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

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   EUROPEAN COMMISSION  Brussels, 23.5.2018  COM(2018) 431 final  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 {SWD(2018) 368 final}  
 
 
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 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 121(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 10(2), second sub-paragraph, thereof, 

Having regard to the recommendation of the Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

According  to  Article  121  of  the  Treaty  on  the  Functioning  of  the  European  Union, 
Member States shall promote sound public finances over the medium term through the 
coordination  of  economic  policies  and  multilateral  surveillance  in  order  to  avoid  the 
occurrence of excessive government deficits. 

The Stability and Growth Pact (SGP) is based on the objective of sound government 
finances as a means of strengthening the conditions  for price  stability and for strong 
sustainable growth conducive to employment creation. 

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

Based on the Commission 2018 spring forecast and the 2017 outturn data validated by 
Eurostat,  the  growth  of  government  expenditure,  net  of  discretionary  revenue 
measures and one-offs, was well above the applicable expenditure benchmark rate in 
2017,  pointing  to  a  significant  deviation  from  the  required  structural  adjustment 
(deviation  of  2.4%  of  GDP).  In  2017,  from  a  position  of  -1.8%  of  potential  GDP  in 
2016,  the  structural  balance  deteriorated  to  -3.1%  of  GDP,  also  pointing  to  a 
significant  deviation  (deviation  of  1.4%  of  GDP).  The  overall  assessment  indicated 
that the expenditure benchmark was negatively affected by three elements, including a 
too  low  medium-term  potential  growth  rate  and  GDP  deflator  underlying  the 
expenditure  benchmark  as  well  as  a  permanent  revenue  effect.  After  correcting  for 
these factors, the expenditure benchmark appears to adequately reflect the fiscal effort 
and points to a significant deviation. This conclusion is confirmed by the assessment 
of  the  structural  balance  pillar,  which  after  taking  into  account  the  impacts  of 

1 

OJ L 209, 2.8.1997, p. 1. 

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(5) 

(6) 

(7) 

decreasing  interest  expenditure,  investment  volatility  and  a  revenue  windfall,  still 
points  to  a  significant  deviation.  The  overall  assessment  therefore  leads  to  the 
conclusion that the observed deviation from the medium-term budgetary objective in 
2017 is significant. 

On [23 May] 2018, following an overall assessment, the Commission considered that a 
significant  observed  deviation  from  the  medium-term  budgetary  objective  exists  in 
Hungary  and  issued  a  warning  to  Hungary  in  accordance  with  Article  121(4)  TFEU 
and 10(2), first-sub-paragraph, of Regulation (EC) No 1466/97. 

According  to  Article  10(2),  second  sub-paragraph,  of  Regulation  (EC)  No  1466/97, 
within  one  month  of  the  date  of  the  adoption  of  the  warning,  the  Council  should 
address a recommendation to the Member State concerned to take the necessary policy 
measures. The  regulation foresees that the recommendation  will set a deadline of no 
more than five months for the Member State to address the deviation. On that basis a 
deadline of 15 October 2018 for Hungary to address the deviation appears appropriate. 
Within  that  deadline,  Hungary  should  report  on  action  taken  in  response  to  this 
recommendation.  

Hungary's  structural  balance  in  2017  is  estimated  to  have  been  1.6%  of  GDP  away 
from  its  medium-term  budgetary  objective  of  a  structural  deficit  of  -1.5%  of  GDP. 
Based on the output gap projections of the Commission 2018 spring forecast, Hungary 
is in good economic times in 2018. Hungary's general government debt ratio is above 
the  60%  of  GDP  threshold.  The  minimum  required  structural  effort  prescribed  by 
Regulation  (EC)  No  1466/97  and  the  matrix  of  requirements,  which  factors  in  the 
prevailing economic circumstances and sustainability concerns, amounts to at least 1% 
of  GDP  for  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 translates into a need to adopt measures 
of a total yield of 1.5% of GDP compared to the current baseline from the Commission 
spring 2018 forecast. Given the significant size of the required structural consolidation 
effort  resulting  from  the  minimum    adjustment  requirement,  it  is  appropriate  not  to 
require  any  additional  required  adjustment  on  top  of  the  minimum  1%  of  GDP 
requirement. 

(8) 

The  required  improvement  of  the  structural  balance  by  1%  of  GDP  in  2018  is 
consistent  with  the  nominal  growth  rate  of  net  primary  government  expenditure  not 
exceeding 2.8% in 2018. 

(9) 

It is appropriate that this recommendation should be made public. 

(10) 

In  order  to  achieve  the  recommended  budgetary  targets,  it  is  crucial  that  Hungary 
adopts and strictly implements the necessary measures and monitors the development 
of current expenditure closely, 

HEREBY RECOMMENDS: 

(1) 

(2) 

Hungary should take the necessary measures to ensure that the nominal growth rate 
of net primary government expenditure does not exceed 2.8% in 2018, corresponding 
to an annual structural adjustment of 1% of GDP, thereby putting the country on an 
appropriate adjustment path towards the medium-term budgetary objective.  

Hungary should use any windfall gains for deficit reduction. Budgetary consolidation 
measures should secure a  lasting improvement in the general government structural 
balance in a growth-friendly manner. 

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(3) 

Hungary  should  report  to  the  Council  by  15  October  2018  on  action  taken  in 
response to this recommendation.The report should provide sufficiently specified and 
credibly announced measures, including budgetary impact of each of them, as well as 
updated and detailed budgetary projections for 2018. 

This recommendation is addressed to Hungary. 

Done at Brussels, 

For the Council 
The President 

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