Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of Hungary and delivering a Council opinion on the 2018 Convergence Programme of Hungary
Date: 2018-05-23
Institutions: European Commission, Secretariat-General
Subjects: Hungary, budget deficit, economic policy, economic reform, educational reform, employment policy, social assistance, stability pact, stability programme, tax system

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   EUROPEAN COMMISSION  Brussels, 23.5.2018 COM(2018) 416 final  Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of Hungary  and delivering a Council opinion on the 2018 Convergence Programme of Hungary  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2018 National Reform Programme of Hungary 

and delivering a Council opinion on the 2018 Convergence Programme of Hungary 

THE COUNCIL OF THE EUROPEAN UNION, 

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

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

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

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

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

(2) 

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On 22 November 2017, the Commission adopted the Annual Growth Survey, marking 
the start of the 2018 European Semester of economic policy coordination. It took due 
account  of  the  European  Pillar  of  Social  Rights,  proclaimed  by  the  European 
Parliament, the Council and the Commission on 17 November 2017. The priorities of 
the  Annual  Growth  Survey  were  endorsed  by  the  European  Council  on  22  March 
2018.  On  22  November  2017,  on  the  basis  of  Regulation  (EU)  No  1176/2011,  the 
Commission  also  adopted  the  Alert  Mechanism  Report,  in  which  it  did  not  identify 
Hungary as one of the Member States for which an in-depth review would be carried 
out. 
The  2018  country  report  for  Hungary4  was  published  on  7  March  2018.  It  assessed 
Hungary’s  progress  in  addressing  the  country-specific  recommendations  adopted  by 

OJ L 209, 2.8.1997, p. 1. 
COM(2018) 416 final. 
P8_TA(2018)0077 and P8_TA(2018)0078. 
SWD(2018) 215 final. 

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(3) 

(4) 

(5) 

(6) 

the Council on 11 July 2017, the follow-up given to the recommendations adopted in 
previous years and Hungary's progress towards its national Europe 2020 targets.  

On  30  April  2018,  Hungary  submitted  its  2018  National  Reform  Programme  and  its 
2018  Convergence  Programme.  To  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

Relevant country-specific recommendations have been addressed in the programming 
of  the  European  Structural  and  Investment  Funds  for  the  2014-2020  period.  As 
foreseen in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament 
and  of  the  Council5,  where  it  is  necessary  to  support  the  implementation  of  relevant 
Council  recommendations,  the  Commission  may  request  a  Member  State  to  review 
and propose amendments to its Partnership Agreement and relevant programmes. The 
Commission has provided further details on how it would make use of that provision 
in  guidelines  on  the  application  of  the  measures  linking  the  effectiveness  of  the 
European Structural and Investment Funds to sound economic governance6.  

Hungary  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth  Pact  and 
subject to the debt rule. In its 2018 Convergence Programme, the Government plans a 
deterioration of the headline deficit from 2.0 % in 2017 to 2.4 % in 2018 and a gradual 
improvement  thereafter  to  0.5  %  of  GDP  by  2022.  The  medium-term  budgetary 
objective  —  a  structural  deficit  of  1.5  %  of  GDP  —  is  planned  to  be  met  by  2020. 
Based  on  the  recalculated  structural  balance7  ,  the  medium-term  budgetary  objective 
would  be  reached  by  2022.  According  to  the  Convergence  Programme,  the  general 
government debt-to-GDP ratio is expected to decline gradually to slightly below 60 % 
by  the  end  of  2022.  The  macroeconomic  scenario  underpinning  those  budgetary 
projections  is  favourable,  which  poses  notable  risks  to  the  implementation  of  the 
deficit targets. 

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.  According  to  the  Commission,  the 
eligible  additional  expenditure  in  2017  amounted  to  0.17  %  of  GDP  for  security-
related measures. 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  the  terrorist 
threat are unusual events, their impact on Hungary's public finances is significant and 
sustainability would not be compromised by allowing for a temporary deviation from 
the  adjustment  path  towards  the  medium-term  budgetary  objective.  Therefore,  the 
required adjustment towards the medium-term budgetary objective for 2017 has been 
reduced to take into account these additional costs.  

(7) 

On  12  July  2016,  the  Council  recommended  Hungary  to  achieve  an  annual  fiscal 
adjustment  of  0.6  %  of  GDP  towards  the  medium-term  budgetary  objective  in  2017 
unless the medium-term budgetary objective was respected with a lower effort. Based 

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Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 
laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the  European  Social 
Fund, the  Cohesion Fund, the European Agricultural Fund for Rural Development and the European 
Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European  Regional 
Development  Fund,  the  European  Social  Fund,  the  Cohesion  Fund  and  the  European  Maritime  and 
Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320). 
COM(2014) 494 final. 
Cyclically  adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission 
using the commonly agreed methodology. 

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on  2017  outturn  data  Hungary  was  found  to  be  in  significant  deviation  from  the 
adjustment  path  toward  the  medium-term  budgetary  objective.  In  line  with  Article 
121(4)  TFEU  and  Article  10(2)  of  Council  Regulation  (EC)  No  1466/97,  the 
Commission issued a warning to Hungary on 23 May 2018 that a significant deviation 
from the adjustment path toward the medium-term budgetary objective was observed 
in 2017. On XX June, the Council adopted a subsequent recommendation confirming 
the need for Hungary to take the necessary measures to ensure that the nominal growth 
rate  of  net  primary  government  expenditure8  does  not  exceed  2.8 %  in  2018, 
corresponding  to  an  annual  structural  adjustment  of  1 %  of  GDP.  Based  on  the 
Commission 2018 spring forecast, there is a risk of a deviation from the recommended 
effort. 

In 2019, in view of Hungary's general government debt ratio above 60 % of GDP and 
projected  output  gap  of  2.3 %,  the  nominal  growth  rate  of  net  primary  government 
expenditure should not exceed 3.9 %, in line with the structural adjustment of 0.75 % 
of  GDP  stemming  from  the  matrix  of  requirements  under  the  Stability  and  Growth 
Pact.  Based  on  the  Commission  2018  spring  forecast,  there  is  a  risk  of  a  significant 
deviation  from  that  requirement  in  2019.  Overall,  the  Council  is  of  the  opinion  that 
significant further measures will be needed as of 2018 to comply with the provisions 
of the Stability and Growth Pact, in light of a strongly deteriorating fiscal outlook, in 
line with the recommendation addressed to Hungary on XX June 2018 with a view to 
correcting  the  significant  observed  deviation  from  the  adjustment  path  toward  the 
medium-term budgetary objective. 

The overall employment rate has improved significantly and the favourable economic 
trend  provides  an  opportunity  to  reintegrate  notably  unemployed  people  into  the 
labour market. The gender employment gap is wide, especially in the 25-39 age group, 
which can in part be explained by a limited supply of good quality childcare. The level 
of participation in childcare for children under the age of 3 is well under the Barcelona 
target and the EU average. Although the public work scheme remains the main active 
labour  market  policy,  the  number  of  participants  in  it  having  decreased  significantly 
represents  a  positive  development.  Nonetheless,  the  scheme  remains  insufficiently 
focused and its effectiveness in reintegrating participants into the open labour market 
continues to be limited considering the labour market situation. Active labour market 
policies which focus more on up- and reskilling are under-developed.  

(8) 

(9) 

(10)  The  proportion  of  people  at  risk  of  poverty  and  social  exclusion  has  decreased  to 
26.3 %  in  2016  but  remains  above  the  EU  average.  Children  in  general  are  more 
exposed  to  poverty  than  other  age  groups.  The  level  of  minimum  income  benefits  is 
below  50  %  of  the  poverty  threshold  for  a  single  household,  making  it  among  the 
lowest in the EU. The adequacy of unemployment benefits is very low: the maximum 
duration  of  3  months  ranks  as  the  shortest  in  the  EU,  and  represents  only  around  a 
quarter of the  average time required by job seekers to  find employment. In  addition, 
the levels of payment are among the lowest in the EU.  

8 

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

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(11)  The Hungarian social dialogue structures and processes remain underdeveloped and do 
not  allow  for  a  meaningful  involvement  of  social  partners  in  policy  design  and 
implementation.  The  deficiencies  in  stakeholders'  engagement  and  the  limited 
transparency  have  an  impact  on  the  evidence  base  for  and  quality  of  policy  making, 
creating uncertainty for investors and slowing down convergence. 

(12)  Measures  have  been  implemented  to  improve  the  tax  system,  but  some  problems 
remain.  Although  decreasing,  the  tax  wedge  on  labour,  especially  for  certain  low-
income  groups,  is  still  high  in  EU  comparison.  The  overall  complexity  of  the  tax 
system,  coupled  with  the  continued  presence  of  sector-specific  taxes,  remains  a 
weakness. Measures  against taxpayer's aggressive planning strategies are essential to 
impede  distortions  of competition between firms, provide fair  treatment of taxpayers 
and  safeguard  public  finances.  Spill-over  effects  of  taxpayer's  aggressive  planning 
strategies between Member States call for a coordinated action of national policies to 
complement  EU  legislation.  Hungary  records  relatively  high  capital  inflows  and 
outflows  through  special  purpose  entities,  which  are  disconnected  from  the  real 
economy.  The  absence  of  withholding  taxes  on  outbound  (i.e.  from  EU  residents  to 
third  country  residents)  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.  The  Commission  takes  note  that 
Hungary acknowledges that outbound payment may lead to aggressive tax planning if 
misused.  Based  on  recent  exchanges,  the  Commission  will  continue  its  constructive 
dialogue to fight against taxpayers aggressive planning strategies. 

(13)  Regulatory  barriers  in  services,  and  retail  trade  in  particular,  impact  on  the  sector's 
performance  and  hamper  the  efficient  reallocation  of  resources,  productivity  and 
innovation. There is a continuous trend to entrust certain services to state-owned firms 
specifically  created  for  these  purpose,  to  the  detriment  of  open  competition. 
Unpredictability  of  the  legal  framework  is  a  further  problem,  especially  in  the  retail 
sector, which in recent years has been faced with frequent changes to regulations. As 
the proposed regulations are often tailored to turnover or floor size, they mainly affect 
foreign  retail  chains.  This  increases  uncertainty  among  business  operators  and  can 
deter  investment.  A  stable  regulatory  environment  favourable  to  competition  is 
needed.  Restrictive  regulation  of  professions  remains  high  in  Hungary,  in  particular 
with respect to key professions like accounting and legal services. 

(14)  Concerns  remain  regarding  preventing  and  prosecuting  corruption.  According  to 
several  indicators,  Hungary's  exposure  to  corruption  appears  to  have  increased  over 
the past years and the risks of corruption could negatively affect the country's growth 
potential. The functioning of the prosecution service is of crucial importance to fight 
corruption  and  money  laundering  and  while  measures  to  fight  low-level  corruption 
appear to have been applied with some success, there is not enough focus on starting 
investigations into high-level cases. Limited transparency and restrictions on access to 
information further hinder measures to prevent corruption. Significant steps have been 
taken regarding public procurement, but there is scope to further improve transparency 
and competition in tendering processes. 

(15)  Education outcomes for basic skills are significantly below the EU average, especially 
for children from disadvantaged socioeconomic background. Pupils are streamed early 
into different types of schools, with wide gaps in education outcomes and employment 
paths.  Disadvantaged  children,  including  Roma  children,  tend  to  be  concentrated  in 
vocational secondary schools which are characterised by poorer levels of basic skills 
and higher dropout rates, and people who leave these schools receive lower wages on 

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average.  The  early  school  leaving  rate  increased  to  12.4  %  on  average,  and  is 
particularly  high  among  Roma  children.  These  challenges  are  especially  pressing  in 
the  context  of  quality  and  inclusive  education.  The  shrinking  pool  of  applicants  and 
high  drop-out  rates  in  tertiary  education  will  further  limit  attainment  rates  at  a  time 
when the demand for highly-skilled workforce is growing. 

(16)  Poor  health  outcomes,  aggravated  by  unhealthy  lifestyles,  persist,  having  a  negative 
impact  on  human  capital.  Low  levels  of  healthcare  spending,  coupled  with  an 
inefficient allocation of resources, limit the effectiveness of the Hungarian healthcare 
system.  This,  together  with  a  high  reliance  on  out-of-pocket  payments,  has  negative 
equity implications for the timely access to affordable, preventive and curative health 
care  of  good  quality.  Shortage  of  health  care  workers  also  hampers  access  to  care, 
although recent salary increases have mitigated this challenge. Ongoing reform efforts 
are focused on tackling excessive use of hospital care services, a key cause of which is 
that  primary  care  providers  are  not  appropriately  equipped  to  act  as  effective 
gatekeepers.  Further  rationalisation  of  hospital  resources  use,  together  with  targeted 
investments  to  strengthen  primary  care  services,  would  enable  the  reduction  of 
disparities  in  access  to  care,  drive  efficiency  gains  and  effectively  improve  health 
outcomes. 

(17) 

In  the  context  of  the  2018  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Hungary’s  economic  policy  and  published  it  in  the  2018 
country  report.  It  has  also  assessed  the  2018  Convergence  Programme  and  the  2018 
National  Reform  Programme  and  the  follow-up  given  to  the  recommendations 
addressed to Hungary in previous years. The Commission has taken into account not 
only  their  relevance  for  sustainable  fiscal  and  socioeconomic  policy  in  Hungary  but 
also their compliance with Union rules and guidance, given the need to strengthen the 
Union’s  overall  economic  governance  by  providing  Union-level  input  for  future 
national decisions.  

(18) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  2018  Convergence 
Programme and its opinion9 is reflected in particular in recommendation 1 below. 

HEREBY RECOMMENDS that Hungary take action in 2018 and 2019 to: 

1. 

2. 

3. 

9 

In 2018, ensure compliance with the Council recommendation of XX June 2018 with 
a  view  to  correcting  the  significant  deviation  from  the  adjustment  path  toward  the 
medium-term  budgetary  objective.  In  2019,  ensure  that  the  nominal  growth  rate  of 
net  primary  government  expenditure  does  not  exceed  3.9 %,  corresponding  to  an 
annual structural adjustment of 0.75 % of GDP.  

Continue simplifying the tax system, in particular by reducing sector specific taxes. 
Improve  the  quality  and  transparency  of  the  decision-making  process  through 
effective  social  dialogue  and  engagement  with  other  stakeholders  and  by  regular, 
adequate  impact  assessments.  Reinforce  the  anti-corruption  framework,  strengthen 
prosecutorial  efforts  and 
in  public 
procurement  inter  alia  through  making  data  gained  from  the  e-procurement  system 
accessible 
regulatory  stability  and 
transparency in the services sector, notably in retail. 

the  public.  Strengthen  competition, 

transparency  and  competition 

improve 

to 

Unlock  labour  reserves  through  improving  the  quality  of  active  labour  market 
the  participation  of 
policies. 

Improve  education  outcomes  and 

increase 

Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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disadvantaged  groups,  in  particular  Roma,  in  quality  and  inclusive  mainstream 
the  adequacy  and  coverage  of  social  assistance  and 
education.  Improve 
unemployment benefits. 

Done at Brussels, 

For the Council 
The President 

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