/3/2017) extends further the outreach 
of the YG by imposing stricter limitations for young people to be involved in the Public Works Scheme. On 
the  back  of  these  initiatives  the  youth  unemployment  rate  and  the  share  of  young  people  not  in  education, 
employment or training (NEETs) have been decreasing. 

successful 

(1)  The  Social  Scoreboard  is  composed  of  14  headline  indicators,  of  which  12  are  currently  used  to  compare  Member 
States'  performance.  The  indicators  "participants  in  active  labour  market  policies  per  100  persons  wanting  to  work"  and 
"compensation  of  employees  per  hour  worked  (in  EUR)"  are  not  used  due  to  reservations  by  Member  States.  Possible 
alternatives will be discussed in the relevant Committees. Abbreviation: GDHI - gross disposable household income. 

low 
Low-skilled  workers  continue  to  face 
employment rates and prospects, as well as low 
wages. The gaps between the employment rates of 
low-, medium- and high-skilled workers have been 
higher  in  Hungary  than  elsewhere  in  the  EU 
(European Commission, 2017a). Wage differences 
across various skills levels are also very high in an 
international  comparison  (Graph  3.3.2).  Despite 

the  high  skills  premium,  few  adults  decide  to 
upskill. 

Recent employment growth has been uneven for 
men and women. In 2016, the gender employment 
gap  amounted  to  15.2 pps.  (above  the  EU28 
average  of  11.5 pps.),  pointing  to  an  untapped 
reserve  to  address  labour  shortages.  The  gap 

20 

 
3.3. Labour market, education and social policies 

impact  is  still  to  be  seen.  Measures  to  improve 
integrated living conditions (replacing institutional 
long-term  care)  supported  by  local  community-
level public services do not seem to be sufficient. 

Integration  of  Roma  in  the  labour  market 
remains a challenge. Between 2011 and 2016 the 
employment  rate  among  Roma  increased  from 
25 %  to  36 %,  but  a  large  share  of  those  in 
employment  (41.6 %)  work  in  the  PWS.  The 
NEET  rate  of  young  Roma  has  significantly 
increased  (by  13 pps.)  and  stands  now  at  51 % 
(COM-FRA  2017).  With  only  26 %  of  Roma 
women in paid work, the gender employment gap 
among Roma reaches 19 pps. (FRA, 2016).  

remain 

underdeveloped. 

Social  dialogue  structures  and  processes  in 
Hungary 
The 
weaknesses  of  existing  structures  of  social 
dialogue  at  bipartite  and  tripartite  levels  do  not 
allow for a proper and meaningful involvement of 
social partners in the design and implementation of 
relevant  policy  reforms.  The  National  Economic 
and  Social  Council  (involving  also  civil  society 
organisations  and  other  stakeholders)  cannot  be 
considered  an  adequate  forum  for  tripartite  social 
dialogue,  as  it  does  not  include  the  government. 
The Permanent Consultation Forum of the Private 
Sector  has  only  a  narrow  scope  of  competences 
and agreements concluded are legally non-binding. 
In consequence, social partners are not involved in 
the preparation of inputs to the European Semester 
or  in  the  implementation  of  the  relevant  country 
specific 
in 
government-provided resources further reduced the 
institutional capacity of social partners.  

recommendations. 

Cutbacks 

The  collective  bargaining  system  is  weak  and 
takes  place  mostly  at  company  level.  Recent 
studies by Eurofound (2016, 2017) note that social 
partners  are  rarely  consulted  by  government 
beyond  wage  matters.  Collective  bargaining 
coverage rate stood at 22%, the fifth lowest in the 
EU (Visser, 2016). 

Poverty and social inclusion  

is  notably 
The  overall  poverty  situation 
improving,  but  poverty 
faced  by 
risks 
vulnerable  groups  remain  high.  The  share  of 
population  at  risk  of  poverty  or  social  exclusion 
(AROPE)  was  at  26.3 %  in  2016,  1.9  pps.  lower 
than  a  year  earlier,  approaching  the  EU  average 

in 

slightly  increased  in  recent  years.  This  occurred 
mostly  among  the  25-39  old  age,  despite  a  recent 
reform  of  the  long  parental  leave  system,  which 
aimed  to  facilitate  the  return  of  young  parents 
(mainly mothers) to work. On the other hand, main 
earners (often men) are not encouraged to take up 
the  leave.  This  is  coupled  with  a  short  supply  of 
formal 
quality  childcare.  The  enrolment 
childcare  of  the  0-3  year  old  stands  at  15.3 %, 
which  is  well  below  the  EU  average  of  30.3 %. 
The coverage is even lower in the poorest counties 
with  a  high  ratio  of  disadvantaged  population. 
From  January  2017,  new  types  of  childcare 
facilities  have  been  introduced.  European  Social 
and  Investment  Funds  (ESIF)  were  allocated  to 
increase  the  capacity  of  day-nursery  facilities, 
which should lead to supply increases in the years 
to  come.  Funds  dedicated  to  cover  operational 
costs are to be increased from HUF 17 bn in 2017 
to 37 bn in 2018. 

Graph 3.3.2:  Wage premium of educational attainment as 

compared to low education 

(1) The graph shows the impact of the level of education as 
a percentage of the wage of a low skilled estimated on the 
basis of a linear regression. The education levels included in 
the analysis are: low (ISCED 0-2), medium (3-4), high (5-6) 
and very high (7-8). (2) Data refer to 2014 
Source: European Commission calculations 

People  with  disabilities  are  under-represented 
in  the  labour  market.  Their  participation  in 
employment is one of the lowest in the EU (39.6 % 
vs. the EU average of 47.4 %). This hampers social 
and  employment  integration,  leading  to  high  risk 
of  poverty  or  social  exclusion  for  this  group 
(32.2%  vs.  the  EU  average  of  29.9  %).  Several 
measures  have  been 
incentivise 
employers to hire people with disabilities, but their 

launched 

to 

21 

-10010203040506070UKLUDEBGEEITESFICYMTCZFRNLBELVPLROLTSISKPTHUMediumHighVery high% 
 
3.3. Labour market, education and social policies 

Children 
in  general  are  more  exposed  to 
poverty  than  other  age  groups  in  Hungary.  In 
2016,  33.6 %  of  the  young  aged  was  at  risk  of 
poverty or social exclusion compared to 26.3 % of 
the  total  population  and  above  the  EU  average  of 
26.5 %.  Households  with  children  are  more  likely 
to be poor than those without children (29.6 % vs. 
23 %).  Risk  of  poverty  affects  38.4 %  families 
with  more  than  3  children  and  62.3 %  for  lone 
parent  families.  Child  poverty  is  linked  with  a 
significant 
inequality  of  opportunity.  Parental 
background  has  a  strong  impact  on  educational 
performance  and  children  of  low-skilled  face  a 
high risk of poverty. 

the  population 

A  considerable  part  of  the  population  faces 
severe  housing  deprivation.  The  respective  rate 
stood  at  16.9 %  of 
in  2016 
compared  to  the  EU  average  of  4.8 %.  This 
proportion reaches one-third among those at risk of 
poverty  or  social  exclusion,  and  one-fourth  under 
18 years of age. Housing deprivation among Roma 
persists  with  33 %  of  Roma  living  in  households 
without access to drinking water and 38 % lacking 
other  basic  amenities  such  as  toilet,  shower  or 
bathroom 
(COM-FRA  2017).  No  significant 
improvement  is  visible  in  the  field  of  social 
housing (Habitat, 2017).  

The  social  safety  net  is  weak  as  social  policies 
put  an  emphasis  on  meeting  needs  by  work 
related income. Meanwhile, as demonstrated by a 
benchmarking  exercise  (European  Commission, 
2017e), the adequacy of minimum income  benefit 
(FHT) is one of the lowest in the EU, below 50 % 
of  the  poverty  threshold.  There  is  no  indexation 
system  for  the  social  assistance  benefits  and  the 
reform  of  cash  benefits  led  to  a  high  degree  of 
discretion 
(European 
Commission,  2017a).  The  low  wage  provided  by 
PWS  (one-third  below  minimum  wage)  is  not 
sufficient to reach the poverty threshold for  many 
participants.  In  fact,  PWS  might  be  a  key  factor 
behind  the  increased  in-work  poverty  of  workers 
with  temporary  contracts  (from  14 %  in  2010  to 
29 % in 2016). 

municipalities 

by 

and closing the gap to the national EU 2020 target. 
This positive development is mainly due to falling 
severe  material  deprivation  and  a  decrease  of  the 
number  of  people  living  in  low  work  intensity 
households.  On  the  other  hand,  relative  monetary 
poverty 
(Graph  3.3.3), 
particularly  affecting  Roma,  whose  exposure  to 
poverty is three-four times higher than for the rest 
of the population.(5)  

remains  unchanged 

Graph 3.3.3:  Main poverty indicators since 2005 

AROPE: People who are at risk of poverty (AROP) and/or in 
severe material deprivation (SMD) AROP: People with 
equivalent disposable income below 60% of the median).   
Source: Eurostat, EU-SILC 

While remaining below the EU average, income 
inequalities rose during the crisis and have not 
yet  started  to  decrease  following  the  recovery 
(see  Section  1).  In  2010,  the  richest  20 %  of  the 
population  received  3.4  times  as  much  income  as 
the  poorest  20 %.  By  2013  this  ratio  grew  to  4.3 
and then stabilised. In parallel, the poorest quintile 
of  households  saw  their  share  in  total  income  to 
decrease from 9.5 % in 2007 to 8.8 % in 2016 (see 
also  GKI,  2017).  Changes  in  the  tax  and  benefit 
system  significantly  contributed  to  rising  income 
inequality  (De  Agostini  et  al.  2016,  European 
Commission, 2017b, pp. 60-62). 

(5)  The rate of Roma at risk of poverty declined from 80% to 
75%  (COM-FRA  2017),  while  according  to  national 
statistics  monetary  poverty  rate  decreased  from  67.9%  to 
54.7%  between  2014  and  2016.  Roma  at  risk  of  poverty 
and  social  exclusion  declined  from  89.9%  to  82.8%,  but 
remained three times higher than for rest of the population. 

There has been a clear shift from social benefits 
toward family support and in-kind benefits (e.g. 
free or discounted school meals, holiday programs, 
free school textbooks). Most of the in-kind benefits 
are  not  targeted  at  low  income  families,  or  the 
applied  means  tests  are  high  enough  to  cover 

22 

0510152025303540050607080910111213141516% of populationHUAt-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 

2010.  The  problem  is  especially  acute  among 
Roma,  for  whom  the  ESL  rate  stands  now  at 
59.9 %  compared  with  8.9 %  among  non-Roma 
the  Hungarian  CSO).  In 
(data  provided  by 
November 2016 the government adopted an action 
plan to reduce ESL and introduced mandatory data 
collection  on  pupils’  progress  at  school,  which 
feeds into a digital early warning and pedagogical 
support  system.  However,  there  is  no  monitoring 
system  for  young  people  who  have  already 
dropped out of school. 

pupils, 

including  Roma, 
Disadvantaged 
increasingly  attend  schools  where  they  are  the 
dominant majority. As a result, the likelihood of 
contacts  between  disadvantaged 
and  non-
disadvantaged  pupils  at  school  declined  between 
2008  and  2016  (Hungarian  Academy  of  Sciences, 
2018).  Increasing  residential  separation  and  the 
effect of parental choice on local school enrolment 
have contributed to this outcome. Despite the state 
taking  over  the  management  of  public  schools 
from  municipalities  in  2013  with  the  aim  of 
reducing  inequalities,  61 %  Roma  children  still 
attend  schools  where  all  or  most  children  are 
Roma.  High  concentration  of  Roma  children  in 
certain  schools  is  also  present  in  urban  settings, 
outside of ethnically segregated areas (FRA 2016).  

Although  successful  pedagogical  models  for 
inclusive education have been developed, only a 
limited  number  of  mainstream  schools actually 
use  them.  Amendments  to  the  Equal  Treatment 
and  Public  Education  Acts  to  prevent  segregation 
were  adopted  in  summer  2017,  but  they  can  only 
have an impact as of the 2018/2019 academic year. 
ESIF-funded  projects  were  launched  in  2017  to 
support  300  schools  in  combating  school  failure 
and 
teaching  methods. 
inclusive 
Teachers  are  entitled  to  a  salary  supplement  if 
working  under  difficult  conditions  as  of  January 
systematically 
2018.  However,  measures 
address  existing 
in  mainstream 
education are lacking. 

introducing 

segregation 

to 

The extension of early childhood education may 
positively  impact  the  later  school  performance 
of  disadvantaged  pupils.  Between  2011  and 
2016,  participation  of  Roma  children  in  early 
significantly 
childhood  education  and  care 
improved, increasing from 81% to 91%. This is the 
highest participation rate in the region. 

middle  income  families  as  well.  The  largest 
expenditure  growth  affected  child  tax  credits, 
home-ownership  supports  (CSOK)  and  work-
related  child-care  allowances,  which  benefit  only 
those  at  work.  By  contrast,  public  spending  on 
means-tested  social  allowances  and  universal 
family  and  childcare  benefits  decreased  in  real 
terms with nominally frozen benefit levels. 

Education and skills 

(PISA),  performance 

The  basic  skills  outcomes  of  15-year-olds  are 
significantly below the EU average. According to 
the  OECD's  2015  Programme  for  International 
Student  Assessment 
in 
reading  and  science  deteriorated  significantly 
compared  to  2012.  Hungary  saw  the  highest 
increase in the share of low achievers in science in 
the EU. More than one in four pupils did not meet 
the basic required level in reading or mathematics. 
According  to  an  empirical  study  (Thum  and 
Raciborski, 2017) better PISA results contribute to 
higher growth potential, highlighting the economic 
importance  of  educational  quality. 
In  2016 
Hungary  announced  that  the  national  curriculum 
would  be  revised  by  the  end  2017  with  ESF 
support,  in  part  as  a  response  to  the  declining 
performance  shown  by  PISA  2015.  However,  to 
date  no  further  details  regarding  the  direction  of 
the reform and the involvement of stakeholders in 
its preparation have been made public. 

pupils’ 

impact 

socioeconomic 
of 
The 
background  on  education  outcomes 
is  the 
strongest in the EU. The impact of school type on 
outcomes  is  also  very  significant,  reflecting  early 
selection  in  secondary  education  (Educational 
Authority  2017).  Pupils  are  tracked  into  different 
schools  according  to  their  performance  starting 
from  the  age  of  10.  Amongst  the  three  types  of 
secondary  school,  pupils  of  vocational  secondary 
schools  (szakközépiskola),  which  have  the  highest 
concentration  of  disadvantaged  pupils,  performed 
particularly poorly in PISA (Educational Authority 
2016). This type of schools shows limited capacity 
socio-economic 
to 
disadvantage  that  large  numbers  of  their  pupils 
face (Civil School Education Platform, 2016).  

counterbalance 

the 

In  2016,  the  early  school  leaving  (ESL)  rate 
increased  to  12.4  %,  above  the  EU  average  of 
10.7  %.  While  ESL  has  been  decreasing  steadily 
across  the  EU,  it  has  not  fallen  in  Hungary  since 

23 

 
3.3. Labour market, education and social policies 

more  difficulties  in  finding  a  job  and  earn  lower 
wages than other secondary school graduates.  

in 

learning 
Promoting  adult  participation 
remains  a  challenge,  especially  among  the 
unemployed. The overall participation figure was 
6.3 %  in  2016,  well  below  the  EU-28  average  of 
10.8 %.  People  in  employment  were  about  four 
times  more  likely  to  participate  in  trainings  than 
unemployed,  which 
further 
segmentation  of  the  labour  market  and  increasing 
skills  mismatches  at  a  time  when  employers  are 
having  growing  problems  in  attracting  skilled 
workers.  The  situation  is  expected  to  improve 
thanks 
training 
to  EU  and  national  funded 
programmes, but the substantial gap is unlikely to 
close. 

contributes 

to 

Healthcare  

the  EU  average.  Although 

Poor health outcomes aggravated by high risks 
from unhealthy lifestyles, uneven quality of care 
and inequalities in access are the key challenges 
faced  by  the  health  system.  In  2015 
life 
expectancy was 75.7 years in Hungary, almost five 
years  below 
life 
expectancy  rose  by  close  to  4  years  over  the  past 
15 years, the gap relative to the EU has narrowed 
only  a  little  (by  0.2  years  since  2002,  the  earliest 
data  point  for  EU28).  Significant  inequalities 
prevail  in  health  status  across  socioeconomic 
groups (Orosz and Kollányi, 2016). The gap in life 
expectancy  between  Hungarians  with  the  highest 
and  lowest  level  of  education  reached  11.7  years 
for  men  and  6.7  years  for  women  in  2015.  These 
wide  disparities  are  linked  to  health  risk  factors 
and inequalities in access to care.  

of 

the  healthcare 

While  showing  a  decreasing  trend,  mortality 
rates  remain  high  reflecting  also  the  limited 
effectiveness 
system. 
Cardiovascular  diseases  and  cancer  account  for 
three-quarters  of  all  deaths,  with  the  third  highest 
mortality  rate  from  ischaemic  heart  diseases  and 
the  highest  one  from  cancer  in  the  EU.  The 
amenable  mortality  rate  for  Hungarians  is  about 
double 
suggests 
shortcomings in the provision of timely and quality 
care. Based on amenable and preventable deaths in 
assessment 
2014, 
estimated that one quarter of total  mortality could 
have been potentially avoided by a more effective 
healthcare  provision  (14 %)  and  health  risk 

average.  This 

comprehensive 

the  EU 

recent 

a 

than 

lower 

those  of  other 

Teacher salaries have increased faster than the 
public  sector  average  since  2013,  but  were  still 
31% 
tertiary 
graduates in 2015 (OECD 2017b). In parallel with 
the  increase  of  the  base  salary  levels,  most  salary 
supplements  for  replacement  and  supplementary 
teaching  hours  were  abolished  and  the  number  of 
weekly teaching hours increased from 20-22 to 22-
26.  In  addition,  teachers  are  obliged  to  stay  in 
school  premises  for 
their 
headmaster for at least 32 hours a week. 

tasks  defined  by 

for  highly-skilled 
The  growing  demand 
workforce  is  not  matched  by  the  performance 
of the higher education. The number of university 
applicants  has  been  shrinking  since  2010,  which 
can  only  be  partially  explained  by  demographic 
changes.  The  tertiary  educational  attainment  rate 
for  30-34  year-olds  stood  at  33 %  in  2016,  well 
below  the  EU  average  of  39.1 %.  The  dropout 
rates  have  been  declining  (35.3%  on  average)  but 
remain  high  especially  in  bachelor  and  undivided 
programmes. The 2014 Higher Education Strategy 
established the position of the ‘chancellor’, who is 
nominated  by the  government  and  takes decisions 
on  strategic  and  economic  matters.  This  measure 
earned Hungary the lowest score in the ranking of 
financial autonomy of higher education institutions 
recent 
across 
amendment  of  the  Higher  Education  Act  in  April 
2017  raised  further  concerns  about  decreasing 
academic freedom (EUA, 2017b). 

(EUA,  2017a).  The 

the  EU 

The  employment  rate  of  recent  vocational 
education  and  training  (VET)  graduates,  at 
84.4 %,  is  well  above  the  EU  average  of  75 %, 
but shows a wide gap between the two types of 
VET. VET has two pathways: vocational grammar 
schools (szakgimnázium) with a higher element of 
general  education  and  vocational  secondary 
schools  (szakközépiskola)  for  less  academically 
inclined  students.  General  education  content  in 
vocational  secondary  schools  is  limited.  This, 
together with the concentration of children of low 
socioeconomic status in those schools, explains the 
heavy  deficit  in  basic  skills  measured  in  PISA. 
This  is further  reflected  in  the  high  dropout  rates. 
In  2016,  the  dropout  rate  in  vocational  secondary 
schools  was  15.3%,  against  a  6.5%  in  vocational 
grammar  schools  and  1.1%  in  general  upper-
secondary 
(Hungarian 
Academy of Sciences, 2018). Their graduates face 

(gimnázium) 

schools 

24 

 
3.3. Labour market, education and social policies 

pocket  payments  in  2014  (6).  This  proportion 
reached  more  than  27%  in  the  lowest  income 
quintile (OECD/EOHSP, 2017). 

important 

Efficiency problems  also seem  to play  a role  in 
the 
limited  effectiveness  of  the  healthcare 
system. Unhealthy lifestyles and the relatively low 
levels of health spending and economic wellbeing 
are  all 
factors  behind  Hungary's 
unsatisfactory  health  outcomes.  However,  an 
analysis  by  Medeiros  and  Schwierz 
(2015) 
suggests  the  presence  of  considerable  efficiency 
that  Hungary 
reserves.  The  study  estimated 
performed  in  the  bottom  quarter  within  the  EU 
regarding health system efficiency as measured by 
the  relationship  between  resources  allocated  to 
healthcare  and  outcomes  achieved.  Inefficiencies 
are  related  to  structural  features.  The  setup  of 
service delivery remains strongly hospital-centred, 
with notable weaknesses in primary care  and care 
patients 
chronic 
coordination 
(OECD/EOHSP, 2017). 

disease 

for 

Graph 3.3.4:  Hospitalisations for ambulatory care-sensitive 

conditions (per 100.000 population) 

(1) Data refer to 2015 or the latest year 
Source: OECD (2017c) 

Key  efficiency  gains  are  still  to  be  made  in  the 
primary  care 
sector.  Data  on  avoidable 
hospitalisations  point  to  significant  opportunities 
to  strengthen  primary  care  (Graph  3.3.3).  Except 
for  a  few  team-based  primary  care  pilots,  GPs 
operate in solo practices (Sinkó et al., 2017). This 
setting,  together  with  weak  incentives  and  often 
avoid 
limited 

professional 

capacities 

to 

(6)  Defined  as  out-of-pocket  outlays  exceeding  40  %  of  total 

household spending net of subsistence needs. 

prevention  (12 %)  (Gyenes  et  al.,  2016,  see  also 
Box  3.5.1).  To  address  some  of  these  problems, 
more  emphasis  has  been  put  on  screening 
programs lately to detect certain types of cancers at 
an  early  stage.  Recently,  a  national  colorectal 
screening programme has been launched. 

Health risks associated with unhealthy lifestyles 
remain high. While decreasing from 30% in 2000, 
still  more  than  one-fourth  of  adults  were  daily 
smokers  in  2014,  the  third  highest  figure  in  the 
EU.  Recorded  alcohol  consumption  per  adult  is 
about  10 %  higher  than  the  EU  average,  and  the 
prevalence of obesity increased from 18 % in 2000 
to 21 % in 2014, becoming the third highest rate in 
the EU. Nearly 40 % of the total disease burden in 
Hungary, as measured by the impact on disability-
adjusted  life  years,  can  be  attributed  to  unhealthy 
lifestyles  (IHME,  2016).  Several  public  health 
measures  were  implemented  over  the  past  years 
showing some positive results (Joó et al., 2017).  

Spending on healthcare is comparatively low. In 
2015, 
total  (current)  spending  on  healthcare 
amounted to 7.2 % of GDP in Hungary compared 
to  the  EU  average  of  9.9 %.  In  per  capita  terms, 
health expenditure is about half of the EU average 
and  the  gap  widened  over  the  past  decade.  This 
was driven by shrinking public spending. Unlike in 
most  EU  countries,  spending  from  public  sources 
declined as a share of GDP, from 5.7 % in 2005 to 
4.8 %  in  2015  (see  also  section  3.1)  (OECD, 
2017c).  Provisional  figures  indicate  that  public 
health  expenditure  went  up  to  5.2 %  of  GDP  in 
2016, which was  still  considerably  lower  than  the 
EU28 level of 7.8 % (calculations based on OECD 
(2017c) and the Eurostat Database). 

includes 

informal 

Equity  in  healthcare  is  put  at  risk  by  the  high 
reliance  on  out-of-pocket  payments.  Out-of-
pocket  payments  account  for  29%  of  total  health 
expenditure,  nearly  twice  as  high  as  the  EU 
average.  This 
“gratuity” 
payments, which adversely affect access to public 
healthcare and distort incentives for providers (see 
Section  3.4)  While  the  share  of  Hungarians 
reporting  unmet  needs  for  medical  care  due  to 
financial  reasons  is  relatively  low  (about  2%  and 
similar  to  the  EU  average),  more  than  6%  people 
with low income reported unmet needs because of 
cost  compared  with  a  mere  0.2%  in  the  highest 
income group (2015 EU-SILC survey). Moreover, 
7.4 %  of  households  faced  catastrophic  out-of-

25 

02004006008001000PTITNLUKSlSEEEFRBEFIEU-21CZATSKDEPLHULTCongestive heart failureDiabetesAsthma & COPD 
 
                                                           
3.3. Labour market, education and social policies 

unnecessary  utilisation  of  specialist  care,  hinder 
the  effectiveness  of  primary  care.  Concerns  for 
future  accessibility  and  effectiveness  of  primary 
care are exacerbated by the fact that nearly half of 
GPs are over 60 years old (OECD/EOHSP, 2017). 
Moreover,  the  system  of  marketable  practicing 
rights,  coupled  with  the  absence  of  team-based 
organisations,  create  high  entry  cost  for  doctors 
intending to work in primary care. While financial 
support  schemes  have  been  put  in  place  to 
subsidise the entry of new GPs, around 5% of GP 
districts were permanently vacant in 2017 (ÁEEK, 
2017). The 2015 Primary Health Care Act marked 
a renewed attempt to reinforce primary care, most 
notably  by  redefining  tasks  of  GPs,  promoting 
group  practices  and  revising  payment  schemes. 
The  impact  of  these  measures  still  remains  to  be 
seen as their implementation progressed slowly so 
far. 

reduced  acute 

The  hospital-centred  health  system  has  further 
scope for improvement. The reorganisation of the 
hospital  sector  executed  in  two  major  phases  (in 
2007  and  2012) 
in-patient 
capacities,  especially  in  smaller  hospitals,  and 
resulted  in  the  closure  of  around  10 000  beds 
overall.  However,  the  number  of  hospital  beds 
remained far above the EU average (699 compared 
to  515  beds  per  100 000  population),  as  well  as 
hospital  activity  rates  (OECD,  2017c).  There  is 
still  room  for  streamlining  in-patient  services  in 
order  to  better  concentrate  resources  for  cost-
intensive  treatments,  while  shifting  less  severe 
cases to ambulatory care settings. As a key step in 
this direction, the government adopted the Healthy 
Budapest  Programme  in  2017  aiming  at  the 
modernisation  of  the  highly  fragmented  hospital 
network  in  the  capital.  In  addition,  the  e-health 
system  launched  recently  can  serve  as  a  valuable 
tool  for  improved  coordination  across  levels  of 
care  and  specialties.  The  greater  use  of  one-day 
surgery  also  offers  efficiency  gains.  The  share  of 
day cases in surgical interventions was rising over 
the past decade and the government has started to 
incentivise further penetration. However, Hungary 
still  lags  behind  most  EU  countries  in  this  regard 
(Gyenes et al., 2016; OECD, 2017d).  

than 

While  the  use  of  services  appears  to  be  more 
the  geographic  distribution  of 
even 
capacities, important inequalities in access exist. 
As shown by the above mentioned comprehensive 
health system assessment (Gyenes et al., 2016), the 

dispersion  of  per  capita  public  health  spending 
across  regions  is  relatively  narrow.  However,  this 
does  not  account  for  differences  in  needs  and  the 
fast  growing  private  care.  More  significant 
inequalities  were  found  regarding  some  key 
aspects of the healthcare process, especially at sub-
regional  levels.  The  use  of  specialist  services  by 
people  in  disadvantaged  areas  is  20%  below  the 
national  average,  and  four-fivefold  differences 
occur  in  waiting  times  for  elective  care  between 
counties.  There  are  also  wide  geographic 
variations  in  mortality  rates  within  30  and  365 
days  following  stroke  or  heart  attack,  which  give 
an  indication  about  the  uneven  quality  of  care. 
Regarding  unmet  medical  needs  (related  to  all 
reported  reasons),  inequalities  by  income  are 
markedly  higher  in  Hungary  than  generally  in  the 
EU.(7) The odds of unmet needs are also estimated 
to  increase  significantly  for  low  education  level 
and the Roma (Gyenes et al., 2016 pp. 528-542). 

Although  recent  salary 
increases  have  a 
mitigating  effect,  workforce  shortages  continue 
to  hamper  access  to  care.  Hungary  has  a 
somewhat  lower  number  of  doctors  than  the  EU 
average  (3.1  per  1000  population  vs.  3.6),  but 
shows a larger difference in the number of nurses 
(6.5 per 1000 population vs. 8.4). The past decade 
saw  a  significant  outflow  of  health  professionals 
leaving  to  work  abroad  (Varga,  2015).  Outward 
migration,  coupled  with  the  expansion  of  private 
healthcare, resulted in staff shortages in the public 
to  care, 
sector.  This  has 
particularly in rural areas. In response, a number of 
staff  retention  measures  were  introduced  over  the 
past  six  years.  In  2016,  a  multi-annual  pay-raise 
programme was launched covering doctors, nurses 
and  other  health  workers.  Recent  data  on 
certification requests needed to work abroad show 
that  the  emigration  of  doctors  has  slowed  down 
(Velkey and Gaál, 2017). At the same time, the age 
composition  of  health  workers  continues  to  raise 
concerns  about  rising  future  replacement  needs 
(ENKK, 2016). 

restricted  access 

(7)  In  2015,  14.4%  of  people  in  the  poorest  quintile  reported 
unmet  medical  needs,  while  only  3.5%  in  the  highest 
income  group.  The  same  figures  for  the  EU28  were  7.6% 
and 3%, respectively (2015 EU-SILC survey). 

26 

 
                                                           
3.4. INVESTMENT 

Investment trends 

the 

Total investment surpassed its pre-crisis level in 
2017,  3  years  after  real  GDP  exceeded  its  2008 
level.. After the crisis, the investment to GDP ratio 
fluctuated around 20 %, which is 4 pps. lower than 
before 
investment 
crisis.  The  weak 
performance  was  due  to  the  drop  in  private 
investment reflecting deleveraging needs and weak 
demand.  Business  investment  declined  by  almost 
20%  and  returned  to  its  2008  level  in  2017. 
Household investments practically dropped to half 
of  their  level  in  2008  and  are  not  expected  to 
recover  by  2019.  Public  investment  has  been 
volatile due to the timing of EU funds' absorption, 
which  generates 
total 
investment and GDP variables (see Box 3.4.1.) 

sizable  volatility 

in 

Graph 3.4.1:  Private and public investment 

(1) Private investment = corporations + households 
(2) private + public investment = total investment 
Source: Eurostat, European Commission calculations based 
on the Autumn 2017 Economic Forecast 

Private investment is set to increase on the back 
of  several  supporting  factors.  Since  2016,  a 
steady  recovery  has  started  in  private  investment. 
Households'  willingness  to  consume  has  been 
gradually  picking  up,  and  financial  conditions  for 
firms  have  improved.  In  the  current  EU  financial 
framework  Hungary  allocates  around  55%  of 
incoming EU funds to the private sector, which is 
higher  than  in  the  previous  period.  The  reduction 
of the corporate income tax rate may also motivate 
invest  more.  The  global  recovery 
to 
firms 
the  prospects  of 
improves 
export-oriented 
to  build  new  capacities.  Several 
companies 

investment  plans  have  been  announced  in  the 
manufacturing  sector,  including  the  car  industry. 
The  main  short-term  risk  to  invest  is  the  labour 
shortage (see Section 3.2). 

investment  has 

Household  investment  has  started  to  increase 
steeply  as  many  supportive  elements  are 
risen 
kicking-in.  Housing 
dynamically since 2016 from a very low level. The 
number  of  new  homes  built  in  2015  was  0.8  per 
1000  inhabitants,  which  was  one  of  the  lowest  in 
the EU and three times lower than in the pre-crisis 
period.  The  growth  is  supported  by  the  fading 
precautionary  behaviour  of  households  and  by 
government  initiated  measures,  such  as  Family 
Housing  Subsidy  Programme  and  the  temporary 
cut in VAT for housing construction. The VAT cut 
will  be  phased  out,  which  may  induce  a  sudden 
decline in housing construction (see Box 3.2.1.). 

themselves 

Business  investment  has  taken  place  mainly  in 
large  and  foreign  owned  firms,  in  particular  in 
the  export  sector  (Kopint-Tárki,  2017).  Large 
companies  are  in  a  better  position  to  negotiate 
tailor-made  conditions  in  a  country,  thus  they  can 
insulate 
from  domestic  business 
environment  to  some  extent.  The  government 
initiated  bilateral  strategic  agreements  with  large 
companies,  which  are  almost  exclusively  foreign-
owned,  also  add  to  this  disconnection.  Other 
studies  (Palócz,  2017)  reveal  that  productivity 
differences  between  large  firms  and  SMEs  are 
higher than in other EU countries, which is related 
to the concentration of investment (see Box 3.4.2). 

recent 

funds.  A 

EU funds have a strong influence on investment 
in  Hungary.  In  2017,  real  gross  fixed  capital 
formation  is  forecast  to  have  increased  by  more 
than 20 %, out of which around half was financed 
directly  by  EU 
study 
commissioned  by  the  government  (KPMG-GKI, 
2017)  also  suggests  that  investment  would  have 
been  much  lower  without  EU  funds  in  the  last 
decade. Between 2009 and 2016, the absorption of 
EU  funds  amounted  to  nearly  4  %  of  GDP  per 
year, which is one of the highest ratios in the EU. 
The high level of EU support creates a dependency 
culture as it involves less risk for the recipient, and 
a  greater  risk 
that  funds  are  not  used  on 
productivity-increasing investment. A study by the 
central  bank  (Banai  et  al,  2017)  concludes  that 
investments using EU money did not improve firm 
level productivity. EU grants were used by already 

27 

246810121416020304050607080910111213141516171819Business inv. HUBusiness inv. EUHousehold inv. HUHoushold inv. EUPublic inv. HUPublic inv. EU% ofGDPforecast 
 
 
productive  firms  to  extend  their  capacity  as 
opposed  to  implementing  technological  upgrades. 
After 2019, the investment dynamics may fade and 
a supportive business environment will be the key 
to the future prospects of investment.  

Net  foreign  direct 
investment  (FDI)  flows 
fluctuated  at  a  relatively  low  level  in  the  post-

crisis  years.  In  comparison  to  regional  peers, 
Hungarian  net  FDI  inflows  were  at  a  low  level 
already before  the  crisis. Hungary's  net  FDI  stock 
declined  from  50  %  of  GDP  before  the  crisis  to 
around  45  %  in  2016.  Recent  data  show  some 
improvement  as  both  net  FDI  inflows  and  stock 
increased in 2016. 

28 

 
 
 
3.4. Investment 

Box 3.4.5: Investment challenges and reforms in Hungary 

Total investment in Hungary has been week since the financial crisis mainly on account of declining private investment. 

While considerable export capacities have been built up, business investment overall remained below the pre-crisis levels 

until 2017 reflecting decreased profitability, deleveraging pressures and weak demand. The drop in household investment 

was  even  more pronounced  as  households  delayed  home  purchases  facing  the  contraction of  their disposable  income.  In 

2017, both business and household investments picked up on the back of strong global and domestic economic recovery. 

Fiscal policy measures and negative real interest rates facilitated this development. Public investment, which has been very 

volatile,  also  increased  sharply  in  2017.  However,  increasing  labour  shortages,  coupled  with  skill  and  geographic 

mismatches, have started to pose a major macroeconomic constraint to investment growth. 

While  the  macroeconomic  environment  is  overall  supportive  for  investment,  the  weak  quality  of  institutions  and  human 

capital  inadequacies  remain  important  constraining  factors.  In  particular,  institutional  weaknesses  and  insufficiently 

qualified workforce may impede investments with a high value-added. The following investment barriers and the related 

policy actions deserve a particular attention: 

1/ The most important barrier to invest is the short supply and inadequate quality of labour force. The Hungarian labour 

market  became  one  of  the  tightest  in  the  EU  as  shown  by  labour  shortages  reported  by  firms  (see  Section  1).  Weak 

educational  and  health  outcomes  also  add  to  the  challenge  (see  Section  3.3).  The  authorities  recently  implemented 

measures to free up labour reserves and improve mobility. The government started to decrease the size of the public work 

scheme, while other, potentially more effective active labour policies are extended.  

2/ Weaknesses in the institutional and regulatory environment result in uncertainty for investors. Limited transparency in 

policy  making  increases  the  costs  of  investment  and  it  may  deter  viable  projects.  Limited  competition  in  public 

procurement and corruption risks in general can distort the allocation of resources as they are not necessarily channelled to 

most productive firms. Regulatory barriers, especially in services, have a similar effect (see Section 3.5). Some measures 

have been recently implemented to improve transparency and competition of public procurement. However, less progress 
was made in reviewing the regulatory environment in the service sector.  

29 

Regulatory/ administrative burdenCSRTaxationCSRPublic administrationAccess to financePublic procurement /PPPsCSRCooperation btw academia, research and businessJudicial system - Financing of R&D&I - Insolvency frameworkBusiness services / Regulated professionsCompetition and regulatory frameworkRetailCSREPL & framework for labour contracts  - Construction - Wages & wage setting - Digital Economy / TelecomEducation CSREnergyLegend:Transport - No barrier to investment identifiedCSRInvestment barriers that are also subject to a CSRSome progressNo progressSubstantial progressLimited progressFully addressedPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education 
 
3.4. Investment 

Box 3.4.6: Interfirm productivity differences and the duality of the economy 

Over the last decade, productivity growth in  Hungary has been slow for a catching-up economy. (1) This is 
unlikely to be explained by the sectoral composition of the Hungarian economy as the share of  services or 
high-tech  industries  in  the  GDP  is  similar  to  most  advanced  economies  (European  Commission,  2017f). 
However, even within same industries, high-productivity, internationally competitive firms coexist with low-
productivity  firms  serving  only  the  domestic  market.  Large  and  persistent  within-industry  productivity 
differences can explain low aggregate productivity growth via two channels. First, this pattern may imply that 
low-productivity firms are not upgrading their technology to catch up with their more productive peers. This 
is certainly a possibility in Hungary, where the share of innovative SMEs is one of the lowest in the EU (see 
section 3.5). Second, persistent differences may also imply that the economic environment does not facilitate 
the reallocation of resources to more efficient firms. 

In  Hungary,  within-industry  differences  constitute  about  85  percent  of  firm-level  labour  productivity 
differences, while the industry affiliation of firms explains only about 15 percent. To take the example of two 
important  industries,  the  difference  between  high-productivity  firms  (90th  percentile)  and  relatively  low-
productivity  firms  (10th  percentile)  is  8-fold  in  food  manufacturing  and  13-fold  in  wholesale  trade.  On 
average,  dispersion  is  7-fold  in  manufacturing  and  9.5-fold  in  services.  While  these  numbers  are  not 
drastically  different  from  findings  in  other  OECD  countries,  Hungary's  within-industry  productivity 
differences are at the higher end of the distribution (OECD, 2016c). 

When considering these differences, a key question is to what extent they reflect the “duality” between small, 
domestic-oriented firms and larger, globalized firms. The answer to this question is twofold. On the one hand, 
size, foreign ownership and exporting do not have an overwhelming explanatory power: these factors explain 
about  10  percent  of  within-industry  productivity  differences.  In  other  words,  there  are  still  substantial 
differences even between smaller domestic firms; the duality is less deterministic than often imagined. On the 
other hand, the disparities between globalized and non-globalized firms are substantial and persistent.  

Graph 1:  Labour productivity advantage of foreign-owned firms and exporters.  

LHS: Controlled for employment size; RHS: Controlled for employment size and capital intensity 

The productivity advantage for foreign and exporter firms shows how much more productive these firms are relative 
to domestic, non-exporter firms of similar employment size and capital intensity in the same industry estimated on the 
basis of regression analysis for each year. The sample includes firms with at least 10 employees. 
Source: Muraközy et al., 2017 

The  left  panel  of  Graph  1  shows  the  estimated  average  labour  productivity  advantage  of  exporters  and 
foreign-owned  firms  compared  to  domestic  non-exporters  after  controlling  for  employment  size.  Both 
variables  command  an  advantage  of  about  60-70%  in  services  and  40-50%  in  manufacturing.  This  implies 
that  on  average,  an  exporter  foreign-owned  firm  is  about  100-130%  more  productive  than  a  domestic  firm 
supplying  only  the  domestic  market.  These  results  confirm  that  participating  in  international  production  or 
ownership  networks  has  been  and  remains  a  key  pivot  in  productivity.  Naturally,  a  large  part  of  these 

30 

2030405060702001200520102015%Foreign (Manufact.)Foreign (Services)Exporter (Manufact.)Exporter (Services)010203040502001200520102015Foreign (Manufact.)Foreign (Services)Exporter (Manufact.)Exporter (Services)% 
 
3.4. Investment 

differences result from the fact that employees of larger and internationalized firms operate more capital. The 
right  panel  of  the  Graph  shows  differences  after  controlling  for  this  factor.  On  this  basis,  the  productivity 
premiums  become  smaller,  but  remain  statistically  highly  significant.  The  productivity  difference  between 
foreign-owned exporters and domestic-owned non-exporters was 30% in manufacturing and 60% in services. 
Significantly, the foreign advantage displays a clearly increasing trend in the last decade in both sectors. 

The importance of within-industry productivity heterogeneity suggests that policies supporting productivity 
growth  and  reallocation  within  sectors  can  be  more  effective  than  policies  aiming  at  inter-industry 
reallocation.  The  persistent  and probably  increasing  productivity  advantage  of  firms integrated  into  global 
ownership or production networks suggests that domestic-oriented firms lack the resources and motivation 
for  upgrading  their  technology  quickly  enough.  The  findings  consistently  show  that  both  productivity 
dispersion  and  the  advantage  of  internationalized  firms  are  larger  in  services.  This  indicates  that 
domestically-owned  firms  and  aggregate  productivity  may  benefit  even  more  from  improving  framework 
conditions in services than in manufacturing, where international competition has more disciplining effects.  

(1)  The Box is based on a research report prepared for the European Commission (Muraközy et al.; 2017) 

Graph 3.4.2:  Worldwide Governance indicator score: 

Hungary and regional peers (EU average=100) 

Both  government  and  business  efficiency  are 
deemed  comparatively  low.  The  World  Bank's 
Doing  Business  Report 
reveals  an  uneven 
performance  for  Hungary  across  the  selected 
flagship indicators (World Bank, 2017). While the 
country  scores  well  in  enforcing  contracts  and 
property registration, the major bottlenecks include 
the  taxation  environment,  getting  access  to  public 
insolvency 
utilities  and 
procedures.  In  October  2016,  Hungary  set  up  a 
Competitiveness  Council,  which  reviews  barriers 
to  businesses.  On  the  initiative  of  the  Council, 
measures  were  adopted  to  ease  access  to  public 
utilities and permits. 

the  high  costs  of 

(1) Figures refer to the average scores of 6 broad indicators 
(on a scale of 0-5) (2) CEE3: Czech Republic, Poland and 
Slovakia 
Source: WGI (2017) 

Business 
performance 

environment 

and 

institutional 

low 

ranks 

relatively 

Hungary 
in 
competitiveness scoreboards. In 2017, the World 
Economic  Forum  ranked  Hungary  60th  out of  137 
countries  and  24th  in  the  EU  (WEF,  2017).  The 
country's  position  has  not  improved  over  the  past 
decade  despite 
improved  macroeconomic 
situation.  Hungary  ranks  low  in  particular  on 
institutional  quality  and  business  sophistication. 
Weaknesses  are  also highlighted  in human  capital 
adequacy.  The  2017 
competitiveness 
yearbook ranks Hungary 25th among EU countries. 

IMD 

the 

Weak  and  declining  institutional  performance 
could  be  a  drag  on  economic  convergence.  The 
Worldwide  Governance  Indicators  shows  that 
Hungary’s  performance  declined  in  all  six  broad 
dimensions  of  governance  over  the  past  decade. 
The  deterioration  is  particularly  notable  in  voice 
and  accountability,  control  of  corruption  and 
regulatory  quality.  In  terms  governance  quality, 
Hungary's relative position worsened in the EU as 
well  as  in  comparison  with  the  regional  peers 
(Graph  3.4.4.).  A  recent  ECB  (del  Hoyo  et  al., 
2017)  study  shows  that  weak  and  declining 
institutional  performance  contributes 
the 
slowing down of economic convergence within the 
importance  of 
EU,  which  underlines 
institutions  (see  also  Acemoglu  and  Robinson, 
2010; Bruinshoofd, 2016 and section 3.5). 

the 

to 

The limited quality and transparency of policy-
making  remains  a  key  challenge.  According  to 
the  weak 
the  World  Economic  Forum, 

31 

80828486889092949698100050607080910111213141516HungaryCEE3 
 
 
3.4. Investment 

recommendations  was  “globally  unsatisfactory” 
(GRECO,  2017).  According  to  GRECO,  albeit  in 
relation  to  prosecutors  some  progress  has  been 
made, adequate checks and balances are needed to 
prevent  the  potential  for  malpractice,  corruption 
and  political  influence.  Failure  to  comply  with 
these  recommendations  could  adversely  affect  the 
business environment as the proper functioning of 
the prosecution service is of crucial importance to 
fight corruption and money laundering. 

Public procurement  

implemented  a 
In  recent  years,  Hungary 
number  of  measures 
improve  public 
to 
procurement practices. Good public procurement 
practices  ensure  that  tendering  authorities  and  tax 
payers  get  the  best  value  for  their  money  (8). 
Hungary managed to fulfil the commitments made 
in its public procurement action plan, which served 
the  2014-2020 
as  an  ex-ante  condition  for 
multiannual  financial  framework.  This  included, 
among  others,  the  adoption  of  a  new  public 
procurement  act  in  November  2015  in  order  to 
the  2014  EU  public  procurement 
transpose 
(9).  The  new 
directives 
framework 
strengthened  in  particular  the  remit  of  the  Public 
Procurement  Authority  in  overseeing  the  legality 
of  direct  award  procedures  and  increased  the 
minimum  number  of 
invited  participants  for 
certain  types  of  tenders.  In  addition,  the  2017 
amendment 
the  public  procurement  act 
introduced  a  non-obligatory  option  to  declare 
public procurement procedures unsuccessful when 
only a single bid is received. 

legal 

to 

While  recent  data  show  some  improvements, 
there  is  still  a  considerable  scope  to  enhance 
in  public 
competition  and 
transparency 
procurement.  Examining  contract 
level  data 
covering  both  the  national  regime  and  tenders 
above the EU threshold, a recent study found that 
the  proportion  of  contracts  with  prior  publication 
of  calls  (an  indicator  of  transparency)  and  the 
average  number  of  bidders  somewhat  increased 
between  2015  and  2016  (CRCB,  2017b).  Overall, 
the  frequency  of  contracts  involving  high  risks  of 

(8)  A  recent  study  by  the  CRCB  (2017b)  estimates  that  the  
social  loss  in  Hungary  in  2009-2016  due  to  weak  public 
procurement  practices  could  have  reached  15-24 %  of  the 
total public procurement value. 

(9)  The  compliance  check  of  the  Hungarian  transposition 

measures is ongoing. 

regulatory 

transparency of policy-making continues to weigh 
on  the  country's  competitiveness  (WEF,  2017). 
Empirical  research  on  legislative  process  revealed 
several  problematic  aspects  of  regulatory  quality 
(CRCB,  2015;  2016;  2017a).  The  research  shows 
that 
impact  assessments  are  not 
available  for  a  significant  number  of  laws  or 
contain  only  limited  information  on  the  effects  of 
new policies. The cross-country comparison by the 
Bertelsmann Institute (2017) also points to the low 
quality  of  evidence-based  policymaking  practices 
in  Hungary.  There  is  also  a  deficit  in  appropriate 
time 
stakeholder  engagement.  The 
provided  for  public  consultations  on  draft  bills 
tends  to  be  very  short.  The  Open  Government 
Index  also  highlights  these  problems,  ranking  the 
country  in  the  bottom  group  in  the  EU  regarding 
civic participation and transparency (WJP, 2015).  

length  of 

The  judicial  system  faces  some  challenges. 
According  to  the  Council  of  Europe's  Group  of 
States  Against  Corruption  (GRECO,  2015  and 
2017),  more  could  be  done  to  better  balance  the 
powers  between  the  President  of  the  National 
Office  for  the  Judiciary  and  the  National  Judicial 
Council by giving a stronger mandate to the latter 
in  appointments  and  promotions  of  judges.  As 
noted by the Association of Hungarian Judges, the 
criticism  by  government  officials  of  individual 
judges 
regarding  specific  court  cases  may 
undermine  public  confidence  in  the  judiciary 
(MABIE,  2017).  Although  the  efficiency  of  the 
justice  system  (length  of  civil,  commercial  and  
administrative  proceedings)  is  in  general  above 
average,  businesses'  perception  of 
judicial 
independence 
(European 
Commission,  2018b).  Recent  amendments  to  the 
rules on the selection of judges (new points system 
favouring  the  recruitment  of  civil  servants;  IM, 
2017)  will  be  monitored  as  regards  its  potential 
impact  on  judicial  independence.  On  a  more 
positive  note,  new  procedural  codes  were  put  in 
place as of 2018, which could facilitate the hearing 
of civil cases and judicial review of administrative 
decisions  within  a  reasonable  time.  At  the  same 
time,  effective  remedies  in  cases  of  excessively 
lengthy  proceedings  are  still  lacking  (European 
Commission, 2017, p. 35). 

remains 

low 

The  organisation  of  the  prosecution  service  to 
fight  corruption  should  still  be  improved.    In 
June  2017,  GRECO  established  that  Hungary's 
2015 
compliance  with 
level 

the 

of 

32 

 
                                                           
3.4. Investment 

Graph 3.4.4:  Share of tenders without prior publication and 

with only a single bidder above EU threshold 

(1) Lines refer to the Single Market Scoreboard reference 
values. Values above the red line are evaluated as 
"unsatisfactory", below the green line as "satisfactory" and 
between the two lines as "average" performance. 
Source: European Commission (2018c) 

The introduction of the e-procurement system is 
expected  to  give  a  new  impetus  for  increasing 
the  efficiency  of 
the  public  procurement 
process. Hungary has made considerable efforts to 
put  in  place  its  e-procurement  system  before  the 
deadline  set  in  the  European  directives  (i.e.  18 
October  2018).  The  testing  phase  of  the  modules 
and system functions already started in 2017. The 
system  became  fully  operational  as  of  1  January 
2018  and  its  use  will  be  mandatory  for  all 
contracting authorities as of mid-April. The impact 
of  the  e-procurement  system  on  competition  and 
transparency  depends  crucially  on  the  quality  of 
the actual functioning of the system, which is to be 
monitored in the coming years. 

Fight against corruption 

Corruption  remains  a  major  concern.  The 
perception of corruption in Hungary is higher than 
in the EU overall (11). The World Economic Forum 
(WEF, 2016; 2017) identifies corruption as one of 
the most problematic factors for doing business in 
by  Transparency 
Hungary.  As  measured 
International's  Corruption  Perception 
Index, 
Hungary's  exposure  to  corruption  appears  to  have 

(11)  56%  of  business  representatives  consider  that  corruption 
negatively  affects  the  business  climate  in  the  country  (EU 
average  37  %),  while  46%  considered  favouritism  and 
nepotism  a  significant  problem  (EU  average  38  %). 
(European Commission, 2017g). 

potentially  generating  rents  for  contractors,  as 
measured by the "corruption risk" indicators in the 
study,  moderated  but  remained  above  the  historic 
level (Graph 3.4.3). The Single Market Scoreboard 
evaluates public procurement practices on the basis 
of  indicators  derived  for  tenders  above  the  EU 
threshold.  On  this  account,  Hungary  shows  an 
improvement  in  terms  of  a  reduced  use  of 
negotiated procedures without prior publication of 
a  call  (Graph  3.4.4).  The  share  of  such  tenders 
dropped from 14% in 2015 to 9% in 2016 and the 
reduction endured with 8% in 2017, falling below 
the  European  Economic  Area  (EEA)  critical 
reference value of 10 %. However, the prevalence 
of tenders attracting only a single bidder remained 
high.  The  share  of  one-bidder  contracts  stood  at 
35%  in  2017  (compared  with  37%  in  2015  and 
2016). This was the 7th highest figure in the EEA, 
well above the reference value of 20 %.(10)  

Graph 3.4.3:  Risk scores related to low competition and 

transparency in Hungarian public 
procurement - corruption risk indicators 

(1) Corruption risk scores show the frequency of contracts 
that potentially generate significant rents for contractors 
with a value between 1 (high risk) and 0 (low risk). CR2 is a 
composite index of two indicators taking a value of 1 for 
each contract with a single bidder and no prior publication 
of the tender. CR3 covers a third risk factor, assuming that 
rounded contract prices (zero values in last four digits) 
reflect low competition. For more details see the source. 
Source: CRCB (2017b) 

(10)  The  picture  seems  to  be  more  positive  at  a  level  of  all 
tenders, including lower value procurements in the national 
regime and framework agreements,  which are not covered 
by the Single Market Scoreboard. Available data for 2016 
indicate  that  overall  there  was  a  noticeable  decrease  in 
single-bidder  tenders  both  as  a  share  of  all  contracts 
(CRCB, 2017b) and procedures (Nézőpont, 2017). 

33 

00,10,20,30,40,50910111213141516CR2CR30%5%10%15%20%25%30%35%40%No Calls for BidsOne Bidder20142015201620175%10%10%20% 
 
 
                                                           
 
                                                           
3.4. Investment 

with  court  orders  on  the  matter  (e.g.  Átlátszó, 
2017,  2018;  G7,  2017;  Index,  2017;  Magyar 
Nemzet  Online,  2017).  The  Data  Protection 
Authority has taken a progressive position in such 
cases  and  so  did  courts,  who  generally  decide  in 
favour  of  public  access  to  information  (NAIH, 
2017). The Constitutional Court rebuffed repeated 
attempts to restrict access by subsequent legislative 
modifications. 

Informal  payments  in  healthcare  still  persist. 
Visiting a doctor or a public healthcare institution 
may still mean having to offer a gift or pay above 
the official fee. Available estimates put the annual 
amount of gratuity payments in healthcare at 0.05-
0.2% of GDP (Gaál et al, 2012; Lantos, 2017). At 
the  same  time,  a  large  majority  of  doctors  would 
like  to  work  in  a  healthcare  system  free  from 
gratuity  payments  (Szinapszis,  2017).  No  steps 
have  been  taken  to  introduce  measures  to  clarify 
the  legal  status  of  gratuity  payments.  There 
remains a contradiction between the Labour Code, 
which authorises institutions to allow employees to 
take  gratuity  payments  and  the  Criminal  Code, 
which sanctions such transactions as bribery.  

increased over the past years (TI, 2018).  Risks of 
corruption  could  negatively  affect  the  country's 
growth potential by distorting allocative efficiency 
in the economy (Gamberoni et al., 2016; del Hoye 
et al., 2017). 

There  are  gaps 
the  anti-corruption 
in 
framework.  The  government's  strategic  approach 
to fighting corruption continues to focus narrowly 
on integrity within public administration. There is 
no  compelling  evidence  on  the  effectiveness  of 
measures  in  preventing  corruption.  Shortcomings 
the  asset 
in  whistle-blower  protection  and 
declarations system of officials have still not been 
addressed. No measures have been taken to reduce 
favouritism by public officials. On the prosecution 
side,  while  measures  to  fight  low-level  corruption 
(such  as  integrity  testing)  appear  to  have  been 
applied  with  some  success,  there  is  not  enough 
focus  on  starting  investigations  into  high-level 
corruption cases. This is reflected in the perception 
level (12). According to the latest available data for 
2014, the proportion of suspended sentences out of 
the  total  number  of  final  convictions  for  offences 
involving the bribery of public officials was 86 %. 
Concerns  regarding  prevention  of  corruption  with 
respect  to  members  of  parliament,  judges  and 
prosecutors  have  not  been  sufficiently  addressed 
yet (GRECO, 2017). 

Limited transparency and restrictions on access 
to  information  hinder  corruption  prevention. 
International  comparisons  suggest  that  Hungary 
still  has  some  way  to  go  to  rank  among  the  well-
performing  countries  in  the  EU  regarding  the 
accessibility  and  quality  of  public  information 
(Bertelsmann, 2017; IBP, 2015; 2018; WJP, 2015). 
Hungary left the Open Government Partnership in 
December  2016.  The  recent  legislation  on  NGOs 
receiving  support  from  foreign  sources  adversely 
affects  the  operating  environment  for  watchdog 
(Venice  Commission, 
2017). 
organisations 
According 
that  are 
to  several  news  portals 
regularly requesting information from government 
agencies,  more  and  more  institutions request fees, 
to  deny  access, 
release 
invoke  exceptions 
information 
litigation 
after 
only 
procedures  or  sometimes  even  refuse  to  comply 

lengthy 

(12)  Only  15 %  of  business  respondents  consider  that  there  are 
appropriate sanctions  in  Hungary  for the  bribery  of  senior 
officials as compared to the EU average of 30 % (European 
Commission, 2017g). 

34 

 
                                                           
3.5. SECTORAL POLICIES 

Research and Innovation 

innovation  performance 

Hungary's  innovative  capacity  remains  low, 
especially  for  domestic  enterprises  and  SMEs. 
Hungary is considered a moderate innovator, with 
a  declining 
in  EU 
comparison  between  2010  and  2016.  (13)  The 
innovation  capacity  of  SMEs  is  particularly  low 
(Graph  3.5.1).  Research  and  innovation  activities 
are  highly 
foreign-owned 
concentrated  on 
enterprises  and  a  few  large  Hungarian  businesses 
(see  Box  3.4.2).  The  pharmaceutical, 
ICT, 
machinery  and  automotive  sectors  represent  the 
highest  proportion  of 
innovative  companies 
(European Commission, 2016a).  

Graph 3.5.1:  The proportion of SMEs introducing innovations 

Source: European Commission SBA database (2017)  

framework 
Despite  government  measures, 
sufficiently  promote 
conditions  do  not 
entrepreneurship  and 
innovation.  Boosting 
business R&D has been a strategic objective of the 
government in recent years through tax incentives 
and  direct  support  measures,  mainly  from  the 
European  Regional  Development  Fund,  but 
measures to support the demand side of innovation 
are  lacking  (Dőry,  Csonka,  Slavcheva,  2018). 
Public funding of private R&D is the third highest 
among  the  EU  Member  States  with  European 
Structural  Funds  playing  a  major  role  (OECD, 
2016d).  The  government  is  supporting  start-ups 
through  accelerator  and  incubator  initiatives,  but 
is  still  weak  and 
entrepreneurship  education 

(13)  According 

to 

the  European 

Innovation  Scoreboard, 
Hungary's innovation performance fell by 3.5 pps between 
2010 and 2016 relative to EU performance in 2010. 

administrative  barriers  often  complicate 
operations of start-ups.  

the 

After  a  gradual  increase  in  recent  years  R&D 
intensity decreased to 1.2% of GDP in 2016. In 
previous  years  the  increase  in  R&D  intensity  was 
mainly  led  by  rising  business  expenditure.  At 
around  0.4%  of  GDP  in  2016,  public  R&D 
expenditure remains amongst the lowest in the EU, 
hampering the quality and efficiency of the public 
R&I  system.  The  decrease  in  public  R&D  can 
partially 
initial 
by 
explained 
from  governmental 
funds 
implementation  of 
programs  co-funded  by  Structural  Funds,  which 
remain the major source of public spending.  

slow 

be 

of 

involvement 

Low  expenditure  and  fragmentation  hamper 
the  quality  and  effectiveness  of  the  public 
research  and 
innovation  system.  Hungary's 
public  research  system  is  underfunded  and  highly 
fragmented  across  universities,  institutes  of  the 
Hungarian  Academy  of  Sciences  and  sectoral 
institutes  supervised  by  the  different  ministries. 
The system lacks an overall strategic vision and a 
stakeholders. 
structured 
Independent  external  evaluations  are  not  yet 
systematically  carried  out.  Despite  measures  in 
place,  science-business  partnerships  are  still  not 
risk  not  being 
sufficiently 
sustainable when public funding stops. The limited 
openness of the Hungarian research system is also 
a  challenge  (Jonkers  and  Wagner,  2017).  These 
issues  were  identified  in  the  peer  review  carried 
out  under  the  Horizon  2020  Policy  Support 
Facility  and  are  being  addressed  by 
the 
government  through  the  still  on-going  review  of 
the national RDI strategies. 

supported  and 

Skills  shortages  remain  a  major  challenge  for 
the Hungarian research and innovation system. 
The  number  of  researchers  has  been  declining  in 
recent years and is relatively low. This is partially 
explained by the more attractive conditions abroad 
for  researchers  that  spur  emigration.  The  share  of 
research  staff  in  the  private  sector  is  close  to  the 
EU  average,  but  mobility  of  researchers  between 
science  and  business  is  limited.  A  number  of 
to  provide  better 
programmes  are 
in  place 
conditions  for  researchers,  but 
these  appear 
insufficient  in  the  light  of  low  salaries  and  more 
attractive  career  opportunities  in  the  business 
sector  and  abroad.  (Dőry,  Csonka  and  Slavcheva, 
2018) 

35 

05101520253035404550ROHUPLBGLVLTSKEUCZSIEEATDEProduct or processMarketing or organisational% of SMEs 
 
 
                                                           
3.5. Sectoral policies 

Digital economy 

Access  to  internet  steadily  improved  in  recent 
years. The country ranks well in the availability of 
fast fixed broadband network, albeit the take-up in 
mobile broadband remains low. At the same time, 
the  business  sector  and  public  administration  are 
not  exploiting  the  opportunities  offered  by  digital 
technology  as  much  as  other  countries  do 
(European Commission, 2017i).  

Despite favourable trends, Hungary lags behind 
in  the  integration  of  digital  technology  by 
businesses.  In  2017,  14.6  %  of  enterprises  used 
social media (up from 13.4 % in 2016), 8.4 % sent 
e-invoices  (8.1  %  in  2016),  10.7  %  applied  cloud 
services (8 % in 2016) and 12.5 % of SMEs were 
selling online (11.7 % in 2016). However, on all of 
the  above  indicators,  Hungary  performs  well 
below  the  EU  average.  The  government  launched 
the  "Modern  Businesses  Programme"  focusing  on 
awareness-raising  activities,  which  can  help 
businesses  becoming  digital.  In  addition,  within 
the  frames  of  "Support  of  Business  Digital 
Developments"  project  more  than  one  thousand 
SMEs  received  grants  and  loan  financing  to  carry 
out investment in ICT developments.  

The  country  also  scores  below  the  EU  average 
in key dimensions of digital public services, but 
important  developments  are  in  the  pipeline. 
Hungary is assessed as a moderate performer in e-
government services with considerable reserves to 
improve  administrative  effectiveness  (European 
Commission,  2017j).  Improvements  are  expected 
in 
to  ongoing  e-government 
developments supported also by EU funds. Several 
digitisation programs have been launched or being 
implemented in the public sector (e.g. e-Health, e-
Procurement,  electronic  tax  declarations),  which 
will  have  an  important  impact  on  businesses  and 
citizen's life. 

this  area  due 

 Regulation in the service sector 

Hungary has relatively high regulatory barriers 
in  services,  which  hampers  productivity  and 
innovation.  Hungary  scores  below  the  average  in 
12  out  of  the  21  service  sectors  on  the  OECD's 
Services  Trade  Restrictiveness  Indicator  (OECD, 
2017e).  More  recently,  additional  restrictive  rules 
have  been  introduced,  notably  through  changes  to 
the  rules  on  advertising.  The  authorities  also 

inefficiencies 

continue entrusting certain services to state-owned 
firms  specifically  created  for  these  purposes  (e.g. 
waste collection, regulated energy retail). Existing 
in  Hungarian  service 
allocative 
sector,  as  revealed  by  the  persistently  high  inter-
firm productivity differences (see Box 3.4.2), point 
to  the  adverse  effects  of  regulatory  barriers.  The 
affects 
competitiveness 
downstream  industries  using  services  as  inputs. A 
recent  study  shows 
restrictive 
that 
regulations  in  the  upstream  service  sectors  would 
increase 
the  productivity  of  manufacturing 
industries  in  Hungary,  particularly  when  coupled 
with  improvements  in  governance  quality  (Curnis 
and Manjón Antolín, 2017), (see also section 3.4). 

tackling 

services 

also 

of 

Unpredictability  of  the  legal  framework  is  a 
further  problem,  especially  in  the  retail  sector. 
The  past  years  saw  frequent  announcements  of 
new  restrictions  affecting  retailers.  This  can  deter 
investment  even  if  no  concrete  actions  are  taken. 
The  ban  on  Sunday  trading  was  introduced  and 
later  withdrawn.  The  authorities  also  backtracked 
on  the  collection  of  the  progressive  food  chain 
inspection  fee  following  legal  action  by  the 
European Commission. In the spring of 2017, new 
plans  were  announced  for  yet  another  set  of 
restrictive measures (OKSZ, 2017), which had not 
the  proposed 
been 
regulations  are  often  tailored  to  turnover  or  floor 
size,  they  mainly  affect  foreign  retail  chains.  The 
unclear  application  of  rules  for  granting  permit  to 
set up shops above a certain size remains a source 
of  uncertainty  (European  Commission,  2017a, 
p.32).  Also,  the  prohibition  of  operating  at  loss 
continues  to  exist,  increasing  normal  business 
risks. 

to  date.  As 

introduced 

Restrictiveness  of  regulation  of  professions 
remains  high 
in  Hungary.  The  analysis 
performed  as  part  of  the  2017  Services  Packages 
points to a high degree of regulatory restrictiveness 
among  key  professions,  resulting  in  low  business 
dynamics,  for  example,  in  accounting  and  legal 
services (European Commission, 2017k). In 2017, 
Hungary  revised  the  legal  rules  for  lawyers.  This 
revision removed some restrictions on cooperation 
between  lawyers  and  other  professions,  while 
allowed  specific  types  of  lawyers  to  provide  a 
wider  range  of  services  than  before.  In  parallel 
however, regulatory complexity increased with the 
creation  of 
legal 
profession  categories  of  "Legal  Counsel"  and 

the  additional 

regulated 

36 

 
3.5. Sectoral policies 

segment  for  households  in  the  natural  gas  sector, 
resulting  in  a  de  facto  public  monopoly.  The 
present  regulatory  regime,  which  still  does  not 
recognise  all  cost  components,  bears  the  risk  of 
accumulating  financial  losses,  once  wholesale 
energy prices start to rise again.  

Although  energy  consumption  decreased,  there 
is  still  room  for  improving  energy  efficiency  in 
the  residential  sector.  Between  2005  and  2015, 
final  energy  consumption  fell  by  5%,  albeit  it 
started  to  increase  again  at  the  end  of  the  period. 
There  remains  a  considerable  scope  for  energy 
savings  in  the  residential  sector,  which  accounts 
for one-third of total consumption.   

electricity 

The use of  renewable  energy  sources  improved 
over  the  past  years;  but  to  a  large  extent  this 
was due to increased biomass use in heating and 
cooling.(14)  At  the  same  time,  the  share  of 
not 
renewables 
increased. Moreover, biomass also has a dominant 
share  in  renewable  electricity  generation,  while 
other  alternative  sources  (e.g.:  solar,  geothermal 
and  wind)  play  a  relatively  minor  role.  This 
provides  an  untapped  opportunity  for  better 
exploitation  of  clean  energy  sources  in  electricity 
generation to attain the climate objectives. 

generation 

has 

Environment policy 

Current  policies  do  not  effectively  support  the 
achievement  of  the  EU  circular  economy 
objectives, in particular the waste management 
targets.  The  government  plans  to  develop  new 
incineration  capacities  for  the  energy  recovery  of 
municipal  waste.  As  new  binding  EU  recycling 
targets will soon be introduced for 2025 and 2030, 
such  infrastructural  investments  may  entail  some 
long  term  risk  (e.g.  structural  overcapacities  or 
stranded  assests).  No  incineration  tax  exists  and 
the  landfill  tax  has  not  increased  since  2013.  The 
municipal  waste  recycling  and  composting  rates 
remained  significantly  below  the  EU  average  in 
2016  (34.7  %  vs.  45.6  %).  Hungary  considerably 
lags  behind  regarding  the  recycling  and  recovery 
targets  for  packaging.  To  remedy  this,  glass 
recycling  was  made  mandatory  in  retail  premises 

(14)  Biomass  includes  wood  firing  in  households.  The  wood 
consumption 
implemented, 
resulting  in  increasing  share  of  renewable  sources  in  the 
final energy consumption. 

statistics  were 

recently 

"Junior  Lawyer".  Hungary  submitted  a  National 
Action Plan in the context of the mutual evaluation 
of 
regulated  professions,  but  has  not  yet 
implemented the actions in the plan. 

to  comply  with 

Hungary  maintains  a  restrictive  approach 
towards  the  collaborative  economy.  Regarding 
the  transport  sector,  Hungary  inter  alia  requires 
online platforms for passenger transport services to 
obtain  a  prior  authorisation  in  the  form  of  an 
operating  permit, 
specific 
professional  qualifications  requirements  and  to 
obtain  a  financial  security.  These  requirements 
could have a stifling effect on such services despite 
strong consumer interest. Citizens in Hungary are, 
on the other hand, allowed to share their properties 
with guests under certain conditions and subject to 
obtaining  prior  authorisations.  The  procedure  for 
these  authorisations  however  is  complex  and 
creates  unnecessary  obstacles  to  the  development 
of this part of the collaborative economy. 

Energy and Climate 

Although  wholesale  electricity  prices  have 
decreased 
in  the  past  years,  they  remain 
comparatively high. Hungary produces electricity 
at  higher  costs  compared  to  its  neighbours.  This 
creates  a  structural  exposure  to  imports,  which 
could be alleviated if access to more competitively 
priced  electricity  from  Western  Europe  was 
improved.  However,  the  absence  of  a  common 
solution  for  the  definition  of  appropriate  bidding 
zones  in  Central  and  Eastern  Europe  remains  a 
limitation  on  cross-border  electricity 
trade. 
Hungary  has  significant  gas 
interconnection 
capacities  to  its  neighbours  and  storage  facilities, 
which enhance the regional security of gas supply. 

Retail  energy  prices 
for  households  are 
comparatively  low  reflecting  a  restrictive  price 
regulation.  Regulated  retail  electricity  and  gas 
prices not reflecting the full costs of energy supply 
(including  network  costs  and  taxes)  have  resulted 
in  losses  to  the  service  providers  over  several 
years. This prompted them to return their universal 
supply  licences.  The  reduced  profitability  in  the 
sector  made  a  negative  impact  on  investments  in 
energy 
transmission  and  distribution,  which 
decreased by around 30% between 2008 and 2016. 
The state-owned National Public Utility Company 
(NKM  Zrt.)  has  taken  over  the  universal  service 

37 

 
                                                           
above  a  certain  floor  size  as  of  January  2018.  Measures 

are 

also 

under  way 
improve 
construction waste and biodegradable waste.  

the  management  of 

to 

(2017)  estimated 

Air  pollution  continues  to  be  a  challenge  in 
the  European 
Hungary.  A  recent  report  by 
Environment  Agency 
that 
premature  deaths  attributable  to  fine  particulate 
matter  exceeded  the  average  mortality  rate  in  the 
EU  in  2014.  Over  the  past  decade,  the  particulate 
matter  emission  level  increased  by  40%,  mainly 
from  residential  solid  fuel  combustion.  In  urban 
areas  air  pollution  linked  road  transport  is  a 
significant public health hazard, and congestion is 

projected  to  increase.  Policies  to  contain  this  risk 
(such as the introduction of low emission zones or 
road access charges in capital city) are missing or 
not  followed  up.  Without  further  policy  actions, 
commitments  made  in  the  National  Emission 
Ceilings Directive will not be achieved. (15) 

(15)  The  replacement  of  the  old  fleet  with  new  passenger  cars 
can  help  decreasing  the  level  of  emissions.  In  2016,  new 
car registrations increased by over 25%. At the same time, 
the motorisation rate is steadily rising, by 2-3% per year. 

38 

 
 
                                                           
 
3.5. Sectoral policies 

Box 3.5.7: Policy Highlights 

Health system performance assessment as a new policy tool 

Building  on  similar  practices  in  other  countries  and  policy  principles  promoted  by  the  World  Health 
Organisation (WHO), Hungary launched its health system performance assessment (HSPA) programme in 
2013. This was led by the objective to provide a comprehensive, systematic and quantitative evaluation on 
key  aspects  of  public  health  and  healthcare  provision.  The  decree  of  the  Ministry  of  Human  Capacities, 
which set forth the process, defined HSPA as a bi-annual exercise. The National Health Service Center was 
put  in  charge  of  coordinating  the  project,  but  the  assessment  itself  has  been  based  on  a  wide  ranging 
collaboration  in  order  to  ensure  an  unbiased,  critical  approach.  The  representatives  of  the  WHO  are  also 
invited  participants  in  the  HSPA  Working  Group,  which  oversees  professional  content  and  acts  as  a 
consultative forum.  

The first comprehensive report became publicly available in mid-2017 (Gyenes et al., 2016). It contains 76 
system-level indicators accompanied by detailed analyses examining 6 broad dimensions of health system 
performance.  These  include:  (i)  health  determinants  and  public  health  risks;  (ii)  health  outcomes;  (iii)  the 
structure  of  healthcare  provision  and  access  to  care;  (iv)  adequacy  of  financial  protection;  (v)  quality  and 
safety  of  healthcare  and  (vi)  efficiency  of  resource  utilisation  and  financial  resilience.  In  addition,  an  in-
depth review is provided on two focus areas selecting myocardial infarction and tuberculosis care in the first 
assessment round. Equity considerations feature strongly with evidence on socio-economic and geographic 
disparities being highlighted along each policy dimension. Overall, the report presents the available diverse 
health-related data within a uniform framework and in a policy-relevant manner. 

This new policy instrument offers several benefits. The HSPA holds up a critical mirror for the Hungarian 
authorities pinpointing both positive and negative trends as measured by the indicator system. While giving 
a  snapshot  of  the  performance  of  the  health  system,  it  helps  to  identify  key  priority  areas  for  which 
improvement is needed in the future. It is also a valuable source of information for health professionals and 
the general public enhancing the accountability of policy making in the sector.  

39 

 
ANNEX A 

Overview Table 

Commitments  

Summary assessment (16)  

2017 country-specific recommendations (CSRs)  

CSR  1:  Pursue  a  substantial  fiscal  effort 
in  2018  in  line  with  the  requirements  of 
the  preventive  arm  of  the  Stability  and 
Growth Pact, taking into account the need 
to strengthen the ongoing recovery and to 
ensure  the  sustainability  of  Hungary’s 
public finances.  

The  compliance  assessment  with  the  Stability  and  Growth 
Pact will be included in Spring when final data for 2017 will 
be available.  

Hungary has made Limited Progress in addressing CSR 2  

for 

CSR 2: Complete the reduction of the tax 
wedge 
low-income  earners  and 
simplify the tax structure, in particular by 
the  most  distortive  sector-
reducing 
specific  taxes.  Strengthen  transparency 
and  competition  in  public  procurement, 
by  implementing  a  comprehensive  and 
efficient  e-procurement 
and 
strengthen the anti-corruption framework. 
Strengthen 
predictability, 
transparency and competition in particular 
in the services sector, notably in retail.  

regulatory 

system, 

Complete  the  reduction  of  the  tax  wedge 
for low-income earners and  

Some Progress Employer's social security contribution rate was 
lowered  by  7.5 %  pps.  in  2017-2018.  However,  the  tax  wedge 

(16)  The following categories are used to assess progress in implementing the 2017 country-specific recommendations (CSRs): 

No progress: The Member State has not credibly announced nor adopted any measures to address the CSR. This category covers a 
number  of  typical  situations,  to  be  interpreted  on  a  case-by-case  basis  taking  into  account  country-specific  conditions.  They 
include the following: 

no legal, administrative, or budgetary measures have been announced  
in the national reform programme, 
in any other official communication to the national Parliament/relevant parliamentary committees or the European Commission,  
publicly (e.g. in a press statement or on the government's website);  
no non-legislative acts have been presented by the governing or legislative 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 to be taken (unless the CSR explicitly asks for orientations or exploratory actions). However, it has 
not proposed any clearly-specified measure(s) to address the CSR. 

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

legislative work is needed before the CSR is implemented;  

presented non-legislative acts, but has not followed these up with the implementation needed to address the CSR. 

Some progress: The Member State has adopted measures  
that partly address the CSR; and/or  
that address the CSR, but a fair amount of work is still needed to address the CSR fully as only a few of the measures have been 
implemented. For instance, a measure or measures have been adopted by the national Parliament or by ministerial decision, but 
no implementing decisions are in place. 

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

have been implemented. 

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

40 

 
 
 
                                                           
 
 
 
 
 
A. Overview Table 

for low income earners remains the highest in the EU.  

simplify the tax structure, in particular by 
the  most  distortive  sector-
reducing 
specific taxes.  

Limited  Progress  The  upper  rate  of  the  bank  levy  was 
decreased in 2017 from 0.24 % to 0.21 %. At the same time, the 
advertisement tax paid by companies publishing or broadcasting 
ads  was  increased.  However,  considerable  efforts  are  made  to 
reduce  high  compliance  costs.  Personal  income  tax  return  is 
prepared by the tax authority every year from 2017. Simplified 
corporate  taxation  regimes  for  small  businesses  have  been 
modified  increasing  the  number  of  eligible  taxpayers.  From 
2018, draft tax returns for excise duties will be prepared by the 
tax  authority  and  taxpayers  classified  as  'reliable'  will  benefit 
from  a  shorter  (30  days)  refund  period  for  VAT.  In  2017,  the 
government  launched  a  modernisation  programme  of  the  tax 
authority  to  adopt  a  more  client-centred  approach  in  tax 
collection 
and 
professional upgrading.  

through  digitization,  process 

redesign 

Strengthen  transparency  and  competition 
in public procurement, by implementing a 
e-
and 
comprehensive 
procurement system, and  

efficient 

Some Progress Hungary implemented a number of measures to 
strengthen transparency and competition in public procurement, 
especially the amendment to the Public Procurement Act. Some 
improvements  are  already  visible  but  there  is  still  room  for 
enhancement.  The  new  e-procurement  system  has  been  put  in 
operation as of January 2018, which is a big step towards further 
increasing  transparency  and  competition.  Its  efficiency  and 
impact is still to be seen in the coming years.  

strengthen the anti-corruption framework.  Limited  Progress  The  government's  strategic  approach  to 
fighting  corruption  continues  to  narrowly  focus  on  integrity 
within  state  administration  and  there  is  no  evidence  as  to  the 
effectiveness  of  the  measures  in  preventing  corruption.  No 
progress  has  been  made  as  regards  the  transparency  of  asset 
declarations, whistleblower protection and informal payments in 
public  healthcare.  No  measures  have  been  taken  to  reduce 
favouritism  among  government  officials  and  there  are  no 
indications  as  to  stepping  up  efforts  to  investigate  corruption 
allegations  involving  high  level  officials.  The  ESI  Funds  are 
financing  a  number  of  anti-corruption  measures,  however 
actions  tackling  high  level,  institutionalised  corruption  and 
increasing state transparency are lacking, such as the review the 
data  subject  to  statutory  disclosure  or  developing  publicly 
available  and  easily  searchable  public  procurement  database 
with  unique  identifier  linked  to  economic  operators.  On  a 
positive note, the statute of limitation of prosecuting corruption 
was extended in 2017.  

regulatory 

Strengthen 
predictability, 
transparency and competition in particular 
in the services sector, notably in retail.  

Limited  Progress  The  revision  of  the  professional  rules  for 
lawyers removed some restrictions. However, Hungary made no 
progress in the general area of business services regulation nor 
in retail. The level of restrictiveness remains high and also legal 
uncertainty  as  regards  additional  restrictions,  notably  in  retail, 

41 

 
A. Overview Table 

remains an issue.  

Hungary has made Limited Progress in addressing CSR 3  

CSR  3:  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 
labour  market 
reinforcing  active 
by 
policies.  Take  measures 
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.  

to 

Better  target  the  public  works  scheme  to 
those  furthest  away  from 
labour 
market  and  provide  effective  support  to 
jobseekers in order to facilitate transitions 
including  by 
to 
reinforcing active labour market policies.  

labour  market, 

the 

the 

Some Progress As result of legislative changes, participation in 
the public works scheme is set to decrease under 150 000 by the 
year  2020,  along  with  the  decrease  of  the  budget  allocated  for 
the  scheme.  In  parallel  with  this  decrease,  the  national 
expenditure for active labour market policies is being gradually 
increased  and  new  national  programmes  have  been  initiated. 
Since  2016  several  ESF  co-financed  programmes  have  been 
running and facilitating the transition from PWS to the primary 
labour  market.  'Training  of  Low-skilled  and  Public  Workers' 
programme  targets  public  workers  and  by  October  2017  it  has 
had  over  50 000  participants.  Other  ESF  (and  YEI)  supported 
ALMP programmes initiated in 2015/2016 are being continued. 
The  two  major  programmes  are  the  'Path  to  the  labour  market' 
and the Youth Guarantee with, respectively, 88 000 and 74 000 
participants.  Other  ESF 
funded  programmes  supporting 
traineeships and entrepreneurship have also been launched.  

to 

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

Limited  Progress  Amendments  to  the  Equal  Treatment  and 
Public  Education  Acts  to  prevent  future  segregation  have  been 
adopted  but  they  can  only  have  an  impact  as  of  the  2018-19 
school  year.  ESIF-funded  measures  have  been  launched  to 
support  schools  in  fighting  school  failure  and  early  school-
leaving.  As  of  January  2018  teachers  are  entitled  to  a  salary 
supplement  if  working  under  difficult  conditions.  However, 
explicit 
desegregation  measures  which  would 
systematically  address  the  existing  segregation  in  mainstream 
education are lacking. In addition, some new measures such as 
the  highly  competitive  entry  exam  to  upper-secondary  schools 
and  the  reduction  of  science  and  general  education  content 
taught at vocational grammar schools and vocational secondary 
schools  have  further  strengthened  differences  between  schools 
and thereby the selectiveness of the school system.  

active 

Improve  the  adequacy  and  coverage  of 
social  assistance  and  the  duration  of 

Limited  Progress  The  duration  of  unemployment  benefits  is 
still  the  lowest  in  the  EU  at  maximum  3  months  and  the  main 
income  support  scheme  remained  unchanged.  However  few 

42 

 
A. Overview Table 

unemployment benefits.  

minor in kind benefits have been expanded and are expected to 
have some positive impact on child poverty alleviation.  

Europe 2020 (national targets and progress)  

Employment rate target: 75 %. 

The employment rate continued to improve and reached 71.5 % 
in 2016. 

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

While  R&D  intensity  has  increased  in  recent  years,  the 
efficiency of the public R&I funding remained a challenge. With 
R&D  intensity  standing  at  1.21 %  of  GDP,  Hungary  needs  to 
make more efforts to meet the national target of 1.8 % of GDP. 

Greenhouse  gas 
target:  +10 % 
compared to 2005 

in 

emissions,  national 
  non-ETS  sectors 

Non-ETS  emissions  were  reduced  by  12 %  between  2005  and 
2016,  well  above  of  the  interim  target  of  +12 %.  According  to 
the latest projections, the 2020 target is expected to be met by a 
wide margin. 

2020 Renewable energy target: 13 % 

With a renewable energy share of 14.2 % in 2016, Hungary is on 
track  to  meet  its  target  for  2020  (13 %).  With  a  7.4%  share  of 
RES in transport in 2016, Hungary needs to make further efforts 
to reach the 10% target by 2020. In the case of electricity, share 
of renewables practically did not show an increase over the last 
seven-eight years. 

2020  Energy efficiency  target: 24.1 Mtoe 
in  primary  energy  consumption  and 
14.4 Mtoe  expressed 
in  final  energy 
consumption  

While  primary  energy  consumption  in  2016  (23.9 Mtoe)  was 
slightly below the indicative 2020 national target, further efforts 
are needed in order to attain the final energy consumption until 
2020, which reached 17.9 Mtoe in 2016. 

Reducing the rates of early school leaving 
below 10 %. 

In 2016, the early school leaving rate increased to 12.4 %, above 
the EU average of 10.7 %. 

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

The  tertiary  educational  attainment  rate  for  30-to  34-year-olds 
stood  at  33 %  in  2016,  significantly  below  the  EU  average  of 
39.1 %. 

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

In  2016,  the  population  at  risk  of  poverty  and  social  exclusion 
was 253 000 lower than in 2008. 

43 

 
 
 
 
 
 
ANNEX B 

Macroeconomic Imbalance Procedure Scoreboard 

Table B.1: 

The MIP Scoreboard for Hungary (AMR 2018) 

(1) )  This table provides data as published under the Alert Mechanism Report 2018, which reports data as of 24 Oct 2017. 
Please note that figures reported in this table may therefore differ from more recent data elsewhere in this document. . 2) 
Unemployment rate: i = Eurostat back-calculation to include 2011 Population Census results. 3) Youth unemployment rate: i = 
Eurostat back-calculation to include 2011 Population Census results. 
Source: European Commission 2017, Statistical Annex to the Alert Mechanism Report 2018, SWD(2017) 661. 

44 

Thresholds201120122013201420152016Current account balance, % of GDP 3 year average-4%/6%0.1 0.9 2.1 2.3 2.9 3.6 Net international investment position% of GDP-35%-105.7 -93.6 -83.1 -80.3 -67.8 -65.0 Real effective exchange rate - 42 trading partners, HICP deflator3 year % change±5% (EA) ±11% (Non-EA)-4.2 -0.8 -3.8 -6.8 -7.1 -5.0 Export market share - % of world exports5 year % change-6%-2.2 -21.0 -22.5 -16.3 -7.8 -0.4 Nominal unit labour cost index (2010=100)3 year % change9% (EA) 12% (Non-EA)4.3 5.0 6.2 5.9 -0.2 3.3 House price index (2015=100), deflated 1 year % change6%-6.9 -9.2 -4.3 3.3 13.3 13.6 Private sector credit flow, consolidated% of GDP14%-4.4 -6.1 -0.9 -0.1 -2.6 -3.6 Private sector debt, consolidated% of GDP133%114.4 101.6 95.1 91.2 84.3 77.0 General government gross debt% of GDP60%79.9 77.6 76.0 75.2 74.7 73.9 Unemployment rate3 year average10%10.7 11.1 10.7 9.6 8.2 6.5 Total financial sector liabilities, non-consolidated1 year % change16.5%6.3 -5.8 -1.2 8.6 0.6 19.5 Activity rate - % of total population aged 15-643 year change in pp-0.2 pp1.2 2.5 2.8 4.6 4.9 5.4 Long-term unemployment rate - % of active population aged 15-743 year change in pp0.5 pp1.6 0.8 -0.6 -1.5 -1.9 -2.5 Youth unemployment rate - % of active population aged 15-243 year change in pp2 pp6.5 1.8 0.2 -5.6 -10.9 -13.7 External imbalances and competitivenessInternal imbalancesEmployment indicators 
 
 
 
 
 
ANNEX C 

Standard Tables 

Table C.1: 

Financial Market Indicators 

1) Latest data Q3 2017. Includes not only banks but all monetary financial institutions excluding central banks 
2) Latest data Q2 2017. 
3) As per ECB definition of gross non-performing debt instruments 
4) Quarterly values are not annualised 
5) Latest data April 2017. 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

45 

201220132014201520162017Total assets of the banking sector (% of GDP)(1)118,5113,9107,5101,5103,198,6Share of assets of the five largest banks (% of total assets)54,051,952,553,353,4-Foreign ownership of banking system (% of total assets)(2)58,155,547,647,047,747,7Financial soundness indicators:2)              - non-performing loans (% of total loans)(3)14,114,014,211,08,16,9              - capital adequacy ratio (%)16,317,417,016,918,017,2              - return on equity (%)(4)-5,1-0,4-21,90,311,78,2Bank loans to the private sector (year-on-year % change)(1)-5,5-4,1-3,5-8,13,37,2Lending for house purchase (year-on-year % change)(1)-9,4-5,4-6,1-10,3-0,83,1Loan to deposit ratio(1)110,6102,194,880,973,373,5Central Bank liquidity as % of liabilities(5)0,73,13,84,95,14,9Private debt (% of GDP)101,695,191,284,377,0-Gross external debt (% of GDP)(2) - public51,747,246,641,737,132,6    - private79,175,379,472,568,661,2Long-term interest rate spread versus Bund (basis points)*639,6435,3364,6293,7305,3272,5Credit default swap spreads for sovereign securities (5-year)*418,0269,8179,2139,1131,398,6 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

† The Social Scoreboard includes 14 headline indicators, of which 12 are currently used to compare Member States 
performance. The indicators "participants in active labour market policies per 100 persons wanting to work" and 
"compensation of employees per hour worked (in EUR)" are not used due to technical concerns by Member States. Possible 
alternatives will be discussed in the relevant Committees. 
(1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).       
(2) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within two weeks.       
(3) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2018.       
(4) Reduction in percentage of the risk of poverty rate, due to social transfers (calculated comparing at-risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation).       
(5) Average of first three quarters of 2017, except for the indicator "individual who have basic or above basic digital skills" 
(annual data). Data for unemployment rate is seasonally adjusted. 
Source: Eurostat 

46 

201220132014201520162017 5Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)11.811.911.411.612.4:Gender employment gap (pps)11.112.413.313.714.015.2Income inequality, measured as quintile share ratio (S80/S20)4.04.34.34.34.3:At-risk-of-poverty or social exclusion rate1 (AROPE)33.534.831.828.226.3:Young people neither in employment nor in education and training (% of population aged 15-24)14.815.513.611.611.0:Dynamic labour markets and fair working conditions†Employment rate (20-64 years)61.663.066.768.971.573.0Unemployment rate2 (15-74 years)11.010.27.76.85.14.3Gross disposable income of households in real terms per capita3 (Index 2008=100) ::101.0103.3::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction447.644.443.642.043.8:Children aged less than 3 years in formal childcare8.010.014.415.415.6:Self-reported unmet need for medical care2.92.62.52.61.3:Individuals who have basic or above basic overall digital skills (% of population aged 16-74):::50.051.050.0 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market and education indicators 

* Non-scoreboard indicator       
(1) Long-term unemployed are people who have been unemployed for at least 12 months.       
(2) Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included.       
(3) PISA (OECD) results for low achievement in mathematics for 15 year-olds.       
(4) Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science.      
(5) Average of first three quarters of 2017. Data for youth unemployment rate is seasonally adjusted.  
Source: Eurostat, OECD 

47 

Labour market indicators201220132014201520162017 5Activity rate (15-64)63.764.767.068.670.1:Employment in current job by durationFrom 0 to 11 months13.714.514.413.814.0:From 12 to 23 months9.09.19.09.29.5:From 24 to 59 months18.418.419.718.619.1:60 months or over58.957.956.658.257.4:Employment growth* (% change from previous year)0.21.14.82.42.61.9Employment rate of women(% of female population aged 20-64)56.256.960.262.164.665.6Employment rate of men (% of male population aged 20-64)67.369.373.575.878.680.7Employment rate of older workers* (% of population aged 55-64)36.137.941.745.349.851.2Part-time employment* (% of total employment, aged 15-64)6.76.46.05.74.84.3Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)9.510.910.811.49.79.0Transition rate from temporary to permanent employment(3-year average)37.837.038.038.537.2:Long-term unemployment rate1 (% of labour force)5.04.93.73.12.41.7Youth unemployment rate (% active population aged 15-24)28.226.620.417.312.910.8Gender gap in part-time employment5.14.84.23.73.73.4Gender pay gap2 (in undadjusted form)20.118.415.114.0::Education and training indicators201220132014201520162017Adult participation in learning(% of people aged 25-64 participating in education and  training)2.93.23.37.16.3:Underachievement in education328.1::28.0::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)29.832.334.134.333.0:Variation in performance explained by students' socio-economic status423.1::21.4:: 
 
 
 
 
C. Standard Tables 

Table C.4: 

Social inclusion and health indicators 

*  Non-scoreboard indicator 
(1) At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income.  
(2) 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. 
(3) Percentage of total population living in overcrowded dwellings and exhibiting housing deprivation. 
(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) Ratio of the median individual gross pensions of people aged 65-74 relative to the median individual gross earnings of 
people aged 50-59. 
(6) Fixed broadband take up (33%), mobile broadband take up (22%), speed (33%) and affordability (11%), from the Digital 
Scoreboard. 
Source: Eurostat, OECD 

48 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare5.04.94.85.6::Disability1.61.51.41.4::Old age and survivors10.910.810.29.7::Family/children2.62.52.32.4::Unemployment0.60.50.40.3::Housing0.30.30.30.3::Social exclusion n.e.c.0.10.10.10.1::Total21.120.519.619.7::of which: means-tested benefits0.90.90.70.8::General government expenditure by function (% of GDP, COFOG)Social protection16.716.415.314.814.3:Health5.15.04.85.24.8:Education4.74.65.15.14.9:Out-of-pocket expenditure on healthcare (% of total health expenditure)29.428.428.329.0::Children at risk of poverty or social exclusion (% of people aged 0-17)*41.943.941.836.133.6:At-risk-of-poverty  rate1 (% of total population)14.315.015.014.914.5:In-work at-risk-of-poverty rate (% of persons employed)5.77.06.79.39.6:Severe material deprivation rate2  (% of total population)26.327.824.019.416.2:Severe housing deprivation rate3, by tenure statusOwner, with mortgage or loan15.214.813.911.917.2:Tenant, rent at market price26.630.924.232.223.7:Proportion of people living in low work intensity households4 (% of people aged 0-59)13.513.612.89.48.2:Poverty thresholds, expressed in national currency at constant prices*607544564058577231605976636370:Healthy life years (at the age of 65)Females6.46.16.15.9::Males6.46.26.05.9::Aggregate replacement ratio for pensions5 (at the age of 65)0.60.60.60.60.7:Connectivity dimension of the Digital Economy and Society Inedex (DESI)6::43.753.559.663.6GINI coefficient before taxes and transfers*51.050.952.549.949.8:GINI coefficient after taxes and transfers*26.928.028.628.228.2: 
 
 
 
 
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

(1) The methodologies, including the assumptions, for this indicator are shown in detail here: 
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 codified 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 don't know. 
(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 here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm 
(6) Aggregate OECD indicators of regulation in energy, transport and communications (ETCR). 
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). 

49 

Performance Indicators2010201120122013201420152016Labour productivity (real, per person employed, year-on-year % change)Labour productivity in Industry19,070,82-0,222,462,519,01-0,51Labour productivity in Construction9,074,70-4,126,906,371,32-12,97Labour productivity in Market Services14,01-0,300,941,48-3,740,50-0,63Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in Industry-4,877,064,774,011,11-5,605,82ULC in Construction3,871,825,32-3,48-7,71-14,2714,46ULC in Market Services1,772,292,000,380,56-2,912,07Business Environment2010201120122013201420152016Time needed to enforce contracts(1) (days)395.0395.0395.0395.0395.0395.0395.0Time needed to start a business(1) (days)5,05,07,07,07,07,07,0Outcome of applications by SMEs for bank loans(2)na1,04na0,671,010,390,38Research and innovation2010201120122013201420152016R&D intensity1,141,191,261,391,351,361,21General government expenditure on education as % of GDP5,505,104,704,605,105,20naPersons with tertiary education and/or employed in science and technology as % of total employment33353637363636Population having completed tertiary education(3)17181920202121Young people with upper secondary level education(4)84838384858484Trade balance of high technology products as % of GDP2,212,970,940,460,28-0,47naProduct and service markets and competition200320082013OECD product market regulation (PMR)(5), overall2,111,541,33OECD (PMR)(5), retail0,791,442,06OECD (PMR)(5), professional services2,863,023,05OECD (PMR)(5), network industries(6)3,311,871,73 
 
 
 
 
C. Standard Tables 

Table C.6:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 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 % of total value added for the economy 
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 EUR)  
Real unit energy costs for manufacturing industry excluding refining : real costs as % 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 GHG 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 2010 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 covering natural gas, total petrol products, nuclear heat, renewable 
energies and solid fuels 
* European Commission and European Environment Agency 
Source: European Commission and European Environment Agency (Share of GHG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes and GDP); Eurostat (all other indicators) 

50 

Green growth performance201120122013201420152016MacroeconomicEnergy intensity kgoe / €0.260.250.240.230.230.23Carbon intensity kg / €0.640.610.570.550.56-Resource intensity (reciprocal of resource productivity)kg / €0.990.870.981.211.010.96Waste intensity kg / €-0.17-0.16--Energy balance of trade % GDP-6.0-6.3-6.3-6.1-4.2-3.2Weighting of energy in HICP%15.4716.7817.0416.9915.9715.40Difference between energy price change and inflation %1.90.3-11.7-10.9-2.7-0.5Real unit of energy cost% of value added19.118.817.717.7--Ratio of environmental taxes to labour taxesratio0.150.150.150.150.15-Environmental taxes% GDP2.62.62.72.62.72.8Sectoral Industry energy intensity kgoe / € 0.150.160.190.180.180.18Real unit energy cost for manufacturing industry excl. refining% of value added23.123.221.621.2--Share of energy-intensive industries in the economy% GDP10.2210.159.229.159.309.50Electricity prices for medium-sized industrial users€ / kWh0.100.100.100.090.090.08Gas prices for medium-sized industrial users€ / kWh0.040.050.040.040.040.03Public R&D for energy % GDP0.000.010.040.000.010.01Public R&D for environmental protection% GDP0.010.010.020.010.010.01Municipal waste recycling rate%22.025.526.430.532.234.7Share of GHG emissions covered by ETS*%35.235.433.232.932.431.5Transport energy intensitykgoe / €0.820.770.710.770.820.81Transport carbon intensitykg / €2.252.161.972.142.31-Security of energy supplyEnergy import dependency%49.849.749.659.353.355.6Aggregated supplier concentration indexHHI54.259.263.875.551.1-Diversification of energy mixHHI0.240.230.220.210.210.22 
 
 
 
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