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
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

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   EUROPEAN COMMISSION  Brussels, 21.11.2018 COM(2018) 806 final  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 {SWD(2018) 504 final}  
 
 
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 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty on the Functioning of the European Union,  
Having regard to Council Regulation (EC) No 1466/971, and in particular Article 10(2), fourth 
subparagraph, thereof, 

Having regard to the recommendation from the European Commission, 

Whereas:  

(1) 

(2) 

(3) 

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  adjustment  path  toward  the  medium-term  budgetary 
objective of -1,5 % of GDP existed in Hungary.  

In view of the established significant deviation, the Council on 22 June 2018 issued a 
recommendation2  for  Hungary  to  take  the  necessary  measures  to  ensure  that  the 
nominal growth rate of net primary government expenditure3 does not exceed 2,8% 
in  2018,  corresponding  to  an  annual  structural  adjustment  of  1,0%  of  GDP.  It 
recommended  that  Hungary  uses  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 the action taken 
in response to that recommendation. 

On 18 and 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. After having transmitted its provisional findings to the 
Hungarian  authorities  for  comments,  the  Commission  reported  its  findings  to  the 
Council on 21 November 2018. Those findings were subsequently made public. The 
Commission report finds that the Hungarian authorities intend to maintain the 2018 
headline deficit target of 2,4% of GDP as set in the 2018 Convergence Programme 
and thus do not plan to act upon the Council Recommendation of 22 June 2018.  

1  OJ L 209, 2.8.1997, p. 1. 
2  OJ C 223, 27.6.2018, p. 1. 
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. 

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(4) 

(5) 

On 15 October 2018 the Hungarian authorities submitted a report on action taken in 
response  to  the  Council  Recommendation  of  22  June  2018.4  In  the  report,  the 
authorities reiterated that their target for 2018 remains a headline deficit of 2,4% of 
GDP.  Compared  to  the  budgetary  projection  in  the  2018  Convergence  Programme, 
the authorities expect significantly higher tax revenues and savings due to decreased 
co-financing  costs  of  projects  funded  from  the  Union  budget.  However,  they  plan 
additional  expenditure  that  fully  offsets  the  deficit-reducing  effect  of  those 
developments.  The  reported  new  discretionary  measures  have  no  significant  net 
fiscal  impact  on  the  budget  outcome  in  2018,  thus  falling  short  of  the  requirement 
stated in the Council Recommendation of 22 June 2018. 

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 of 2,8 % (deviation of 1,6 
% of GDP). The structural balance is set to deteriorate by 0,4 % of GDP against the 
recommended  improvement  of  1,0  %  of  GDP  (deviation  of  1,4  %  of  GDP). 
Therefore, both pillars point to a deviation from the recommended adjustment by a 
wide  margin.  The  reading  of  the  expenditure  benchmark  is  negatively  affected  by 
three  elements,  namely  a    lower-than-currently-estimated  medium-term  potential 
growth  rate  and  GDP  deflator  underlying  the  expenditure  benchmark  as  well  as  an 
indirect  revenue  effect  of  certain  measures.  After  adjusting  for  these  factors,  the 
expenditure benchmark appears to adequately reflect the fiscal effort and still points 
to a deviation. The assessment of the structural balance leads to a similar result. The 
structural balance is negatively impacted by a revenue shortfall, but it 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  a  deviation  from  the  recommended  adjustment  by  a  wide 
margin. 

(6) 

The  above  findings  lead  to  the  conclusion  that  Hungary's  response  to  the  Council 
Recommendation of 22 June 2018 has been insufficient. The fiscal effort falls short 
of ensuring that the nominal growth rate of net primary government expenditure does 
not  exceed  2,8  %  in  2018,  which  would  correspond  to  an  annual  structural 
adjustment of 1,0 % of GDP, 

HAS ADOPTED THIS DECISION:  

Hungary  has  not  taken  effective  action  in  response  to  the  Council  Recommendation  of  22 
June 2018. 

Article 1 

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

procedure_en 

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This Decision is addressed to Hungary. 

Done at Brussels, 

Article 2 

For the Council 
The President 

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