COMMISSION STAFF WORKING DOCUMENT Accompanying the document Recommendation for a COUNCIL RECOMMENDATION with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Hungary
Date: 2018-05-23
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Hungary, budget deficit, budgetary assessment, budgetary control, economic growth, gross domestic product, medium-term forecast, public expenditure, stability pact, structural adjustment

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 23.5.2018  SWD(2018) 368 final  COMMISSION STAFF WORKING DOCUMENT Accompanying the document Recommendation for a  COUNCIL RECOMMENDATION with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective   in Hungary {COM(2018) 431 final}  
 
 
COMMISSION STAFF WORKING DOCUMENT 

Accompanying the document 

Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to correcting the significant observed deviation from the adjustment path 
toward the medium-term budgetary objective 

in Hungary 

1. 

INTRODUCTION 

On 21 June 2013, the Council abrogated its decision on the existence of an excessive deficit in 
Hungary, on account of its correction in 2012, which, based on the Commission 2013 spring 
forecast, appeared durable.  

Since then Hungary has been subject to the preventive arm of the Stability and Growth Pact, 
which  requires  sufficient  progress  towards  the  member  state's  medium-term  budgetary 
objective  (MTO).  Hungary  is  also  subject  to  the  debt  rule  as  its  general  government  debt 
remains  above  60%  of  GDP.  On  12  July  2016,  the  Council  addressed  recommendations  to 
Hungary in the context of the European Semester. In particular, in the area of public finances 
the Council recommended Hungary to  achieve a fiscal adjustment of 0.6%  of GDP in  2017 
unless the medium-term objective (MTO) was respected with a lower effort.1  

Based  on  the  Commission  2018  spring  forecast,  Section  2  of  this  document  presents  the 
macroeconomic  and  fiscal  developments  in  2017  and  an  outlook.  Section  3  presents  an 
assessment of compliance with the obligations stemming from the Stability and Growth Pact, 
including an overall assessment of the reasons for the deviation with respect to the preventive 
arm  requirements.  Section  4  proposes  the  necessary  fiscal  effort  for  2018  to  address  the 
significant deviation, including an applicable expenditure benchmark rate compatible with the 
suggested  annual  improvement  in  the  structural  balance.  Section  5  provides  the  overall 
conclusions. 

2. 

MACROECONOMIC AND FISCAL DEVELOPMENTS IN 2017 AND OUTLOOK 

In  2017,  real  GDP  growth  accelerated  to  4.0%,  from  2.2%  in  2016,  supported  also  by 
expansionary  fiscal  policy.  The  rebound  in  GDP  growth  was  helped  by  tax  reductions  and 
increase  in  public  investment.  In  addition,  private  consumption  benefitted  from  a  strong 
labour market and large administrative wage increases. Export growth accelerated, supported 
by  the  revival  of  the  main  export  markets.  A  strong  growth  of  domestic  demand  raised 
imports by an even larger amount, resulting in a negative contribution of net exports to GDP 
growth.  The  considerable  reduction  of  employers'  social  security  contribution  mitigated  the 
pass-through  of  wage  increases  to  inflation;  nonetheless  consumer  prices  accelerated  from 
0.4% in 2016 to 2.4% in 2017.  

The  Commission  2018  spring  forecast  projects  GDP  growth  to  remain  at  4%,  before 
moderating  to  3.2%  in  2019.  Cyclical  factors,  which  are  currently  supporting  growth,  are 
expected to gradually wear off. Investment is expected to stabilize at a high level; with further 
investment limited by capacity shortages in construction. As readily available labour reserves 

1 OJ C 299, 18.8.2016, p. 52. 

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are exhausted and unemployment falls to record low levels, job creation is projected to slow 
down.  In  addition,  tailwinds  from  administrative  wage  increases  are  projected  to  gradually 
wear off, dampening real wage dynamics in 2019. The moderation of income growth is set to 
slow down private consumption growth in 2019. 

Based  on  the  estimates  of  the  2018  Commission  spring  forecast,  Hungary's  positive  output 
gap  is  calculated  to  have  widened  in  2017,  to  1.6%  of  GDP  from  0.3%  in  2016.  Projected 
GDP growth remains above the potential in 2018 before falling below potential in 2019. With 
an output gap exceeding 1.5% of GDP, the economy is assessed to be in 'good times' in 2017-
2019.  

Table 1: Macroeconomic developments and forecast 2017-2018  

2 

2016OutturnCP 2017OutturnCP 2017CP 2018COMReal GDP (% change)2.24.04.04.04.34.0Private consumption (% change)4.34.74.74.75.24.9Gross fixed capital formation (% change)-10.616.816.816.812.812.5Exports of goods and services (% change)3.47.17.17.17.27.0Imports of goods and services (% change)2.99.79.79.79.29.5Contributions to real GDP growth:- Final domestic demand0.05.75.75.75.55.2- Change in inventories1.5-0.3-0.3-0.30.00.4- Net exports0.7-1.4-1.4-1.4-1.1-1.5Output gap10.31.41.61.41.72.4Employment (% change)2.61.62.01.61.50.9Unemployment rate (%)5.14.24.24.23.43.7Labour productivity (% change)-0.42.32.02.32.83.1HICP inflation (%)0.42.42.42.42.52.3GDP deflator (% change)1.03.73.73.72.72.8Comp. of employees (per head, % change)4.09.27.99.29.17.4Net lending/borrowing vis-à-vis the rest of the world (% of GDP)6.04.14.24.15.94.1Source:Commission 2018 spring forecast (COM); Convergence Programme (CP).201720181In % of potential GDP, with potential GDP growth recalculated by Commission services on the basis of the programme scenario using the commonly agreed methodology.Note: 
 
 
 
 
In 2017, the general government deficit rose to 2.0% of GDP, from 1.7% of GDP in 2016. In 
structural  terms,  this  corresponds  to  a  significant  loosening  of  the  fiscal  stance  with  the 
structural balance estimated to have deteriorated from around -1.8% of GDP in 2016 to below 
-3% in 2017 (see Table 2). While the economy grew above its potential and at a high nominal 
rate, public finances were also helped by one-off receipts from agricultural land sales (0.4% 
of GDP, recorded as negative expenditure). In addition, government revenues benefited from 
a  temporary  extra  corporate  income  tax  payment  (amounting  to  0.6%  and  0.7%  of  GDP  in 
2016 and 2017, respectively). 

Despite the robust growth of major tax bases, the tax-to-GDP ratio dropped by 0.9% of GDP 
in  2017.  This  resulted  from  sizeable  tax  cuts,  most  notably  (i)  a  5  pps.  reduction  of  the 
employers' social security contribution rate, (ii) a lowering of the corporate income tax, and 
(iii) decreasing VAT rates for selected items (see Table 3). The negative effect of tax cuts on 
revenues  was  partly  compensated  by  extra  income-related  tax  receipts  as  a  result  of 
accelerating wage increases induced also by a minimum wage hike and a reduction in social 
contributions.  In  parallel,  government  spending  rose  strongly.    Aside  from  the  increased 
spending on programmes fully matched by EU funds revenue, primary expenditure grew just 
slightly  below  nominal  GDP  (at  7.6%  compared  with  7.8%).  The  observed  high  growth  in 
expenditure  reflected  measures,  such  as  public  sector  pay  raises,  as  well  as  the  steeply 
increased spending on public investment projects. At the same time, interest outlays declined, 
even in nominal terms, providing a considerable deficit-moderating effect (0.4% of GDP).  

The 2017 budget deficit remained below the 2017 Convergence Programme target of 2.4% of 
GDP.  Whereas  EU  fund  absorption  fell  short  of  planned,  revenues  from  taxes  and  other 
sources exceeded the targets. On the expenditure side, spending on goods and services turned 
out  to  be  significantly  lower  than  expected.  These  deficit-improving  developments  were 
partially absorbed by higher-than-planned capital expenditure financed from domestic sources 
and extra spending on public wages and social transfers. 

Looking ahead, the Commission 2018 spring forecast projects the headline deficit to peak at 
2.4%  of  GDP  in  2018.  Further  tax  cuts,  particularly  an  additional  2.5  pps.  lowering  of 
employers'  social  security  contribution  rate  and  continued  selective  VAT  reductions,  are 
expected to have a negative impact on the tax-to-GDP ratio. In addition, a significant deficit-
increasing  effect  is  projected  to  arise  from  the  phasing-out  of  temporary  revenues  (i.e.  land 
sales and the  corporate tax windfall),  which benefited the budget  during 2016 and 2017. At 
the  same  time,  overall  primary  expenditure  (without  EU  funds)  is  projected  to  increase 
moderately relative to the forecast high nominal GDP growth, albeit still well above inflation. 
Thus  the  forecast  slowdown  in  spending  growth  partly  offsets  the  impact  of  the  above-
mentioned  deficit-increasing  developments  in  2018.  Based  on  a  no-policy-change  scenario, 
the government deficit is projected to decrease to 2.1% of GDP in 2019. 

In  the  2018  Convergence  programme,  the  Hungarian  authorities  plan  a  headline  deficit  of 
2.4% of GDP in 2018, in line with the Commission forecast, and a deficit of 1.8% of GDP in 
2019,  somewhat  below  the  no-policy-change  projection  of  the  Commission.  Both  the  total 
revenue  and  total  expenditure  planned  for  2018  are  higher  than  in  the  Commission  forecast 
(see Table 2). The underlying macroeconomic projection of 4.3% of real GDP growth in 2018 
is more optimistic than the Commission 2018 forecast, with a positive impact on tax receipts. 
Compared to the Commission forecast, the government target also counts on higher extra tax 
revenues  generated  by  increased  wage  growth,  due  to  further  minimum  wage  increases  and 
social  security  cuts.  On  the  expenditure  side,  the  planned  public  investment  spending  is 
notably higher. The lower public investment projection in the Commission forecast is based 

3 

 
 
on assuming lower-than-planned EU fund absorption and slower implementation of projects 
financed  from  domestic  sources,  taking  into  account  the  increasing  capacity  constraints  in 
construction.  

Table 2: Composition of the budgetary adjustment 

4 

OutturnCP 2017OutturnCP 2017CP 2018COMRevenue44.945.544.545.345.544.7of which:- Taxes on production and imports18.218.418.018.218.118.0- Current taxes on income, wealth, etc.7.47.37.46.76.96.8- Social contributions13.612.912.812.612.712.4- Other (residual)5.76.96.27.87.87.4Expenditure46.547.946.547.747.947.1of which:- Primary expenditure43.345.043.745.045.344.5of which:Compensation of employees10.910.710.810.510.510.6Intermediate consumption7.08.07.17.97.37.1Social payments14.814.214.213.813.813.7Subsidies1.41.31.31.31.41.4Gross fixed capital formation3.14.74.45.56.05.5Other (residual)6.26.05.86.06.36.2- Interest expenditure3.22.92.82.72.62.6General government balance (GGB)-1.7-2.4-2.0-2.4-2.4-2.4Primary balance1.60.50.80.20.20.1One-off and other temporary measures-0.10.40.40.00.00.0GGB excl. one-offs-1.6-2.8-2.3-2.4-2.4-2.4Output gap10.30.71.61.41.72.4Cyclically-adjusted balance1-1.8-2.8-2.8-3.1-3.2-3.6Structural balance2-1.8-3.2-3.1-3.1-3.2-3.6Structural primary balance21.5-0.3-0.3-0.4-0.6-1.0Notes:Source:Commission 2018 spring forecast (COM) and Convergence programmes (CP) (% of GDP)1Outputgap(in%ofpotentialGDP)andcyclically-adjustedbalanceaccordingtotheprogrammeasrecalculatedbyCommission on the basis of the programme scenario using the commonly agreed methodology.2Structural (primary) balance = cyclically-adjusted (primary) balance excluding one-off and other temporary measures.201620172018 
 
 
 
 
 
 
Table  3:  Main  discretionary  revenue  measures  included  in  the  Commission  2018 
forecast (fiscal impact in % of GDP) 

Title 

2017 

2018 

2019  

Reduction  of  employer's  social  security  contribution  (SSC)  rate 
combined  with  the  alignment  of  SSC  allowances  to  the  reduced  rates       
(a rate reduction from 27% to 22% in 2017 and to 19.5% in 2018) 

-1.4% 

-0.75% 

Extra  payroll  tax/SSC  revenues  due  to  minimum  wage  increases  – 
direct, static effect (general wage minimum: 15% rise in 2017 and 8% in 
2018; skilled workers: 25% rise in 2017 and 12% in 2018) 

+0.35% 

+0.1% 

Reduction  of  the  corporate  income  tax  (replacing  the  two-bracket 
schedule with 10% and 19% tax rates with a single 9% rate) 

-0.4% 

Selective VAT rate cuts (2017: poultry, milk and eggs from 27% to 5%, 
restaurant  meals  and  internet  from  27%  to  18%;  2018:  fish  and  pork 
liver from 27% to 5%; restaurant meals and internet from 18% to 5%) 

-0.2% 

-0.2% 

Measures  to  increase  tax  collection  efficiency  (the  extension  of  online 
cashiers  in  services  and  the  phasing-in  online  invoicing  between 
companies)  

+0.15% 

+0.05% 

Note:  

The budgetary impact in the table as included in the Commission 2018 spring forecast. A positive sign implies that revenue 
increases as a consequence of this measure. The table includes measures with a fiscal impact of at least 0.1% of GDP over the 
examined period. 

5 

 
 
 
 
 
 
 
 
 
 
 
Table 4: Debt developments  

In 2017, the government debt-to-GDP ratio declined by 2.4% of GDP, reaching 73.6%. This 
decrease  was  mainly  driven  by  a  favourable  snow-ball  effect  reflecting  the  acceleration  of 
nominal GDP growth and helped also by the primary surplus, while it was adversely affected 
by below-the-line developments (i.e. stock-flow adjustments). The Commission 2018 spring 
forecast  projects  a  slowdown  in  the  rate  of  debt  reduction  in  2018  due  to  an  additional 
sizeable stock-flow adjustment effect, with  the debt  ratio  decreasing only  slightly to  73.3%. 
Thereafter,  the  debt  ratio  is  projected  to  decline  faster,  falling  to  71%  in  2019  thanks  to 
persisting  high  nominal  GDP  growth.  The  authorities'  updated  debt  projection  is  broadly  in 
line with the Commission forecast for 2018, while the authorities expect a lower debt ratio by 
the  end  of  2019  relative  to  the  Commission,  mainly  on  account  of  a  higher  GDP  growth 
projection. 

In 2017, Hungary is calculated to have complied with the debt rule as the debt-to-GDP ratio 
remained below the debt-reduction benchmark. A similar conclusion is reached for 2018 and 
2019 on the basis of the updated national plans and the Commission 2018 spring forecast. 

3. 

COMPLIANCE WITH THE ADJUSTMENT TOWARDS THE MTO IN 2017 

Hungary's medium-term objective (MTO) is a deficit of 1.5% of GDP in structural terms. 

On 12 July 2016, the Council addressed recommendations to Hungary within the context of 
the European Semester. In particular, in the area of public finances the Council recommended 
Hungary  to  achieve  a  fiscal  adjustment  of  0.6%  of  GDP  in  2017,  unless  the  medium-term 
objective (MTO) is respected with a lower effort. 

6 

2016OutturnCP 2017OutturnCP 2017CP 2018COMGross debt ratio176.072.073.672.073.273.3Change in the ratio-0.7-2.1-2.4-2.1-0.4-0.3Contributions2:1. Primary balance-1.6-0.5-0.8-0.5-0.2-0.12. “Snow-ball” effect0.9-1.9-2.6-1.9-2.2-2.1Of which:Interest expenditure3.22.92.82.92.62.6Growth effect-1.6-2.8-2.8-2.8-3.0-2.8Inflation effect-0.7-2.0-2.6-2.0-1.8-1.93. Stock-flow adjustment0.00.51.10.52.12.0Source:Commission 2018 spring forecast (COM) and Convergence programmes (CP)Notes:1 End of period.2Thesnow-balleffectcapturestheimpactofinterestexpenditureonaccumulateddebt,aswellastheimpactofrealGDPgrowthandinflationonthedebtratio(throughthedenominator).Thestock-flowadjustmentincludesdifferencesincashandaccrualaccounting,accumulationoffinancialassetsandvaluationandotherresidualeffects. 20172018(% of GDP) 
 
 
 
 
The 2018 Convergence Programme indicates that the budgetary impact of the security-related 
measures  in  2017  is  significant,  and  provides  adequate  evidence  of  the  scope  and  nature  of 
these  additional  budgetary  costs.  The  eligible  additional  expenditure  for  security-related 
measures in 2017 amounted to 0.17% of GDP. The provisions set out in Articles 5(1) and 6(3) 
of Regulation (EC) No 1466/97 cater for this additional expenditure, in that the severity of a 
terrorist  threat  is  an  unusual  event,  the  impact  of  which  on  Hungary's  public  finances  is 
significant,  while  sustainability  should  not  be  compromised  by  allowing  for  a  temporary 
deviation  from  the  adjustment  path  towards  the  MTO.  Therefore,  the  required  adjustment 
towards the medium-term budgetary objective for 2017 has been reduced to take into account 
the  additional  costs  in  2017.  Adding  also  the  three-year  carry-forward  of  the  allowance  for 
refugee  and  security  related  incremental  costs,  granted  in  2015  and  2016,  implies  that 
Hungary  is  eligible  for  a  temporary  deviation  under  the  unusual  event  clause  amounting  to 
0.25% of GDP from the required adjustment path in 2017.  

According  to  the  Commission  2018  spring  forecast,  Hungary  recorded  a  structural  balance 
slightly  above  -1.8%  of  GDP  in  2016,  meaning  that  the  initial  position  for  2017  was  a 
distance of 0.25% of GDP from its MTO. Based on the adjustment matrix2, and taking into 
account the distance from the MTO in the initial position as well as the eligible correction for 
the unusual event clause, Hungary is required to maintain its structural deficit position in 2017 
vis-a-vis 2016 (i.e. a structural deficit of 1.8% of GDP). This is equivalent to the requirement 
to  ensure  a  growth  of  government  expenditure,  net  of  discretionary  revenue  measures  and 
one-offs, not higher than 1.5% in real terms.  

In  2017,  both  the  expenditure  benchmark  and  the  structural  balance  pillars  point  to  a 
significant deviation from the required adjustment based on outturn data and the Commission 
2018  spring  forecast.  The  growth  of  net  government  expenditure3  was  well  above  the 
applicable expenditure benchmark rate (deviation of 2.4% of GDP). As the structural balance 
deteriorated  by  1.4%  of  GDP  in  2017,  while  the  requirement  was  to  maintain  the  initial 
position, the structural balance pillar also clearly points towards that conclusion (deviation of 
1.4% of GDP).  

The overall assessment reveals that the expenditure benchmark is negatively affected by three 
elements.  First,  the  medium-term  growth  rate  applied  as  a  reference  underlying  the 
expenditure benchmark is negatively impacted by the low estimated potential growth rates in 
the  aftermath  of  the  crisis.  As  a  result,  the  currently  estimated  10-year  average  potential 
growth  rate  is  considerably  higher  (by  1  pp.).  Second,  the  expenditure  benchmark  is  also 
negatively affected by the use of a too low GDP deflator compared to the one reflecting the 
actual cost pressures on government expenditure. Third, the expenditure benchmark appears 
to underestimate the fiscal effort because some of the revenue windfalls could be considered 
permanent. This permanent effect is linked to extra tax revenues generated by the ripple effect 
of  significant  minimum  wage  increases  on  earnings  above  the  statutory  minimum  as  the 
wage-cost share in the economy was recovering towards its historic average. After taking into 
account  these  factors,  the  expenditure  benchmark  appears  to  adequately  reflect  the  fiscal 

2   “Commonly agreed position on Flexibility within the SGP”, formally endorsed by ECOFIN Council on 12 
February 2016, available at: http://data.consilium.europa.eu/doc/document/ST-14345-2015-INIT/en/pdf 

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

7 

 
 
                                                 
 
effort  and  still  points  to  a  significant  deviation.  This  is  confirmed  by  the  reading  of  the 
structural  balance,  which  after  adjusting  for  the  impacts  of  decreasing  interest  expenditure, 
investment  volatility  and  a  revenue  windfall  (filtering  out  the  above  mentioned  permanent 
effect) also points to a risk of significant deviation. 

Therefore the overall assessment confirms that a deviation from the adjustment path towards 
the MTO in 2017 was significant.  

8 

 
 
Table 5: Compliance with the MTO or the required adjustment towards it  

9 

(% of GDP)2017Medium-term objective (MTO)-1.5Structural balance2 (COM)-3.1Structural balance based on freezing (COM)-3.2Position vis-a -vis the MTO3Not at MTO2017COMCPCOMCPCOMRequired adjustment40.3Required adjustment corrected50.0Change in structural balance6-1.4-0.2-0.50.70.4One-year deviation from the required adjustment7-1.4-1.2-1.5-0.1-0.4Two-year average deviation from the required adjustment7-0.7-1.3-1.4-0.6-0.9Applicable reference rate81.5One-year deviation adjusted for one-offs9-2.4-2.0-1.8-0.3-0.7Two-year deviation adjusted for one-offs9-1.9-2.2-2.1-1.1-1.2PER MEMORIAM: One-year deviation10-2.0-2.3-2.1-0.3-0.7PER MEMORIAM: Two-year average deviation10-1.7-2.2-2.1-1.3-1.4Conclusion over one yearSignificant deviationSignificant deviationSignificant deviationOverall assessmentOverall assessmentConclusion over two yearsSignificant deviationSignificant deviationSignificant deviationSignificant deviationSignificant deviationSource:Initial position120182019-1.5-1.5-3.6-3.3-3.6-Not at MTONot at MTO(% of GDP)20182019Structural balance pillar1.00.81.00.81 The most favourable level of the structural balance, measured as a percentage of GDP reached at the end of year t-1, between  spring forecast (t-1) and the latest forecast, determines whether there is a need to adjust towards the MTO or not in year t.  A margin of 0.25 percentage points (p.p.) is  allowed in order to be evaluated as having reached the MTO.Expenditure benchmark pillar2.83.9ConclusionNotes8  Reference medium-term rate of potential GDP growth. The (standard) reference rate applies from year t+1, if the country has reached its MTO in year t. A corrected rate applies as long as the country is adjusting towards its MTO, including in year t. 9 Deviation of the growth rate of public expenditure net of discretionary revenue measures, revenue increases mandated by law and one-offs from the applicable reference rate in terms of the effect on the structural balance. The expenditure aggregate used for the expenditure benchmark is obtained following the commonly agreed methodology. A negative sign implies that expenditure growth exceeds the applicable reference rate. 10 Deviation of the growth rate of public expenditure net of discretionary revenue measures and revenue increases mandated by law from the applicable reference rate in terms of the effect on the structural balance. The expenditure aggregate used for the expenditure benchmark is obtained following the commonly agreed methodology. A negative sign implies that expenditure growth exceeds the applicable reference rate. Convergence Programme (CP); Commission 2018 spring forecast (COM); Commission calculations.2  Structural balance = cyclically-adjusted government balance excluding one-off measures.3 Based on the relevant structural balance at year t-1.4 Based on the position vis-à-vis the MTO, the cyclical position and the debt level (See European Commission:Vade mecum on the Stability and Growth Pact, page 38.).5  Required adjustment corrected for the clauses, the possible margin to the MTO and the allowed deviation in case of overachievers.6 Change in the structural balance compared to year t-1. Ex post assessment (for 2014) is carried out on the basis of Commission 2015 spring forecast. 7  The difference of the change in the structural balance and the corrected required adjustment.  
 
 
4. 

NEW ADJUSTMENT PATH TO THE MTO AND REQUIRED FISCAL EFFORT  

Based  on  the  Commission  2018  spring  forecast,  Hungary  is  in  good  economic  times  (as  its 
output  gap  of  +2.4%  is  above  the  threshold  level  of  +1.5%  of  potential  GDP).  Hungary's 
public  debt  exceeds  the  60%  of  GDP  threshold.  Hungary's  structural  balance  in  2017  is 
estimated to have been 1.6% of GDP away from its MTO of -1.5% of GDP.  

The required structural effort prescribed by Regulation (EC) No 1466/97 and the  matrix of 
requirements,  which  factors  in  the  prevailing  economic  circumstances  and  possible 
sustainability concerns, amounts to at least 1% of GDP in 2018.  

The Commission 2018 spring forecast projects a further deterioration of the structural balance 
by  0.5%  of  GDP  in  2018.  Therefore,  a  minimum  structural  improvement  of  1%  of  GDP  in 
2018  relative  to  the  2017  outturn  translates  into  a  need  to  adopt  structural  consolidation 
measures of a total yield of at least 1.5% of GDP in 2018 for the year as a whole, relative to 
the current baseline from the Commission 2018 spring forecast. Given the significant size of 
the  required  structural  consolidation  effort  resulting  from  the  minimum    adjustment 
requirement, no additional required adjustment on top of the minimum 1% requirement would 
appear warranted.  

Based  on  the  Commission  forecast,  the  above-mentioned  1%  of  GDP  structural  adjustment 
target  is  consistent  with  a  nominal  growth  rate  of  net  primary  government  expenditure  of 
2.8% in 2018, compared to the growth rate of 7.4% projected by the Commission. 

5. 

OVERALL CONCLUSION 

In 2017, GDP growth rebounded to 4.0%, driven by domestic demand, which was supported 
by  pro-cyclical  fiscal  policy  and  wage  hikes.  The  headline  deficit  rose to  2%  from  1.7%  of 
GDP  in  2016,  while  the  economy  grew  above  its  potential  and  public  finances  were  also 
helped by favourable temporary effects. The deficit increased mainly due to sizeable tax cuts. 
Meanwhile  primary  expenditure,  net  of  spending  fully  matched  by  EU  funds,  increased 
firmly, albeit somewhat below the accelerating nominal GDP. The structural deficit increased 
to  3.1%  of GDP, from  1.8%  of GDP in  2016. The debt-to-GDP ratio decreased further,  but 
remained above 70% of GDP.  

Both  the  expenditure  benchmark  and  the  structural  balance  pillars  point  to  a  significant 
deviation in 2017. An overall assessment confirms that the observed deviation from the MTO 
in 2017 is significant.  

An improvement in Hungary's structural balance by 1% of GDP in 2018 relative to the 2017 
outturn  would  put  Hungary  on  an  appropriate  adjustment  path  towards  the  MTO.  Such  an 
improvement  is  consistent  with  the  nominal  growth  rate  of  net  primary  government 
expenditure not exceeding 2.8% in 2018.  

10