COMMISSION STAFF WORKING DOCUMENT Accompanying the documents Recommendation for a Council decision establishing that no effective action has been taken by Hungary in response to the Council recommendation of 22 June 2018 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: 2018-11-21
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Hungary, budget deficit, budgetary assessment, budgetary control, economic growth, economic policy, gross domestic product, medium-term forecast, public expenditure, stability pact

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 21.11.2018  SWD(2018) 504 final  COMMISSION STAFF WORKING DOCUMENT Accompanying the documents Recommendation for a Council decision establishing that no effective action has been taken by Hungary in response to the Council recommendation of 22 June 2018  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) 805 final} - {COM(2018) 806 final}  
 
 
COMMISSION STAFF WORKING DOCUMENT 
Accompanying the documents 

Recommendation for a Council decision establishing that no effective action has been 
taken by Hungary in response to the Council recommendation of 22 June 2018 

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 

Since 2013, Hungary has been subject to the preventive arm of the Stability and Growth Pact, 
which  requires  sufficient  progress  towards  the  medium-term  budgetary  objective  (MTO). 
Hungary is also subject to the debt rule as its general government debt remains above 60% of 
GDP.  

On 22 June 2018 the Council decided in accordance with Article 121(4) of the Treaty on the 
Functioning of the European Union ("TFEU") that a significant observed deviation from the 
MTO  occurred  in  Hungary  in  2017.1  In  view  of  the  established  significant  deviation,  the 
Council issued a recommendation for Hungary to take the necessary measures to ensure that 
the  nominal  growth  rate  of  net  primary  government  expenditure2  does  not  exceed  2.8%  in 
2018, corresponding to an annual structural adjustment of 1.0% of GDP. It also recommended 
Hungary  to  use  any  windfall  gains  for  deficit  reduction,  while  budgetary  consolidation 
measures should ensure a lasting improvement in the general government structural balance in 
a  growth-friendly  manner.  The  Council  established  a  deadline  of  15  October  2018  for 
Hungary  to  report  on  action  taken  in  response  to  the  recommendation.  The  Hungarian 
authorities delivered their report in response to the Council Recommendation (hereafter: "the 
report")  within  that  deadline.  On  18-19  September  2018,  the  Commission  undertook  an 
enhanced  surveillance  mission  in  Hungary  for  the  purpose  of  on-site  monitoring  under  the 
Article  -11(2)  of  Regulation  (EC)  No  1466/97.  The  findings  of  the  enhanced  fiscal 
surveillance were subsequently made public. 

Section  2  of  this  document  discusses  macroeconomic  developments  and  outlook  in  2018  and 
2019. Section 3 presents the updated budgetary projections for 2018 and 2019. Section 4 assesses 
compliance  with  the  Council  Recommendation  of  22  June  2018,  while  Section  5  proposes  an 
adjustment path for 2019. Section 6 concludes. 

2. 

MACROECONOMIC DEVELOPMENTS AND OUTLOOK 2018-2019  

Hungarian economic growth accelerated to  4.7% in  the first  half of 2018. GDP growth  was 
broad-based,  supported  by  all  main  domestic  demand  components  and  exports.  Private 
consumption  benefited  from  strong  real  wage  growth  owing  to  the  tight  labour  market  and 
administrative  wage  measures,  including  the  8%  rise  in  the  minimum  wage  and  salary 

1   Council Recommendation of 22 June 2018 with a view to correcting the significant observed deviation from 
the adjustment path toward the medium-term budgetary objective in Hungary (OJ C 223, 27.6.2018, p. 1) 
2   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. 

1 

 
 
 
                                                 
increases  in  the  public  sector.  Private  investment  was  supported  by  strong  demand  and 
favourable financing conditions, while government fixed capital formation grew dynamically 
also on the back of increased EU-fund absorption. 

Table 1: Macroeconomic developments and forecast  

According  to  the  Commission  2018  autumn  forecast,  GDP  growth  in  2018  as  a  whole  is 
expected at 4.3% (see Table 1). This marks the peak of the domestic business cycle, as growth 
is set to decelerate to 3.4% in 2019 and to 2.6% in 2020. The expected slowdown is due to the 
fading  effect  of administrative wage increases, the moderation of investment  dynamics, and 
the expected weakening of main export markets. 

Strong  demand  growth  and  capacity  constraints  have  begun  to  raise  costs  and  prices. 
Unemployment fell to a record low, contributing to strong labour cost growth, which is only 
partly offset by cuts of employer social contributions. A broad set of indicators point to rising 
inflationary pressure: the GDP deflator is forecast to rise by 3.7% in 2018, construction costs 
increased by 9.8% y-o-y in August 2018, while the aggregate house price index rose 12.1% y-
o-y in the first quarter of 2018. HICP inflation is set to rise to 3.3% in 2019 on the back of 
unprocessed food and energy prices, but the underlying momentum will keep inflation at 3% 
in 2020, after cost shocks fade. 

2 

2017OutturnCPCOMCPCOMReal GDP (% change)4.14.34.34.13.4Private consumption (% change)4.85.25.24.83.3Gross fixed capital formation (% change)18.212.812.57.59.4Exports of goods and services (% change)4.77.27.16.96.0Imports of goods and services (% change)7.79.29.07.47.1Contributions to real GDP growth:- Final domestic demand6.25.55.74.24.0- Change in inventories-0.20.0-0.30.00.0- Net exports-1.9-1.1-1.10.0-0.6Output gap11.71.72.81.52.9Employment (% change)2.01.50.91.50.5Unemployment rate (%)4.23.43.62.73.3Labour productivity (% change)2.12.83.42.63.0HICP inflation (%)2.42.53.02.73.3GDP deflator (% change)3.82.73.73.13.3Comp. of employees (per head, % change)6.29.18.17.96.6Net lending/borrowing vis-à-vis the rest of the world (% of GDP)4.35.93.25.92.4Commission 2018 autumn forecast (COM); 2018 Convergence Programme (CP).20182019Note:1In % of potential GDP, with potential GDP growth recalculated by Commission services on the basis of the Source: 
 
 
The Commission GDP growth forecast for 2018 was revised up since the spring, from 4.0% to 
4.3%. The Commission 2018 autumn forecast estimates also a higher GDP deflator in 2018 
than in the spring, resulting in a higher nominal path of the economy. The Hungarian Ministry 
of  Finance  has  not  published  a  comprehensive  update  of  their  macroeconomic  projections 
since the 2018 Convergence Programme. Nonetheless, the authorities revised their 2018 real 
GDP growth forecast marginally upwards, while they increased their nominal path markedly 
with an elevated GDP deflator as reflected in the 2018 autumn EDP notification. This results 
in a significant denominator effect on the government revenue and expenditure-to-GDP ratios 
in  the  updated  budgetary  projection  for  2018.  While  the  2018  growth  expectation  of  the 
Commission  is  similar  to  the  authorities’  assessment,  the  2019  projection  remains  more 
conservative  compared  to  the  macroeconomic  scenario  presented  in  the  2018  Convergence 
Programme. The Commission forecast expects that capacity constraints exert a stronger effect 
on prices, which in turn limits real GDP growth. 

Based on the Commission 2018 autumn forecast and the commonly agreed methodology  for 
calculating the cyclical position of the economy, the positive output gap is projected to widen 
further in 2018 and to broadly stabilise in 2019. In 2020, GDP growth slows below potential, 
narrowing the output gap. 

3. 

FISCAL DEVELOPMENTS AND OUTLOOK 2018-2019 

On  18-19  September  2018  the  Commission  undertook  an  enhanced  surveillance  mission  in 
Hungary  for  the  purpose  of  on-site  monitoring  under  Article  -11(2)  of  Regulation  (EC)  No 
1466/97.  The Commission report on the mission finds that the Hungarian authorities do not 
plan to act upon the Council Recommendation of 22 June 2018 this year. At the same time, 
they  expressed  their  commitment  to  improve  the  budgetary  position  as  of  2019.  The  2019 
budget, which was already adopted by the Hungarian Parliament in July 2018, aims to bring 
down the general government deficit by 0.6% of GDP next year, in line with the plans set out 
in the 2018 Convergence Programme. However, the Council recommendation does not cover 
2019.  

Updated budgetary projection for 2018 and reported action 
In their report on action taken3, the authorities maintain the general government deficit target 
from the 2018 Convergence programme of 2.4% of GDP in 2018. The report highlights that 
the unchanged 2018 deficit target is accompanied by significant changes in the revenue and 
expenditure  sides  of  the  budget.  Compared  to  the  2018  Convergence  Programme,  the 
authorities  expect  substantially  higher  tax  revenues  and  reduced  co-financing  costs  of  EU-
funded  projects  due  to  a  lower-than-initially-planned  EU  fund  absorption.  However,  the 
deficit-improvement resulting from these developments (amounting altogether to some 1% of 
GDP)  is  projected  to  be  fully  absorbed  by  extra  spending,  mainly  on  nationally  financed 
investments and public wages. 

The authorities provide a list of discretionary measures they have taken or planned, without 
providing  their  estimated  impact.  Moreover,  the  list  includes  only  measures  with  a  positive 
impact  on  the  budget.  Table  2  presents  those  measures  listed  in  the  report,  which  were 
adopted or announced following the Council recommendation of 22 June 2018 and thus had 
not been reported yet in the 2018 Convergence Programme. The estimates of the fiscal impact 
in  the  Table  2  come  from  subsequent  exchanges  with  the  authorities.  Based  on  these 

3   https://ec.europa.eu/info/files/hungary-report-council-recommendations-under-significant-deviation-

procedure_en 

3 

 
 
                                                 
estimates,  the  reported  new  discretionary  measures  have  no  notable  impact  on  the  budget 
execution  in  2018,  but  rather  contribute  to  the  planned  deficit  reduction  in  2019  (i.e.  the 
increase of certain consumption taxes and the rationalisation of staffing public administration 
starting at the end of 2018). The report also refers to ongoing efforts aimed at enhancing tax 
collection  efficiency,  most  notably  the  phasing-in  of  an  online  invoicing  system  for  inter-
company  transactions  in  2018.  That  measure  is  not  included  in  Table  2  as  it  was  already 
adopted  when  the  2018  Convergence  Programme  was  published.  The  estimated  budgetary 
effect of it has been incorporated in the Commission 2018 autumn forecast (see Table 3). 

Table 2: Discretionary fiscal measures listed in the report (fiscal impact in % of GDP) 

Table 3: Discretionary revenue measures included in the Commission 2018 forecast 
(fiscal impact in % of GDP) 

4 

20182019RevenuesExcise duties: Increasing the tobacco duties in three steps  (September 2018, January and July 2019)0.01%0.04%Extra levy on unhealthy foodstuff ("chips tax"): increasing the tax rate and broadening the tax base0.03%Corporate income tax: capping the deductibilty of interest liabilities (part of transposition of EU Anti-Tax Avoidance Directives)0.02%ExpenditureRationalisation of personnel in central public administration1 0.02%-0.1%1 Preliminary estimate. The positive value in 2018 reflects planned severance payments.Note:2The budgetary impact in the table as estimated by the authorities. A positive sign implies that revenue /expenditure increases as a consequence of this measure.Measure20182019Reduction of employer's social security contribution (SSC) rate (rate reduction from 22% to 19.5% in 2018 and to 17.5% from 1st July 2019)-0.7%-0.3%Extra payroll tax/SSC revenues due to minimum wage increases – direct, static effect (general wage minimum: 8% rise in 2018; skilled workers: 12% rise in 2018)0.2%Selective VAT rate cuts (2018: fish and pork liver from 27% to 5%; restaurant meals and internet from 18% to 5%; 2019: preserved milk from 27% to 5%)-0.2%-0.1%Measures to increase tax collection efficiency (extension of online cashiers and phasing-in online invoicing between companies) 0.1%Revamping SSC allowances (phasing-out the previous age related benefits, while making old age pensioners exmept of all social contributions)-0.1%Residual (all other smaller measures taken together)-0.1%0.1%TOTAL-0.7%-0.4%Note: The budgetary impact in the table as included in the Commission 2018 autumn forecast. A positive sign implies that revenue increases as a consequence of this measure. The table presents spearately only measures with a fiscal impact of at least 0.1% of GDP over the examined period. 
 
 
 
Based  on  the  Commission  2018  autumn  forecast,  which  takes  into  account  the  above 
discussed budgetary developments and measures, the general government deficit is projected 
at 2.4% of GDP in 2018, in line with the authorities’ current target (see Table 4). Compared to 
the updated budgetary outturn in 2017, the headline deficit is expected to increase by 0.2% of 
GDP, while the general government deficit excluding the effect of one-offs is set to improve 
by  a  similar  magnitude.4  As  the  positive  output  gap  is  projected  to  continue  widening,  the 
Commission projects a deterioration of the structural balance by 0.4% of GDP, from -3.4% in 
2017 to -3.8% in 2018. 

Regarding key  factors shaping the 2018 deficit forecast,  the fall-out  of  one-off  receipts (i.e. 
income  from  land  sales)  and  temporary  tax  proceeds  (i.e.  a  corporate  income  tax  revenue 
windfall),  which  benefited  the  budget  in  the  previous  year,  significantly  contribute  to  the 
increasing headline deficit. Revenues have also been reduced by tax measures, including a 2.5 
percentage-point decrease in the employer social contribution rate, the effect of which on the 
tax-to-GDP  ratio  is  projected  to  be  largely  dampened  due  to  a  rapid  growth  of  major  tax 
bases.  While  the  revenue  outlook  improved  considerably  since  the  spring,  it  is  set  to  be 
matched by extra spending reflecting information provided in the updated budgetary plans of 
the authorities. Nonetheless, the growth of primary expenditure, excluding increased spending 
from EU funds, is forecast to slow compared to 2017 and to remain well below the forecast 
high GDP growth.5 This projected moderation of spending growth coupled with a continued 
decline  of  interest  outlays  reduces  the  impact  of  the  above-mentioned  deficit-increasing 
developments. 

Updated budgetary projection for 2019 

According  to  the  Commission  2018  autumn  forecast,  the  headline  deficit  is  expected  to 
decrease to 1.9% of GDP in 2019, just slightly above the budgetary target of 1.8%, declining 
by around 0.5 percentage points compared to 2018. The impact of fiscal expansion seen since 
2017 on the budgetary position is projected to be partly reversed with the structural balance 
estimated to improve by some 0.5% of GDP to -3.3% of GDP in 2019 (see Table 4). 

The  Commission  2018  autumn  forecast  incorporates  an  additional  2  percentage-point  cut  in 
social  contributions,  which  is  planned  by  the  authorities  as  of  July  2019.  The  remaining 
elements  of  the  2019  tax  package  are  estimated  to  be  broadly  revenue-neutral  overall  (see 
Table  3).  Taking  into  account  the  budgeted  appropriations,  total  primary  expenditure, 
excluding spending from EU funds, is expected to increase rather moderately relative to the 
GDP,  which  is  the  key  driver  of  the  forecast  deficit-reduction.6  The  projected  expenditure 
restraint  affects  the  main  spending  items  at  a  varying  degree.  While  the  public  wage  bill  is 
foreseen to  increase  well below inflation and social payments  are also  set  to  decline in  real 
terms,  spending  on  government  investment  is  forecast  to  expand  even  as  a  percentage  of 
GDP. 

4   The  2017  budgetary  outturn  figures  were  revised  in  the  2018  autumn  EDP  notification  resulting  in  a 
deterioration of the general government deficit recorded for 2017 by around 0.3% of GDP compared to the 
spring data. 

5   In 2017, primary expenditure, filtering out the effect of one-offs and EU funds, rose above the rate of GDP 
growth, by 9.5% in nominal terms and 5.5% in real terms as measured relative to the GDP deflator. In 2018, 
primary expenditure, netting out the same factors, is projected to increase only by 5.7% relative to a nominal 
GDP  growth  of  8.1%,  which  corresponds  to  a  real  growth  of  2.0%.  This  results  in  1  percentage  point 
reduction in the expenditure-to-GDP ratio. 

6   In  2019,  total  primary  expenditure,  excluding  spending  from  EU  funds,  is  projected  to  increase  by  4.4% 

relative to a forecast nominal GDP growth of 6.9%, which corresponds to a real growth of 1.0%. 

5 

 
 
                                                 
Table 4: Composition of the budgetary adjustment 

Public debt developments 

In  2017,  the  general  government  debt-to-GDP  ratio  reached  73.3%,  decreasing  overall  by 
some  7  percentage  points  from  its  peak  in  2011.  The  Commission  2018  autumn  forecast 
projects  a  marked  slowdown  in  debt  reduction  in  2018  despite  the  forecast  nominal  GDP 
growth  above  8%:  the  debt  ratio  is  expected  to  decrease  only  to  72.9%  (see  Table  5).  This 
stoppage  results  from  a  sizeable  adverse  stock-flow-adjustment  effect  largely  due  to  the 
increased pre-financing needs of EU-funded projects and the weakening of the exchange rate. 
In 2019, the debt ratio is expected to decline faster, falling to 70.3% by the end of the  year 
thanks to the improving budgetary position and the persisting high nominal GDP growth. 

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

6 

OutturnCPUpdate October3COMCPBudget July3COMRevenue44.745.545.144.945.145.544.7of which:- Taxes on production and imports18.018.118.418.317.918.118.2- Current taxes on income, wealth, etc.7.46.96.96.97.07.16.9- Social contributions12.812.712.512.412.612.712.2- Other (residual)6.57.87.37.37.67.67.4Expenditure46.947.947.547.346.947.346.6of which:- Primary expenditure44.145.344.944.744.544.944.2of which:Compensation of employees10.910.510.810.89.99.910.1Intermediate consumption7.97.37.67.67.18.07.8Social payments13.913.813.413.413.113.012.9Subsidies1.41.41.41.41.41.31.3Gross fixed capital formation4.56.06.05.87.06.66.3Other (residual)5.56.35.75.76.06.05.7- Interest expenditure2.82.62.52.52.42.42.4General government balance (GGB)-2.2-2.4-2.4-2.4-1.8-1.8-1.9Primary balance0.60.20.10.10.60.60.5One-off and other temporary measures0.40.00.00.00.00.00.0GGB excl. one-offs-2.6-2.4-2.4-2.4-1.8-1.8-1.9Output gap11.71.7n.a.2.81.5n.a.2.9Cyclically-adjusted balance1-3.1-3.2n.a.-3.8-2.6n.a.-3.3Structural balance2-3.4-3.2n.a.-3.8-2.6n.a.-3.3Structural primary balance2-0.7-0.6n.a.-1.3-0.2n.a.-0.9Notes:Source: 2018 Convergence programme (CP), 2018 autumn EDP notification, Hungarian Ministry of Finance (Update October), 2019 budget approved on 20 July 2018, Hungarian Ministry of Finance (Budget July), and the Commission 2018 autumn forecast (COM)3The figures of October update and the 2019 budget also reflect statistical revisions and thus are not fully comparable with the 2018 CP. The 2019 budget was adpoted before the budgetary projections for 2018 were updated by the authorities in October 2018.1Outputgap(in%ofpotentialGDP)andcyclically-adjustedbalanceaccordingtotheCPisrecalculatedbyCommissiononthebasisoftheprogramme scenario using the commonly agreed methodology.2Structural (primary) balance = cyclically-adjusted (primary) balance excluding one-off and other temporary measures. (% of GDP)201720182019 
 
 
Table 5: Debt developments  

4. 

COMPLIANCE WITH THE COUNCIL RECOMMENDATION FOR 2018 

On  22  June  2018,  the  Council  recommended  Hungary  to  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 1.0% of GDP. 

In  2018,  based  on  the  Commission  2018  autumn  forecast,  the  growth  of  government 
expenditure,  net  of  discretionary  revenue  measures  and  one-offs,  is  projected  at  7.0%,  well 
above the recommended reference rate of  growth (deviation  of 1.6% of  GDP, see Table 6). 
The structural balance is set to deteriorate by 0.4 % of GDP pointing to the opposite direction 
of the recommended structural improvement of 1.0% GDP (deviation of 1.4% of GDP).  

The  overall  assessment  indicates  that  the  expenditure  benchmark  is  negatively  affected  by 
three  factors.  First,  the  medium-term  potential  GDP  growth  arising  from  the  Commission 
2017  spring  forecast  applied  as  a  benchmark  is  impacted  by  very  low  potential  growth 
estimates  in  the  aftermath  of  the  crisis.  As  a  result  of  data  revisions  and  the  subsequently 
estimated recovery of the growth potential, the currently calculated average potential growth 
rate  for  the  same  reference  period  of  2012-2021  is  considerably  higher  (2.3%  vs.  1.8%). 
Second,  the  GDP  deflator  underlying  the  expenditure  benchmark  (which  is  based  on  the 
projection of the Commission 2017 spring forecast) does not seem to account properly for the 
increased  cost  pressures  affecting  government  spending.  Third,  the  expenditure  benchmark 
appears  to  underestimate  the  fiscal  effort  because  it  does  not  take  into  account  the  indirect 
revenue  effect  of  certain  measures.  In  particular,  this  concerns  the  structural  increase  in  tax 
revenues  generated  by  the  ripple  effect  of  significant  minimum  wage  increases  on  earnings 
above  the  statutory  minimum  as  well  as  by  the  pass-through  of  the  employer  social 
contribution  rate  cut  into  higher  wages.  After  adjusting  for  these  factors,  the  expenditure 
benchmark  appears to  adequately reflect  the fiscal  effort and still points to  a deviation  by a 
wide  margin.  The  assessment  of  the  structural  balance  leads  to  a  similar  result.  The  size  of 
deviation  indicated  by  the  structural  balance  pillar  is  negatively  affected  by  a  revenue 

7 

CPOutturnCPCOMCPCOMGross debt ratio173.673.373.272.969.670.3Change in the ratio-2.4-2.6-0.4-0.3-3.6-2.6Contributions2:1. Primary balance-0.8-0.6-0.2-0.1-0.6-0.52. “Snow-ball” effect-2.6-2.9-2.2-3.0-2.7-2.3Of which:Interest expenditure2.82.82.62.52.42.4Growth effect-2.8-2.9-3.0-2.9-2.8-2.3Inflation effect-2.6-2.7-1.8-2.5-2.1-2.33. Stock-flow adjustment1.10.92.12.8-0.30.2Source:2018 Convergence programme (CP) and Commission 2018 autumn forecast (COM),  Commission calculations 20182019(% of GDP)Notes:1 End of period.2Thesnow-balleffectcapturestheimpactofinterestexpenditureonaccumulateddebt,aswellastheimpactofrealGDPgrowthandinflationonthedebtratio(throughthedenominator).Thestock-flowadjustmentincludesdifferencesincashandaccrualaccounting,accumulationoffinancialassetsandvaluationandotherresidualeffects. 2017 
 
 
shortfall7, but this is partly offset by the effect of a higher point estimate for potential GDP 
growth compared to the medium-term average underlying the expenditure benchmark. 

Therefore the overall assessment confirms the deviation from the recommended adjustment. 

Table 6: Hungary under the preventive arm of the SGP – 
 Compliance with the Council Recommendation of 22 June 2018 

7   The  revenue  shortfall  reflects  the  phase-out  of  the  extraordinary  corporate  income  tax  revenue  discussed 

above. 

8 

(% of GDP)20172018Medium-term objective (MTO)-1.5-1.5Structural balance2 -3.4-3.8Structural balance based on freezing-3.2-3.6Position vis-a -vis the MTO3Not at MTONot at MTORequired adjustment40.31.0Required adjustment corrected50.01.0Change in structural balance6-1.4-0.4One-year deviation from the required adjustment7-1.4-1.4Two-year average deviation from the required adjustment7-0.7-1.4Applicable reference rate81.52.8One-year deviation adjusted for one-offs9-2.4-1.6Two-year deviation adjusted for one-offs9-1.9-2.0Conclusion over one yearSignificant deviationSignificant deviationConclusion over two yearsSignificant deviationSignificant deviationSource: Commission 2018 autumn forecast (COM); Commission calculations.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. 8  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. 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 2017) is carried out on the basis of Commission 2018 spring forecast. 7  The difference of the change in the structural balance and the corrected required adjustment. Initial position11 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 pillarConclusionNotesStructural balance pillar 
 
 
 
                                                 
5. 

PROPOSED ADJUSTMENT PATH FOR 2019 

On 13 July 2018, the Council addressed recommendations to Hungary within the context of 
the  European  Semester.  In  the  area  of  public  finances,  for  2019  the  Council  recommended 
Hungary to 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.8 The 
Council  recommendation  for  2019  was  set  in  line  with  the  minimum  requirement  as 
determined  by  Regulation  (EC)  No  1466/97  and  the  commonly  agreed  adjustment  matrix9, 
which factors in the prevailing economic circumstances and possible sustainability concerns, 
taking into account the Commission 2018 spring forecast. 

Based  on  the  Commission  2018  autumn  forecast,  Hungary's  structural  deficit  increased  by 
1.7% of GDP in 2017 and it is projected to deteriorate further by 0.4% of GDP reaching 3.8% 
in 2018. As a result, the structural deficit is estimated to be 2.3% of GDP away from the MTO 
in  2018.  In  order  to  correct  for  the  cumulated  deviations  and  to  bring  Hungary  back  on  an 
appropriate  adjustment  path  following  past  slippages,  an  additional  and  persistent  effort 
should complement the adjustment target for 2019 recommended by the Council on 13 July 
2018.  An  additional  effort  of  0.25%  of  GDP  seems  appropriate  given  the  magnitude  of  the 
observed  significant  deviation  from  the  required  fiscal  adjustment.  It  would  accelerate  the 
adjustment back towards the MTO. 

Based  on  the  Commission  2018  autumn  forecast,  that  target  of  1.0%  of  GDP  structural 
adjustment is consistent with a nominal growth rate of net primary government expenditure of 
3.3% in 2019, compared to the growth rate of 5.3% currently projected by the Commission. 

The structural improvement of 1.0% of GDP in 2019 translates into a need to adopt measures 
of a total yield of 0.5% of GDP in structural terms as compared to the current 2019 baseline of 
the Commission 2018 autumn forecast, given projected improvement of the structural balance 
in 2019. 

6. 

CONCLUSION 

On  22  June  2018,  the  Council  recommended  Hungary  to  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 1.0% of GDP. 

In the  report on action taken in  response to  the  recommendation, the authorities retain their 
initial  general  government  deficit  target  of  2.4%  of  GDP  for  2018.  Compared  to  the  spring 
2018, the authorities expect significantly higher tax revenues and savings due to the decreased 
co-financing  costs  of  EU-funded  projects.  However,  the  deficit-reducing  effect  of  these 
developments  is  planned  to  be  fully  offset  by  additional  spending.  The  reported  new 
discretionary measures have no significant net fiscal impact on the budget outcome in 2018, 
thus falling short of the structural effort recommended by the Council.  

The Commission 2018 autumn forecast projects a general government deficit for 2018 in line 
with  the  authorities’  current  target.  This  implies  a  worsening  of  both  the  nominal  and 
structural  deficits  compared  to  2017.  In  2018,  based  on  the  Commission  2018  autumn 
forecast,  both  the  expenditure  benchmark  and  the  structural  balance  pillars  point  to  a 

8   OJ C 320, 10.09.2018, p. 72 
9   “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 

9 

 
 
                                                 
deviation  from  the  fiscal  effort  recommended  by  the  Council  on  22  June  2018.  An  overall 
assessment confirms this conclusion.  

In light of an insufficient response to the Council Recommendation of 22 June 2018 and the 
cumulated high deviation from the required adjustment path toward the MTO, it is appropriate 
to  address  to  Hungary  a  revised  recommendation  on  the  necessary  measures  to  be  taken.  A 
revised  recommendation  to  improve  Hungary's  structural  balance  by  1.0%  of  GDP  in  2019 
relative to 2018 would accelerate Hungary's adjustment back towards the MTO.  

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