COMMISSION STAFF WORKING DOCUMENT Country Report Hungary 2019 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011
Date: 2019-02-27
Institutions: European Commission, Secretariat-General
Subjects: Hungary, economic situation, education, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 27.2.2019  SWD(2019) 1016 final  COMMISSION STAFF WORKING DOCUMENT Country Report Hungary 2019 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2019) 150 final}  
 
 
CONTENTS 

Executive summary 

1.  Economic situation and outlook 

2.  Progress with country-specific recommendations 

3.  Reform priorities 

3.1.  Public finances and taxation 

3.2.  Financial sector 

3.3.  Labour market, education and social policies 

3.4.   Competitiveness reforms and investment 

Annex A: Overview Table 

Annex B: Commission Debt sustainability analysis and fiscal risks 

Annex C: Standard Tables 

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7 

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24 

32 

45 

50 

51 

Annex D: Investment Guidance on Cohesion Policy Funding 2021-2027 for Hungary 

57 

References 

LIST OF TABLES 

Table 1.1: 

Key economic and financial indicators - Hungary 

Table 2.1: 

Assessment of the implementation of 2018 country-specific recommendations (CSR) 

Table 3.2.1: 

Financial soundness indicators, all banks in Hungary 

Table C.1: 

Financial market indicators 

Table C.2: 

Headline Social Scoreboard indicators 

Table C.3: 

Labour market and education indicators 

Table C.4: 

Social inclusion and health indicators 

Table C.5: 

Product market performance and policy indicators 

Table C.6: 

Green growth 

LIST OF GRAPHS 

Graph 1.1: 

Contributions to real GDP growth 

Graph 1.2: 

Investment rate by sector (% of GDP) 

1 

63 

13 

15 

21 

51 

52 

53 

54 

55 

56 

7 

7 

 
 
 
 
Graph 1.3: 

Key labour market rates: activity, unemployment, long-term unemployment, youth 

unemployment, NEET (%) 

Graph 1.4: 

Labour costs and unemployment 

Graph 1.5: 

Unit labour cost growth 

Graph 1.6: 

Contribution to inflation 

Graph 1.7: 

Net international investment position 

Graph 1.8: 

Financial liabilities by sector (non-consolidated loans & debt securities, % of GDP) 

Graph 1.9: 

Convergence of GDP per capita between 2007 and 2017 (PPS, EU=100) 

Graph 1.10:  Contributions to potential growth 

Graph 1.11:  Regional GDP per capita based on purchasing parity (% of EU average) 

Graph 2.1:  Overall multiannual implementation of 2011-2018 CSRs to date 

Graph 3.1.1: 

Tax wedge of a single worker earning 67% of average wage 

Graph 3.1.2: 

Trends in primary expenditure (% of GDP) 

Graph 3.1.3:  Breakdown of general government spending, three year average (2014-2016) 

Graph 3.1.4:  Gross government debt ratio: the baseline scenario and alternative trajectories 

Graph 3.2.1:  Credit growth 

Graph 1: 

Real house prices in Hungarian regions (peak of previous cycle=100) 

Graph 3.3.1:  Regional unemployment rate and participation in the Public Works Scheme, 2017 

Graph 3.3.2:  Childcare under 3 years age (%) 

Graph 3.3.3:  Main poverty indicators, 2005-2018 

Graph 3.3.4:  Programme for International Student Assessment (PISA) results, 2000-2015 

Graph 3.3.5: 

Tertiary education attainment rate among 30-34 years, 2008-2017, relative to EU 

average 

Graph 3.4.1:  Labour productivity (total economy, 2000=100) 

Graph 3.4.2: 

Investment in intellectual property (% of GDP) 

Graph 3.4.3:  Use of IT solutions by businesses (% of companies in 2017) 

Graph 1: 

Share of financially unviable ('zombie') firms in the Hungarian business sector 

Graph 3.4.4:  Decomposition of business sector productivity growth (%) 

Graph 3.4.5:  Labour productivity in the market service sector relative to the EU average (2000=100) 

Graph 3.4.6:  Average of the voice and accountability and control of corruption indexes in 

Worldwide Governance Indicator (EU average=100) 

Graph 3.4.7:  Share of tenders without prior publication and award of contracts with only a single 

bidder above EU threshold 

8 

8 

9 

9 

10 

11 

11 

12 

12 

14 

17 

18 

19 

20 

21 

23 

24 

25 

27 

29 

30 

32 

32 

35 

37 

38 

39 

41 

43 

2 

 
 
 
LIST OF BOXES 

Box 2.1: EU  funds and programmes contribute to addressing help overcome structural challenges 

and to  fostering growth and competitiveness development in Hungary 

Box 3.2.1: Regional disparities in house prices 

Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights 

Box 3.4.1: Investment challenges and reforms in Hungary 

Box 3.4.2: Zombie firms in Hungary 

16 

23 

26 

33 

37 

3 

 
 
EXECUTIVE SUMMARY 

resilience 

Strong  growth  performance  has  created 
favourable  conditions  to  carry  out  reforms  to 
increase  productivity  and  strengthen  growth 
and 
fundamentals, 
economic 
convergence  capacity  (1).  The  economic  cycle  is 
near  its  peak.  Productivity  growth  has  improved, 
but  remains  below  pre-crisis  rates,  limiting  the 
possibility  for  income  convergence.  Economic 
policy 
task  of  withdrawing 
macroeconomic  stimulus  at  the  right  time  to 
prevent  overheating,  while  improving  education 
and  training,  and  creating  a  business  environment 
that attracts productivity-enhancing investment. 

the  dual 

faces 

The  Hungarian  economy  is  enjoying  a  strong 
cyclical  upswing.  Households  and  companies  are 
making  up  for  years  of  postponed  consumption 
and  investment,  which  is  rapidly  lifting  economic 
activity.  A  positive  feedback  loop  is  emerging 
between  household  income,  the  housing  market 
and lending, adding to economic momentum. This 
is an opportunity for a generation of well planned 
investments.  Employment  has  risen  to  a  new 
historic  peak,  thanks  to  strong  demand  for  labour 
and  policy  measures  enabling  a  larger  proportion 
of people to seek paid work. Labour shortages and 
large  minimum  wage  increases  are  sparking  rapid 
wage  growth.  Economic  growth  was  also  boosted 
by  pro-cyclical  fiscal  expansion,  entailing  rising 
public  investment  from  own  sources  and  the 
absorption  of  EU  funds.  Monetary  stimulus 
remained in place through record low real interest 
rates and a gradually depreciating currency.  

The domestic recovery is nearing its limits amid 
external  headwinds.  Economic  growth  is  set  to 
level off after pent-up consumption unwinds, while 
investment  is  stabilising  at  a  high  level.  The 
external environment is also providing less support 
to  export  growth,  while  the  major  role  played  by 
the  car  industry  creates  a  vulnerability  to  trade 
technological 
to  regulatory  and 
disputes  and 
change.  

fuelling 

investment,  but  as 

Loose  macroeconomic  policies  are  heating  up 
the  economy.  Policy  stimulus  has  supported 
productivity-enhancing 
the 
economic cycle matures, it also risks creating new 
imbalances.  Labour  costs  continue  to  outpace 
productivity  growth, 
inflation.  The 
external surplus of the economy is diminishing, as 
weakening  exports  cannot  fully  counterbalance 
dynamic  import  growth.  The  large  increase  in 
public 
capacity 
shortages in construction, leading to cost overruns 
and project delays, and contributing to rapid house 
financing 
price 
conditions are creating opportunities to invest, but 
present  a  challenge  in  terms  of  using  ample 
financial  resources  efficiently.  Macroeconomic 
policies  now  face  the  challenge  of  regaining  their 
manoeuvring space before the next downturn.  

increases.  Persistently  easy 

aggravating 

investment 

is 

improvement 

Fiscal consolidation efforts are insufficient. The 
budget deficit is expected to peak at around 2 % of 
GDP,  and  only  a  moderate 
is 
projected  in  the  next  years.  The  deficit  is  one  of 
the  highest  in  the  European  Union,  while  public 
debt  also  remains  high  for  Hungary’s  level  of 
development.  The  favourable  economic  cycle 
boosted tax revenues, but the structural deficit rose 
by 2 percentage points of GDP between 2016 and 
2018.  In  2018,  the  Council  launched  a  significant 
deviation procedure addressed to Hungary (2). The 
structural  deficit  is  expected  to  improve  in  2019, 
although  less  than  what  is  recommended  by  the 
Council. Further improvement is expected in 2020. 

Stronger  productivity  growth  will  enable 
income to catch up with the EU average. In the 
course  of  the  last  decade,  the  mobilisation  of 
labour market reserves has helped income per head 
catch  up  with  the  EU  average,  while  output  per 
worker  has  barely  grown.  Labour  reserves  have 
diminished  and  the  working-age  population  is  set 
term.  Higher 
to  decrease 
productivity is thus essential if living standards are 
to be brought closer to the EU average.  

the  medium 

in 

(1)  This  report  assesses  Hungary’s  economy  in  light  of  the 
European Commission’s Annual Growth Survey published 
on 21 November 2018. In the survey, the Commission calls 
on  EU  Member  States  to  implement  reforms  to  make  the 
European  economy  more  productive, 
resilient  and 
inclusive.  In  so  doing,  Member  States  should  focus  their 
efforts  on  the  three  elements  of  the  virtuous  triangle  of 
economic  policy  —  delivering  high-quality  investment, 
efforts  on  productivity  growth, 
focusing 
reforms 
inclusiveness  and 
institutional  quality  and  ensuring 
macroeconomic stability and sound public finance. 

Increased  investment  in  research,  innovation, 
infrastructure  and  skills  are 
important  to 
improve  productivity  and  long-term  growth 
that  benefits  society  as  a  whole.  Public  and 
private  investment  as  a  share  of  GDP  is  high,  but 

(2)  https://www.consilium.europa.eu/en/press/press-

releases/2018/06/22/hungary-and-romania-called-on-to-
correct-significant-budgetary-deviations/ 

4 

 
 
                                                           
                                                           
Executive summary 

environment in services has not improved. The 
quality  and  transparency  of  decision  making 
and social dialogue has not advanced.  

Regarding  the  progress  on  reaching  the  national 
targets under the Europe 2020 Strategy, Hungary is 
in  reducing  greenhouse  gas 
performing  well 
emissions, 
renewable  energy  use, 
boosting the employment rate and cutting poverty. 
More  effort  is  needed  to  raise  research  and 
development  spending  and 
tertiary  education 
attainment, and reduce early school leaving.  

increasing 

Hungary  performs  well  on  some  indicators  of 
the Social Scoreboard supporting the European 
Pillar  of  Social  Rights,  but  challenges  remain. 
The  gender  employment  gap  is  high,  partly 
explained  by  a  scarcity  of  childcare  facilities  for 
children  under  3  years  of  age.  The  share  of  early 
school  leavers  increased  further  from  an  already 
high level. While inequality is lower than  in other 
Member States, it has increased since 2008, partly 
as a result of changes in the tax and benefit system. 
With social benefits at a low level, the good score 
on the impact of  social transfers can be  explained 
by  generous  parental  leave  benefits.  On  the 
positive  side,  the  unemployment  rate,  including 
long-term, is below the EU average.  

The  main  findings  of  this  country  report,  and  the 
related policy challenges, are as follows: 

Productivity growth remains modest. It has been 
slow for a decade compared to Hungary’s regional 
peers.  Large  productivity  differences  persist 
between  larger,  more  capital-intensive  foreign 
firms, and smaller, more labour-intensive domestic 
counterparts.  Only  few  firms  innovate,  reflecting 
weaknesses  in  the  entrepreneurial  culture  and 
product  market  competition.  Low  funding  for 
public  research and development is detrimental to 
the  research  and  innovation  system.  The  skills 
level of managers and workers are not high enough 
to secure the spread of efficient business practices 
such as digitalisation.  

Limitations  to  product  market  competition 
the  selection  process  of  efficient 
hinders 
enterprises.  Regulatory  barriers 
state 
involvement including new monopolies and ad hoc 
exemptions  from  competition  scrutiny,  inefficient 
insolvency  procedures,  targeted  measures,  and 
sector specific taxes prevent productive businesses 

and 

to 

to  be  enhanced 

its  composition  could  be  better  geared  to  raise 
productivity.  Research  and  innovation  capacities 
improve  moderate 
need 
inequality 
innovation  performance.  Territorial 
could be alleviated by improving infrastructure and 
public  services  in  deprived  areas.  Investment  is 
crucially needed in skills, education and training to 
boost  future  economic  growth  in  Hungary.  Other 
relevant  investment  spending  items  are  childcare, 
healthcare  and  social  inclusion.  Greening  the 
economy requires investment in energy efficiency, 
climate  change  resilience  and  waste  management. 
The  institutional  framework  needs  to  improve  to 
ensure  that  the  economic  and  social  benefits  of 
investments  are  maximised.  Annex  D 
these 
identifies  key  priorities  for  support  by 
the 
the 
European  Regional  Development  Fund, 
European Social Fund Plus and the Cohesion Fund 
for the 2021-2027 period  in Hungary, building on 
the  analysis  of  investment  needs  and  challenges 
outlined in this report. 

Overall, Hungary has made limited progress in 
addressing 
country-specific 
the 
recommendations.  

2018 

There  has  been  some  progress  in  the  following 
areas: 

  The  complexity  of  the  tax  system  has  been 
reduced  as  several  small  taxes  were  abolished 
or  merged.  The  number  of  participants  in  the 
Public Work Scheme has decreased further and 
the  tax  burden  on  employees  after  retirement 
has been cut, helping to unlock labour reserves.  

There  has  been  limited  progress  in  the  following 
areas: 

tendering 

  The  public  procurement  framework  improved 
as  incentives  were  created  to  discourage  less 
transparent 
procedures.  Some 
measures  have  been  introduced  to  prevent  the 
high  concentration  of  disadvantaged  pupils,  in 
particular Roma pupils, in certain schools, with 
limited 
impact.  The  adequacy  of  social 
assistance improved modestly as some transfers 
were increased.  

There has been no progress in the following areas: 

  No  measures  have  been  put  forward 

to 
reinforce  the  anti-corruption  framework  and 
strengthen prosecutorial efforts. The regulatory 

5 

 
 
Executive summary 

Employment  policies  face  the  challenge  of 
creating  a  more  inclusive  labour  market.  Gaps 
in  employment  and  salaries  between  genders  and 
skills  groups  remain  wide  compared  with  the  rest 
of  the  EU.  The  tax  burden  for  single  earners  on 
low  incomes  remains  high,  despite  recent  cuts  in 
employers’ contributions. Labour market outcomes 
for vulnerable groups, including Roma and people 
with  disabilities,  are  weak.  The  Public  Works 
Scheme  has  decreased  markedly,  but  it  is  still 
oversized and  not effective in leading participants 
to  the  jobs  in  the  primary  labour  market.  Other 
policies  to  help  unemployed  or  inactive  people 
find  work  or  training  are  insufficiently  targeted. 
Recent  measures  are  designed  to  get  more  retired 
workers back into jobs and to increase overtime.  

Poverty  has  decreased  with  economic  growth. 
The  share  of  people  at  risk  of  poverty  and  social 
exclusion is falling, although it was still above the 
EU  average  in  2017,  while  social  assistance  and 
unemployment  benefits  have  become 
less 
adequate. There has been a clear shift from social 
benefits  towards  work-related  family  support  and 
in-kind benefits, which are not sufficiently targeted 
on the poor. While home-ownership subsidies have 
expanded, there has been no improvement in social 
housing. 

Large regional disparities persist. The relatively 
well-developed  capital  stands  in  contrast  to  weak 
regional centres and a large number of very small 
settlements,  which 
struggle  with  degrading 
depopulation.  Territorial 
and 
infrastructure 
concentration  of  poverty  and  social  exclusion  is 
also  significant.  Recent  policy  initiatives  aim  to 
strengthen  larger  cities  and  improve  quality  of 
living  in  villages,  but  a  more  holistic  approach  to 
territorial development is needed. 

Shortcomings  in  the  management  of  natural 
resources  hamper  sustainable  growth.  Energy 
efficiency  remains  low,  especially  in  residential 
buildings. The use of renewable energy sources is 
rising  with  potential  for  further  increase.  Air 
pollution  and  water  quality  remain  concerns  and 
waste  recycling  is  underdeveloped.  Hungary  is 
exposed to climate  change risks,  notably droughts 
and 
require  additional 
issues 
investment and institutional capacity building. 

floods.  These 

from  starting  up  and  growing.  They  also  shield 
unproductive  firms  that  might  otherwise  close 
down,  especially  in  retail  and  other  services.  The 
complex  tax  system  raises  compliance  costs,  in 
particular  for  smaller  firms.  The  absence  of 
withholding 
interests,  royalties  and 
dividends  appears  to  be  used  by  multinationals 
engaged in aggressive tax planning structures,  but 
Hungary  is  taking  some  steps  to  limit  such 
practices, in particular  by  implementing  European 
and internationally agreed initiatives. 

taxes  on 

in 

changes 

regulations 

institutional 

capacity  would 
Improved 
contribute to faster  economic convergence.  The 
transparency of policy-making is limited due to the 
lack  of  appropriate  involvement  from  employers’ 
associations,  trade  unions  and  other  stakeholders. 
The same  applies to impact assessments. Fast and 
unpredictable 
can 
discourage  high  value  added  investments.  The 
public  procurement  framework  has  improved  in 
recent  years,  but 
to  promote 
it  still 
competition and productivity. Available indicators 
point  to  notable  corruption  risks.  Determined 
action  to  prosecute  corruption  in  high-level  cases 
is  missing.  Weak  accountability  and  obstacles  in 
access  to  public  information  hinder  the  anti-
corruption  framework.  The  effectiveness  of  the 
justice  system  increasingly  raises  concerns,  in 
independence. 
particular  as 
Corruption  risks  and  favouritism  distort 
the 
allocation of resources as these are not channelled 
to the most productive firms.  

judicial 

regards 

fails 

Both  the  education  and  healthcare  systems  are 
underperforming.  Educational  outcomes  in  basic 
skills  and  the  tertiary  attainment  rate  are  well 
below  the  EU  average.  Disadvantaged  children 
have  little  chance  of  acquiring  appropriate  basic 
skills  and  accessing  higher  educational  tracks. 
Health  outcomes  lag  behind  most  other  EU 
countries  reflecting  unhealthy  lifestyles  and  the 
limited  effectiveness  of  healthcare  provision. 
There are significant socio-economic disparities in 
access 
to  quality  care.  Public  spending  on 
healthcare  is  below  the  EU  average,  and  high 
earners  rely  on  out-of-pocket  payment  to  access 
quality  provision.  The  system  remains  strongly 
hospital-centred,  with  weaknesses  in  primary  care 
and prevention of chronic diseases.  The exclusion 
of disadvantaged groups, in particular Roma, from 
quality education is a missed opportunity in human 
capital accumulation. 

6 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth 

financial 

The  Hungarian  economy  is  near  the  peak  of  a 
strong  cyclical  recovery.  Domestic  consumption 
and  investment  are  making  up  for  lost  years  after 
the 
and  macroeconomic 
stabilisation.  Policies  that  supported  the  recovery 
are  now  exacerbating  the  heating  up  of  the 
economy  as  spare  capacity  has  been  absorbed 
while productivity growth remains modest.  

crisis 

Economic  growth  accelerated  further  in  2018, 
boosted  by  pro-cyclical  fiscal  and  monetary 
stimulus.  Fiscal  expansion  materialised  through 
public investments, advance payments of EU funds 
and  administrative  wage  increases.  The  monetary 
stimulus  was  maintained  through  negative  real 
interest rates and a depreciating currency. The self-
reinforcing  dynamics  of  the  labour  market,  the 
to 
housing  market  and 
economic  momentum.  At  the  same  time,  weaker 
external demand held back export growth. 

lending  also  added 

Graph 1.1:  Contributions to real GDP growth 

Source: European Commission, Winter 2019 Economic 
Forecast 

 Growth is set to slow, a s the cyclical recovery nears its e nd. GDP growth is forecast to decrease from a cy clical peak close to 5 %  in 201 8 to 3 .4 % in  2019 and  to fall further to 2 .6 % in  2020 (see Graph 1.1). After the pent-up  demand for consumer durables and investment goods un winds,  domestic demand should  grow at a more measured pace. Capacity  c onstraints are also increasingly  binding, especially  in cons truction.  Finally , fiscal policy  is forecast to become less pro-cy clical. 

Domestic  demand  remains  the  main  driver  of 
growth.  Strong  wage  growth,  the  easing  of 
precautionary  saving  motives  and  accessible 
financing  are  fuelling  consumption  and  housing 
investment. Tightening capacity constraints, rising 
labour  costs  and  easy  financing  conditions  are 
encouraging 
Public 
investment as a share of GDP is set to stabilise at a 
increased 
(see  Graph  1.2).  The 
high 
utilisation  of  EU  funds,  which  amount  to  4 %  of 

investment. 

corporate 

level 

GDP annually over the 2014-2020 cycle, is making 
a significant contribution to investment growth. 

Graph 1.2: 

Investment rate by sector (% of GDP) 

Source: Eurostat, European Commission Autumn 2018 
Economic Forecast  

new 

increases.  However, 

New export capacities are mitigating the impact 
of  the 
international  slowdown,  but  make 
Hungary  more  vulnerable  to  disruptions  in 
trade flows. Headwinds from the global economy 
are  slowing  down  export  growth.  The  export 
market  share  continues  to  grow  thanks  to  large 
capacity 
export 
capacities  are  concentrated  in  cyclically  sensitive 
sectors  such  as  chemicals,  car  manufacturing  and 
transport.  Therefore  the  timing  of  their  phase-in, 
and  the  expected  market  share  gains,  may  also 
depend  on  the  state  of  the  international  business 
cycle.  The  motor  vehicle 
industry  already 
accounted for 4.9 % of gross value added in 2017, 
and  even  over  7 %  taking  into  account  input 
linkages. The increasingly important role of the car 
industry  and  its  suppliers  poses  a  risk  for  the 
Hungarian  economy,  because  these  sectors  are 
particularly  affected  by  global  trade  disputes,  and 
by technological and regulatory change.  

Labour market 

Labour  market  performance 
in  Hungary 
continued to improve in line with the generally 
good  economic  situation.  The  activity  rate  of 
those  between  20  and  64  years  of  age  reached  a 
record  76 %  in  2017,  having  been  on  a  steadily 
increasing path since 2009 (see Graph 1.3). It may 

7 

-10-8-6-4-202468030405060708091011121314151617181920%, ppsChange in inventoriesInvestmentConsumptionNet exportsReal GDP growthforecast2468101214160002040608101214161820% of GDPBusinessHouseholdPublicforecast 
 
 
 
1. Economic situation and outlook 

continue to increase in the near term, supported by 
the  gradual  rise  of  the  retirement  age  and  tax 
incentives  for  employment  after  retirement  (see 
Section  3.2,  3.3).  Unemployment,  including  long-
term  and  youth  unemployment,  has  fallen  below 
pre-crisis levels, and is forecast to decrease further. 

down outward migration. Between 2016 and 2020, 
the minimum wage will have risen by 45% overall, 
while for skilled workers it will have increased by 
63%. Real wage growth is forecast to remain rapid, 
given  the  tightness  of  the  labour  market  and 
continuing minimum wage hikes (see Graph 1.4).  

Graph 1.3: 

Key labour market rates: activity, 
unemployment, long-term unemployment, 
youth unemployment, NEET (%) 

Graph 1.4: 

Labour costs and unemployment 

(1) Deflated with HICP inflation 
Source: Eurostat 

Labour  costs  continue  to  outpace  productivity 
gains.  Although  the  impact  of  rapid  wage  growth 
on  labour  cost  is  mitigated  by  the  ongoing 
reduction  of  employers’  social  contributions  (see 
Section  3.1),  real  compensation  still  outpaces 
labour  productivity  gains.  Unit  labour  costs  are 
growing rapidly both in historical comparison and 
relative 
(see  Graph  1.5). 
Recovering  sales  volumes  and  the  2017  corporate 
income  tax  cut  managed  to  offset  the  erosion  of 
profit  margins  in  past  years.  As  these  supporting 
factors  wane,  labour  costs  may  add  pressure  on 
consumer prices and external competitiveness. 

trade  partners 

to 

(1) NEET rate: Not in employment, education or training (% of 
population), total, ages 15-24 
Source: Eurostat 

The  labour  market  continued  to  tighten.  The 
number  of  job  vacancies  exceeded  87 000  in  the 
third  quarter  of  2018,  around  20 %  more  than  in 
2017.  In  parallel,  labour  reserves,  including  the 
numbers  of  part-time  employees,  unemployed 
people,  participants  in  the  Public  Works  Scheme 
and  certain  segments  of  the  inactive  population, 
are shrinking. In the  fourth quarter of 2018, 89 % 
of  manufacturing  firms  reported  labour  shortages 
compared with the EU average of 21 %. There are 
increasing skills and regional mismatches between 
those  seeking  work  and  the  jobs  on  offer  (see 
Section 3.3).  

The  tight 
labour  market  and  government 
measures  are  fuelling  real  wage  growth.  After 
years  of  moderation,  wage  growth  has  been 
accelerating  sharply  since  2017.  Nonetheless, 
average  hourly  wages  in  euro  terms  stood  at  just 
one-third  of  the  EU  average  in  2017,  and  at  60% 
even after adjusting for differences in price levels. 
The  government  encourages  wage  convergence 
through minimum wage increases in a bid to slow 

8 

58606264666870727476780510152025300102030405060708091011121314151617Activity rate 20-64 (rhs)Unemployment rate 15-74Long-term unemployment rate 15-74Youth unemployment rate 15-24NEET rate 15-24024681012-6-4-20246810121400020406081012141618%rate of change y-o-y (%)Compensation per employee, deflated (1)Wages and salaries per employee, deflated (1)Unemployment rate (right axis, reverse scale) 
 
 
1. Economic situation and outlook 

construction  prices  accelerated  above  10 %  in 
autumn 2018. 

Inflation  is  forecast  to  remain  around  the 
central  bank  target.  Although  the  impact  of 
energy and raw food price  increases is set to fade 
in  2019,  administrative  measures  (most  notably 
tobacco  duty  increases)  will  add  to  inflation. 
Furthermore,  amid  strong  demand,  the  currency 
depreciation  of  2018  and  sustained  labour  cost 
growth  can  pass  through  to  consumer  prices  (see 
Graph 1.6). 

Graph 1.6:  Contribution to inflation 

Source: Eurostat 

Monetary  policy  remained  loose  in  2018,  and 
stimulus is  set to be withdrawn only gradually. 
The  central  bank  kept  interbank  rates  at  very  low 
levels  through  its  liquidity  operations.  Although 
nominal  interest  rates  increased  somewhat  in  the 
course  of  the  year,  rising  inflation  kept  real  rates 
negative.  Other  policy  measures  taken  by  the 
central bank sent mixed signals. While the central 
bank  abandoned  tools  designed  to  influence  long 
rates, 
for  Growth 
programme  for  small  companies,  which  will 
supply them with cheap fixed-rate financing in the 
years 
to  come  (see  Section  3.2).  Increasing 
divergence  between  global  and  local  interest  rate 
expectations contributed to the depreciation of the 
currency in 2018. 

its  Funding 

renewed 

it 

Graph 1.5: 

Unit labour cost growth 

Source: AMECO 

Social developments  

The  benefits  of  growth  have  not  been  equally 
distributed.  The  growth  rate  of  GDP  per  capita 
during 2010-2018 averaged about 2.4 %,  which is 
slightly  higher  than  the  growth  rate  of  per  capita 
household income.  At the same  time, the share of 
income  of  the  top  20 %  has  increased  from  3.4 
times  that  of  the  bottom  20 %  in  2010  to  4.3  in 
2017.  This  represents  a  significant  increase  in 
inequality, even though the ratio remains below the 
EU  average  of  5.1.  There  are  further  challenges 
related to the equality of opportunity. In particular, 
looking  at  the  2015  Programme  for  International 
Student Assessment (PISA) scores, the variation in 
Hungarian students’ science results which could be 
attributed  to  differences  in  their  socio-economic 
background was among the largest in the EU (see 
Section 3.3). 

Inflation and monetary policy 

Rising production costs and strong demand are 
stoking  inflation.  Driven  by  rising  fuel  and  food 
prices,  consumer price  inflation in 2018 rose near 
the mid-value of the 3 % ±1 pp. target band of the 
central  bank.  Inflation  excluding  these  volatile 
items  is  also  on  the  rise,  particularly  in  the  more 
labour-intensive  service  categories.  A  broader  set 
of measures confirms growing price pressure. The 
GDP deflator was rising by 5 % in the third quarter 
the  annual  growth  rate  of 
of  2018,  while 

9 

-8-6-4-202468101202030405060708091011121314151617181920Rate of change y-o-y (%)Inflation (GDP deflator growth)Real compensation per employeeProductivity contribution (negative sign)Nominal unit labour costULC in 36 industrial competitors of Hungaryforecast-2-10123456708091011121314151617181920%Contribution of energy and unprocessed foodContribution of otherHICP inflationforecast 
 
 
External position 

The  current  account  surplus  is  melting  away, 
but  the  net  financing  capacity  remains  positive 
thanks  to  the  inflow  of  EU  funds.  The  trade 
balance is decreasing on the back of rising import 
demand  and  weaker  exports.  The  income  balance 
is also set to worsen slightly, mostly driven by the 
profitability of foreign-owned companies operating 
within  Hungary,  and  a  deterioration  of  the  labour 
income  balance  as  the  booming  economy  absorbs 
more  cross-border  workers  from  neighbouring 
countries.  A  nearly  balanced  current  account  is 
expected  in  2019-2020,  which  is  still  higher  than 
the  medium-term  position  explained  by  economic 
fundamentals  (European  Commission,  2018a). 
From  a  sectorial  perspective,  the  lower  current 
account  is  driven  by  rising  private  investment, 
which  is  only  partly  offset  by  lower  net  public 
borrowing.  As  the  rising  utilisation  of  EU  funds 
will  continue  to  support  the  capital  account,  the 
external financing position will remain positive.  

Graph 1.7:  Net international investment position 

1. Economic situation and outlook 

Graph  1.7).  Gross  external  debt  fell  to  near  86 % 
of GDP by mid-2018, almost halving since its peak 
of  156 %  in  2010.  Besides  the  process  of  private 
and  public  deleveraging  and  strong  nominal  GDP 
growth,  the  increasing  reliance  of  public  debt 
management on domestic savers also played a role 
in  reducing  external  debt  (see  also  Section  3.1). 
The  net  inward  stock  of  foreign  direct  investment 
continued to decrease in 2017, to 35 % of GDP. 

Public finances 

to 

Fiscal policy turned pro-cyclical in recent years. 
Hungary registered one of the fastest GDP growth 
rates,  above  the  estimated  potential  in  2017  and 
2018.  Instead  of  building  public  finance  reserves 
for bad times, the budget deficit rose from 1.6 % of 
GDP  in  2016  to  around  2 %  in  2018,  among  the 
highest  in  the  EU.  While  major  tax  bases  grew 
faster than GDP, government spending  grew even 
increased  public 
stronger,  mainly  due 
investments. Part of the cyclical revenues was used 
to 
social 
contributions. In addition, public investments grew 
rapidly, and are forecast to exceed 6 % of GDP in 
2019-2020.  The  structural  deficit  is  estimated  to 
have risen from 1 ¾ % in 2016 to 3 ¾ % in 2018. 
In  2018 
launched  a  significant 
deviation  procedure  addressed  to  Hungary.  The 
structural  deficit  is  expected  to  improve  by  0.5 % 
in  2019,  although  less  than  what  is  recommended 
by  the  Council.  The  public  debt  is  high  for  a 
middle income economy, at above 70 % of GDP. 

tax  cuts  on  employers’ 

the  Council 

finance 

Source: Eurostat 

international 

The  net 
investment  position 
continued to improve on account of the external 
financing surplus. In the third quarter of 2018, the 
net  position  of  the  government  including  the 
central  bank  amounted  to  -8.4 %  of  GDP,  while 
that  of  the  private  sector  was  -39.1 %.  The 
aggregate  position  of  the  economy  still  exceeds 
prudential benchmarks, albeit to a lessening extent. 
In  addition, 
the  net  position  on  defaultable 
instruments, the less stable forms of financing, was 
already  nearly  balanced  at  the  end  of  2017  (see 

Financial sector and housing market 

The credit cycle is gaining momentum, spurred 
by  easing  financing  conditions.  Loan  demand 
increased  amid  robust  economic  growth.  Banks 
reduced credit spreads and relaxed non-price credit 
conditions.  New 
lending  to  corporations  and 
households  is  accelerating  briskly,  exceeding  the 
repayments  of  existing  loans.  However,  after 
several  years  of  deleveraging,  indebtedness  levels 
remain low, especially in the household sector (see 
Graph  1.8).  The  stock  of  outstanding  mortgage 
loans  has bottomed out at 7.8 % of GDP in 2017, 
the  lowest  level  in  the  EU.  The  macro-prudential 
tools  of  the  central  bank  have  ensured  prudent 
far.  Policy 
lending  practices  so 
household 
initiatives  in  recent  years  have  also  borne  fruit 
through  shifting  new  mortgage  lending  towards 
loans  with  long  interest  rate  fixation  periods, 

10 

-150-100-50050000102030405060708091011121314151617% of GDPReserve assetsNet portfolio investmentOther investment (net)Net direct investmentNet Int'l investment position (NIIP)Marketable debt (NIIP minus FDI and shares) 
 
1. Economic situation and outlook 

2023  for  projects 
that  had  already  received 
building  permits  by  November  2018.  The 
extension  came  after  survey  evidence  showing 
delays  at  the  majority  of  construction  projects 
because  of  capacity  constraints.  These  constraints 
are  in  turn  aggravated  by  the  simultaneous,  rapid 
growth  of  public  investments.  Meanwhile,  the 
uncertainty  surrounding  the  future  tax  rate  caused 
a 6 % drop in the number of new building permits 
in the first three quarters of 2018, foreshadowing a 
period of weaker housing investment after 2020. 

Productivity and potential growth 

in  the 

Modest  productivity  growth  limited  income 
convergence 
last  decade.  In  2017, 
Hungarian  GDP  per  capita  stood  at  67.8%  of  the 
EU  average,  just  7.7  pps  higher  than  a  decade 
earlier. Since the crisis, the rising employment rate 
has  played  a  key  role  in  the  convergence  of  per 
capita  income,  while  productivity  gains  have 
lagged behind regional peers (see Graph 1.9).  

Graph 1.9:  Convergence of GDP per capita between 
2007 and 2017 (PPS, EU=100) 

(1) CEE3: Czech Republic, Poland and Slovakia 
Source: Eurostat 

At the current stage of the economic cycle, high 
investment supports productivity growth. In the 
next  few  years,  labour  productivity  is  set  to 
increase at its fastest rate since the financial crisis, 
albeit still somewhat more slowly than in the pre-
crisis  period  (see  Graph  1.10).  Technological 
upgrading  through  investment  can  also  boost 
estimated  total  factor  productivity  growth.  The 
recovery  of  lending  after  a  long  deleveraging 
expansion  of 
period 

facilitate 

should 

the 

limiting interest rate risk in the short term (see also 
Section 3.2). 

Graph 1.8: 

Financial liabilities by sector (non-
consolidated loans & debt securities, % of 
GDP) 

Source: Eurostat 

The  rise  in  house  prices  accelerated  in  2018, 
leading  to  overvaluation  concerns  in  some 
market  segments.  Real  house  prices  rose  6.9 % 
annually  in  the  third  quarter  of  2018,  up  from  an 
annual  average  3.6 %  in  2017.  An  alternative 
house price index by the central bank signals even 
higher  real  price  increase  of  11.7%  in  the  third 
quarter of 2018. Sustained income growth and high 
consumer  confidence  are  unwinding  pent-up 
demand  on  the  housing  market.  In  addition,  low 
interest rates raise the attractiveness of housing as 
an  investment  asset.  Four  out  of  ten  property 
buyers  report  investment  motives  as  the  main 
reason  for  their  purchase  (MNB,  2018a).  Against 
the  past  undervaluation  of 
this  background, 
housing  disappeared  after  2016  according 
to 
standard  valuation  metrics  such  as  the  price-to-
income  and  price-to-rent  ratios.  The  Budapest 
housing  market  has  already  become  overvalued 
according to the central bank (see Box 3.2.1). 

The  housing  cycle  has  been  intensified  by  the 
temporary reduction of value added tax on new 
housing.  Lowering  this  tax  to  5 %  from  27 % 
boosted  construction  activity.  The  number  of 
completed  apartments  rose  by  28 %  in  the  first 
three  quarters  of  2018,  compared  to  the  same 
period of 2017. The tax reduction was initially due 
to  expire  in  2020,  but  it  has  been  extended  until 

11 

05010015020002Q403Q404Q405Q406Q407Q408Q409Q410Q411Q412Q413Q414Q415Q416Q417Q4% of GDPGovernmentHouseholdNon financial corporationsPrivate non-financial sector50556065707580HungaryCEE3GDP per capita (% of EU average)GDP per capita in 2017 relative to EU averageEffect of change in labour productivity between 2007 and 2017Effect of change in employment rate between 2007 and 2017GDP per capita in 2007 relative to EU average 
 
 
 
1. Economic situation and outlook 

Regional disparities 

are 

Regional  disparities  remain  prominent  despite 
some  convergence.  The  capital  city  plays  an 
extraordinarily  important  role  in  the  economy, 
accounting  for  18 %  of  population  and  36 %  of 
GDP.  In  fact,  its  income  per  capita  even  exceeds 
the  EU  average  by  36 %.  It  is  surrounded  by  the 
much  less  developed  Pest  county,  whose  income 
level remains at 54 % of EU average, and which is 
itself  divided  into  a  thriving  commuting  zone 
around  the  capital  and  a  struggling  hinterland. 
the  remaining  regions,  Western  and 
Among 
Central  Transdanubia 
relatively  more 
developed.  The  more  rapid  income  convergence 
they experienced over the last decade was a result 
into 
of  significant  foreign  direct 
manufacturing.  The  remaining  four  regions  are 
among  the  least  developed  regions  in  the  entire 
EU, 
no 
convergence  in  the  last  decade  (see  Graph  1.11). 
Over  10%  of  their  workforce  is  still  employed  in 
agriculture, while their industrial productivity lags 
significantly behind the national average. They are 
relatively poorly endowed with human capital and 
transport  infrastructure.  Income  differences  also 
persist between urban and rural territories.  Income 
per  capita  is  significantly  lower  in  rural  than  in 
urban  areas  (45 %  versus  141 %  of  the  EU 
average)  and  the  difference  between  them  is  high 
in  European  comparison  (European  Commission, 
2017a).  

experienced 

investment 

virtually 

have 

and 

Graph 1.11:  Regional GDP per capita based on purchasing 

parity (% of EU average) 

companies  with a  high  growth potential (Duval et 
al.,  2017).  However,  persistently  easy  corporate 
financing  conditions  also  create  risks,  because 
credit  tends  to  flow  disproportionately  to  firms 
with  more  collateral,  but  not  necessarily  higher 
productivity,  resulting  in  capital  misallocation 
(Cecchetti-Kharroubi, 2015, Gopinath et al., 2017; 
see also Section 3.2).  

Graph 1.10:  Contributions to potential growth 

Source: European Commission Autumn 2018 Economic 
Forecast 

and 

growth 

Microeconomic  factors  continue  to  constrain 
productivity 
long-term 
convergence.  Low 
innovation  activity  and 
inadequate  management  practices  hold  back 
productivity  growth  within  individual  firms.  The 
regulatory 
the 
reallocation of resources towards more  productive 
companies  (see  Section  3.4).  These  structural 
factors  are  reflected  in  the  moderate  rate  of 
estimated  total  factor  productivity  growth,  and  in 
relatively  slow  economic  convergence  over  the 
longer term (see Graph 1.10). 

environment 

slows 

down 

In view of the ageing population, productivity is 
set to play an even more important role in long-
term growth. Without new measures to encourage 
participation,  the  labour  force  is  set  to  start 
shrinking  in  the  next  decade  as  a  result  of 
demographic trends (see Section 3.2). 

Source: Eurostat 

12 

-10123405070911131517192123Rate of change y-o-y (%)Capital accumulation contributionTFP contributionLabour contributionPotential growthforecast020406080100%200020082016 
 
 
 
1. Economic situation and outlook 

Table 1.1: 

Key economic and financial indicators - Hungary 

(1) NIIP excluding direct investment and portfolio equity shares         
(2) domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches.         
(3) The tax-to-GDP indicator includes imputed social contributions and hence differs from the tax-to-GDP indicator used in the 
section on taxation. 
Source: Eurostat and ECB as of 31-1-2019, where available; European Commission for forecast figures (Winter forecast 2019 for 
real GDP and HICP, Autumn forecast 2018 otherwise) 

13 

2004-072008-122013-1520162017201820192020Real GDP (y-o-y)3,4-1,13,32,34,14,83,42,6Potential growth (y-o-y)2,90,21,82,12,83,23,43,1Private consumption (y-o-y)2,0-2,42,34,04,8...Public consumption (y-o-y)-0,10,63,50,71,3...Gross fixed capital formation (y-o-y)4,0-4,38,9-11,718,2...Exports of goods and services (y-o-y)16,62,06,85,14,7...Imports of goods and services (y-o-y) 13,60,17,13,97,7...Contribution to GDP growth:Domestic demand (y-o-y)2,0-2,13,7-0,56,2...Inventories (y-o-y)-0,1-0,5-0,71,4-0,2...Net exports (y-o-y)1,51,60,31,4-1,9...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)-0,4-0,51,11,30,90,80,50,4Capital accumulation (y-o-y)1,40,60,80,51,01,41,61,4Total factor productivity (y-o-y)1,90,10,00,40,81,11,31,3Output gap2,5-2,7-1,20,41,72,82,92,4Unemployment rate7,110,28,25,14,23,63,33,2GDP deflator (y-o-y)4,13,42,70,93,83,73,33,0Harmonised index of consumer prices (HICP, y-o-y)5,54,90,60,42,42,92,83,0Nominal compensation per employee (y-o-y)7,32,40,34,46,28,16,66,2Labour productivity (real, person employed, y-o-y)3,60,00,5-0,72,1...Unit labour costs (ULC, whole economy, y-o-y)3,62,4-0,25,24,14,53,53,6Real unit labour costs (y-o-y)-0,5-1,0-2,84,30,20,80,20,6Real effective exchange rate (ULC, y-o-y)2,7-2,6-3,43,94,10,10,91,4Real effective exchange rate (HICP, y-o-y)3,1-0,8-2,40,81,7-0,40,40,8Savings rate of households (net saving as percentage of net disposable income)6,95,57,18,17,3...Private credit flow, consolidated (% of GDP)13,30,8-1,2-3,00,9...Private sector debt, consolidated (% of GDP)81,6110,690,477,971,4...of which household debt, consolidated (% of GDP)24,836,424,920,318,8...of which non-financial corporate debt, consolidated (% of GDP)56,874,265,457,552,6...Gross non-performing debt (% of total debt instruments and total loans and advances) (2).9,813,18,15,6...Corporations, net lending (+) or net borrowing (-) (% of GDP)-2,82,13,63,32,93,53,42,6Corporations, gross operating surplus (% of GDP)22,423,025,024,625,124,925,224,8Households, net lending (+) or net borrowing (-) (% of GDP)2,23,05,44,53,62,31,11,7Deflated house price index (y-o-y).-6,93,913,63,3...Residential investment (% of GDP)4,43,12,02,42,8...Current account balance (% of GDP), balance of payments-7,4-1,02,76,23,21,31,21,1Trade balance (% of GDP), balance of payments-1,24,57,210,07,5...Terms of trade of goods and services (y-o-y)-0,7-0,50,71,10,0-0,4-0,70,0Capital account balance (% of GDP)0,51,94,00,01,0...Net international investment position (% of GDP)-89,4-104,9-77,0-58,5-52,9...NIIP excluding non-defaultable instruments (% of GDP) (1)-33,8-49,0-28,0-11,9-8,1...IIP liabilities excluding non-defaultable instruments (% of GDP) (1)75,2112,386,870,862,5...Export performance vs. advanced countries (% change over 5 years)47,113,7-12,2-3,26,3...Export market share, goods and services (y-o-y)..2,05,4-0,5...Net FDI flows (% of GDP)-2,5-1,6-1,7-2,3-1,3...General government balance (% of GDP)-7,2-4,1-2,4-1,6-2,2-2,4-1,9-1,8Structural budget balance (% of GDP)..-1,8-1,8-3,4-3,7-3,2-2,9General government gross debt (% of GDP)62,377,776,875,973,372,970,368,6Tax-to-GDP ratio (%) (3)37,438,238,339,338,437,637,337,2Tax rate for a single person earning the average wage (%)35,635,534,533,5....Tax rate for a single person earning 50% of the average wage (%)19,626,434,533,5....forecast 
  
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

of 

60 % 

all  Country 

Since  the  start  of  the  European  Semester  in 
2011, 
Specific 
Recommendations  addressed  to  Hungary  have 
recorded  at  least  ‘some  progress’.  40 %  of  the 
recommendations 
‘no 
recorded 
progress’ (see Graph 2.1). Substantial progress has 
been  achieved  in  the  financial  sector,  for  instance 
improving the asset quality of the banks and access 
to finance. 

‘limited’  or 

Graph 2.1:  Overall multiannual implementation of 2011-

2018 CSRs to date 

(1) The overall assessment of the country-specific 
recommendations related to fiscal policy excludes 
compliance with the Stability and Growth Pact.  
2011-2012: Different CSR assessment categories.  
The multiannual CSR assessment looks at the implementation 
since the CSRs were first adopted until the 2018 Country 
Report. 
Source: European Commission 

Since  2011 
the  government  has  achieved 
considerable  progress  in  strengthening  public 
finances.  It  has  implemented  measures  including 
structural  reforms  to  reduce  the  budgetary  deficit 
below  3 %  of  GDP.  As  a  result,  in  2013,  the 
decision  on  the  existence  of  an  excessive  deficit 
was abrogated. However, since 2016, the structural 
deficit  has  deteriorated  and  in  2018  the  Council 
concluded  that  it  deviated  significantly  from  its 
medium-term budgetary objective. 

The  labour  market  situation  has  improved 
considerably  since  2011  supported  by  the 
measures 
implemented  by  the  government. 
Since  the  launch  of  the  European  Semester,  a 
number  of  recommendations  on  labour  taxation, 
tax  compliance,  active  labour  market  policies, 
education and social assistance were issued. In the 

last eight  years, the authorities  have taken several 
measures  to reduce the tax burden on labour. The 
tax  wedge  has  been  reduced,  especially  for 
families and selected groups. However, it remains 
high,  in  particular  for  single  low-income  earners. 
There  has  been  some  progress  with  active  labour 
market  policies.  For  years,  the  authorities’  main 
focus  was  the  Public  Works  Scheme,  despite  its 
limited  efficiency.  Recently, 
the  number  of 
participants in the Scheme has declined markedly, 
reflecting improving labour market conditions.  

received 

improved 

recommendations 

Digitalisation  in  taxes  and  public  procurement 
the  business  environment. 
has 
Hungary  has 
to 
improve the business environment every year since 
the  European  Semester  started.  Recommendations 
including:  administrative 
cover  several  fields, 
burden;  public  procurement; 
legislative 
process;  competition;  the  regulatory  environment; 
and corruption. While the complex tax system and 
high  compliance  cost  remains  a  challenge  for 
firms, several promising measures were developed 
authorities 
building 
implemented an e-procurement system to improve 
transparency  and  boost  competition  in  public 
procurement. 

digitalisation.  The 

the 

on 

The quality of banking sector assets has greatly 
improved  and  lending  activity  has  picked  up. 
Between  2013  and  2015  Hungary  received  yearly 
recommendations  to  take  measures  to  restore 
lending to the real economy, to reduce burdens on 
banks and to improve asset quality. Since then, the 
banking tax has been reduced significantly and the 
level  of  non-performing  loans  held  by  banks  has 
dropped considerably.  

Following  the  2016  country  report  and  the  in-
depth  review,  Hungary  is  no  longer  deemed  to 
experience  macroeconomic  imbalances.  Since 
2016,  the  economy  has  experienced  a  strong 
recovery.  External 
been 
significantly reduced and the public debt ratio has 
declined  since  the  beginning  of  the  decade.  The 
indicators  of  the  net  international  investment 
position  have  rapidly  improved.  However,  there 
have recently been indications that the economy is 
heating up, which warrants close monitoring. 

imbalances 

have 

14 

No Progress8%Limited Progress32%Some Progress30%Substantial Progress15%Full Implementation15% 
 
 
2. Progress with country-specific recommendations 

Table 2.1: 

Assessment of the implementation of 2018 country-specific recommendations (CSR) 

Source: European Commission 

the 

2018 

limited  progress 

in 
Hungary  has  made 
country-specific 
addressing 
recommendations (see Table 2.1). Some progress 
has  been  made  in  reducing  the  complexity  of  the 
tax system and unlocking labour reserve. Progress 
has  been  limited  in  increasing  the  participation  of 
disadvantaged  groups,  in  particular  Roma,  in 
inclusive  mainstream  education  and  in  improving 
the adequacy and coverage of social assistance and 

unemployment benefits. Limited progress has been 
made  in  improving  transparency  and  boosting 
competition in public procurement. There has been 
no progress towards improving the anti-corruption 
framework and strengthening prosecutorial efforts, 
improving  the  regulatory  environment  in  services 
or  improving  the  quality  and  transparency  of 
decision-making, including the social dialogue. 

15 

Overall assessment of progress with 2018 CSR:  Limited progress CSR1: In 2018, ensure compliance with the Council recommendation of 18 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.  CSRs related to compliance with the Stability and Growth Pact will be assessed in spring once the final data are available. CSR2: 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 improve transparency and competition in public procurement inter alia through further developing the e-procurement system. Strengthen competition, regulatory stability and transparency in the services sector, in particular in retail. Limited progress   Some progress has been made in reducing the complexity of the tax structure.   No progress made in improving the quality of decision making.  No progress has been made on strengthening anti-corruption framework and prosecution.  Limited progress has been made on strengthening transparency and competition in public procurement.  No progress has been made on improving the regulatory environment in the services sector.  CSR3: Unlock labour reserves through improving the quality of active labour market policies. Improve education outcomes and increase the participation of disadvantaged groups, in particular Roma, in quality and inclusive mainstream education. Improve the adequacy and coverage of social assistance and unemployment benefits. Limited progress   Some progress has been made to unlock labour reserve.  Limited progress has been made to improve educational outcomes and to increase the participation of disadvantaged groups, in particular Roma, in inclusive mainstream education.  Limited progress has been made in improving the adequacy and coverage of social assistance and unemployment benefits.    
 
 
 
2. Progress with country-specific recommendations 

Box 2.1: EU  funds and programmes contribute to addressing help overcome structural 
challenges and to  fostering growth and competitiveness development in Hungary  

Hungary  is  one  of  the  main  beneficiaries  of  EU  solidarity.  European  Structural  and  Investment  Funds 
(ESI Funds) aimed to support Hungary in facing development challenges, amount to EUR 25 billion under 
the  current  Multiannual  Financial  Framework,  equivalent  to  around  2.9 %  of  GDP  annually  or  around 
53.6 % of all public investment per year on average. At the end of 2018, 104 % of the available budget was 
committed to specific projects. In addition, EUR 1.1 billion was allocated to projects on strategic transport 
networks  through  a  dedicated  EU  funding  instrument,  the  Connecting  Europe  Facility.  Furthermore,  a 
number of Hungarian research institutions, innovative firms and individual researchers benefited from other 
EU funding instruments, notably Horizon 2020 which provided EUR 212 million. The Fund for European 
Aid to the Most Deprived provides almost EUR 93 million to support the most vulnerable in Hungary. 

EU funding has helped to address policy challenges also identified in previous CSRs. European Social 
Fund  supported  public  education  (including  combatting  early-school  leaving  and  exclusion)  and  to  the 
reduction  of  labour  market  mismatches  (through  enhancing  the  employability  of  disadvantaged  groups, 
vocational  education  and  training  and  lifelong  learning).  By  October  2018,  more  than  88 000  adults  had 
participated  in  dedicated  trainings.  Hungary  received  support  from  the  Youth  Employment  Initiative  to 
combat youth unemployment, benefitting over 40 000 young people to date. Early childhood care and social 
inclusion measures especially for Roma are further important areas for investment. By the end of 2018, the 
European  Agricultural  Fund  for  Rural  Development  (EAFRD)  improved  the  competitiveness  of  9 054 
agricultural  holdings.  The  European  Regional  Development  Fund  (ERDF)  supported  closer  collaboration 
between business and research institutions, improved research infrastructures and R&D investments in the 
private sector. By the end of 2018, ESI Funds supported capacity building in over 16 000 firms and helped 
700 firms introduce new products in their markets. By 2018, investments mainly driven by the ERDF and 
the Cohesion Fund have led to building or modernisation of 268 km of roads and 321 km of railways, and 
improved water supply for 700 000 people.  

In  addition,  the  Commission  can  provide  tailor-made  technical  support  upon  a  Member  State's 
request  via  the  Structural  Reform  Support  Programme  to  help  Member  States  implement  growth-
sustaining  reforms  to  address  challenges  identified  in  the  European  Semester  process  or  other 
national reforms.  In Hungary,  for example, the Commission is assisting the authorities in their efforts to 
contribute to the integration of capital markets by linking the Hungarian Central Securities Depository with 
other  central  securities  depositories  in  Central  and  Eastern  Europe.  Additional  support  will  soon  start  to 
improve the quality and cost-effective accessibility to primary care services and ambulatory surgeries.  

EU  funding  contributes  to  the  mobilisation  of  private  investment.  While  private  beneficiaries  of  EU 
grants  pay  a  part  of  the  investment  and  therefore  mobilise  additional  funding,  financial  instruments  are  a 
useful  tool  for  achieving  higher leverage.  ESI  Funds  allocate  about  EUR  2.3 billion  in  the  form  of  loans, 
micro-loans,  guarantees  and  equity,  supporting  investments  on  R&D,  innovation,  information  and 
communication  technology,  energy  efficiency,  and  social  investments.  In  Hungary,  financing  under  the 
European Fund for Strategic Investments (EFSI) amounts to EUR 548 million, and is set to trigger EUR 2.4 
billion  in  additional  private  and  public  investments.  Hungary  ranks  10th  as  to  the  volume  of  approved 
operations  as  a  share  of  GDP.  Under  the  Infrastructure  and  Innovation  window,  5  projects  involving 
Hungary  and  financed  by  the  European  Investment  Bank  with  EFSI  backing  were  approved,  worth  about 
EUR 420 million and triggering EUR 1 billion investment. Under the window for small and medium sized 
enterprises, 9 agreements were approved with intermediary banks or funds financed by the EIF with EFSI 
backing, for a total of EUR 128 million. The latter has triggered EUR 1.4 billion in investments with some 
12 000 companies expected to benefit from improved access to finance.  

EU  actions  strengthen  national,  regional  and  local  authorities  and  the  civil  society.  EUR  523  million 
has  been  allocated  for  modernising  public  administrations  at  different  levels.  Additionally,  with  EUR  172 
million the EAFRD through 103 Local Action Groups provide rural communities in Hungary with a method 
for involving local partners in steering the future development of their area. 

https://cohesiondata.ec.europa.eu/countries/HU 

16 

 
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES AND TAXATION 

3.1.1.  TAXATION 

Hungary’s relatively high tax-to-GDP ratio has 
decreased.  In  2017,  it  stood  at  38.3 %  of  GDP, 
after dropping by 1 percentage point from 2016. It 
is  0.8  pps  below  the  EU  average,  but  well  above 
the level of regional peers. In EU comparison, the 
share of revenues from labour taxation is  low and 
decreasing, while the weight of consumption taxes 
is  high  and  increasing  further.  Environmental  tax 
revenues stood at 2.5 % of GDP in 2017, near the 
EU average. However, there is no CO2 emissions-
based vehicle tax, and the  value added tax rate on 
energy  has  been  cut.  Revenues  from  recurrent 
property taxes and capital income tax are markedly 
below the EU average. 

Graph 3.1.1:  Tax wedge of a single worker earning 67% of 

average wage 

earners  is  close  to  the  EU  average,  reflecting  the 
flat  personal  income  tax  rate.  The  flat  design 
reduces work incentives for low wage earners and 
raises  equity  concerns.  There  are  progressive 
elements  for  families  with  children.  In  particular, 
child  tax  credit  substantially  reduces  the  tax 
burden  for  low-income  households  with  children. 
However,  the  tax  wedge  remains  above  the  EU 
average  for  these  households  as  well.  Employers’ 
to  be  reduced  by 
social  contribution  is  set 
additional  2  pps 
the 
framework  of  social  contribution  allowances  was 
renewed  as  of  January  2019  in  order  to  better 
target  benefits  towards  new  entrants  and  the  low 
skilled (see Graph 3.1.1).  

in  2019.  In  addition, 

Sector-specific  taxes  and  a  large  number  of 
small  taxes  complicate  the  tax  system.  Sector-
specific  taxes  raise  concerns  because  they  create 
distortions  and  weaken  the  investment  climate  in 
general. They also risk creating an uneven playing 
field for businesses. The tax system operates about 
60  different  taxes,  many  of  which  are  small  and 
generate  administrative  burden.  Recently,  some 
minor taxes, such as the cultural tax, were phased 
out, while others were merged. In 2019, the upper 
rate  of  the  bank  levy  was  lowered  further  from 
0.21 %  to  0.2 %,  and  it  will  cease  to  apply  to 
investment companies.  

(1) JPA: employees in jobs which required no qualifications 
and for agricultural workers 
Source: European Commission based on OECD data 

The  high  tax  burden  on  labour  has  decreased. 
Employers’ social contribution rates were lowered 
by a total of 7.5 pps in 2017-2018, reducing the tax 
wedge by about 3 pps. Despite these measures, the 
tax burden on labour remains high for low-income 
earners. In 2017, the tax wedge for singles without 
children  at  any  income  level  stood  at  46.2 %, 
which  exceeded  the  EU  average  by  14  and  8  pps 
for  those  earning  50%  and  67%  of  average  wage 
respectively.  The  tax  wedge  for  high-income 

Some  goods  and  services  are  simultaneously 
subject to reduced value added tax rates and to 
additional  sector-specific  levies.  This  makes  the 
tax 
system  even  more  complex  and  has 
counterbalancing effects. The government justifies 
the  use  of  reduced  value  added  tax  rates  on  the 
grounds  of 
fairness 
considerations. However, these goals can be served 
more directly and in a more targeted way through 
other measures, including better tax collection and 
income redistribution (OECD, 2014).  

compliance 

and 

tax 

Hungary is continuing its efforts to reduce high 
compliance  costs.  Medium-sized  companies  had 
to  spend  277  hours  a  year  to  meet  main  tax 
obligations in 2017, which was among the highest 
in  the  EU.  This  represents  a  drop  of  53  hours 
compared  to  2007,  mostly  because  of  a  reduction 
in 
tax 
obligations (WB-PWC, 2019). The introduction of 

time  spent  on  corporate 

income 

the 

17 

303234363840424446485020152016201720182019& of labour costStandard caseJPANew Entrants' AllowanceEU average 
 
 
3.1. Public finances and taxation 

3.1.2.  QUALITY OF PUBLIC EXPENDITURE 

Government  expenditures  remain  higher  than 
in  regional  peers.  The  primary  expenditure-to-
GDP ratio, excluding interest costs, remains closer 
to 
the  EU  average  (see  Graph  3.1.2).  The 
underlying  expenditure  trend,  which  excludes  EU 
transfers  from  primary  spending,  has  followed  an 
opposite pattern to that in the EU. It decreased by 
5  pps  between  2006  and  2012,  primarily  as  the 
result of contained spending on social transfers and 
the  public  wage  bill.  However,  the  reduction  of 
spending  is  being  reversed  and  the  underlying 
expenditures-to-GDP  ratio  has  been  rising  since 
2013.  In  contrast,  other  EU  countries  raised  their 
expenditure ratio during the crisis, but reduced it in 
recent  years  as  their  economies  recovered.  With 
one  of  the  highest  economic  growth  rates  in  the 
EU, Hungary needs to build stronger fiscal buffers 
in order to prepare its economy for future potential 
risks stemming from lower economic growth. 

Graph 3.1.2:  Trends in primary expenditure (% of GDP) 

(1) CEE3: Czech Republic, Poland, Slovakia 
Source: European Commission 

Public spending on human capital accumulation 
is  low.  Health  expenditures  are  markedly  lower 
than  the  EU  and  regional  average  (see  Graph 
3.1.3),  and  even  declined  in  the  last  decade, 
contrary  to  increasing  trends  across  the  EU.  The 
largest fall occurred in the pharmaceutical budget, 
reflecting  a  series  of  cost-containment  measures. 
Recent  reviews  of  the  State  Audit  Office  have 
revealed  the  low  efficiency  of  spending  by  public 
healthcare  providers.  Total  spending  on  education 

group  taxation  for  corporate  income  tax  purposes 
from  2019  is  likely  to  cut  businesses’  compliance 
costs  further,  particularly  because  it  may  be 
applied  together  with  value  added  tax  group  and 
accounting consolidation to enhance centralisation.  

to  reduce 

Measures 
tax  abuse  produced 
significant  revenue  yields.  The  introduction  of 
online cash registers from 2014 helped boost value 
added tax revenues. In addition, a system of online 
invoicing  was  introduced  in  2018,  which  enables 
business-to-business  invoices  to  be  monitored  in 
real time. Partly as a result of these measures, the 
value  added  tax  gap  (i.e.  revenue  loss  relative  to 
total tax liability) fell from 21 % in 2013 to 13 % 
in  2016,  close  to  the  EU  average  (CASE  et  al., 
2018).  This  trend  is  set  to  continue,  as  the  higher 
value added tax revenue figures for 2018 suggest.  

High  capital  flows  through  special  vehicles, 
coupled  with  the  absence  of  withholding  taxes 
may indicate that Hungary’s tax rules are used 
by  companies  that  engage  in  aggressive  tax 
planning.  Hungary  records  relatively  high  capital 
inflows  and  outflows  through  special  purpose 
entities,  which  have  no  or  little  effect  on  the  real 
economy 
(OECD,  2016).  The  absence  of 
withholding taxes on dividend, interest and royalty 
payments  made  by  companies  based  in  Hungary 
may 
tax 
altogether, if they are also not subject to tax in the 
recipient 
facilitating 
jurisdiction,  potentially 
aggressive tax planning (ZEW, 2016).  

those  payments  escaping 

lead 

to 

by 

EU 

interest 

implementing 

is  acting  to  curb  aggressive  tax 
Hungary 
planning 
and 
internationally agreed initiatives. In 2019, some 
provisions  of  the  Anti-Tax  Avoidance  Directive, 
such  as 
limitation  rules,  have  been 
introduced, while controlled foreign company rules 
have been extended. Other provisions like the anti-
hybrid  and  exit  tax  rules  will  be  introduced  from 
2020. In the context of the Base Erosion and Profit 
Shifting  project,  a  minimum  level  of  protection 
against  treaty  abuse  has  been  developed  and  is 
embedded  in  the  Multilateral  Instrument  articles. 
Hungary  has  signed  this  agreement  in  2017,  but 
has put reservations on many articles. It is still too 
early 
the  measures 
implemented.  It  remains  important  to  assess  the 
extent to which new measures will limit the scope 
for aggressive tax planning in Hungary. 

impact  of 

to  assess 

the 

18 

383940414243444546474802030405060708091011121314151617% of GDPHungaryHungary without EU fundsEU averageCEE3 
 
3.1. Public finances and taxation 

as a share of GDP is close to the EU and regional 
average.  However,  complementary  statistics  rank 
Hungary  among  the  last  in  the  EU  on  every 
education  level,  and  also  in  terms  of  expenditure 
(OECD,  2018a).  Low  spending 
per  student 
contributes 
to  weak  health  and  education 
outcomes,  which  are  a  key  challenge  to  long-run 
economic growth (see Section 3.3). 

Graph 3.1.3:  Breakdown of general government spending, 
three year average (2014-2016) 

3.1.3.  DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

Hungary’s public debt  ratio has been declining 
since  2011,  but  remains  high  for  a  middle-
income economy. In 2017, it further decreased to 
73.3 %, having fallen by more than 7 pps from its 
peak  in  2011.  Debt  reduction  was  initially  driven 
by successive primary surpluses, but since 2017 it 
has been led mainly by high nominal GDP growth. 
The  takeover  of  mandatory  second-pillar  private 
pension  assets  by  the  state,  amounting  to  about 
10 %  of  GDP,  also  supported  the  debt  reduction. 
The  revaluation  of  foreign-currency-denominated 
debt  increased  the  debt  ratio  by  4.9 %  of  GDP 
between 2011 and 2017. Over the same period, the 
central  bank  made  a  cumulative  profit  of  around 
4 %  of  GDP  on  currency  transactions,  of  which  
0.2 % was used to reduce debt.  

(1) CEE3: Czech Republic, Poland, Slovakia 
Source: Eurostat COFOG statistics 

on 

affairs, 

Spending 
public 
economic 
administration, debt  service, sport,  culture  and 
religion is comparatively high (see Graph 3.1.3). 
Expenditure  on  economic  affairs  has 
risen 
noticeably, well above the EU average since 2010. 
This  development  is  linked  to  increased  state 
involvement  in  the  economy,  the  extension  of  the 
Public  Works  Scheme  and  high  infrastructural 
investment. Spending on general public services is 
also  well  above  the  EU  and  regional  average 
owing to the higher wage and operational costs of 
executive and legislative organs, external, financial 
and  fiscal  affairs.  Spending  on  sport,  culture, 
broadcasting  and  religion  relative  to  GDP  was 
more than three times as much as the EU average 
in  2016.  Debt  service  costs  have  fallen  markedly 
over the last decade, but remain high compared to 
other EU countries as the relatively high debt ratio 
is coupled with one of the highest implicit interest 
rates. 

Domestic actors play an increasing role in debt 
financing.  To  reduce  the  adverse  impact  of 
currency depreciation on public debt, Hungary cut 
the  proportion  of  foreign-currency-denominated 
debt from above 50 % to about 20 % between 2011 
and 2017. In parallel, the share of domestic-owned 
debt  also  increased  markedly.  To  facilitate  this 
process,  new  types  of  bonds  were  issued  for 
households,  offering  a  higher  interest  of  200-300 
for 
basis  points  above 
the 
institutional 
retail 
securities  already  accounted  for  25 %  of  public 
debt, significantly adding to debt servicing cost. 

rates  available 

In  2018, 

investors. 

these 

The  debt  trajectory  could  deteriorate  in  the 
medium term without further fiscal adjustment. 
The  debt  ratio  is  projected  to  fall  by  more  than 
4 pps  over  2018-2020  due  to  the  continuing 
decline  in  interest  outlays  and  fast  nominal  GDP 
growth.  In  the  medium  term  however,  the  debt 
ratio is projected to stagnate  just below 70 % in a 
(see  Graph  3.1.5) 
no-policy-change  scenario 
(European Commission, 2019). The closing of the 
positive  output  gap  increases  the  primary  deficit, 
which is only partly offset by declining age-related 
the 
public  expenditure,  reflecting  savings  on 
parametric  pension  reform.  The  debt-increasing 
impact  of  the  primary  deficit  is  calculated  to  be 
offset  by  a  modestly  favourable  snowball  effect. 
Using  a  higher  deflator  in  the  calculations,  which 
would be more in line with the central bank’s 3 % 
inflation  target,  would  imply  a  faster  reduction  in 
the  medium  term.  If  the  structural  balance  was 

19 

02468101214161820EconomicaffairsSport,culture,religionGeneralpublicservicesInterestcostsEducationHealthSocialprotection% of GDPHungaryEU averageCEE3 
 
gradually improved to the Hungary’s medium-term 
objective, the debt ratio would fall below 60 % by 
2028 (see Graph 3.1.5).  

Graph 3.1.4:  Gross government debt ratio: the baseline 

scenario and alternative trajectories 

Source: European Commission 

No significant  risks of fiscal stress are foreseen 
in the short term. However, some fiscal variables 
in  the  Commission’s  assessment  framework  point 
to possible short-term challenges, in particular the 
low  primary  balance,  high  share  of  short-term 
debt,  gross  financing  needs  and  relatively  high 
yield spreads, especially if there were to be a rapid 
change in the financial markets’ perceptions, could 
deteriorate public finances in the future. 

Fiscal sustainability risks are high in the longer 
term.  The  structural  primary  balance  should 
improve by 1.1 pps of GDP over 5 years relative to 
the  ‘no-policy-change’  scenario,  in  order  to  bring 
the debt ratio to the 60 % reference value by 2033. 
The  upfront  fiscal  adjustment  ensuring  that  the 
debt  ratio  would  not  move  on  an  ever-increasing 
path,  amounts  to  4.1 %  of  GDP.  This  reflects  the 
increasing  ageing  related  costs  in  the  long  term. 
Spending  on  pensions  and  healthcare  is  projected 
to  increase  by  2.3 %  of  GDP  between  2016  and 
2070  (European  Commission,  2018b).  These 
indicators  imply  medium  risks.  The  level  of  risks 
increases  to  high  in  alternative  scenarios,  in 
particular when considering a rise in interest rates. 

3.1. Public finances and taxation 

3.1.4.  FISCAL FRAMEWORK 

The  mandate  of  the  Fiscal  Council  has  been 
extended  by  recent  measures,  but  its  analytical 
remit  remains  narrow.  In  July  2018, 
the 
Economic  Stability  Act  was  amended,  extending 
the  Council’s  monitoring  mandate  to  cover  the 
domestic  nominal  and  structural  budget  balance 
rules. This step means that the Fiscal Council is to 
check  compliance  with  all  national  numerical 
rules, in line with the provisions of the Budgetary 
Frameworks Directive. Even before this legislative 
change, in June 2018, the Council  had, for the first 
time, at its own initiative, issued an opinion on the 
2017  budgetary  execution,  which  included  an  ex 
post  assessment  of  compliance  with  all  domestic 
rules in force. Although these reforms are steps in 
the  right  direction,  an  imbalance  persists  between 
the  narrow  analytical  remit  of  the  Fiscal  Council, 
in  particular  as  regards  fiscal  issues  outside  the 
its 
cycle, 
budget-making 
annual 
constitutionally enshrined veto right.  

and 

is 

of 

that  differences  between 

There  has  been  noteworthy  progress  with  the 
the  medium-term  budgetary 
rollout 
framework, but it still does not genuinely guide 
fiscal  planning.  A  key  feature  of  the  Hungarian 
mechanism 
the 
medium-term  expenditure  and  revenue  plans  for 
budgetary  chapters  (laid  down  in  a  government 
resolution  by  end-December  in  year  t-1)  and  the 
draft budget for year t+1 must be formally justified 
in  the  budget  documentation.  Since  the  first 
application  of  this  requirement  in  2016,  when  the 
written  justifications  for  such  differences  were 
often  unavailable,  there  has  been  remarkable 
progress.  The  explanations 
that  have  been 
provided  more  recently  are  numerically  detailed 
and  the  differences  are  generally  smaller  in  most 
budgetary  chapters.  Still,  even  a 
rigorous 
implementation of this provision would imply that 
the  controlling  role  of  medium-term  plans  is 
limited  as  the  explanatory  requirement  concerns 
only the appropriations  for  year t+1 and plans for 
later  years  can  be  revised  freely  in  a  new 
resolution (3). 

(3)  In  November  2018,  the  Public  Finance  Act  was  also 
amended.  It  now  stipulates  that  national  medium-term 
the 
fiscal  plans  must 
sustainability of any major policies envisaged. It must also 
cover their direct long-term budgetary impacts. 

include  an  assessment  of 

20 

5055606570758085901314151617181920212223242526272829% of GDPNo-policy change scenario without ageing costsStability and Growth Pact scenarioBaseline no-policy change scenario 
 
                                                           
3.2.  FINANCIAL SECTOR 

to 

increasing  willingness 

Strong economic growth supports the resilience 
of  the  banking  sector.  New  lending  has  picked 
up,  backed  by  improved  borrowers’  confidence 
and  demand  on  the  part  of  borrowers,  as  well  as 
banks 
lend.  Banks 
comfortably  meet  liquidity  and  capital  adequacy 
requirements.  Their  profitability  improved  further 
up to the first half of 2018, albeit largely thanks to 
one-off  items.  While  the  ratio  of  non-performing 
loans  continued  to  decrease  last  year,  it  remains 
high  compared  to  the  EU  average,  as  do  banks’ 
operating  costs.  The  state  maintains  a  strong 
presence in the financial sector.  

Graph 3.2.1:  Credit growth 

Source: ECB 

Banking  sector  assets  are  expanding  as  new 
lending picks up. In the third quarter of 2018, the 
balance  sheet  of  monetary  financial  institutions 
grew by 7.2% y-o-y. The loan stock of both large 
corporations  and 
sized 
enterprises  grew  by  14 %,  while  household  loans 
were  up  by  5 %  (based  on  transactions;  see  also 

small  and  medium 

Chart  3.2.1).  Banks  have  increased  their  exposure 
to state by expanding their holdings of government 
bonds.  Their  share  in  the  sector’s  assets  has  risen 
from  around  12 %  in  2012  to  22 %  in  the  third 
quarter  of  2018,  the  highest  in  the  EU.  This 
process  has  been  encouraged  by  various  central 
bank programmes over the past years. 

Lending  conditions  are  easing,  but  credit 
standards have remained prudent overall. Loan 
to  value  ratios  of  new  mortgage  loans  have  been 
stable  near  55 %  while  strong  income  growth 
in 
keeps  borrowers’  payment-to-income  ratio 
check. The central bank considerably tightened the 
latter  ratio  for  flexible  rate  loans  from  October 
2018.  Following  the  introduction  of  the  Certified 
Consumer  Friendly  Housing  Loans  scheme  in 
2017, consumers chose fixed-interest rates housing 
loans  more  frequently  than  variable  ones  –  in 
contrast to previous years – to lock in the currently 
low  interest  rate  levels.  Contrary  to  household 
lending, risks of foreign currency lending persist in 
the  commercial  real  estate  segment:  82 %  of  the 
portfolio  is  euro  denominated,  with  similar  shares 
registered in new lending. These projects continue 
to  run  unhedged  currency  risk  because,  even 
though  rental  fees  are  listed  in  euros,  a  large 
proportion  of  tenants  earn  revenues  in  forints 
(MNB, 2018b). 

The  widespread  availability  of  financing  eases 
investment  barriers,  but  can  also  lower  their 
efficiency.  Both  real  borrowing  costs  and  non-
price  lending  conditions  have  eased.  In  addition, 
several  public  programmes  offer  financing  on 
favourable  terms  from  both  EU  and  national 
sources.  Despite  the  expiry  of  the  Funding  for 
Growth Scheme in 2017, the central bank decided 
to launch a fourth round of the scheme in January 
2019  with  a  total  budget  of  around  EUR  3  bn  to 

Table 3.2.1: 

Financial soundness indicators, all banks in Hungary 

* ECB aggregated balance sheet: loans excl to gov and MFI / deposits excl from gov and MFI 
** For comparability only annual values are presented 
Source: ECB CBD 

21 

-25-20-15-10-5051015rate of change y-o-y (%)Total private Non-financial corporationsHouseholdsMortgage credit(%)201020112012201320142015201620172018Q2Non-performing debt10,912,814,114,014,211,08,15,65,0Non-performing loans----19,415,211,98,46,7Non-performing loans NFC----26,023,415,59,87,1Non-performing loans HH----26,620,417,512,211,7Coverage ratio51,052,259,063,858,757,760,359,163,2Loan to deposit ratio*136,9128,0110,6102,194,880,973,470,770,3Tier 1 ratio11,511,313,314,713,813,915,914,215,3Capital adequacy ratio14,113,816,317,417,016,918,016,217,2Return on equity**-0,3-12,0-5,1-0,4-21,90,311,714,5-Return on assets**0,0-0,9-0,40,0-2,0-0,11,31,5- 
 
 
 
 
 
 
3.2. Financial sector 

Record bank profits in 2017 and the first half of 
2018 were boosted by one-off items. The average 
return  on  equity  for  all  institutions  was  a  record 
high  14.5 %  in  2017,  and  remained  strong  in  the 
first half of 2018. Nevertheless, the profitability is 
heterogeneous across the sector and is much lower 
in  small  institutions,  among  which  seven  still 
booked  after-tax  losses.  The  outstanding  results 
were  possible  largely  thanks  to  one-off  items 
including dividend and to trading revenue, as well 
as  the  reversal  of  provisions.  Return  on  equity 
without one-offs is estimated at 8 %. It is still high 
in  comparison  to  the  EU  average,  thanks  to  high 
net  interest  income.  However,  low  interest  rates 
and intensifying competition are gradually eroding 
margins, bringing operating efficiency into focus.  

the 

from 

Hungarian  banks’  relative  inefficiency  weighs 
on  their  long-term  profitability.  Operating  costs 
across  the  sector  remain  high  in  EU  and  regional 
comparison.  Banks  have  made  efforts  to  contain 
costs  by  keeping  annual  wage  increases  five 
percentage points below the national average since 
2014, and by reducing the number of branches by 
one  quarter  between  2014  and  2018.  Still, 
Hungarian  banks  –  apart 
largest 
institutions  –  make  slow  progress  in  applying 
digital  technology  to  banking.  Hungary  ranks 
among  the  last  in  the  EU  in  terms  of  digital 
banking  (MNB,  2018b).  The  central  bank  has 
recently 
innovation  hub  and  a 
regulatory  sandbox  to  support  the  spread  of 
financial  technology  in  local  institutions.  Finally, 
the widespread use of cash in the economy drives 
up banks’ operating costs. Currency in circulation 
has risen from about 8 % of GDP in 2010 to nearly 
14 % by 2018, also encouraged by the introduction 
of  the  financial  transaction  tax  in  2012.  In  July 
2018,  the  government  adopted  a  five-year  action 
plan  to  reduce  cash  use  in  transactions  with  the 
public  sector,  and  among  businesses.  As  of 
January 2019, HUF 20 000 from every individuals’ 
transaction is exempt from the transaction tax. 

launched  an 

Divestment by the state in the sector progresses 
slower than planned. Despite earlier declarations 
and  market  demand,  the  government  has  not  sold 
Budapest  Bank  (the  eighth  largest  bank).  It  also 
maintains stakes in smaller institutions. The central 
the 
bank  remains  a  majority  shareholder  of 
Budapest  Stock  Exchange,  giving  rise 
to  a 
potential conflict of interest as it is also responsible 
for supervising the stock exchange. 

lending 

provide small firms with long-term loans (up to 10 
years) at maximum fixed-interest rate of 2.5 %. In 
parallel,  the  central  bank  continues  to  run  the 
Market-Based Lending Scheme, aiming to enhance 
banks’ 
to  small  firms,  while  public 
development  banks  also  offer  financial  support 
through  loans  and  credit  guarantees  (see  Box 
3.4.1).  Given  the  ongoing  recovery  of  private 
lending,  the  extent  of  public  intervention  in  the 
bank  credit  market  appears  excessive  and  may 
crowd  out  market  lending.  The  abundance  of 
competing 
creates 
incentives for firms to look for funds with the least 
strings  attached,  reducing  demand  for  better-
monitored  programmes 
(Kállay,  2015).  This 
concern is backed up by an analysis of EU funds in 
the  2007-2013  cycle,  which  found  that  non-
refundable EU grants to small firms had less of an 
impact  on  firm  level  productivity  than  refundable 
ones (Banai et al. 2017). 

financing 

schemes 

also 

Non-bank  finance  is  modest  and  dependent  on 
EU funds. Capital market financing has not grown 
much  since  2017.  EU  funds  are  sponsoring  a 
programme  carried  out  by  the  Budapest  Stock 
Exchange 
to  help  small  and  medium  sized 
enterprises prepare for stock  exchange listing. EU 
funds  also  play  a  major  role  in  venture  capital 
financing,  whose  size  relative  to  GDP  had  grown 
to near the EU average by 2016. 

indicators 

soundness 

Financial 
are  not 
currently  giving  rise  to  any  concerns  about 
stability  (see  Table  3.2.1).  Banks  are  maintaining 
adequate  financial  resilience  and  sound  solvency 
ratios.  Their  capital  position  improved  further  in 
the first half of 2018. In the same period, the loan-
to-deposit  ratio  fell  further  to  around  70 %  from 
73 % at the end of 2016. The  aggregated  stock of 
non-performing loans fell to 5 % in the first half of 
2018,  while  this  share  is  still  high  among  the 
households.  The  total  decline  was  mostly  due  to 
sales  of  portfolios  to  debt  and  asset  management 
companies,  but  it  was  also  supported  by  the 
increase  in  lending  stock  and  the  improving 
repayment  capacity  of  borrowers  as  a  result  of 
strong  economic  growth.  Debt  management 
companies have also reduced their non-performing 
loan  stock.  Their  corporate  holdings  fell  by  over 
30 %  between  2015  and  2018.  The  average 
coverage  ratio  remained  at  around  60 %,  with 
major variations between banks. 

22 

 
3.2. Financial sector 

Box 3.2.1: Regional disparities in house prices 

The  Hungarian  housing  market  is  characterised  by  strong  regional  disparities.  The  regional  house  price 
indices  published  by  the  central  bank  show  that  individual  regions  are  in  different  stages  of  the  housing 
cycle. Prices in Budapest have already surpassed their last peak by 28 %, adjusted for changes in purchasing 
power. Two further regions have reached the high point of the last cycle, while the remaining regions remain 
3-22 % percent below it. 

Regional  house  prices  largely  reflect  differences  in  socio-economic  developments,  such  as  income  levels 
and  growth  rates,  unemployment  rates  and  internal  migration  flows.  In  addition,  the  legacy  of  foreign 
currency  loans,  which  were  the  most  prevalent  in  the  least  developed  regions,  may  affect  house  prices 
persistently (Verner-Gyöngyösi, 2018). 

Graph 1: 

Real house prices in Hungarian regions (peak of previous cycle=100) 

Source: MNB Central Bank of Hungary 

In  the  case  of  Budapest,  standard  economic  fundamentals  alone  cannot  account  for  all  of  the  increase  in 
prices (MNB, 2018a). Specific factors may stem from the unique role played by the capital, which is not just 
a centre for national economic activity, administration and education, but also a regional economic hub and 
a  major  tourist  destination.  All  this  has  made  the  Budapest  housing  market  more  attractive  to  foreign 
investors. In 2017 non-native buyers accounted for 8.8 % of transactions in the capital, compared to 3.6 % in 
the rest of the country (HCSO, 2018a). Administrative data show that the share of buyers from outside the 
European Union rose from 1.7 % to 6 % between 2010 and 2016, largely on account of rising interest from 
China.  Meanwhile,  the  share  of  non-EU  buyers  remained  flat  at  0.5 %  outside  the  capital.  International 
evidence suggests that economic and political developments in host countries can affect foreign demand for 
housing, making Budapest house prices more exposed to global factors (1). At the same time, rising tourism 
and hotel capacity shortages led to the rapid spread of Airbnb services in Budapest, which already involve 
1 % of all apartments (Jancsik et al., 2018). 

Budapest-specific  factors  can  also  accelerate  suburbanization,  which  pushes  up  prices  and  boosts 
construction and economic activity in neighbouring municipalities. On the other hand, negative side-effects 
of  suburban  sprawl  include  road  congestion,  pollution,  and  rising  spatial  mismatches  in  the  supply  and 
demand of public services (Kovács-Tosics, 2014). Addressing these challenges  requires coordinated effort 
and investments in the metropolitan area in several policy fields.  

(1)  See Badarinza-Ramadorai (2018) for evidence on the London housing market. 

23 

5060708090100110120130BudapestCentral TransdanubiaPest countyWestern Transdanubia5060708090100110120130Southern Great PlainSouthern TransdanubiaNorthern Great PlainNorthern Hungary 
 
 
 
  
  
 
 
3.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

3.3.1.  LABOUR MARKET 

and 

age  group 

reached  74.6 % 

Employment  and  wages  increased  amid  strong 
economic  expansion,  but  did  not  benefit  all 
groups equally. The  employment rate  for the 20-
64 
the 
unemployment  rate  fell  to  3.8 %  in  the  third 
quarter of 2018. However, the gaps in employment 
and  wages  between  genders  and  skills  groups 
remain  wide  in  EU  comparison.  Labour  market 
outcomes for various vulnerable groups, including 
Roma  and  people  with  disabilities,  are  weak. 
Despite its reduction, the Public Works Scheme is 
still large.  

the  proportion  of 

Outward  migration  and  demographic  trends 
put  pressure  on  the  size  of  the  workforce.  At 
least  300  000  and  possibly  as  many  as  600  000 
Hungarians  are  estimated  to  permanently  live  in 
other  EU  Member  States  (Portfolio,  2018)  mostly 
in the United  Kingdom and  Germany. Within this 
group, 
tertiary  education 
graduates  is  higher  than  of  any  other  educational 
segment  (Hárs,  2018).  The  outflow  has  not  been 
the  number  of 
balanced  by 
foreigners  legally  working  in  Hungary  (including 
EU  citizens)  is  estimated  by  the  government  at 
45 000.  According  to  projections  made  by  the 
Hungarian  Demographic  Research  Institute,  by 
2030  the  working  age  population  will  shrink  by 
around  11 %.  Over  the  same  period,  the  total 
population is projected to decrease by 6 %.  

immigration,  as 

Policy responses to the labour shortage focus on 
prolonging  working  lives  and  working  hours. 
Most early retirement possibilities  have  now been 
closed  and  the  statutory  retirement  age  is  set  to 
reach  65  years  in  2022.  As  of  2019,  no  social 
security  contributions  are  due  for  employees  who 
have  passed  the  retirement  age.  Recently  the 
Parliament  amended  the  Labour  Code  to  allow 
in 
more  overtime  work.  The  working  week 
Hungary  (39.6  hours  in  the  second  quarter  of 
2018) is already longer than the EU average (37.0 
hours). The possibility to further raise the working 
hours  and  defer  compensation  has  been  strongly 
opposed.  Other  means  of  addressing  the  labour 
shortage  –  e.g.  more  inclusive  and  higher  quality 
education  and  training,  further  reduction  of  the 
Public Works Scheme – remain underutilised.   

Regional 
labour  market  disparities  remain 
significant. The difference in unemployment rates 

in  2017.  Since  2010, 

between  the  best  and  worst  performing  regions 
was  more  than  threefold  in  2017  with  a  rate  of 
2.2 % in Central Transdanubia versus 7.4 % in the 
Northern  Great  Plain.  More  than  260 000  people 
(ca.  5.7 %  of  the  active  population)  migrated 
within  Hungary 
the 
population  of  Central  Hungary  increased  by  2 %, 
while  the  population  in  the  two  regions  in  the 
north-west  decreased  by  2.6 %  and  in  the  four 
regions  in  east  and  south  by  4.9 %.  The  decrease 
was  particularly  significant  in  rural  areas.  Poor 
public  transport,  deficient  road  infrastructure  and 
high  rental  costs  are  barriers  to  further  mobility 
(see Section 3.4).  

Graph 3.3.1:  Regional unemployment rate and 

participation in the Public Works Scheme, 2017 

The graph plots the unemployment rate against Public 
Works Scheme participation (as a ratio to active 
population), by region. The size of the disks is proportional to 
the average number of participants in 2017.  
Source: European Commission based on data from Eurostat 
and Hungarian Government 

The  participation  in  the  Public  Works  Scheme 
has decreased. Between the first and third quarters 
of 2018 the number of participants fell by 40 000, 
or  22 %.  Its  budget  for  2019  is  lower  by  20 % 
compared to 2018. The favourable economic cycle 
and  targeted  measures  improved  the  efficiency  of 
the  scheme.  In  2017,  18.1 %  of  participants  were 
in regular employment six months after leaving the 
scheme  compared  to  15.6 %  in  2016.  The  per 
capita  cost  of  the  scheme  is  higher  and  its 
efficiency  is  lower  than  that  of  active  labour 
market policies (Fertig and Csillag, 2015). Despite 
plans,  no  measures  were 
to  convert 
participants  into  permanent  municipality  workers. 
Its  budget  is  allocated  roughly  proportionally  to 
the regional unemployment rate, so sizeable funds 

taken 

24 

Central HungaryCentral TransdanubiaWestern TransdanubiaSouthern TransdanubiaNorthern HungaryNorthern Great PlainSouthern Great Plain 012345678910012345678910Public Works Scheme participation as a ratio to active population, % Unemployment rate, % 
 
 
3.3. Labour market, education and social policies 

objective (see Graph 3.3.2). In 2017, childcare was 
not  available  in  2610  settlements  inhabited  by 
about  70 000  children  (26  %)  under  the  age  of  3, 
which  points  towards  a  significant  need  for 
investment.  New  types  of  crèche  facilities  are 
becoming  more  widespread  but  their  coverage 
remains  low.  Family  crèches  accounted  for  13 % 
of  total  available  places  and  mini-crèches  and 
workplace  crèches  for  less  than  1 %  (HCSO, 
2018b). Projects co-financed by the EU support the 
creation  of  more  crèche  places  and  contribute  to 
lowering childcare costs. 

Graph 3.3.2:  Childcare under 3 years age (%) 

Source: Eurostat 

the 

The  duration  of  unemployment  benefits  is  the 
shortest in the EU, at a maximum of 3 months. 
This  is  below  the  average  time  needed  to  find  a 
job.  Although 
ratio  of  people  staying 
unemployed  for  less  than  three  months  slightly 
improved  in  recent  years,  the  average  duration  of 
unemployment 
to  12  months 
is  still  close 
(European Commission 2018c, p. 34). This shows 
a substantial mismatch with the benefit provision.  

Low-skilled  workers  continue  to  face 
low 
employment  rates  and  lower  wages.  The  gaps 
between the employment rates and average  wages 
of  low-,  medium-  and  high-skilled  workers  have 
been  higher  in  Hungary  than  in  most  other  EU 
Member  States.  The  tax  wedge  for  low  incomes 
remains  among  the  highest  in  the  EU  despite 
recent cuts to employer contributions (Section 3.1). 
Due to the concentration of high-skilled workers in 
cities, this is a particular problem in rural areas.  

go  to  regions  with  very  low  unemployment  rates 
(see Graph 3.3.1). 

improve 

Active labour market policies have a wide reach 
but their targeting could be improved, pointing 
to  an  investment  need.  By  the  end  of  2018, 
programmes  aiming 
jobseekers’ 
to 
employability  and  possibilities  to  enter  the  labour 
market,  funded  by  the  European  Social  Fund  and 
the  Youth  Employment  Initiative  covered  more 
than  230  000  people.  While  on  average  34 % 
trainings,  a 
participated 
reliable  quality 
in 
to 
rating 
assurance  and 
jobseekers  is  still  lacking.  The  better  skilled 
unemployed  are  well  served,  but  there  is  not 
enough  support  targeting  the  less  employable 
groups,  such  as  the  long-term  unemployed,  the 
inactive,  Roma  and  people  with  disabilities. 
Coordination  with  social  and  health  services  is 
insufficient.  

system  accessible 

less 

time 

leaving 

The  efficiency  of  public  employment  services 
could  be  improved.  The  caseload  for  many 
jobcentres exceeds their capacity and caseworkers 
are  overloaded  with  administrative  duties  (Hétfa, 
2018), 
individualised 
assessment.  The  institutional  structure  of  the 
public  employment  services  is  fragmented.  Using 
quotas  for  active  labour  market  policies  still 
greatly 
influences  profiling  outcomes,  which 
impairs  the  efficiency  of  job  matching.  The 
monitoring  of  the  quality  of  training  programmes 
remains limited.  

for 

The  gender  employment  gap  is  high  and  the 
availability  of  childcare  remains  low.  Although 
the employment rate for women has increased, the 
gender employment gap remained high at 16 pps in 
the  first  quarter  of  2018,  well  above  the  EU 
average of 11.7 pps. The gap is the widest (20 pps) 
in the  25-39 age group, due to significantly lower 
employment  rates  for  young  mothers.  The  impact 
of  parenthood  on  the  employment  rate  of  women 
with  a  child  under  6  years  old  was  the  second 
highest in the EU (at 42.6 pps). This is also related 
to the fact that men are not encouraged to take up 
parental  leave.  The  number  of  children  who  are 
under 3 years old and in childcare is increasing but 
remains  below  the  EU  average  and  the  Barcelona 

25 

051015202530352010201120122013201420152016% of totalBarcelona objectiveEUHungary 
 
3.3. Labour market, education and social policies 

Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights 

The  European  Pillar  of  Social  Rights  is  designed  as  a  compass  for  a  renewed  process  of 
upward  convergence  towards  better  working  and  living  conditions  in  the  European 
Union (1). It sets out twenty essential principles and rights in the areas of equal opportunities and 
access to the labour market; fair working conditions; and social protection and inclusion. 

but 

challenges 

Hungary  performs  relatively  well  on 
some indicators of the Social Scoreboard 
supporting the European Pillar of Social 
Rights, 
remain.  
Employment and unemployment outcomes 
compare  well  with  EU  averages  and 
inequality  is  lower  than  in  many  other 
Member  States.  Challenges  related 
to 
human  capital  formation  include  a  high 
rate of early school leaving and the level of 
digital  skills.  The  gender  employment  gap 
is  high.  With  social  benefits  at  low  level, 
the  good  score  on  the  impact  of  social 
transfers  can  be  explained  by  generous 
parental leave benefits. 

The  Pillar  principle  of  housing  and 
assistance  for  the  homeless  states  that 
adequate  shelter  and  services  shall  be 
provided  to  the  homeless  in  order  to 
promote  their  social  inclusion.  A  recent 
change 
the  Hungarian  constitution 
outlawing  living  on  the  street  attempts  to 
tackle  homelessness  but  does  not  address 
its  root  causes.  More  action  is  needed  as 

in 

regards provision of social housing and other inclusion measures. 

In  line  with  the  Pillar  principle  on  inclusion  of  people  with  disabilities,  in  2018  the 
Hungarian government  revised the nursing allowance for  home care: it committed to 30 % 
increase  of  the  amount  in  four  years,  and  introduced  higher  amount  for  care by parents.  At  the 
end  of  the  four-year  period,  the  allowance  for  care  by  parents  will  reach  the  minimum  wage, 
recognising  care  similar  to  employment.  The  decision  is  a  significant  step  in  preventing 
institutional care.  

(1)  The European Pillar of Social Rights was proclaimed on 17 November 2017 by the European Parliament, the Council 
and  the  European  Commission.  https://ec.europa.eu/commission/priorities/deeper-and-fairer-economic-and-monetary-
union/european-pillar-social-rights/european-pillar-social-rights-20-principles_en 

Adult  participation  in  learning  remains  low. 
The proportion of adults participating in education 
and training was 6.2 % in 2017, well below the EU 
average  of  10.9 %.  This  affects  in  particular  the 
unemployed,  who  are  about  four  times  less  likely 
to  participate 
in 
learning 
this 
order 
employment. 
disequilibrium,  more  investment  in  adult  learning 
is necessary. 

than  people 
address 

in 
In 

to 

The  employment  of  Roma  has  increased,  but 
challenges  remain.  Between  2014  and  2017  the 
employment rate of Roma increased from 33 % to 
45 %,  but  a  large  share  of  those  in  employment 
(36.6 %) work in the Public Work Scheme (HCSO, 
2018c).  With  only  36 %  of  Roma  women  in  paid 
work,  the  gender  employment  gap  among  Roma 
reaches  19  pps.  Apart  from  the  lower  education 
level,  geographical  factors  also  contribute  to  the 

26 

 
 
3.3. Labour market, education and social policies 

facing 

(the  national  Europe  2020  goal  is  450 000).  The 
number  of  people 
severe  material 
deprivation  and  living  in  low  work  intensity 
households  has  halved  since  2013.  The  severe 
material  deprivation  rate  was  still  the  fourth 
highest  in  the  EU  in  2017  (see  Graph  3.3.3). 
Income  mobility  across  generations  is  lower  than 
in  most  other  Member  States  (Tóth  and  Szelényi, 
2018).  Poverty  risks  faced  by  children,  families 
with  three  or  more  children  and  single  parent 
families are decreasing, but remain higher than the 
EU  average.  In  2018,  they  amounted  to  23.8 %, 
25.5 %  and  40.0 %,  respectively.  The  adequacy 
and  coverage  of 
tailored  early  childhood 
development  services  for  disadvantaged  families, 
such  as  the  Sure  Start  Children  Centres  do  not 
meet all demand.  

Graph 3.3.3:  Main poverty indicators, 2005-2018 

Source: Eurostat 

Poverty and social exclusion are concentrated in 
certain  areas.  The  share  of  population  at  risk  of 
poverty  or  social  exclusion  in  Northern  Hungary 
was  10.5 pps  and  in  rural  areas  5.7 pps  above  the 
national  average  in  2017  (HCSO,  2017a).  In  the 
least  developed  districts,  where  one 
ten 
Hungarians lives, the average income per taxpayer 
reached  only  69.8 %  of  the  national  average  in 
2016,  hardly  above  the  minimum  wage  (HCSO, 
2017b).  The  concentration  of  social  exclusion  is 
confirmed 
found 
neighbourhoods  with  high  share  of  low  educated 
and unemployed people (segregated areas) in 22 % 

a  mapping (4) 

that 

by 

in 

(4)  The mapping was done by the Hungarian Central Statistical 

Office, based on census data.  

disadvantage as a significant share of Roma live in 
areas  where  employment  possibilities  are  scarce.  
The  security  of  employment  is  also  lower  for 
Roma  as  only  half  of  those  in  employment  have 
open-ended  contracts  compared  to  90 %  among 
non-Roma. 

the 

still  under-
People  with  disabilities  are 
represented  on 
labour  market.  Their 
participation in employment has slightly increased 
but is still one of the lowest in the EU (41.6 % vs. 
the average of 48.1 %). The disability employment 
gap  is  wider  than  the  EU  average  (32.2  vs. 
25.8 pps).  The  government  attempts  to  integrate 
people  with  disabilities  in  the  labour  market  by 
limiting 
also 
encouraging  companies  to  employ  them.  The 
public services for jobseekers  with disabilities  are 
operated in isolation from the Public Employment 
Service and funding for non-governmental service 
providers  continues  to  be  limited.  This  hampers 
access  to  personalised  vocational  rehabilitation, 
job  matching  and  workplace  adjustment  services, 
pointing to an investment need. 

conditions,  while 

eligibility 

Social dialogue structures and processes are not 
developed  enough.  The  National  Economic  and 
Social  Council  (NGTT)  is  a  broad  civil  dialogue 
body  operating  without  the  participation  of  the 
government  and  has  an  advisory  role.  The 
Permanent  Consultation  Forum  of  the  Private 
Sector  and  the  Government  (VKF)  is  a  tripartite 
body  with  members  selected  by  the  government 
and  operating 
in  a  non-transparent  manner 
(Pásztóy,  2018).  It  has  only  a  narrow  scope  of 
competences  and  the  agreements  it  concludes  are 
not 
legally  binding.  The  Sectoral  Dialogue 
Committees have a weak institutional background, 
which  impairs  their  efficiency.  All  in  all,  the 
current  setup  fails  to  meet  the  principle  of  social 
dialogue  and  involvement  of  workers,  which  is 
included  in  the  European  Pillar  of  Social  Rights. 
Social  partners  continue  to  have  very  limited 
influence on national decision-making. 

3.3.2.  SOCIAL POLICIES 

Hungary’s  overall  poverty  situation  has  been 
improving since 2013, but challenges remain.  In 
2018, one in five (19.6 %) Hungarians was at risk 
of poverty or social exclusion. In absolute numbers 
this represented 908 000 people fewer than in 2008 

27 

05101520253035400506070809101112131415161718% of populationAt-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivationPeople living in low work intensity households 
 
                                                           
3.3. Labour market, education and social policies 

highest  in  the  EU,  key  elements  of  the  social 
safety  net  can  be  improved.  In  parallel  to  the 
expansion  of  employment, 
the  number  of 
recipients  of  the  minimum  income  benefit  fell 
from  237 600  in  2012  to  99 800  in  2017.  As  the 
minimum income benefit has not risen since 2012 
and is now below one-third of the national poverty 
threshold,  it  puts  Hungary  among  the  lowest 
performers in terms of adequacy. The public works 
wage  decreased  relative  to  the  minimum  wage, 
from  77.2 %  in  2013  to  59.1 %  in  2018.  In-work 
poverty has increased from 5.2 % in 2010 to 8.4 % 
in  2018.  Social  security  does  not  provide  full 
coverage  for  all  people  in  employment,  such  as 
casual 
(European 
and 
Commission, 2018d).  

seasonal  workers 

3.3.3.  EDUCATION AND SKILLS 

fourth 

among 

graders  but 

the  EU 
Educational  outcomes  are  below 
average  and  there  is  great  variation  between 
schools.  The  2016  Progress 
in  International 
Reading  Literacy  Study  shows  improvements  in 
large 
reading 
performance  gaps  remain  between  schools  and 
school  types.  By  the  age  of  15,  basic  skills  are 
significantly  below  the  EU  and  regional  averages 
(PISA, 2015) and have decreased in the last decade 
(see  Graph  3.3.4).  Students’  achievement  shows 
their  socio-economic 
strong  correlations  with 
that  37 %  of 
background.  The  study  shows 
schools  where 
Hungarian 
disadvantaged  students  are  the  majority,  meaning 
that  disadvantaged  students  are  more  separated 
from  non-disadvantaged  peers  in  Hungary  than  in 
other  countries.  Disadvantaged  students  have  low 
chances  of  entering  the  higher  educational  tracks 
as  the  scholarship  scheme  for  them  offers  more 
favourable  conditions  for  entering 
lower 
vocational  track,  acting  as  an  additional  factor 
educational  mobility. 
preventing 
Inequality in education narrows the  possibility for 
social  mobility.  Low-income  families  in  Hungary 
have the poorest chances of approaching the mean 
income in the EU (OECD, 2018b). 

students  go 

upward 

the 

to 

The 
separation  of  disadvantaged  pupils, 
including  Roma,  has  accelerated  in  the  last 
decade.  The  education  system  has  become  more 
segregated  in  recent  years,  which  is  only  partly 
explained  by  residential  separation.  The  share  of 
primary  schools  with  50 %  or  higher  Roma 

separation 

of  the  localities.  Nationwide,  the  share  of  people 
living in segregated areas is  2.8 %,  but reaches as 
much  as  11.9 %  in  the  least  developed  districts. 
to 
Residential 
educational segregation (see Section 3.3.3), and is 
often  accompanied  by  severely  limited  access  to 
basic  public  infrastructure  and  services.  EU  co-
funded  development  projects  addressing  those 
challenges  have  been  implemented  in  over  200 
localities, but more investment might be needed. 

contributes 

also 

The  majority  of  Roma  face  poverty  or  social 
exclusion. The share of Roma at risk of poverty or 
social  exclusion  was  67.8 %  in  2018.  While  the 
estimated share of Roma in the national population 
is around 7 %, among people at risk of poverty or 
social exclusion it reaches 20-25 %. 

the  population 

The supply of social housing is not sufficient to 
address  demand  from  those  in  need.  The  share 
that  face  severe  housing 
of 
deprivation  was  15.9 %  in  2017,  the  second 
highest in the EU, and 3.5 times the EU average. It 
was  particularly  high  among  children  (27.3 %). 
The supply of affordable rental housing is low and 
shrinking.  Between  2010  and  2016,  rental  prices 
grew  by  75 %,  while  the  average  net  wage  in  the 
lowest income decile grew by only 11 % (Habitat, 
2018).  The  share  of  municipal  flats  rented  with 
social  purposes  was  at  only  1.1 %  of  the  housing 
stock  in  2017  (HCSO,  2018d).  Increasing  the 
supply  of  social  housing  would  help  address 
homelessness. 

The provision of long-term care for people with 
disabilities  is  improving  but  requires  further 
attention.  In  2016,  some  26 600  people  with 
disabilities  and  mental  health  problems  lived  in 
long-term  residential  social  institutions,  and  some 
54 900  benefited  from  a  nursing  allowance  for 
home  care,  ranging  from  23.6 %  to  42.5 %  of  the 
minimum wage (HCSO, 2017c). This allowance is 
set 
(see  Box  3.3.1) 
(Government, 2018). While Hungary committed to 
investing  EU  funds  to  transit  10 000  people  from 
institutional to community-based care by 2023, the 
conditions  for  independent  living  could  still  be 
improved.  The  supply  of  support  services  for 
community and home care is strongly limited.  

significantly 

rise 

to 

leave 
While,  thanks  to  generous  parental 
benefits,  the 
impact  of  non-pension  social 
transfers  on  poverty  reduction  is  one  of  the 

28 

 
3.3. Labour market, education and social policies 

participation increased from 10 % in 2008 to 15 % 
in 2017. Improved participation of Roma children 
in  early  childhood  education  and  care  and  recent 
measures  (including  anti-segregation  officers  and 
working  groups  and  new  rules  defining  school 
catchment areas) are meant to prevent segregation. 
However, their impact is limited by the exemption 
of  non-state  schools  from  the  requirement  to  take 
disadvantaged  pupils  (Ercse  2018,  Ercse-Radó 
2019). 

Graph 3.3.4:  Programme for International Student 
Assessment (PISA) results, 2000-2015 

(1) Average of mathematics, reading and science (2) CEE4: 
Czech Republic, Poland, Slovakia, Slovenia 
Source: OECD 

In 2017, the early school leaving rate  increased 
to  12.5 %,  which  is  above  the  EU  average  of 
10.6 %.  While  early  school  leaving  has  been 
decreasing steadily across the EU, it has not fallen 
in Hungary since 2010. Schools with high rates of 
pupils at risk of dropping out are required to offer 
more personalised support to the pupils concerned, 
indicating a possible investment need. Early school 
leaving  rate  is  particularly  high  among  Roma 
(65.3 %).  Participation  of  17  and  18  year-olds  in 
secondary  education  dropped  sharply  between 
2011  and  2016  (from  98 %  to  85 %),  after  the 
ending  age  of  compulsory  education  was  lowered 
from  18  (the  age  of  completing  secondary 
education)  to  16  in  2012.  The  share  of  students 
concerned varies greatly by school type and region 
(EA,  2018a).  In  the  three  most  affected  counties, 
14-16 % of students are at risk of dropping out. In 
the  lower  track  of  vocational  education  and 
training, this figure is 21 %. 

The  two  tracks  of  vocational  education  and 
training  differ  strongly  in  terms  of  career 
perspectives  for  their  graduates.  Vocational 
education  and  training  has  two  regular  pathways: 
vocational  grammar  school  (szakgimnázium)  with 
more  general  education  content  and  vocational 
secondary  school  (szakközépiskola)  with  less. 
Students  in  vocational  secondary  schools  have  a 
significant  and  growing  deficit  in  basic  skills 
compared  to  those  in  vocational  grammar  schools 
and  grammar  schools  (gimnázium)  (EA,  2018b). 
Moreover,  vocational  secondary  schools  have 
much  higher  drop-out  rates  (15.3 %  per  school 
year  in  2016)  than  vocational  grammar  schools 
(6.5 %)  and  grammar  schools  (1.1 %).  Vocational 
secondary  school  graduates  earn  24 %  less  than 
(HAS, 
vocational  grammar  school  graduates 
2018a).  The  wage  disadvantage  of  vocational 
secondary  school  graduates  increases  by  age, 
indicating  the  lack  of  transferability  of  skills 
acquired  in  these  schools  (Fazekas  and  Köllő, 
2018).  Recent  legislative  changes  aim  to  improve 
the 
relevance  of  vocational 
education  and 
training.  However,  switching 
between  professions  or  pathways  is  made  more 
difficult  by  the  reduced  general  education  content 
starting  in  the  first  year  of  vocational  secondary 
schools. 

labour  market 

The  shortage  of  teachers  remains  a  challenge. 
The teaching workforce is ageing, and according to 
forecasts  some  50 000  teachers  will  retire  within 
10  years  (Government,  2016a).  The  number  of 
applicants  for  initial  teacher  education  rose  in 
2017, but dropout rates are high and the number of 
graduates  who  actually  enter 
the  profession 
remains  low.  Teachers’  salaries  rose  in  recent 
years  but  are  still  25 %  lower  than  those  of  other 
tertiary  education  graduates,  compared 
to  an 
OECD average deficit of 4-19 % (OECD, 2018c). 
The  low  effectiveness  and  equity  in  the  school 
system are likely to be linked with the low level of 
curricular  autonomy,  the  lack  of  socioeconomic 
diversity  within  schools  and  low  teacher  salaries 
(European Commission, 2018e, 98p.).  

A continuing low level of participation in higher 
education  is  likely  to  further  restrain  tertiary 
attainment  rates.  The  employment  rate  of  recent 
tertiary  graduates  is  88.7 %,  well  above  the  EU 
average  of  84.9 %,  reflecting  strong  demand  for 
highly  skilled  workers.  Tertiary  graduates  also 
enjoy  the  highest  wage  premium  across  the  EU 

29 

470475480485490495500200020032006200920122015PISA scoreCEE4HUOECD 
 
3.3. Labour market, education and social policies 

Differences  based  on  socio-economic  status  are 
particularly  significant,  with  highly  educated 
Hungarians  living  up  to  12.8  years  longer  than 
level.  These 
lower  education 
those  with  a 
differences  are  partially  explained  by  a  higher 
prevalence  of  risk  factors  among  people  living  in 
lower  socio-economic  groups,  as  well  as  by 
inequalities in access to care services. 

Many  people  lead  an  unhealthy  lifestyle.  Daily 
smoking rates among adults remained flat between 
2006 and 2016 at around 26 %, one of the highest 
figures  in  the  EU.  In  recent  years,  the  Hungarian 
authorities  have  put  in  place  a  series  of  policies 
against  smoking,  which  have  proven  effective  in 
reducing  juvenile  smoking.  The  prevalence  of 
alcohol use  disorders in Hungary is the  highest in 
the  EU,  affecting  21.2 %  of  the  total  population 
and  36.2 %  of  men  (WHO,  2018).  Obesity  rates 
have  increased  over  the  past  decade,  affecting  an 
alarming 30 % of the population in 2016. The high 
prevalence  of  risk  factors  makes  cardiovascular 
diseases  the  leading  cause  of  death  in  Hungary, 
accounting for 49.5 % of all mortality in 2016, i.e. 
around  double  the  EU  average.  Cancer  incidence 
and  mortality  rates  are  also  among  the  highest  in 
the  EU.  Partly  due  to  unhealthy  lifestyles,  the 
proportion of live births weighing less than 2500 g 
was  among  the  highest  in  the  EU  (8.5 %  in 
2015)(5).  The  risks  of  unhealthy  lifestyles  and 
related  mortality  are  especially  high  among  the 
lower  educated  (Wood-Bellis,  2017).  The  impact 
of  health  promotion  and  disease  prevention 
policies in recent years has been limited. 

The  timely  provision  of  quality  care  remains  a 
challenge,  impacting  life  expectancy.  Although 
relatively  few  of  the  surveyed  Hungarians  report 
unmet health needs (see Box 3.3.1), the number of 
amenable  deaths  remains  almost  twice  the  EU 
average. While progress is being made to improve 
take-up  of  cancer  screenings  by  target  groups, 
and 
participation 
geographical 
remain 
sizeable.  Improving  access  to  and  the  quality  and 
cost-effectiveness of cancer care may require more 
investment in prevention and early detection. 

is 
still 
inequalities 

relatively 
in 

access 

low, 

A  high  reliance  on  out-of-pocket  payments  in 
healthcare  raises  concerns  about  equality  of 
access. Hungary spends 2 % of GDP less on health 

(5)  WHO https://gateway.euro.who.int/en/hfa-explorer/ 

tertiary 

all  but 

short-cycle 

(OECD,  2017).  However,  current  enrolment  and 
completion  trends  are  not  aligned  with  demand. 
The  tertiary  education  attainment  rate  among  30-
34 year olds decreased to 32.1 % in 2017, against 
an increasing EU and regional average (see Graph 
3.3.5). As of 2020, a foreign language certificate of 
proficiency  level  B2  will  be  an  entry  requirement 
education 
for 
programmes.  This  may  further  exacerbate  the 
long-term  downward 
the  pool  of 
applicants,  as  only  48 %  of  applicants  currently 
hold  a  B2  level  certificate  (HAS,  2018a).  The 
Ombudsman  found  that  the  language  requirement 
would  need  to  be  accompanied  by  a  greater 
to 
allocation  of  human  and  other  resources 
language 
infringing 
to 
constitutional  rights  (Ombudsman  2017).  The 
share of disadvantaged students among all students 
admitted  into  tertiary  education  was  very  low,  at 
1.4 %  in  2016,  and  the  share  of  Roma  was  only 
0.8 % (HAS, 2018a; HCSO, 2018e). 

teaching 

avoid 

trend 

in 

Graph 3.3.5:  Tertiary education attainment rate among 30-

34 years, 2008-2017, relative to EU average 

(1) EU=100 
Source: Eurostat 

3.3.4.  HEALTHCARE 

improving, 

Although  gradually 
the  health 
status  of  Hungarians  lags  behind  that  of  most 
other Europeans and significant socio-economic 
health disparities persist. Over the last five years, 
the  gap  in  life  expectancy  between  Hungary  and 
the EU has narrowed by about 15 weeks. However, 
large  differences  remain:  in  2016,  life  expectancy 
for  men  and  women  was  lower  than  the  EU 
average,  by  5.6  and  3.9  years  respectively. 

30 

60657075808590951002008200920102011201220132014201520162017HungaryCEE3 
 
                                                           
3.3. Labour market, education and social policies 

to 

Although the number of physicians in Hungary has 
increased over the last  five  years and is now only 
slightly  below  the  EU  average  (3.2  compared  to 
3.6 per 1000 people), the number of nurses is still 
low  (6.4  compared  to  8.4  per  1000  people).  The 
government  has  made  staff  retention  a  priority  in 
response 
the  mass  emigration  of  health 
professionals  and  the  expansion  of  the  private 
sector over the last decade. The salaries of doctors 
and nurses  have been raised, and  existing  training 
and support programmes  have been  enhanced and 
extended.  Despite  the  success  of  these  measures, 
vacant  posts  remain  hard  to  fill,  especially  for 
general  practitioners  and  maternal  child  health 
nurses.  Health  infrastructure  and  capacities  are 
distributed  unevenly,  with  significant  shortages  in 
large 
rural  and  deprived  areas.  There  are 
differences  in  waiting  times  across  regions  for 
elective  procedures,  for  example  cataract  surgery, 
knee and hip replacement.  

3.3.5.  INVESTMENT NEEDS 

Increased  investment  in  skills,  education  and 
training  and  social  inclusion  of  disadvantaged 
groups are important for improving Hungary’s 
productivity  and  long-term  inclusive  growth. 
Shortage  of  skilled  labour  is  among  the  main 
obstacles  to  business  investment,  pointing  at  the 
need  to  invest  more  in  bringing  unused  or  under-
used  reserves  to  the  primary  labour  market.  This 
responses, 
requires 
including  improving  quality  and  inclusiveness  of 
education  and  training,  addressing  disadvantages 
by  strengthened  social  and  healthcare  services, 
promoting  social  and  geographical  mobility  also 
by  social  housing,  and  paying  due  attention  to 
geographical  disparities  in  the  availability  of  the 
services.  The  gender  dimension  needs  to  be 
addressed,  among  others  by 
the 
availability of child and long-term care services. 

comprehensive 

improving 

policy 

care than the EU average and relies more on end-
user  financing.  In  2017,  household  out-of-pocket 
payments  accounted  for  30 %  of  all  health 
expenditure, a much higher proportion than the EU 
average  (18 %).  This  figure  includes  gratuity 
payments  to  physicians,  which  have  historically 
played a non-negligible role in healthcare delivery 
in  Hungary.  Survey  data  (Eurobarometer,  2017) 
show that the number of Hungarians who reported 
having made an informal payment to a practitioner 
increased  by  7  pps  to  17 %  between  2013  and 
2017.  This  ratio  is  more  than  fourfold  the  EU 
average  (4 %).  In  2015,  11.5 %  of  Hungarian 
households  faced  health  expenditure  above  40 % 
of their income available after basic needs, mainly 
on outpatient medicines. 

Structural  changes  to  the  hospital  sector  are 
required  to  improve  the  efficiency  and  quality 
of inpatient care. While some positive steps have 
been taken to limit excess in-patient capacity in the 
past decade, in 2016 the ratio of hospital beds per 
1000 population was 37 % above the EU average, 
while  the  bed  occupancy  rate  was  one  of  the 
lowest  in  the  EU  at  68.5 %.  In  contrast  to  the 
general  EU  trend,  the  average  length  of  time  that 
patients  stay  in  hospital  has  increased  and  is  now 
among the highest in the EU. The hospital network 
is  very  fragmented,  which  hinders  efficiency  and 
quality  of  care.  EU  funds  have  contributed  to 
positive  developments  that  have  modernised  the 
infrastructure  of  about  70  hospitals  between  2007 
and  2017.  Further  efficiency  gains  require  a 
hospital  network  structure 
reduces  and 
concentrates  hospital  capacity  both  regionally  and 
functionally.  

that 

Improving primary care  and care coordination 
would significantly increase efficiency. Evidence 
of  the  intensive  use  of  hospital  services,  together 
with high rates of ambulatory sensitive admissions, 
points  to  a  weak  gatekeeping  system.  General 
practitioners  operate  mainly  in  solo  practices  and 
are  not  equipped  to  provide  effective,  person-
centred care. There is a room for improvement as 
regards  clarity  of  guidelines,  care  pathways  for 
chronic  disease  management  and  investments  in 
primary  care 
in  under 
provisioned areas.  

services,  especially 

There  has  been  some  progress  on  training  and 
retaining  health  professionals,  but 
future 
supply and regional disparities are still an issue. 

31 

 
3.4. COMPETITIVENESS REFORMS AND INVESTMENT  

by 

foreign 

from 
financed 

large-scale  projects 

climbed above its historic average by 2018. In the 
early  phase  of  the  cycle,  business  investment  was 
subdued  apart 
in 
direct 
manufacturing 
investment. This was because rising demand could 
still  be  satisfied  with  existing  capacities.  As 
capacity  utilisation 
investment 
picked up in recent years. Household investment is 
reviving  after  several  years  of  subdued  activity, 
thanks to the improving labour market and pent-up 
housing  demand.  Public 
is  also 
accelerating,  driven  both  by 
the  accelerated 
spending  of  EU  funds  and  rising  investment  from 
own financing (see Graph 1.2).  

rose  steadily, 

investment 

Although  aggregate  investment  is  robust,  its 
composition reflects some structural weaknesses 
in the economy. The recent rise in the investment 
rate was driven by construction and machinery; the 
accumulation  of  intellectual  property  stagnated  at 
2.6 %  of  GDP  in  2017,  about  1  percentage  point 
below  the  EU  average,  albeit  slightly  exceeding 
regional peers (see Graph 3.4.2). The proportion of 
non-investing  firms  is  also  higher  than  the  EU 
average (24 % compared to 13 %; EIB, 2018). 

Graph 3.4.2:  Investment in intellectual property (% of GDP) 

3.4.1.  PRODUCTIVITY AND INVESTMENT NEEDS 

that 

reveal 

Productivity  differences  between  firms  remain 
the 
large.  Company-level  data 
dispersion  of  productivity  across  firms  in  any 
given  sector  is  relatively  large  in  international 
comparison. Foreign-owned firms on average tend 
to  be  larger,  use  more  capital,  and  be  more 
productive  than  domestic-owned  ones.  They  also 
enjoy a productivity advantage over similarly sized 
domestic firms (Muraközy et al. 2018).  

Graph 3.4.1:  Labour productivity (total economy, 2000=100) 

(1) CEE3: average of Czech Republic, Poland and Slovakia 
Source: Eurostat 

Productivity  growth  is  picking  up  with  the 
favourable  economic  cycle,  but 
it  remains 
sluggish  in  historical  and  regional  comparison. 
Although  Hungary's  productivity  kept  pace  with 
that  of  regional  peers  until  the  financial  crisis,  it 
increasingly  fell  behind  in  subsequent  years  (see 
Graph  3.4.1). This  divergence  is  explained  by  the 
weak  performance  of  market  services  (see  also 
Graph  3.4.5),  while 
the 
manufacturing sector increased further. Contrary to 
private companies, the productivity of state-owned 
since  2012 
to 
enterprises 
(Muraközy et al. 2018).  

the  productivity  of 

increase 

failed 

Thanks  to  the  cyclical  economic  upswing, 
investment  is  rising  in  every  sector,  supporting 
productivity  gains.  The  investment  rate  had 

(1) CEE3 is the average of Czech Republic, Poland and 
Slovakia 
Source: Eurostat 

32 

100110120130140150160000102030405060708091011121314151617HungaryCEE3EU012345959799010305070911131517HungaryCEE3EU% 
 
 
 
3.4. Competitiveness reforms and investment  

Box 3.4.1: Investment challenges and reforms in Hungary 

Investment  staged  a  strong  recovery  in  recent  years,  rising  from  its  trough  of  19.3 %  of  GDP  in  2012  to 
about 25 % of GDP in 2018. The favourable economic cycle and the utilisation of EU funds have been the 
key  drivers  of  broad-based  investment  growth  (see  Section  1).  Access  to  investment  finance  improved 
markedly with the inflow of EU funds and record low interest rates (see Section 3.2). 

National  development  banks  also  contributed  to  easing  financing  constraints.  Eximbank  supports  export 
activity and export-related investment, while Magyar Fejlesztési Bank plays a role in disbursing refundable 
EU funds, and finances infrastructure projects  and market niches. Their combined balance sheet rose from 
5.2 %  of  GDP  in  2010  to  5.8 %  in  2017.  In  addition,  investment  loans  refinanced  by  the  central  bank’s 
Funding for Growth scheme averaged nearly 1 % of GDP in 2013-2017. 

While the macroeconomic environment supports investment growth, structural barriers persist including: 

1.  Limited availability of skilled labour, which leads to project delays in construction, and can discourage 
investment in new manufacturing capacity. Recent policy initiatives aim to postpone workers’ retirement 
and increase the number of working hours (see Section 3.3). 

2.  Several  aspects  of  the  business  environment,  including  regulatory  uncertainty,  weaknesses  in 
competition  and  the  insolvency  framework.  In  this  area,  the  planned  review  of  insolvency  procedures 
could improve the allocation of existing capital (see Section 3.4). 

Increased  investment  in  innovation,  transport 
infrastructure  and  resource  management  are 
important for sustainable and inclusive growth. 
R&D  spending  is  well  below  the  EU  average  and 
the  Europe  2020  target,  holding  back  innovation 
performance  and  contributing 
large 
productivity  gap  between  foreign  and  domestic 
firms.  Low  accessibility  of  disadvantaged  areas 
entrenches  territorial  inequality.  Environmental 
challenges  negatively  affecting  the  quality  of  life, 
including  low  energy  efficiency,  low  renewable 
energy use, air pollution, and weaknesses in water 
and waste management. 

the 

to 

Research and innovation 

Hungary’s  overall  innovation  performance  is 
moderate  and  has  declined  relative  to  the  EU. 
The low level of intellectual asset accumulation is 
also  reflected  in  the  low  number  of  patent, 
trademark,  and  design  applications,  the  small 
number of innovative businesses and the low level 
of internationalisation by small and  medium sized 
enterprises.  This  fact  is  also  reflected  in  the 
European 
(European 
Innovation  Scoreboard 
Commission,  2018f).  Smaller  firms  are  especially 
reluctant  to  innovate,  hindering  their  involvement 
in  global  value  chains.  According  to  the  2016 
Community  Innovation  Survey,  only  17.9 %  of 
small firms introduced new products or processes, 

33 

Regulatory/ administrative burdenCSRTaxationCSRPublic administrationAccess to finance - Public procurement /PPPsCSRCooperation btw academia, research and businessJudicial system - Financing of R&D&I - Insolvency frameworkBusiness services / Regulated professionsCompetition and regulatory frameworkRetailCSREPL & framework for labour contracts  - Construction - Wages & wage setting - Digital Economy / TelecomEducation CSREnergyLegend:Transport - No barrier to investment identifiedCSRInvestment barriers that are also subject to a CSRSome progressNo progressSubstantial progressLimited progressFully addressedPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education 
 
 
3.4. Competitiveness reforms and investment  

monitoring  system  of  the  strategy  and  drafting  its 
first monitoring report. 

further  concerns 

Recent  policy  measures  create  uncertainty  in 
academic  and  research  fora.  Hungarian  higher 
education  institutions  have  the  lowest  financial 
autonomy  in  the  EU  according  to  a  recent 
evaluation  (EUA,  2017a).  In  addition,  the  April 
2017  amendment  of  the  Higher  Education  Act 
raised 
regarding  academic 
freedom  (EUA,  2017b).  The  Central  European 
University, the largest higher education beneficiary 
under Horizon 2020, signalled its intention to leave 
Hungary  because  of  the  regulatory  uncertainty 
created  by  this  amendment.  More  recently,  the 
government  has announced that it  plans to reform 
R&D  financing  to  boost  innovation  performance. 
The Hungarian  Academy of  Sciences  has rejected 
the  proposed  changes  to  its  financing  (HAS, 
2018b) and closing its selected institutions for fear 
of breaching academic independence. It now faces 
financial  difficulties  as  the  funding  of  non-wage 
expenditure  by  the  central  budget  has  been  cut 
from 
policy-related 
2019.  These 
uncertainties  may  result  in  losing  top  research 
talent  to  abroad  and  risk  a  persistent  decline  in 
research quality. 

January 

Digitalisation and business organisation 

the 

technology.  While 

Only  a  fraction  of  small  businesses  adopt  good 
organisational  practices,  and  information  and 
communication  technologies.  According  to  the 
2016  Community  Innovation  Survey,  just  18.5 % 
of  small  Hungarian firms introduced marketing or 
organisational innovations, compared to 38.4 % in 
the EU on average. Hungary ranks among the last 
in the EU when it comes to businesses integrating 
digital 
broadband 
infrastructure  is  developed in  Hungary  (82%  of 
homes are covered by at least 30 Mbps), half of the 
population lacks basic digital skills, which is 7 pps 
more  than  the  EU  average.  Only  few  SMEs  use 
digital  technologies  (see  Graph  3.4.3)  including 
management  support  software,  suggesting  that 
state-of-the-art  management  practices  are  seldom 
adopted.  The  most  basic  aspects  of  business 
planning  are  missing  in  most  small  companies: 
only  three  out  of  ten  make  annual  business  plans 
and  only  two  out  of  ten  have  any  marketing  and 
sales strategy (MNB, 2018b). Surveys indicate that 
family ties and connections play an important role 
while  education  and  merit  are  less  relevant  in 

which  is  less  than  half  of  the  EU  average.  The 
main  self-reported  causes  for  failing  to  innovate 
were  the  lack  of  ideas,  the  perceived  lack  of 
low  market 
for 
demand 
competition. 

innovation, 

and 

intensity 

investment  remains  below 

R&D 
the  EU 
average, and is dependent on EU funds. In 2017, 
R&D  spending 
increased  by  0.15 
percentage points to 1.35 % of GDP, partly due to 
the  accelerated  advance  payments  of  EU  funds. 
This  is  still  well  below  the  Europe  2020  target  of 
1.8 %.  Business  R&D,  which  amounts  to  0.99 % 
of  GDP,  is  concentrated  in  a  few  large,  mainly 
foreign-owned  companies,  and  benefits  from 
generous  government  support.  Public  funding  of 
private  R&D  is  among  the  highest  in  the  EU.  At 
the  same  time,  public  sector  R&D  expenditure 
declined  from  0.49 %  of  GDP  in  2006  to  0.35 % 
by 2017, well below the EU average of 0.7 %.  

trend 

The  quality  of  public  science  suffers  due  to 
underfunding. The shortage of financial resources 
is  detrimental  to  the  career  opportunities  of 
researchers  in  the  public  sector  and  their  number 
fell  by  1.5 %  since  2010.  This 
is 
accompanied  by  a  decrease  in  the  number  of 
research  units,  and  a  falling  proportion  of  highly 
cited  publications.  The  proportion  of  science  and 
engineering graduates has also declined since 2014 
and  is  among  the  lowest  in  the  EU.  Science-
business  cooperation  remains  below 
the  EU 
average  due  to  the  traditional  divide  between 
research,  education  and  innovation  entities  in 
Hungary. 
In  2017,  eight  university-business 
cooperation  centres  were  set  up  with  EU  co-
financing  to  foster  collaboration.  The  centres 
should develop sustainable institutional operations 
and 
innovation  projects.  Scientific 
performance and technology transfer would benefit 
from  investment  in  public  research  capacities, 
which  are  a  key  source  of  knowledge  and  human 
resources for innovation in domestic companies. 

run 

to 

The smart specialisation strategy would benefit 
from  being  updated,  reinforced  and  more 
focused.  Hungary  introduced  its  national  smart 
specialisation strategy in 2014 as a precondition to 
accessing  European  Structural  and  Investment 
Funds,  in  order  to  increase  the  performance  of  its 
scientific, technological and innovation system. In 
2018,  the  National  Research,  Development  and 
the 
Innovation  Office 

revamping 

started 

34 

 
3.4. Competitiveness reforms and investment  

averages. Even though the backbone of the  Trans-
European  Transport  Networks  is  electrified,  the 
39 % electrification ratio in the entire rail network 
is rather low. The Danube bridge in Budapest is a 
major  bottleneck  of  the  rail  network.  The  poor 
quality  of 
infrastructure  and  aging 
vehicle fleets contribute to the high number of road 
and  rail  fatalities,  which  exceed  the  EU  average. 
The  government 
rehabilitation 
launched 
a 
programme  of 
lower  class  roads  and  plans 
investment  in  the  rail  network  to  address  these 
challenges.  

transport 

Inland  navigation  on  the  Danube  is  suffering 
from low water conditions as well as restrictive 
regulation.  Multimodal  transhipment  possibilities 
may be improved for some main ports.  Enhanced 
cooperation with Slovakia on the Danube would be 
important. 

Energy sector and climate 

Energy  efficiency 
in  the  residential  sector 
remains  weak.  Hungary  is  at  risk  of  failing  to 
reach  its  2020  energy  saving  target,  largely 
because household energy consumption per capita 
remains  12 %  higher  than  the  EU  average  even 
though  income  levels  are  considerably  lower. 
Energy  efficiency  standards  for  new  buildings 
have  been  strengthened  considerably,  but  there 
remains  a  large  potential  in  refurbishing  the 
existing  housing  stock,  public  buildings  and 
district heating networks; as well as in small firms.  

The electricity sector faces new challenges, with 
significant investment needed in generation and 
the network. Hungary imports around one third of 
its electricity needs, and about half of its domestic 
electricity generation comes from nuclear sources. 
Coal,  lignite  and  gas  cover  around  40 %  of 
electricity  production.  The  share  of  renewable 
sources  remained  around  10 %  in  2017.  Although 
investments  in  solar  generation  facilities  doubled 
to  500 MW  between  2016  and  2018,  and  are 
expected to quadruple until the end of 2020, there 
are still investment opportunities in solar, wind and 
geothermal  energy,  especially  if  coal  were  to  be 
phased  out  from  electricity  generation.  The 
network  also  needs  to  be  prepared  for  the  rising 
electricity 
role  of  decentralised 
generation,  along  with  more  balancing  and  power 
storage capacities. 

renewable 

awarding  managerial  positions  than  in  most  other 
Member States (WEF, 2018). 

Graph 3.4.3:  Use of IT solutions by businesses (% of 

companies in 2017) 

Source: Eurostat 

Connectivity 

in 

disadvantaged 

Weak  transport  connectivity  contributes  to 
unemployment 
areas. 
Transport networks are centred on Budapest, while 
local networks and transversal connections through 
the  country  are  not  well  developed.  Local 
unemployment  in  remote,  mostly  rural  areas  is 
significantly  increased  by  high  commuting  costs 
(Bartus,  2011)  and  weak  local  public  transport 
2014).  Until  2018, 
connections 
(Pogonyi, 
employers  could  offer  workers  a 
tax-free 
contribution to public transport season tickets; this 
benefit has been abolished from 2019 even though 
it  could  support  commuting  in  low-mobility  areas 
(Alpek et al. 2016). 

The  poor  condition  of  road  and  rail  networks 
hampers  mobility  and  reduces  travel  safety. 
More  than  half  of  the  road  network  is  in  bad 
condition  (Magyar  Közút,  2018).  The  situation  is 
particularly  acute  in  disadvantaged  regions.  Road 
congestion is a growing challenge and a barrier to 
productivity  in  Hungary’s  urban  areas,  which  are 
among  the  most  congested  in  Europe  (Christidis-
Nicolás,  2012).  Plans  for  a  road  access  charge  in 
Budapest have nonetheless stalled. The completion 
of  the  Trans-European  core  rail  transport  network 
according to standards is below the respective EU 

35 

020406080Big Data analysisRadio Frequency IdentificationOnline buying,reservation, bookingCloud computingCustomer RelationshipManagement softwareEnterprise ResourcePlanning softwareHigh speed broadbandconnection (>30 Mbps)Remote accessfor employeesWebsiteEU averageHungary 
 
3.4. Competitiveness reforms and investment  

submitted  on  31  January  2019,  will  further 
contribute  to  identifying  and  assessing  Hungary’s 
energy  and  climate-related 
investment  needs. 
Hungary’s  Second  National  Climate  Change 
Strategy  for  2018-2030,  with  an  outlook  to  2050 
was  adopted  by  the  Hungarian  Parliament  on  30 
October 2018. 

Environment policy 

Air  pollution  and  water  quality  remain  a 
concern. In 2015, around 15 000 premature deaths 
in  Hungary  were  attributable  to  bad  air  quality 
(EEA,  2018).  The  main  sources  of  pollution  are 
residential  solid  fuel  combustion,  agriculture  and 
transport emissions. Water supply and sanitation is 
still  not  fully  compliant  with  the  Drinking  Water 
Directive, and water affordability remains an issue 
for  the  low-income  population.  Regulated  tariffs 
for water and wastewater services might not cover 
the maintenance costs of many operators.  

Hungary  is  at  the  initial  phase  of  moving 
towards  a  circular  economy.  Despite  the  recent 
major  reform  of  the  waste  management  system 
Hungary  is  at  risk  of  failing  to  achieve  the  2020 
target  of  50 %  preparation  for  re-use/recycling  of 
municipal  waste (European  Commission,  2018g). 
In  2016,  the  proportion  of  recycled  municipal 
waste  remained  11  pps  below  the  EU  average, 
while  the  proportion  of  landfilling  exceeded  it  by 
23 pps. Progress is slow due to a lack of incentives 
for households to participate in separate collection, 
and 
instruments.  The 
Ombudsman  of  Future  Generations  has  criticised 
the 
collection, 
questioning  its  financial  sustainability  (AJBH, 
2018).  

insufficient  economic 

system  of  waste 

funding 

Retail  energy  price  regulation  discourages 
investment in the sector. Retail electricity and gas 
prices  in  the  household  sector  are  low  in  EU 
comparison. However, this is largely owing to end-
user  price  regulation,  which  does  not  recognise 
some cost elements in the final prices. This results 
in  higher  prices  for  non-household  customers,  as 
utilities try to recover costs in this latter segment. 
Hungary’s  wholesale  electricity  market  prices  are 
higher  compared  to  those  of  their  neighbours, 
primarily  due 
to  higher  domestic  electricity 
generation  costs.  Implementing  all  planned  cross-
border  interconnection  projects  would  improve 
access  to  electricity  imports  with  competitive 
prices  from  Western  Europe.  Gas  supply  sources 
are  still  highly  concentrated,  underlining  the  need 
infrastructure 
to 
projects,  as  this  would  make  it  possible  for 
Hungary to import gas from alternative sources.  

implement  all  regional  gas 

Hungary  is  on  track  to  meet  its  climate  goals, 
but  there  remain  challenges  in  decarbonisation 
and  climate  change  adaptation.  Emissions  not 
covered by the EU Emissions Trading System are 
allowed  to  increase  by  a  maximum  of  10 %  by 
2020 compared to 2005 levels. Instead, they fell by 
9 %  until  2017,  and  are  forecast  to  decrease  by 
19 %  until  2020.  Despite  this  improvement,  air 
pollution remains a problem. The transport sector, 
which  is  a  large  contributor  to  air  pollution  in 
cities,  increased  its  greenhouse  gas  emissions  by 
24 % 
further 
from  2013 
the  economy  will  require 
decarbonisation  of 
investments.  In  addition,  half  of  Hungary’s 
territory is significantly exposed to climate change 
risks  including  drought  and  floods,  which  create 
the  need  for  investment  in  water  management  on 
main rivers.  

to  2016.  The 

In  its  National  Energy  and  Climate  Plan  to  be 
adopted  by  31  December  2019  in  line  with  the 
Regulation  on  the  Governance  of  the  Energy 
Union  and  Climate  Action  (6),  Hungary  will 
provide  an  overview  of  its  investment  needs  until 
2030  for  the  different  dimensions  of  the  Energy 
renewable  energy,  energy 
Union, 
efficiency,  security  of  supply,  and  mitigation  and 
of  and  adaptation  to  climate  mitigation.  The 
information  provided,  including  in  the  draft  plan 

including 

Environmental  challenges  require  a  series  of 
investments and institutional capacity building. 
Investments would best target the main sources of 
air  pollution,  as  well  as  waste  collection  and 
recycling.  Key  measures  under  specific  sectoral 
policies  (e.g.  energy,  transport)  also  need  to  be 
aligned  with  air  quality  objectives.  Institutional 
capacity  is  hampered  by  frequent  changes  in 
environmental  administration;  significant  staff 
reductions carried out in 2018 raise concerns.  

(6)  Regulation  (EU)  2018/1999  of  the  European  Parliament 

and of the Council  

36 

 
                                                           
 
3.4. Competitiveness reforms and investment  

Box 3.4.2: Zombie firms in Hungary 

Recent research shows that the survival of unproductive, financially unviable (‘zombie’) firms can account 
for a part of the global productivity slowdown since the millennium. The share of these firms increased in 
several  countries,  and  their  presence  is  associated  with  lower  productivity  growth  and  investment  (Adalet 
McGowan et al. 2017). Following the financial crisis, banks in a weak financial position were particularly 
reluctant to cut lending to these companies. This reduced lending to healthy firms and raised barriers to the 
entry of new firms (Andrews-Petroulakis, 2017). 

For  the  purpose  of  this  analysis,  ‘zombie’  firms  are  defined  as  relatively  old  companies  (over  10  years) 
whose  interest  expenses  have  exceeded  operating  income  for  the  last  three  years  (Adalet  McGowan  et  al. 
2017).  According  to  this  definition,  their  regular  business  operations  do  not  generate  enough  income  to 
finance  their  debt  burden.  They  were  identified  among  the  universe  of  Hungarian  firms  using  double 
bookkeeping, based on company tax statements for 2003-2016 (Muraközy et al. 2018). 

The share of ‘zombie’ firms in Hungary was already high before the financial crisis, and rose even further 
until  2011.  Their  peak  share  was  similar  to  Spain  and  even  higher  than  Italy,  while  their  weight  in 
employment surpassed both countries. Their persistent large  share suggests that they  were not responsible 
for slower reallocation after the crisis; rather, they held back productivity growth throughout the period.  

In  recent  years,  the  share  of  ‘zombie’  firms  has  fallen,  helped  by  banks’  restructuring  of  nonperforming 
loans, the improving macroeconomic environment and loose monetary policy, which suppressed borrowing 
costs. The Funding for Growth programme, launched by the central bank in 2013, was expressly designed to 
reduce  the  debt  burden  of  small  and  medium  sized  enterprises  by  refinancing  their  existing  loans  at 
preferential  terms.  This  policy  may  have  negative  side  effects:  although  it  buys  companies  time  to  raise 
productivity,  past  Japanese  experience  shows  that  the  ever  greening  of  loans  only  increased  inefficient 
investment among small firms (Imai, 2016).  

Graph 1: 

Share of financially unviable ('zombie') firms in the Hungarian business sector 

Classification based on Adalet McGowan et al. (2017) 
Source: Muraközy et al. (2018), based on company level data 

According to international evidence, the presence of ‘zombie’ firms is associated with inefficient insolvency 
regimes,  low  bank  capitalisation  and  a  low  share  of  non-bank  financing  (Adalet  McGowan  et  al.  2017). 
Hungary  underperforms  compared  to  other  EU  members  in  all  of  these  areas  (see  also  Section  3.2), 
suggesting  that  despite  recent  improvements,  conditions  for  the  re-emergence  of  ‘zombie’  firms  have  not 
disappeared altogether.  

37 

0246810121416180304050607080910111213141516%Share of firmsShare of employment 
 
 
  
3.4.2.  MARKET FUNCTIONING  

Business dynamics 

firms 

The  reallocation  of  resources  towards  more 
efficient 
slowed  down  persistently, 
hindering aggregate productivity growth. While 
productivity  growth  within  individual  firms  is 
already  nearing  pre-crisis  values,  the  contribution 
of  business  dynamics  remains  weak  (see  Graph 
3.4.4).  The  entry  of  new  firms  kept  falling  even 
the  economic  recovery  started  (Bauer-
after 
trend  fits  with 
Endrész,  2018).  While 
this 
international  experience, 
it  was  potentially 
exacerbated  by  rising  outward  migration  from 
Hungary,  because  it  involved  a  particularly  high 
share  of  younger  and  better-educated  individuals 
(see Section 3.3.1).  

Graph 3.4.4:  Decomposition of business sector productivity 

growth (%) 

(Falk et al. 2018). The high cost of business failure 
may  also  increase  risk  aversion  and  set  back 
entrepreneurship. 

Weak  competition  hampers  reallocation.  More 
productive  firms  do  not  grow  larger  due  to  weak 
competition  and  financing  constraints  (Muraközy 
et  al,  2018),  albeit  access  to  finance  is  already 
improving  (see  Section  3.2).  A  large  number  of 
old,  small,  low-productivity  firms  persist  on  the 
market, preventing the realisation of economies of 
scale  (MNB,  2018c).  After  the  crisis  banks  have 
kept  afloat  less  productive  firms  to  limit  their 
credit  losses,  slowing  the  process  of  creative 
destruction (see Box 3.4.2). 

remain 

inefficient. 
Insolvency  procedures 
Evidence  for  their  shortcomings  arises  in  a  still-
high rate  of  non-performing loans, the assessment 
of the World Bank Doing Business survey, and an 
elevated  fear  of  failure  by  potential  entrepreneurs 
(European  Commission,  2018h).  The  insolvency 
procedure  does  not  create  sufficient  incentives  to 
reorganise viable businesses (Pálinkó-Tóth, 2017), 
while the cost of resolving insolvency is high.  

insolvency  framework 

A  review  of  the 
is 
ongoing.  In  2017  and  early  2018  the  government 
introduced  a  new  pre-insolvency  procedure  to 
restructure  viable  companies  and  rescue  honest 
entrepreneurs. Starting from 2019, further reforms 
are  planned  with  the  support  of  the  European 
Commission  and  EBRD,  including  increasing  the 
importance  of  early  restructuring  in  the  law,  as 
well 
insolvency 
as 
administrators. 

training 

judges 

and 

Regulation in the services sector 

in 

countries, 

Productivity and competitiveness of the services 
sector  are  relatively  weak.  Contrary  to  what 
the 
regional  peer 
happened 
performance of  services declined sharply over the 
past  decade  (see  Graph  3.4.5.).  The  Global 
Competitiveness  Index  ranks  Hungary  at 
the 
bottom  in  the  EU  in  terms  of  product  market 
functioning 
is 
(WEF,  2018).  The 
particularly  weak  on 
the  extent  of  market 
dominance,  competition  in  services  and  services 
trade openness. 

ranking 

Competition  and  productivity  in  the  services 
sector  is  hindered  by  regulatory  barriers  and 

The within effect is the average productivity growth of 
individual companies. The between effect is due to 
changing market shares between existing firms with different 
productivity levels. The net entry effect results from 
differences in the productivity levels of new entrants, 
continuing and exiting firms. 
Source: Muraközy et al. (2018) 

The  culture  of  entrepreneurship 
is  weak, 
reducing  the  pool  of  enterprises  with  high 
growth  potential.  The  Global  Entrepreneurship 
Monitor  (Horváth-Szerb,  2016)  and  the  Global 
Competitiveness  Report  (WEF,  2018)  both  reveal 
a low level of entrepreneurial activity in Hungary. 
The  share  of  entrepreneurs  out  of  necessity  is 
relatively  high,  near  28 %;  these  individuals  tend 
to have lower ability and manage low-productivity 
businesses (Poschke, 2013). Start-up skills and the 
willingness to take risks are weak in the population 

38 

-2-10123456782004-20072007-20102010-20132013-2016ppsBetween firm growthNet entry effectWithin firm growthTFP growth 
 
 
3.4. Competitiveness reforms and investment  

There remains a strong growth potential for the 
collaborative  economy.  Around  a 
third  of 
respondents  from  a  recent  Eurobarometer  survey 
have  used  services  offered  via  collaborative 
platforms.  Also  in  the  use  of  services  related  to 
accommodations,  Hungary  has  the  second  most 
users  in  the  EU  from  1000  people.  At  the  same 
time, Hungary is last in the EU regarding the usage 
of  shared  transport  services  among  users  of 
collaborative platforms. This could be linked to the 
highly  restrictive  regulation  in  the  sector,  as 
indicated in  the  2018 Country  Report.  While only 
8 %  of  respondents  from  Hungary  have  ever 
offered  services  via  collaborative  platforms,  20 % 
would  consider  offering  services  occasionally  as 
private individuals.   

in  Hungary  vis-à-vis 

Regulation  of  professions  remains  restrictive. 
According  to  the  new  OECD  Services  Trade 
Restrictiveness  Index,  the  level  of  regulatory 
service 
restrictiveness 
providers from other Member States is higher than 
the  Single  Market  average  in  sectors  such  as 
accounting,  architecture,  engineering,  legal  and 
computer  services.  Recently  revised  regulations 
maintain  provisions  such  as  recommended  prices 
that limit competition. The government is working 
on  a  proposal  to  decrease  the  high  number  of 
regulated professions in Hungary.  

3.4.3.  REGIONAL DIFFERENCES 

Geographic  structures  contribute  to  spatial 
inequality.  Spatial  disparities  are  significant  in 
terms  of  economic  development,  labour  market 
and  education  outcomes,  and  demographic  trends 
(see Sections 1 and 3.3). 94 out of 175 districts are 
classified  as  having  a  disadvantaged  status.  The 
capital plays a disproportionately large  role in the 
economy  while  regional  economic  centres  are 
weak.  Urbanisation  is  relatively  low,  as  30 %  of 
the  population  lives  in  villages.  Large  areas  are 
populated with very small settlements: one-third of 
all municipalities have fewer than 500 inhabitants. 
these  spatial  features,  agglomeration 
Due 
benefits  are  mostly  seen  in  Budapest  but  remain 
weak in the rest of the country. 

to 

Deficiencies  in  local  infrastructure  reinforce 
spatial  differences.  Rural  areas  suffer  from 
shortages  and  degradation  of  infrastructure  and 
public  services  including  local  education  and 

state  involvement.   The  authorities  continue  to 
entrust  certain  services  to  state-owned  or  private 
firms  specifically  created  for  these  purposes  (e.g. 
textbook  publishing,  waste  collection,  mobile 
payments,  tobacco  wholesale  and  retail,  golden 
visas  etc.).  The  government  can  exempt  certain 
mergers  and  acquisitions  from  the  competition 
scrutiny.  Over  the  last  five  years,  the  government 
used  this  power  more  than  20  times  in  a  wide 
range  of  sectors 
including  energy,  banking, 
broadcasting,  tobacco  and  media.  The  lack  of 
competition 
sectors  may  become 
these 
efficiency. 
innovation 
detrimental 
Exemptions to competition law increase regulatory 
uncertainty,  as  market  participants  in  affected 
sectors do not know what forces are shaping future 
market structures (OECD, 2016). 

in 
to 

and 

Graph 3.4.5:  Labour productivity in the market service 

sector relative to the EU average (2000=100) 

(1) CEE3: Czech Republic, Poland, Slovakia, (2) Based on 
chain linked volume, normalised to 2000 
Source: Eurostat 

new 

special  authorisation 

envisaging 
for 

Unpredictable  retail  regulations  may 
limit 
investment  and  competition.  The  government 
an 
introduced 
legislation 
additional 
retailers 
wishing to expand operations. This is on top of the 
2015  legislation,  requiring  players  to  file  for 
special  authorisation  for  new  retail  outlets  bigger 
than  400m2.  The  unclear  application  of  the  new 
legislation  remains  a  source  of  uncertainty  for 
retailers  and  can  deter  investment  in  the  sector. 
Frequent  introductions  and  subsequent  repeals  of 
measures  have  been  distorting  the  functioning  of 
the sector over the past years.  

39 

100105110115120125000102030405060708091011121314151617HungaryCEE3 
 
3.4. Competitiveness reforms and investment  

regional  aspect  of 
the  Smart  Specialisation 
Strategy  is  still  at  an  early  stage,  with  priorities 
defined 
regional 
differentiation, and with insufficiently harmonised 
implementation measures.  

terms  without 

in  broad 

3.4.4.  INSTITUTIONAL CAPACITY  

Business 
performance 

environment 

and 

institutional 

Hungary  continued  to  rank  relatively  low  on 
business  environment  scoreboards.  In  2018, 
internationally collated indicators ranked Hungary 
in the bottom quartile of EU Member States (WEF, 
is 
2018;  IMD,  2018;  DUIHK,  2018).  This 
consistent  with  Hungary’s  position  based  on 
income  level.  The  country’s  ranking  has  not 
improved  over  the  past  decade.  Although  sub-
indicators  on  macroeconomic  performance  and 
taxation improved, Hungary performed  weakly on 
competition  in  services,  business  dynamics  and 
institutional quality. In October 2016, Hungary set 
up  a  Competitiveness  Council,  which  reviews 
barriers  to  businesses.  In  2018,  the  Council 
discussed  several  comprehensive  proposals  to 
improve  the  business  environment,  prepared  by 
various stakeholders. 

Weak  and  declining  quality  of  institutional 
governance  limits  competition.  The  Worldwide 
Governance  Indicators  show  that  over  the  past 
decade,  Hungary’s  performance  declined  in  five 
broad dimensions  of  governance,  but  improved  in 
political  stability  (WGI,  2018).  The  deterioration 
in  international  comparison  is  particularly  notable 
in  the  areas  of  voice  and  accountability,  and 
control  of 
(see  Graph  3.4.6.). 
Institutions are key to a well-functioning economy 
(Acemoglu-Robinson,  2010;  Bruinshoofd,  2016). 
Corruption  risks  and  weak  accountability  distort 
the  allocation  of  resources  as  these  are  not 
necessarily  channelled  to  the  most  productive 
firms. They also slow down business dynamics and 
productivity  growth  in  general  (Akcigit  et  al., 
2018).  

corruption 

Digital  public  services  remain  a  challenging 
area for Hungary’s digital economy and society. 
Hungary ranks among the last in the EU on the re-
use of information across administrations to  make 
life easier for citizens (pre-filled forms) and on the 

health  care.  A  clear  East-West  demarcation  exists 
in  the  access  and  subscription  of  households  to 
fixed broadband internet. The Eastern regions have 
an access rate of 75-80%, while the access rates in 
Western  and  Central  regions  are  80-85%  and  85-
90%,  respectively.  Rural  areas  lag  significantly 
behind 
fast  broadband 
connections  (European  Commission,  2018i).  In 
cities, uncoordinated suburban sprawl has not been 
followed  by  investment  in  infrastructure,  and  city 
centres  are  often  losing  function.  Deficiencies  in 
infrastructure  degrade  the  quality  of  life,  hinder 
local  market  integration  and  ultimately  contribute 
to the depopulation of disadvantaged areas. 

the  coverage  of 

in 

exist 

terms 

Significant  geographical  differences  in  public 
services  and  infrastructure  underline  the  need 
investment.  Significant  regional 
for  distinct 
innovation 
disparities 
performance 
Hungary (European 
Commission, 2017b). The urban-rural divide could 
be  alleviated  by  improving  the  connectedness  of 
remote rural communities and by improving public 
services, 
including  education  and  healthcare, 
which would slow the population decline.  

in 
within 

of 

benefit 

thematic 

individual 

policies  would 

the  existence  of 

the  distribution  of 

Regional 
from 
geographic  and  thematic  differentiation  and 
the 
coordination.  Despite 
integrated  territorial  programmes  (co-financed  by 
EU funds) that build on local needs and potentials, 
interventions  are  not  sufficiently  differentiated. 
Although  budget  allocations  reflect  the  economic 
the  available 
strength  of  Hungary’s  regions, 
portfolio  and 
investment 
priorities  do  not.  Moreover,  the  system  is  not 
tailored  to  reflect  different  territorial  needs  or  to 
choices. 
accommodate 
Regarding  the  lack  of  coordination,  the  recently 
launched 
development 
programmes  (the  Modern  Cities  Programme  and 
the  Modern  Villages  and  Small  Municipalities 
Programme)  target  the  development  of  23  larger 
cities  and  villages,  respectively.  The  majority  of 
spending  is  dedicated  to  improving  transport 
regional 
infrastructure, 
innovation 
features 
prominently.  However,  coordination  between  the 
two  flagship  programmes  appears  weak.  This 
creates  the  risk  that  smaller  cities  –  which  host 
30 %  of  population  and  are  not  covered  by  either 
programme  –  may  lose  functions  to  larger  cities, 
which would lead to their decline. In addition, the 

infrastructure 

investment 

territorial 

national 

also 

but 

in 

40 

 
3.4. Competitiveness reforms and investment  

indicators  point 

environment.  Available 
to 
weaknesses  in  the  transparency  of  policy-making 
(Bertelsmann,  2018;  WJP,  2015).  The  Hungarian 
Parliament  continues  to  adopt  legislation  that  has 
substantial  societal  and  economic  impact  within  a 
very  short  time  for  public  consultation.  Between 
2011  and  2014  on  average  seven  days  were 
available to discuss a piece of legislation (Vértesy, 
2016).  Regulatory  impact  assessments  are  not 
available for a significant number of laws (CRCB, 
2015,  2016,  2017).  Lack  of  meaningful 
consultation  and  impact  assessment  leads  to  a 
learning-by-doing  approach,  which  contributes  to 
frequent changes in the legal framework. In 2017, 
the  Parliament  adopted  208  Acts,  which  also 
amended  around  1 200  existing  laws.  Fast  track 
legislation combined with the increased number of 
new  laws  worsens  the  stability  of  the  legal 
framework. For businesses, it leads to higher costs 
and  discourages  innovation  and  high  value-added 
have 
investments. 
proliferated.  Over  the  last  decade,  more  than  70 
pieces  of  legislation  targeted  specific  people  or 
institutions.  Sometimes,  such  targeted  legislations 
penalise actors (e.g. sector-specific taxes); in other 
cases,  they  grant  benefits  (e.g.  easing  conflict  of 
interest  rules  for  a  specific  public  office)  or 
monopolies.   

regulations 

Selective 

The effectiveness of the justice system 

Recent  developments  in  Hungary  give  rise  to 
concerns  on  judicial  independence.  The  rule  of 
law,  including  the  independence,  efficiency  and 
quality  of  the  justice  system,  are  crucial  to 
attracting  business  and  enabling  economic  growth 
(European Commission, 2018j). Over the last year, 
perceived judicial independence among businesses 
decreased 
Justice 
in  Hungary 
Scoreboard, forthcoming). 

(2019  EU 

Checks and balances within the ordinary courts 
system  have  been  further  weakened.  The 
National  Judicial  Council  (the  Council) (7)  faces 
increasing  difficulties  in  counter-balancing  the 
powers of the President of the National Office for 

(7)  The  15-member  Council  is  composed  of  the  president  of 
the  Kúria  (Supreme  Court)  ex  officio  and  14  judges-
members  (and  14  substitute  members)  elected  by  their 
the  central 
tasked  with 
peers. 
administration of the judiciary. 

supervising 

is 

It 

of 

(online 

sophistication 
service 
services 
completion).  However,  several  digital  solutions 
have  been recently implemented, such as eHealth, 
automatic online filling of the tax statement and an 
e-procurement system.  

Graph 3.4.6:  Average of the voice and accountability and 

control of corruption indexes in Worldwide 
Governance Indicator (EU average=100) 

(1) Figures refer to the average scores of two indicators on a 
scale  of 0-5 (2) CEE3: Czech Republic, Poland and Slovakia 
Source: World Governance Indicators 2018 

the 

legal 

framework 
The  effectiveness  of 
hinders  the  business  environment  of  smaller 
enterprises.  In  the  everyday  business  operation, 
how  rules  are  applied  is  just  as  important  as  the 
formal rules themselves. Perception indicators tend 
to show poorer results than assessments of formal 
rules  and  measurable  statistics.  This  points  to  a 
discrepancy between the formal framework and the 
actual  application  of  the  rules  (Jakab-Gajduschek, 
2018). Small firms tend to have worse perceptions 
than  large  companies,  suggesting  that  smaller 
companies  operate  in  a  less  favourable  business 
environment  (DUIHK,  2018).  Investment  projects 
large  firms  also  benefit  from  significant 
by 
government support (Éltető-Antalóczy, 2017). The 
government concluded strategic agreement with 79 
firms  between  2012  and  2018.  However,  such 
arrangements  are  not  accessible  to  smaller  firms. 
Differences  in  the  business  environment  firms 
actually 
significant 
productivity gap between small and large firms. 

face  contribute 

the 

to 

Weaknesses  in  the  transparency  of  policy-
business 
making 

process  may 

affect 

41 

757779818385878991939505060708091011121314151617HungaryCEE3 
 
                                                           
the Judiciary (the Office) (8). The situation, which 
was  already  flagged  by  the  Council  of  Europe’s 
Group  of  States  against  Corruption  (GRECO, 
the  Venice  Commission (Venice 
2015)  and 
Commission, 2012a) has further deteriorated since 
January 2018. According to the Council, five of its 
new  judges-members  have  resigned  following 
pressure  from  the  Office  President.  In  addition, 
according to the Council, the Office President has 
called for the initiation of disciplinary proceedings 
against 
remaining  members.  Only  one 
substitute  member  out  of  14  has  remained.  The 
absence  of  effective  control  over  the  Office 
President  increases  the  possibility  of  arbitrary 
decisions  in  the  management  of  the  judicial 
system. The Office President’s decisions to declare 
managerial 
calls 
posts ‘unsuccessful’ (9) have been criticised by the 
Council (NJC, 2018; see also Venice Commission, 
2012a).  According  to  the  applicable  legislation, 
judicial 
these  decisions  are  not  subject 
review (10).  

application 

four 

for 

to 

to 

In  December  2018,  the  Hungarian  Parliament 
adopted  two  legislative  acts  establishing  an 
administrative courts system, without waiting for 
the  opinion  of  the  Venice  Commission,  requested 
by 
the  Hungarian  Minister  of  Justice  and 
scheduled for March 2019. The Council of Europe 
for  Human  Rights  expressed 
Commissioner 
concerns  as 
the 
their  compliance  with 
to 
requirements  of  judicial  independence (Council  of 
Europe,  2018).  The  new  administrative  courts 
system 
regional 
administrative courts and a Higher Administrative 
Court  –  is  to  be  set  up  as  of  2020.  It  will  be 
responsible for reviewing administrative  decisions 
the  business  environment  (including 
affecting 
public  procurement, 
administrative 
permits  and  decisions  by  competition  and  media 

composed 

taxation, 

eight 

of 

– 

(8)  The  Office  President 

is  an  administrative  authority 
nominated by the President of the Republic and elected by 
the  Parliament  with  a  two  thirds  majority  from  among 
judges  with  at  least  a  five-year  experience  as  a  judge  to 
carry out the central administration of the judiciary. 

(9)  (Vice) presidents and heads of divisions (kollégium) of the 
regional  courts  of  appeal,  (vice)  presidents  and  heads  of 
divisions of the regional courts, (deputy) heads of regional 
administrative and labour law divisions (Section 128(2) of 
Act CLXI of 2011). 

(10)  In  cases  where  the  Office  President  declares  a  call  for 
application  ‘unsuccessful’,  the  Office  President  has  a 
discretionary power to appoint a court manager  ad interim 
after  a  repeated  call  for  application  and  for  a  maximum 
period of one year. 

3.4. Competitiveness reforms and investment  

judicial 

to  protect 

authorities)  and  for  hearing  other,  sensitive  cases 
(such  as  on  the  civil  service  and  elections).  The 
Commission  is  analysing  the  new  administrative 
courts system as regards the existence of effective 
safeguards 
independence, 
including  the  appointment  of  judges  and  court 
presidents, the powers of and the procedure for the 
the  Higher 
appointment  of 
Administrative Court, the central administration of 
the  new  courts,  the  transfer  and  the  evaluation  of 
judges, the supervisory role of judicial bodies, and 
the  uniformisation  of  case  law.  The  forthcoming 
opinion  of  the  Venice  Commission  will  feed  into 
this analysis.  

the  President  of 

Administrative  judges  are  increasingly  being 
recruited from the public administration. A new 
points  system  for  assessing  judicial  applications, 
which  favours  the  recruitment  of  senior  civil 
servants,  was  introduced  by  a  ministerial  decree 
(IM,  2017).  As  a  result,  the  ratio  of  civil  servants 
among  new  judges  (11)  appointed  to  the  bench  to 
review administrative decisions rose from 4.8 % to 
43.6 % (NOJ,  2018).  Further  appointments  under 
the  newly  envisaged 
this  scheme  will 
administrative judicial posts, the number of which 
remains  to  be  determined  at  the  discretion  of  the 
Minister of Justice.  

fill 

its 

with 

remains 

compliance 

The  effective  functioning  of  the  prosecution 
service  remains  a  concern.  The  Group  of  States 
against  Corruption  (GRECO)  concluded  that  the 
2015 
of 
level 
recommendations 
“globally 
unsatisfactory” (GRECO, 2018). The possibility to 
re-elect the Prosecutor General and the  possibility 
to maintain them in office after the expiry of their 
mandate  by  a  minority  blocking  the  election  in 
Parliament  of  a  successor,  as  well  as  the  strict 
hierarchical  structure  of  the  prosecution  service, 
has  been  criticised  by  both  GRECO (GRECO, 
the  Venice  Commission (Venice 
2015)  and 
Commission,  2012b)  as 
these  considerably 
increase  the  potential  for  political  influence  over 
this office. 

(11)  Administrative judicial posts created in 2017 were filled in 
in two batches; the new points system was applicable to the 
second batch only. 

42 

 
                                                           
 
 
                                                           
3.4. Competitiveness reforms and investment  

publication.  However,  the  share  of  tenders  with  a 
single bid remained stably high over the last years 
and  increased  in  2018  to  39 %  for  tenders  above 
the  EU  threshold  (Graph  3.4.7).  This  high  figure 
suggests that the legislative amendment of January 
2017  aiming  to  reduce  this  figure  did  not  bring 
substantial  results.  Other  statistics  covering  all 
procedures  (CRCB,  2018a,  PPA,  2018)  show  that 
the share of single bidding below the EU threshold 
was  somewhat  lower.  The  Public  Procurement 
Authority publishes statistics  on  tender  level data, 
showing  substantial 
in  single 
bidding  since  2015.  However,  the  methodology 
underlying these statistics was not agreed with the 
Commission,  and  they  cannot  be  verified  as  no 
access  is  granted  to  a  downloadable  and  easily 
searchable database. 

improvements 

Public Procurement 

of 

e-procurement 

the  e-submission 

Introduction 
improved 
efficiency  in  public  procurement  but  there  is  a 
scope to further improve transparency. Hungary 
made 
for  all  contracting 
authorities  and  all  procurement  procedures 
mandatory as of April 2018, before the deadline in 
the  Directive.  E-procurement 
the 
submission of tenders and saves costs for bidders. 
The  wider  use  of  the  e-procurement  could  further 
increase  the  efficiency  and  transparency  of  public 
projects,  improving  the  perception  of  a  lack  of 
fairness of the procurement procedure in Hungary. 
However,  the  effectiveness  of  the  Hungarian  e-
procurement and its impact  on competition is still 
the  specific 
to  be  seen  particularly 
indicators that can be extracted from the system.  

facilitates 

through 

Graph 3.4.7:  Share of tenders without prior publication and 

award of contracts with only a single bidder 
above EU threshold 

(1) Lines refer to the Single Market Scoreboard reference 
values. Values above the red line are evaluated as 
"unsatisfactory", below the green line as "satisfactory" and 
between the two lines as "average" performance. 
Source: European Commission (2019) 

While  recent  data  show  some  improvements  in 
using less transparent procedures, there is still a 
considerable scope to enhance competition. The 
share  of  contracts,  concluded  after  negotiation 
without prior publication for tenders above the EU 
threshold,  has  been  decreasing  markedly  year-on-
year  and  reached  5 %  in  2018  (see  Graph  3.4.7). 
The  amendment  to  the  Public  Procurement  Act 
adopted  in  November  2018  tightens  further  the 
rule to launch negotiated procedures without prior 

in  public  procurement 

Some  areas  remain  unaddressed  and  anti-
competitive  practices  are  still  a  challenge.  The 
majority  of  the  public  procurements  under  EU 
thresholds  are  organised  via  special  procedures, 
which  allow  only  limited  publicity  for  potentially 
interested  parties.  While  horizontal  collusion 
is 
between  bidders 
punishable,  there  are  legal  gaps  in  criminalisation 
of  illegal  agreements  between  certain  bidders  and 
the  advisors  to  the  contracting  authorities.  In  the 
past,  several  Commission  audits  on  management 
verifications  identified  systemic  irregularities,  in 
particular  related  to  inadequate  selection  and 
award  criteria  and 
treatment  of 
tenderers.  The  remedial  system  may  not  be 
effective, as the relatively high fees seem to be one 
of the main contributing factors to the low number 
of 
initiated  by  economic 
operators. All these factors may have a dissuasive 
effect  on  bidders  and  limit  competition,  thus 
creating  social  losses.  In  a  study  carried  out  for 
Hungary, weak competition in construction tenders 
was estimated to increase contract prices by 20 % 
compared  to  a  situation  of  intense  competition 
(CRCB, 2018b). 

to  unequal 

requests 

remedy 

Fight against corruption  

Corruption  remains  an  important  concern. 
Hungary’s  scores  on  most  corruption  indicators 
have  deteriorated  or  stagnated  in  recent  years 
(WGI,  2018;  TI,  2019).    In  particular,  Hungary’s 
score on favouritism is weak (WEF, 2017), which 
may suggest a lack of merit-based appointments in 
public  administration.  An  amendment  to  the  Law 

43 

0510152025303540No Calls for BidsOne Bidder20152016201720185%10%10%20%% 
 
3.4. Competitiveness reforms and investment  

Data  Protection  and  Freedom  of  Information 
confirmed  that  there  were  instances  where  public 
institutions  illegally  charged  fees  for  requested 
documents.  While  the  situation  has  so  far  been 
remedied  by  courts  and  the  Authority,  existing 
obstacles  and  misapplication  of  the  rules  may 
hinder transparency in the long run. The Authority 
registered  an  increased  number  of  requests  (220 
per year for 2017-2018, up from around 150 in the 
previous  period)  and  notes  that  in  81 %  of  cases 
access was granted. An independently run platform 
shows  divergent  figures,  however,  and  this  may 
point to deficiencies in the reporting of statistics by 
public institutions. 

on National Assets grants national asset ownership 
rights  to  any  person  appointed  by  an  individual 
government  decision.  The  State  Audit  Office 
found that this provision, coupled with widespread 
discretionary  appointments,  magnifies  the  risk  of 
abuse  of  state  property.  It  also  found  that  there 
have been no steps to address shortcomings in the 
whistle-blower protection framework and the asset 
declaration systems of officials, nor have effective 
measures  been 
to  curb  gratitude 
payments in healthcare (SAO, 2018). 

introduced 

launch 

investigations 

The  anti-corruption  framework  mainly  focuses 
on  the 
integrity  of  public  services,  while 
determined  action  on  prosecuting  high-level 
corruption  is  lacking.  Each  year  between  2015 
and  2017,  Hungary  received  one  of  the  highest 
number  of  recommendations  in  the  EU  from  the 
European Anti-Fraud Office. Hungarian authorities 
reportedly 
following 
recommendations  of  European  Anti-Fraud  Office 
and  their  indictment  rate  has  increased  in  2017. 
However,  there  are  still  no  signs  of  determined 
action to prosecute corruption involving high-level 
officials  or  their  immediate  circle  when  serious 
allegations  arise.  Accountability  for  decisions  to 
close investigations is a matter of concern as there 
are  no  effective  remedies (12)  against  decisions  of 
the  prosecution  service  not  to  prosecute  alleged 
criminal activity detrimental to the public interest, 
including  corruption,  fraud  affecting  the  EU’s 
financial  interests  and  embezzlement  of  public 
funds. Perceptions of effectiveness of the judiciary 
in tackling high-level corruption are very low, with 
only  15 %  of  the  surveyed  population  believing 
that  bribery  to  senior  officials  is  appropriately 
sanctioned  in  Hungary  compared  to  30 %  on  the 
average in the EU (European Commission, 2017c). 
Some  changes  have  been 
the 
criminal procedure law in July 2018 to clarify the 
competences  of 
the  prosecution  vis-à-vis  the 
police. An increase in resources is also foreseen. 

introduced 

in 

Restrictions  on  access  to  information  hinder 
corruption  prevention.  Breaches  of  obligations 
by  public  institutions  and  the  application  of 
dissuasive 
for  access  may  discourage 
members of the public from exercising their rights. 
In  its  annual  report,  the  National  Authority  for 

fees 

(12)  Substitute private prosecution is not available if the victim 
is the state or an organ vested  with public power (Section 
787(3)(d) of Act XC of 2017). 

44 

 
                                                           
ANNEX A: OVERVIEW TABLE 

Commitments  

Summary assessment (13) 

2018 country-specific recommendations (CSRs)  

the 

significant  deviation 

CSR 1: In 2018, ensure compliance with the Council 
recommendation  of  June  2018  with  a  view  to 
correcting 
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.  

from 

The compliance assessment with the Stability and 
Growth Pact will be included in Spring when final 
data for 2018 will be available.  

Hungary  has  made  Limited  Progress  in  addressing 
CSR 2  

CSR  2:  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 
strengthen  prosecutorial 
efforts and improve transparency and competition in 
public  procurement 
further 
developing  the  e-procurement  system.  Strengthen 
competition,  regulatory  stability  and  transparency  in 
the services sector, in particular in retail.  

framework, 

inter  alia 

through 

Continue simplifying the tax system, in particular by 
reducing sector-specific taxes.  

Some  Progress  In  2019,  the  government  continued 
simplifying  the  tax  system.  The  upper  rate  of  the 
bank levy was lowered further from 0.21 % to 0.2 % 
and  it  will  stop  being  applicable  for  investment 
tax  was 
companies.  The 

transaction 

financial 

(13)  The following categories are used to assess progress in implementing the country-specific recommendations (CSRs): 
No progress: The Member State has not credibly announced nor adopted any measures to address the CSR. This category covers a 
number  of  typical  situations  to  be  interpreted  on  a  case  by  case  basis  taking  into  account  country-specific  conditions.  They 
include the following:  

-no legal, administrative, or budgetary measures have been announced 
-in the national reform programme, 
-in any other official communication to the national Parliament/relevant parliamentary committees or the European Commission, 
-publicly (e.g. in a press statement or on the government's website); 
-no non-legislative acts have been presented by the governing or legislative body; 
-the  Member  State  has  taken  initial  steps  in  addressing  the  CSR,  such  as  commissioning  a  study  or  setting  up  a  study  group  to 
analyse possible measures to be taken (unless the CSR explicitly asks for orientations or exploratory actions). However, it has 
not proposed any clearly-specified measure(s) to address the CSR. 

Limited progress: The Member State has:  
-announced certain measures but these address the CSR only to a limited extent; and/or 
-presented  legislative  acts  in  the  governing  or  legislative  body  but  these  have  not  been  adopted  yet  and  substantial  further,  non-

legislative work is needed before the CSR is implemented; 

-presented non-legislative acts, but has not followed these up with the implementation needed to address the CSR. 
Some progress: The Member State has adopted measures 
-that partly address the CSR; and/or 
-that address the CSR, but a fair amount of work is still needed to fully address the CSR fully as only a few of the measures  have 
been implemented. For instance, a measure or measures have been adopted by the national Parliament or by ministerial decision 
but no implementing decisions are in place. 

Substantial progress: The Member State has adopted measures that go a long way towards addressing the CSR and most of them 

have been implemented. 

Full implementation: The Member State has implemented all measures needed to address the CSR appropriately. 

45 

 
 
                                                           
 
A. Overview Table 

abolished  for  the  first  HUF  20  000  in  individuals’ 
transactions  from  2019.  The  tax  system  operates 
around sixty different taxes, many of which are small 
and  generate  administrative  burden.  Recently,  some 
smaller  taxes,  such  as  the  cultural  tax,  were  phased 
out, while others were merged.  

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.  

No  Progress  No  substantial  changes  have  been 
introduced for the system of social dialogue, thereby 
this  still  remains  underdeveloped  and  ineffective.  In 
consequence,  social  partners  continue  to  have  very 
limited 
influence  on  national  decision-making. 
Regulatory  impact  assessments  are  not  available  for 
a  significant  number  of  laws.  Lack  of  meaningful 
consultation  and  impact  assessment  leads  to  a 
learning  by  doing  approach,  which  contributes  to 
frequent  changes  in  the  legal  framework.  Fast  track 
legislation  combined  with  the  increased  number  of 
new 
legal 
framework  and  leads  to  higher  costs  for  businesses, 
innovation  and  high  value  added 
discourages 
investments. 
legislations 
targeted 
penalise actors (such as the sector specific taxes); in 
other cases they grant benefits or monopolies.  

the  stability  of 

laws  worsens 

Sometimes 

the 

Reinforce  the  anti-corruption  framework,  strengthen 
prosecutorial efforts and  

the 

anti-corruption 

indicators.  In  particular 

No  Progress  Corruption  remains  a  major  concern. 
Hungary’s scores on most corruption indicators have 
deteriorated over the past years based internationally 
the  score  on 
collated 
favouritism  is  weak.  The  anti-corruption  framework 
mainly focuses on integrity of public services, while 
determined  action  on  prosecuting  high 
level 
corruption  is  lacking.  No  steps  were  taken  to 
reinforce 
framework.  No 
measures have been taken to reduce favouritism and 
ensure  merit-based  appointments  at  all  levels  in 
public  administration.  Restrictions  on  access  to 
information  hinder  corruption  prevention.  Public 
institutions  continued  to  illegally  charge  fees  for 
requested  documents.  Some  changes  have  been 
introduced  in  the  criminal  procedure  law  in  July 
2018  to  clarify  the  competences  of  the  prosecution 
against the police and an increase of resources is also 
foreseen.  

Improve  transparency  and  competition  in  public 
procurement inter alia through further developing the 
e-procurement system.  

Limited  Progress  Efforts  have  been  made  by 
Hungary  in  2018  to  introduce  full  electronic  public 
procurement, but there is still a wide scope to further 
improve  transparency  in  tendering  processes.  The 
public  procurement  data  are  currently  not  published 
in  a  structured  form.  The  Hungarian  e-procurement 
system does  not offer access  to the  system’s data  in 

46 

 
A. Overview Table 

an  open  machine-readable  format,  and  there  are  no 
searchable  functions  allowing  for  listing  call  for 
tenders  or  bids  in  different  categories.  Furthermore, 
there are no functionalities for making aggregate data 
easily understandable to citizens (e.g. visualisations, 
statistics).  

Strengthen  competition,  regulatory  stability  and 
transparency  in  the  services  sector,  in  particular  in 
retail.  

for 

to  be 
No  Progress  Certain  services  continue 
entrusted to state-owned or private firms specifically 
created 
these  purposes.  The  government 
continues to exempt certain mergers and acquisitions 
from  competition  scrutiny.  Short-term  regulatory 
measures  with  immediate  impact  on  the  business 
environment are being discussed; once adopted, their 
impact  is  still  to  be  measured.  The  legislation 
imposing a ban on loss-making has been withdrawn, 
legislative  act  on  authorisation 
but  a  new 
requirements  for  the  transformation  of  buildings 
dedicated 
introduced.  This 
legislation  is  likely  to  unnecessarily  increase  the 
administrative burden on retail companies.  

to  retail  has  been 

CSR  3:  Unlock  labour  reserves  through  improving 
the quality of active labour market policies. Improve 
education outcomes and increase the participation of 
disadvantaged groups, in particular Roma, in quality 
and  inclusive  mainstream  education.  Improve  the 
adequacy  and  coverage  of  social  assistance  and 
unemployment benefits.  

Hungary  has  made  Limited  Progress  in  addressing 
CSR 3  

Unlock 
quality of active labour market policies.  

labour  reserves 

through 

improving 

the 

the  gaps 

Some  Progress  The  strong  economic  expansion  in 
Hungary 
raises  employment  and  wages.  The 
employment  rate  for  the  age  group  20-64  increased 
to  around  75  %  and  the  unemployment  rate  fell 
below  4  % 
in 
in  2018.  However, 
employment  and  wage  outcomes  between  genders 
and skills groups remain wide in an EU comparison. 
Labour  market  outcomes  for  various  vulnerable 
groups, including Roma and people with disabilities, 
is  still 
are  weak.  The  Public  Works  Scheme 
disproportionally 
several 
2016 
large.  Since 
programmes  co-financed  by  the  European  Social 
Fund  have  been 
the 
transition from Public Works Scheme to the primary 
labour  market.  Other  European  Social  Fund  funded 
and 
programmes 
entrepreneurship  have  also  been  launched  and  are 
currently  ongoing.  The  Training  of  Low-skilled  and 
Public  Workers  programme  targets  mostly  public 
workers.  Other  European  Social  Fund  (and  Youth 
Employment  Initiative)  supported  active 
labour 
market programmes initiated in 2015/2016 are being 

running  and 

traineeships 

facilitating 

supporting 

47 

 
A. Overview Table 

continued.  A  specific  project  was  also  launched  to 
support  non-governmental  organisations  to  provide 
(such  as  counselling, 
labour  market  services 
for 
mentoring,  psychological  counselling  etc.) 
disadvantaged jobseekers. In parallel, participation in 
the  public  works  scheme  is  set  to  decrease,  along 
with  the  decrease  of  the  budget  allocated  for  the 
scheme.  

Improve  education  outcomes  and 
the 
participation  of  disadvantaged  groups,  in  particular 
Roma, 
inclusive  mainstream 
education.  

in  quality  and 

increase 

Limited  Progress  Some  measures  such  as  the 
modification  of 
school  catchment  areas  and 
establishing  anti-segregation  officers  were  taken  to 
prevent segregation. However, their impact is limited 
by  the  exemption  of  non-state  schools  from  the 
requirement  to  take  disadvantaged  pupils,  combined 
with  the  effect  of  free  school  choice.  300  schools 
showing high rates of drop-out risk are involved in a 
targeted EU-funded project.  

Improve 
assistance and unemployment benefits.  

the  adequacy  and  coverage  of  social 

Limited Progress No substantial change in the level 
and coverage of social benefits, with a few minor in 
kind benefits have been expanded. No change in the 
duration  of  unemployment  benefits,  however,  the 
ratio  of  people  staying  unemployed  for  less  than 
three months slightly improved recent years.  

Europe 2020 (national targets and progress)  

Employment rate target set in the NRP: 75 %.  

R&D target set in the NRP: 1.8 % of GDP  

The  employment  rate  of  the  20-64  age  group 
continued  to  improve  and  reached  73.3 %  in  2017 
and  74.6 %  in  the  third  quarter  of  2018.  It  is  above 
the EU average (72.2 % in 2017). 

Expenditure  on  R&D  increased  by  0.15  percentage 
points to 1.35 % of GDP in 2017. Hungary needs to 
make  further, significant efforts to meet the  national 
target.  

In 2017, R&D intensity in Hungary was composed of 
73%  private  investment  (0.99%  of  GDP)  and  26% 
public investment (0.35% of GDP).  

National  greenhouse  gas  (GHG)  emissions  target:  
+10  %  in  2020  compared  with  2005  (in  sectors  not 
included in the EU emissions trading scheme)  

By 2017, emissions fell by 9 % compared with 2005. 
According to the latest projection, the 2020 target is 
expected to be met by a wide margin. 

2020 renewable energy target: 13 %  

Although  in  2017  the  preliminary  renewable  share 
(13.3%) was higher than the 2020 target, it decreased 

48 

 
 
 
A. Overview Table 

from  the  last  year  (14.3%),  owing  to  lower  share  of 
renewables in heating and cooling, and transport. 

Energy efficiency, 2020 energy consumption targets:  

Hungary's 2020 energy efficiency target is 24.1 Mtoe 
expressed  in  primary  energy  consumption  (14.4 
million  tons  of  oil  equivalent  expressed  in  final 
energy consumption)  

for 

the 

Both  primary  and  final  energy  consumption  rose 
amid  strong  economic  growth 
third 
consecutive year in 2017, respectively reaching 24.5 
and 18.5 million tons of oil equivalent. These values 
are  above  the  respective  2020  targets,  implying  that 
more  efforts  need  to  be  done  in  the  remaining  three 
years.  Final  energy  consumption  target  will  be 
difficult to meet without additional measures.  

Early school/training leaving target: below 10 %.  

In 2017, the early school leaving increased to 12.5 %, 
above the EU average of 10.6 %. It has been getting 
farther from the national target since 2014. 

Tertiary  education  target:  34  %  of  population  aged 
30-34.  

The tertiary education attainment rate for 30-34-years 
olds  fell  to  32.1 %,  significantly  below  the  EU 
average of 39.9 %. 

Target  for  reducing  the  number  of  people  at  risk  of 
poverty or social exclusion, expressed as an absolute 
number of people: 450 000.  

In  2018,  the  population  at  risk  of  poverty  or 
exclusion  was  908 000  lower  than  in  2008.  At  this 
point, Hungary significantly overachieves its national 
target. 

49 

 
ANNEX B: COMMISSION DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

50 

General Government debt projections under baseline, alternative scenarios and sensitivity tests2017201820192020202120222023202420252026202720282029Gross debt ratio73.372.970.368.667.667.467.967.968.068.168.268.468.7Changes in the ratio (-1+2+3)-2.6-0.3-2.6-1.7-1.0-0.20.50.00.10.10.10.20.3of which(1) Primary balance (1.1+1.2+1.3)0.60.10.50.60.2-0.1-0.5-0.5-0.4-0.4-0.3-0.3-0.3(1.1) Structural primary balance (1.1.1-1.1.2+1.1.3)-0.7-1.3-0.9-0.6-0.6-0.5-0.5-0.5-0.4-0.4-0.3-0.3-0.3(1.1.1) Structural primary balance (bef. CoA)-0.7-1.3-0.9-0.6-0.6-0.6-0.6-0.6-0.6-0.6-0.6-0.6-0.6(1.1.2) Cost of ageing0.00.0-0.1-0.1-0.1-0.2-0.3-0.3-0.3(1.1.3) Others (taxes and property incomes)0.00.00.00.00.00.00.00.00.0(1.2) Cyclical component0.91.41.41.20.80.40.00.00.00.00.00.00.0(1.3) One-off and other temporary measures0.40.00.00.00.00.00.00.00.00.00.00.00.0(2) Snowball effect (2.1+2.2+2.3)-2.9-3.0-2.3-1.4-0.8-0.40.0-0.5-0.4-0.3-0.2-0.10.1(2.1) Interest expenditure2.82.52.42.42.32.32.42.52.52.62.72.82.9(2.2) Growth effect-2.9-2.9-2.3-1.7-1.4-1.2-1.1-1.6-1.6-1.6-1.6-1.6-1.5(2.3) Inflation effect-2.8-2.6-2.3-2.0-1.8-1.5-1.3-1.3-1.3-1.3-1.3-1.3-1.3(3) Stock-flow adjustments0.92.80.20.20.00.00.00.00.00.00.00.00.0Note: For further information, see the European Commission Fiscal Sustainability Report (FSR) 2018. b. For the medium-term, the risk category (low/medium/high) is based on the joint use of the S1 indicator and of the DSA results. The S1 indicator measures the fiscal adjustment required (cumulated over the 5 years following the forecast horizon and sustained thereafter) to bring the debt-to-GDP ratio to 60 % by 2033. The critical values used are 0 and 2.5 pps. of GDP. The DSA classification is based on the results of 5 deterministic scenarios (baseline, historical SPB, higher interest rate, lower GDP growth and negative shock on the SPB scenarios) and the stochastic projections. Different criteria are used such as the projected debt level, the debt path, the realism of fiscal assumptions, the probability of debt stabilisation, and the size of uncertainties. c. For the long-term, the risk category (low/medium/high) is based on the joint use of the S2 indicator and the DSA results. The S2 indicator measures the upfront and permanent fiscal adjustment required to stabilise the debt-to-GDP ratio over the infinite horizon, including the costs of ageing. The critical values used are 2 and 6 pps. of GDP. The DSA results are used to further qualify the long-term risk classification, in particular in cases when debt vulnerabilities are identified (a medium / high DSA risk category). [2]Thechartspresentaseriesofsensitivitytestsaroundthebaselinescenario,aswellasalternativepolicyscenarios,inparticular:thehistoricalstructuralprimarybalance(SPB)scenario(wheretheSPBissetatitshistoricalaverage),theStabilityandGrowthPact(SGP)scenario(wherefiscalpolicyisassumedtoevolveinlinewiththemainprovisionsoftheSGP),ahigherinterestratescenario(+1pp.comparedtothebaseline),alowerGDPgrowthscenario(-0.5pp.comparedtothebaseline)andanegativeshockontheSPB(calibratedonthebasisoftheforecastedchange).Anadversecombinedscenarioandenhancedsensitivitytests(ontheinterestrateandgrowth)arealsoincluded,aswellasstochasticprojections. Detailed information on the design of these projections can be found in the FSR 2018.HU - Debt projections baseline scenario[1]Thefirsttablepresentsthebaselineno-fiscalpolicychangescenarioprojections.Itshowstheprojectedgovernmentdebtdynamicsanditsdecompositionbetweentheprimarybalance,snowballeffectsandstock-flowadjustments.Snowballeffectsmeasurethenetimpactofthecounteractingeffectsofinterestrates,inflation,realGDPgrowth(andexchangerates in some countries). Stock-flow adjustments include differences in cash and accrual accounting, net accumulation of assets, as well as valuation and other residual effects.[3] The second table presents the overall fiscal risk classification over the short, medium and long-term. a. For the short-term, the risk category (low/high) is based on the S0 indicator. S0 is an early-detection indicator of fiscal stress in the upcoming year, based on 25 fiscal and financial-competitiveness variables that have proven in the past to be leading indicators of fiscal stress. The critical threshold beyond which fiscal distress is signalled is 0.46. 404550556065707580859020162017201820192020202120222023202420252026202720282029Debt as % of GDP -HUBaselineEnhanced lower GDP growth scenarioAdverse combined scenarioEnhanced higher interest rate scenario40506070809020162017201820192020202120222023(% of GDP)Stochastic debt projections 2019-2023 -HUp10_p20p20_p40p40_p60p60_p80p80_p90p50Baseline404550556065707580859020162017201820192020202120222023202420252026202720282029Debt as % of GDP -HUBaselineHistorical SPB scenarioSGP scenario404550556065707580859020162017201820192020202120222023202420252026202720282029Debt as % of GDP -HUBaselineHigher interest rate scenarioNegative shock on the SPBLower GDP growth scenarioBaselineHistorical SPBLower GDP growthHigher interest rateNegative shock on SPBStochastic projectionsRisk categoryMEDIUMMEDIUMMEDIUMHIGHMEDIUMMEDIUMDebt level (2029)68.767.072.473.472.2Debt peak year20182018201820292018Percentile rank67.0%66.0%Probability debt higher36.3%Dif. between percentiles40.8HIGHLong termDSAHIGHDebt sustainability analysis (detail)Medium termHIGHMEDIUMShort termLOW(S0 = 0.3)(S1 = 1.1)S2MEDIUM(S2 = 4.1)S1 
 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial market indicators 

Notes:  
1) Latest data Q3 2018. Includes not only banks but all monetary financial institutions excluding central banks. 
2) Latest data Q2 2018. 
3) Quarterly values are annualised. 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

51 

201320142015201620172018Total assets of the banking sector (% of GDP)1)113,9107,6101,4103,097,795,1Share of assets of the five largest banks (% of total assets)51,949,349,449,849,6-Foreign ownership of banking system (% of total assets)2)55,547,647,047,746,347,3Financial soundness indicators:2)              - non-performing loans (% of total loans)-19,415,211,98,46,7              - capital adequacy ratio (%)17,417,016,918,016,217,2              - return on equity (%)3)-0,4-21,90,311,714,515,6Bank loans to the private sector (year-on-year % change)1)-4,1-3,5-8,13,36,310,0Lending for house purchase (year-on-year % change)1)-5,4-6,1-10,3-0,84,99,8Loan to deposit ratio2)-89,178,674,571,871,3Central Bank liquidity as % of liabilities1)3,13,84,95,13,93,3Private debt (% of GDP)95,291,484,677,971,4-Gross external debt (% of GDP)2) - public47,246,641,637,030,126,7    - private75,379,473,069,457,256,5Long-term interest rate spread versus Bund (basis points)*435,3364,6293,7305,3264,5263,5Credit default swap spreads for sovereign securities (5-year)*269,8179,2139,1131,398,680,2 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

1 People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).       
2 Unemployed persons are all those who were not employed but had actively sought work and were ready to begin working 
immediately or within two weeks.       
3 Long-term unemployed are people who have been unemployed for at least 12 months.       
4 Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2019.       
5 Reduction in percentage of the risk of poverty rate, due to social transfers (calculated comparing at-risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation).       
6 Average of first three quarters of 2018 for the employment rate, unemployment rate and gender employment gap. Data for 
unemployment rate is seasonally adjusted.       
Source: Eurostat 

52 

201320142015201620172018 6Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)11,911,411,612,412,5:Gender employment gap (pps)12,413,313,714,015,315,3Income inequality, measured as quintile share ratio (S80/S20)4,34,34,34,34,34,4At-risk-of-poverty or social exclusion rate1 (AROPE)34,831,828,226,325,619,6Young people neither in employment nor in education and training (% of population aged 15-24)15,513,611,611,011,0:Dynamic labour markets and fair working conditions†Employment rate (20-64 years)63,066,768,971,573,374,3Unemployment rate2 (15-74 years)10,27,76,85,14,23,7Long-term unemployment rate3 (as % of active population)4,93,73,12,41,71,5Gross disposable income of households in real terms per capita4 (Index 2008=100) 97,4101,2103,5109,8114,4:Annual net earnings of a full-time single worker without children earning an average wage (levels in PPS, three-year average)10934112561148011712::Annual net earnings of a full-time single worker without children earning an average wage (percentage change, real terms, three-year average)0,02,73,44,5::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction544,443,642,043,846,448,8Children aged less than 3 years in formal childcare10,014,415,415,6::Self-reported unmet need for medical care2,62,52,61,31,0:Individuals who have basic or above basic overall digital skills (% of population aged 16-74)::50,051,050,0: 
 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market and education indicators 

* Non-scoreboard indicator       
1 Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included.       
2 PISA (OECD) results for low achievement in mathematics for 15 year-olds.       
3 Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science.       
4 Average of first three quarters of 2018. Data for youth unemployment rate is seasonally adjusted.       
Source: Eurostat, OECD 

53 

Labour market indicators201320142015201620172018 4Activity rate (15-64)64,767,068,670,171,2:Employment in current job by durationFrom 0 to 11 months14,514,413,814,013,2:From 12 to 23 months9,19,09,29,510,3:From 24 to 59 months18,419,718,619,120,0:60 months or over57,956,658,257,456,4:Employment growth* (% change from previous year)1,14,82,43,12,02,3Employment rate of women(% of female population aged 20-64)56,960,262,164,665,766,7Employment rate of men (% of male population aged 20-64)69,373,575,878,681,082,1Employment rate of older workers* (% of population aged 55-64)37,941,745,349,851,754,0Part-time employment* (% of total employment, aged 15-64)6,46,05,74,84,34,3Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)10,910,811,49,78,87,4Participation in activation labour market policies(per 100 persons wanting to work)37,035,240,751,1::Transition rate from temporary to permanent employment(3-year average)37,038,038,537,2:31,2Youth unemployment rate (% active population aged 15-24)26,620,417,312,910,710,1Gender gap in part-time employment4,84,23,73,73,63,8Gender pay gap1 (in undadjusted form)18,415,114,014,0::Education and training indicators201320142015201620172018Adult participation in learning(% of people aged 25-64 participating in education and  training)3,23,37,16,36,2:Underachievement in education2::28,0:::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)32,334,134,333,032,1:Variation in performance explained by students' socio-economic status3::21,4::: 
 
 
 
  
C. Standard Tables 

Table C.4: 

Social inclusion and health indicators 

* Non-scoreboard indicator       
1 At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income.        
2 Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay 
their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone.       
3 Percentage of total population living in overcrowded dwellings and exhibiting housing deprivation.       
4 People living in households with very low work intensity: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months.       
5 Ratio of the median individual gross pensions of people aged 65-74 relative to the median individual gross earnings of 
people aged 50-59.       
6 Fixed broadband take up (33%), mobile broadband take up (22%), speed (33%) and affordability (11%), from the Digital 
Scoreboard.       
Source: Eurostat, OECD 

54 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare5,04,94,85,15,2:Disability1,61,51,41,31,2:Old age and survivors10,910,810,29,69,5:Family/children2,62,52,32,32,3:Unemployment0,60,50,40,40,3:Housing0,30,30,30,30,4:Social exclusion n.e.c.0,10,10,10,10,1:Total21,120,519,619,118,9:of which: means-tested benefits0,90,90,70,80,7:General government expenditure by function (% of GDP, COFOG)Social protection16,716,415,314,814,3:Health5,15,04,85,24,8:Education4,74,65,15,14,9:Out-of-pocket expenditure on healthcare (% of total health expenditure)29,428,428,328,929,7:Children at risk of poverty or social exclusion (% of people aged 0-17)*41,943,941,836,133,631,6At-risk-of-poverty  rate1 (% of total population)14,315,015,014,914,513,4In-work at-risk-of-poverty rate (% of persons employed)5,77,06,79,39,610,2Severe material deprivation rate2  (% of total population)26,327,824,019,416,214,5Severe housing deprivation rate3, by tenure statusOwner, with mortgage or loan15,214,813,911,917,214,1Tenant, rent at market price26,630,924,232,223,722,0Proportion of people living in low work intensity households4 (% of people aged 0-59)13,513,612,89,48,26,6Poverty thresholds, expressed in national currency at constant prices*607544564058577231605976636370665923Healthy life years (at the age of 65)Females6,46,16,15,96,4:Males6,46,26,05,96,7:Aggregate replacement ratio for pensions5 (at the age of 65)0,60,60,60,60,70,6Connectivity dimension of the Digital Economy and Society Inedex (DESI)6::43,753,559,663,6GINI coefficient before taxes and transfers*51,050,952,549,949,848,8GINI coefficient after taxes and transfers*26,928,028,628,228,228,1 
 
 
 
  
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

1 Value added in constant prices divided by the number of persons employed.       
2 Compensation of employees in current prices divided by value added in constant prices.       
3 The methodologies, including the assumptions, for this indicator are shown in detail here: 
http://www.doingbusiness.org/methodology.        
4 Average of the answer to question Q7B_a. "[Bank loan]: If you applied and tried to negotiate for this type of financing over 
the past six months, what was the outcome?". Answers were codified as follows: zero if received everything, one if received 
75% and above, two if received below 75%, three if refused or rejected and treated as missing values if the application is still 
pending or don't know.       
5 Percentage population aged 15-64 having completed tertiary education.       
6 Percentage population aged 20-24 having attained at least upper secondary education.       
7 Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       
8 Aggregate OECD indicators of regulation in energy, transport and communications (ETCR).       
Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation 
indicators); SAFE (for outcome of SMEs' applications for bank loans). 

55 

Performance indicators201220132014201520162017Labour productivity per person1 growth (t/t-1) in %Labour productivity growth in industry-1,352,642,789,91-2,070,17Labour productivity growth in construction-6,006,047,170,60-12,9412,15Labour productivity growth in market services-0,810,11-3,31-0,42-0,533,93Unit Labour Cost (ULC) index2 growth (t/t-1) in %ULC growth in industry4,874,130,81-5,417,275,71ULC growth in construction5,46-3,39-7,64-13,6616,28-4,65ULC growth in market services2,290,980,26-2,853,441,25Business environment201220132014201520162017Time needed to enforce contracts3 (days)605605605605605605Time needed to start a business3 (days)7,07,07,07,07,07,0Outcome of applications by SMEs for bank loans4:0,671,010,390,380,82Research and innovation201220132014201520162017R&D intensity1,261,391,351,361,201,35General government expenditure on education as % of GDP4,704,605,105,104,90:Number of science & technology people employed as % of total employment363736363636Population having completed tertiary education5192020212121Young people with upper secondary education6838485848484Trade balance of high technology products as % of GDP0,940,460,28-0,040,240,27Product and service markets and competition200320082013OECD product market regulation (PMR)7, overall2,111,541,33OECD PMR7, retail0,791,442,06OECD PMR7, professional services2,863,023,05OECD PMR7, network industries83,311,871,73 
 
 
 
C. Standard Tables 

Table C.6:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 prices)  
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)  
          Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)  
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR)  
          Waste intensity: waste (in kg) divided by GDP (in EUR)  
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP    
Weighting of energy in HICP: the proportion of 'energy' items in the consumption basket used for the construction of the HICP  
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change)  
Real unit energy cost: real energy costs as % of total value added for the economy  
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 EUR)   
Real unit energy costs for manufacturing industry excluding refining : real costs as % of value added for  manufacturing 
sectors  
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP  
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000–100 000 GJ; figures 
excl. VAT.  
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste  
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP  
Proportion of GHG emissions covered by EU emissions trading system (ETS) (excluding aviation): based on GHG emissions  
(excl land use, land use change and forestry) as reported by Member States to the European Environment Agency.  
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value 
added (in 2010 EUR)  
Transport carbon intensity: GHG emissions in transport activity divided by gross value added of the transport industry  
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels  
Aggregated supplier concentration index:  covers oil, gas and coal. Smaller values indicate larger diversification and hence 
lower risk.  
Diversification of the energy mix: Herfindahl index covering natural gas, total petrol products, nuclear heat, renewable 
energies and solid fuels  
* European Commission and European Environment Agency  
Source: European Commission and European Environment Agency (Share of GHG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes and GDP); Eurostat (all other indicators). 

56 

Green growth performance201220132014201520162017MacroeconomicEnergy intensity kgoe / €0,250,240,230,230,230,23Carbon intensity kg / €0,610,570,550,560,55-Resource intensity (reciprocal of resource productivity)kg / €0,870,981,211,151,101,13Waste intensity kg / €0,17-0,16-0,14-Energy balance of trade % GDP-6,3-6,3-6,2-4,2-3,2-3,8Weighting of energy in HICP%16,817,017,016,015,414,7Difference between energy price change and inflation %0,3-11,7-10,9-2,7-0,5-1,6Real unit of energy cost% of value added19,517,817,118,019,0-Ratio of environmental taxes to labour taxesratio0,150,150,150,150,15-Environmental taxes% GDP2,62,52,52,62,62,5Sectoral Industry energy intensity kgoe / € 0,130,150,150,140,150,15Real unit energy cost for manufacturing industry excl. refining% of value added19,817,716,416,516,6-Share of energy-intensive industries in the economy% GDP8,57,97,98,08,28,2Electricity prices for medium-sized industrial users€ / kWh0,100,100,090,090,080,08Gas prices for medium-sized industrial users€ / kWh0,050,040,040,040,030,03Public R&D for energy % GDP0,010,040,000,010,010,01Public R&D for environmental protection% GDP0,010,020,010,010,010,01Municipal waste recycling rate%25,526,430,532,234,735,0Share of GHG emissions covered by ETS*%35,433,232,932,431,6-Transport energy intensitykgoe / €0,760,700,770,820,810,82Transport carbon intensitykg / €2,121,942,122,292,23-Security of energy supplyEnergy import dependency%50,150,159,853,955,862,6Aggregated supplier concentration indexHHI59,263,875,551,157,0-Diversification of energy mixHHI0,230,220,210,210,220,23 
 
 
 
 
ANNEX D: INVESTMENT GUIDANCE ON COHESION POLICY 

FUNDING 2021-2027 FOR HUNGARY 

Building  on  the  Commission  proposal  for  the  next  Multi-Annual  Financial  Framework  for  the  period 
2021-2027 of 2 May 2018 (COM (2018) 321), this Annex presents the  preliminary Commission services 
views  on  priority  investment  areas  and  framework  conditions  for  effective  delivery  for  the  2021-2027 
Cohesion  Policy.  These  priority  investment  areas  are  derived  from  the  broader  context  of  investment 
bottlenecks,  investment  needs  and  regional  disparities  assessed  in  the  report.  This  Annex  provides  the 
basis for a dialogue between Hungary and the Commission services in view of the programming of the 
cohesion policy funds (European Regional Development Fund, Cohesion Fund and European Social Fund 
Plus) (14). 

Policy Objective 1: A Smarter Europe – Innovative and smart industrial transformation 

Hungary’s  overall  innovation  performance  remains  moderate  relative  to  that  of  the  EU,  while 
investment in research and development and science-business cooperation are below the EU average. 
High  priority  investment  needs (15)  are  identified  to  enhance  research  and  innovation  capacities 
and the uptake of advanced technologies in the smart specialisation areas and in particular to:  

  support the inter-institutional links and cooperation among stakeholders of research/academia and 
business, build critical research mass and attract talent in the strategic smart specialisation areas in 
order to turn research and development results into business applications, especially in cities with 
university capacity; 

  build on the existing research capacities as knowledge centres of smart economic transformation, 

support knowledge transfer and   strategic partnerships; 

  support  networking,  cooperation  and  exchange  of  experience  beyond  national  boundaries, 

including joint cross-regional, transnational and interregional projects. 

High speed broadband coverage will be sufficient by 2021 in Hungary, however it still belongs to the 
low-performing  countries  in  terms  of  Information  and  Communications  Technology  uptake  and  the 
use  of  data-driven  technologies.  Priority  investment  needs  are  identified  to  reap  the  benefits  of 
digitalisation for citizens and companies, by:  

 

increasing  Information  and  Communications  Technology  uptake  in  small  and  medium-sized 
enterprises,  including  supporting  infrastructures  and  services,  taken  into  account  the  territorial 
differences; 

 

improving digital skills,  special attention needed in the education of both sides  – consumers and 
business. 

(14)  This Annex is to be considered in conjunction with the Proposal for a Regulation of the European Parliament and of the Council 
on the European Regional Development Fund and on the Cohesion Fund COM(2018) 372 and in the Proposal for a Regulation 
of  the  European  Parliament  and  of  the  Council  on  the  European  Social  Fund  Plus  COM(2018)  382  and  in  particular  the 
requirements for thematic concentration and urban earmarking outlined in these proposals. 

(15)  The intensity of needs is classified in three categories in a descending order – high priority needs, priority needs, needs. 

57 

 
 
                                                           
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Hungary 

Hungarian small and medium-sized enterprises suffer from low productivity and innovation activity, 
hindering  their  involvement  in  global  value  chains.  High  priority  investment  needs  are  identified  to 
enhance  growth  and  competitiveness  of  small  and  medium-sized  enterprises,  including  in  rural 
areas and in particular to:,  

 

raise  productivity  and  the  value  added  of  the  economy  by  increasing  the  number  of  innovative 
firms,  invest  in  firms'  capacity  to  apply  new  technologies  in  order  to  rank  up  in  global  value 
chains; 

  encourage  the  entrepreneurial  ecosystem,  foster  the  creation  of  start-ups/scale-ups,  accelerators, 
develop  new  business  models  for  small  and  medium-sized  enterprises,  in  particular  through 
investment in intangible; 

 

raise competitiveness and internationalisation of small and medium-sized enterprises, also through 
participation in industry led and research driven international clusters and cooperation among the 
Central and Eastern European and Danube Strategy countries. 

Human  capital  represents  a  bottleneck  to  productivity  gains.    High  priority  investment  needs  are 
identified to  develop skills for smart  specialisation, industrial transition and entrepreneurship, 
and in particular through: 

  specific  trainings  in    re-  and  upskilling  in  smart  specialisation  areas,  innovation  management, 
entrepreneurship  and  innovative  business  models  within  firms,  with  attention  to  the  need  to 
address industrial transition and circularity;  adjust skills development to the business needs. 

Cooperation actions in the context of the EU Strategy for the Danube Region and the Thematic Smart 
Specialisation  Platforms  would  be  beneficial.  To  strengthen  innovation  performance  and  foster 
productivity  growth,  smart  specialisation  areas  should  be  identified  on  the  basis  of  national  and 
regional needs and potential. 

Policy Objective 2: A low carbon and greener Europe – Clean and fair energy transition, green 
and blue investment, circular economy, climate adaptation and risk prevention 

As  Hungary's  economy  is  relatively  energy  intensive,  energy  efficiency  gains  are  as  vital  as  an 
increase of the share of renewables. High priority investment needs are identified to increase energy 
efficiency and use of renewable energy, and in particular to: 

 

reduce  energy  consumption  levels  in  residential  buildings  such  as  renovation  of  multi-apartment 
buildings and improving energy efficiency in small and medium-sized enterprises; 

 

improve energy efficiency in public buildings and district heating networks; 

  decrease  greenhouse  gas  emissions  and  air  pollution  by  replacing  fossil-fuelled  boilers  with 
installations  based  on  renewable  or  on  low  carbon-intensive  energy  sources  accompanied  by 
energy efficiency renovation of buildings; 

  support  transition  to  renewables  in  heating  and  cooling,  including  through  joint  initiatives  under 

the EU Strategy for the Danube Region, such as geothermal and biomass. 

58 

 
 
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Hungary 

In  Hungary,  the  main  disaster  risks  are  the  floods  along  the  Danube  and  Tisza  river  and  drought 
periods. High priority investment needs are identified to  promote climate change adaptation,  risk 
prevention and disaster resilience, and in particular to: 

  address risks as identified in the national risks assessment, with the focus on prevention; 

 

increase  cross-border  and  transnational  co-operation  to  identify  the  most  suitable  climate 
adaptation  and  risk  prevention  measures  and  management  measures,  including  sharing  of  best 
practices and developing harmonized data systems. 

Even though the improvement of drinking water infrastructure is ongoing, the need for protection of 
water  sources  and  leaking  related  losses  remain  high.  Priority  investment  needs  are  identified  to 
promote sustainable water management, and in particular to:  

 

improve drinking water supply following the water hierarchy, including leakage reduction of water 
networks, and other efficiency measures; water reuse, for purposes other than drinking water (e.g. 
urban  irrigation);  improve  drinking  water  access  in  public  spaces  and  for  vulnerable  and 
marginalised groups; protection of water sources. 

Waste management is still inefficient and Hungary is struggling to meet important EU targets. High 
priority investments are needed to promote the transition to circular economy,  in particular: 

  support shifting towards highest steps of the waste management hierarchy: waste prevention, reuse 

and recycling as well as expanding separate collection system; 

 

invest in capacity-building for all stakeholders involved in the transition to circular economy, and 
promote circular economy in small and medium-sized enterprises; 

  develop  alternatives  to  raw  materials  and  promote  the  use  of  recycled  materials  (e.g.  actions  to 

increase the demand for recycled content, promotion of ‘urban mining’). 

Although Hungary is making efforts to preserve its rich natural heritage and improve its air quality, 
environmental  implementation  is  still  a  challenge.  Priority  investments  needs  are  identified  to 
enhance biodiversity, green infrastructure in urban environment and reducing pollution, and in 
particular to:  

 

improve air quality and related monitoring and modelling;  

  support for biodiversity and the Natura 2000 network in urban areas. 

Policy Objective 3: A more connected Europe – Mobility and regional ICT connectivity 

59 

 
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Hungary 

Although Hungary is developing the transport infrastructure, gaps still remain in ensuring modal shift 
from  road  to  more  sustainable  forms  of  transport  as  well  as  safety  and  security.  High  priority 
investment  needs  are  identified  to develop  a  sustainable,  climate  resilient,  intelligent,  intermodal 
Trans-European  Networks  for  Transport,  including  improved  access  to  Trans-European 
Networks for Transport, national, regional and cross border mobility, and in particular to: 

  continue  investments  in  Trans-European  Networks  for  Transport  to  meet  EU  standards  and 
promote  a  shift  towards  sustainable  and  accessible  modes  of  transport,  such  as  railways,  inland 
waterways, in particular Danube navigability in line with the objectives of the EU Strategy for the 
Danube Region, and multi-modal transport,  

 

investments into infrastructure safety and security, in particular road safety; 

 

investments in Integrated Transport Systems; 

 

investments into making the transport system smarter, more connected and cleaner. 

Based  on  sustainable  multimodal  urban  mobility  plans  and  bad  air  quality  levels,  high  priority 
investments need are identified to promote sustainable urban mobility, in particular to: 

 

 

investments in low-carbon public transport and active modes of transport, like biking and walking; 

investments  reducing  the  negative  externalities  of  transport,  in  particular  congestion,  emissions, 
and  traffic  accidents  by  fostering  sustainable  and  accessible  modes  like  regional/light  railways, 
multi-modal transport, cycling, including cycle transportation on public transit services). 

Policy Objective 4: A more social Europe – Implementing the European Pillar of Social Rights 

Targeted  investment  in  employment,  social,  educational  and  healthcare  including  infrastructure  in 
lagging regions(16) and for disadvantaged groups will be key to foster development in Hungary. 

Persistent  skills  mismatches  are  coupled  with  weak  labour  market  prospects  for  the  low  skilled  and 
less  employable  cohorts.  Priority  investment  needs  are  therefore  identified  to  improve  access  to 
employment, in particular for youth, long-term unemployed and inactive people, and notably to: 

  support active and preventive labour market  measures,  including skills anticipation, personalised 

services, coordination with other services, including for persons with disabilities; 

  devise outreach measures to the inactive; 

 

foster bipartite social dialogue and support social partners in capacity building. 

A high gender employment gap is coupled with low availability of early childcare. Priority investment 
needs  are  therefore  identified  to  promote  women’s  labour  market  participation  and  a  better 
work/life balance, and in particular to: 

  promote  access  to  affordable,  sustainable  and  high-quality  childcare,  including  through 
infrastructure,  with  focus  on  rural  areas;  promote  sharing  responsibilities  among  parents  and 
flexible working arrangements. 

(16)  Especially in the disadvantaged territories as defined by the 311/2007 Government Decree. 

60 

 
                                                           
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Hungary 

Educational  outcomes  are  relatively  low  and  characterised  by  high  inequalities,  prospects  for 
vocational education and training graduates are weak and participation in adult learning is inadequate. 
High priority investment needs are therefore identified  to improve  the quality and labour  market 
relevance of education and training and equal access to it, and in particular to: 

  prevent early school leaving and support young people not in education or training; 

 

reduce exclusion and support access to, and completion of, higher levels of education and training 
among disadvantaged groups, including Roma; 

  strengthen  basic  skills,  including  digital  skills  in  vocational  education  and  training  and  general 

education, key competences and  smooth transition to work;  

  promote adult learning via upskilling and reskilling; 

  support infrastructure development in education and training. 

Material  deprivation  among  certain  groups  and  in  certain  regions  remains  high.  High  priority 
investment needs  are therefore identified to promote the integration of marginalised communities 
and to address material deprivation, and in particular to: 

  develop social and educational measures, including infrastructure, in disadvantaged districts; 

 

tackle housing exclusion and regenerate deprived urban and rural areas; 

  design measures to overcome discrimination against marginalised communities, such as Roma; 

 

improve services for people with disabilities, and physical accessibility to public institutions. 

The  health  status  of  the  population  shows  high  levels  of  inequalities.  Priority  investment  needs  are 
identified to enhance access to services, including health- and long-term care, in particular to: 

 

foster access to affordable healthcare, reducing inequalities, especially in disadvantaged districts; 

  provide infrastructure, including primary care facilities, and healthcare equipment; 

  support the transition from institutional care to independent living community-based services. 

Policy Objective 5 –  A Europe  closer  to  citizens  by  fostering  the  sustainable  and  integrated  
development  of urban, rural and coastal areas and local initiatives 

There are high priority territorial disparities (across regions and urban-rural) affecting various policy 
areas  requiring  a  more  tailor  made  and  differentiated  approach.  High  priority  investment  needs  are 
identified  to  foster  the  integrated  social,  economic,  cultural  and  environmental  development  in 
urban areas, and in particular to: 

 

investing in the specific potentials of selected functional urban areas as university centres, places 
of  innovation,  science  and  technology,  and  tackle  the  specific  urban  challenges,  differentiated 
based on the local needs; 

 

in case of small and medium sized cities, polycentric development and urban-rural linkages should 

61 

 
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Hungary 

be more heavily supported to tackle depopulation, accessibility of jobs, infrastructure and services; 

  support for cooperation activities both inside the country and also cross-border. 

High priority investment needs are identified to foster the integrated social, economic, cultural and 
environmental development, including in rural areas, and in particular to: 

 

investing in the rural areas of the regions lagging behind by addressing their infrastructure gap and 
other  identified  development  needs,  by  paying  special  attention  to  the  most  deprived  areas  and 
ensuring the adequate access to basic services (e.g. health, education, social services) and jobs;  

  support the non urban areas by focusing on endogenous local development based on existing assets 
and  creating  the  conditions  for  the  inhabitants  for  self-realisation  (including  investments  in 
depopulating areas and nationally recognized tourism regions) through integrated approaches;  

  support for cooperation activities both inside the country and cross-border. 

Factors for effective delivery of Cohesion policy 

  strengthened  capacity  of  all  beneficiaries  (including  regional  and  local  authorities),  social  partners 
(including through more meaningful social dialogue), and civil society organisations and development 
of a partnership based model to implementation; 

 

improved public procurement performance, in particular increased competition and transparency; 

 

improved measures to prevent and address conflict of interest, fraud and corruption; 

  development and implementation of a roadmap on administrative capacity building necessary for the 
effective  administration  and  implementation  of  the  Funds  in  the  field  of  public  procurement, 
transparency and fight against corruption; 

  use  of  financial  instruments  and/or  contributions  to  Hungary's  compartment  under  InvestEU  for 

revenue-generating and cost-saving activities; 

  effective delivery of the policy objectives through innovative actions, including social innovation. 

62 

 
 
 
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