Recommendation for a COUNCIL DECISION establishing that no effective action has been taken by Hungary in response to the Council Recommendation of 4 December 2018
Date: 2019-06-05
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Hungary, budget deficit, economic policy, economic reform, financial control, gross domestic product, multilateral surveillance, public finance, stability pact, stability programme

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   EUROPEAN COMMISSION  Brussels, 5.6.2019 COM(2019) 539 final  Recommendation for a COUNCIL DECISION establishing that no effective action has been taken by Hungary in response to the Council Recommendation of 4 December 2018 {SWD(2019) 534 final}  
 
 
Recommendation for a 

COUNCIL DECISION 

establishing that no effective action has been taken by Hungary in response to the 
Council Recommendation of 4 December 2018 

THE COUNCIL OF THE EUROPEAN UNION, 

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

Having regard to the recommendation from the European Commission, 

Whereas:  

(1) 

(2) 

On  22  June  2018,  the  Council  decided  in  accordance  with  Article  121(4)  of  the 
Treaty  on  the  Functioning  of  the  European  Union  ("TFEU")  that  a  significant 
observed  deviation  from  the  adjustment  path  toward  the  medium-term  budgetary 
objective of -1.5 % of GDP existed in Hungary. In view of the established significant 
deviation,  the  Council  on  22  June  2018  issued  a  recommendation2  for  Hungary  to 
take  the  necessary  measures  to  ensure  that  the  nominal  growth  rate  of  net  primary 
government expenditure3 did not exceed 2.8 % in 2018, corresponding to an annual 
structural adjustment of 1.0 % of GDP. 

On  4  December  2018  the  Council  concluded  that  Hungary  had  not  taken  effective 
action in response to the Council Recommendation of 22 June 2018. On that basis, 
on 4 December 2018 the Council issued a revised Recommendation for Hungary to 
take  the  necessary  measures  to  ensure  that  the  nominal  growth  rate  of  net  primary 
government expenditure does not exceed 3.3 % in 2019, corresponding to an annual 
structural  adjustment  of  1.0 %  of  GDP4.  It  also  recommended  Hungary  to  use  any 
windfall  gains  for  reduction  of  its  deficit,  while  budgetary  consolidation  measures 
should ensure a lasting improvement in the general government structural balance in 
a growth-friendly manner. The Council established a deadline of 15 April 2019 for 
Hungary to report on the action taken in response to the recommendation.  

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4 

OJ L 209, 2.8.1997, p. 1. 
OJ C 223, 27.6.2018, p. 1. 
Net  primary  government expenditure  is comprised of  total government expenditure excluding interest 
expenditure,  expenditure  on  Union  programmes  fully  matched  by  Union  funds  revenue  and  non-
discretionary  changes  in  unemployment  benefit  expenditure.  Nationally  financed  gross  fixed  capital 
formation  is  smoothed  over  a  four-year  period.  Discretionary  revenue  measures  or  revenue  increases 
mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted 
out. 
OJ C 460, 21.12.2018, p. 4. 

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(3) 

(4) 

(5) 

(6) 

(7) 

On 20 March 2019, the Commission undertook an enhanced surveillance mission in 
Hungary  for  the  purpose  of  on-site  monitoring  under  the  Article  -11(2)  of  Council 
Regulation (EC) No 1466/97. After having transmitted its provisional findings to the 
Hungarian  authorities  for  comments,  the  Commission  reported  its  findings  to  the 
Council  on  5  June  2019.  Those  findings  were  subsequently  made  public.  The 
Commission report finds that the Hungarian authorities do not plan to act  upon the 
Council Recommendation of 4 December 2018. The authorities confirmed during the 
mission  that  their  budgetary  target  for  2019  remains  a  headline  deficit  of  1.8 %  as 
included  in  the  2019  budget  adopted  in  July  2018,  despite  the  more  favourable 
macroeconomic scenario and the better-than-expected fiscal outturn in 2018. 

On  15  April  2019,  the  Hungarian  authorities  submitted  a  report  on  action  taken  in 
response  to  Council  Recommendation  of  4  December  2018.  In  the  report,  the 
authorities reiterated that their target for 2019 remained a headline deficit of 1.8% of 
GDP  in  2019,  a  0.4  percentage  points  of  GDP  reduction  compared  to  the  2018 
outturn.  The  report  does  not  contain  any  plan  to  comply  with  the  fiscal  adjustment 
recommended by the Council. In addition, the broad range of economic programmes 
with fiscal impact listed in the report remain largely unquantified; nor does the report 
include any budgetary projection for 2019. Thereby, the report does not comply with 
the  reporting  requirement  of  the  Council.  The  improvement  in  the  underlying 
structural  deficit  falls  significantly  short  of  the  requirement  stated  in  the  Council 
Recommendation.  

Based on the Commission 2019 spring forecast published on 7 May 2019, the growth 
of net primary expenditure is projected to amount to 6.5 % in 2019, well above the 
recommended  rate  of  3.3 %.  The  structural  balance  is  set  to  improve  by  0.4 %  of 
GDP relative to 2018, falling short of the recommended adjustment of 1.0 % of GDP. 
Therefore,  both  indicators  point  to  a  deviation  from  the  recommended  adjustment. 
The  gap  to  the  expenditure  benchmark  amounts  to  1.2 %  of  GDP.  The  gap  of  the 
structural balance is somewhat smaller, amounting to 0.6 % of GDP. The structural 
balance  is  negatively  influenced  by  some  revenue  shortfalls.  The  reading  of  the 
expenditure  benchmark  is  strongly  negatively  impacted  by  the  medium-term 
potential  GDP  growth  applied  in  its  calculation,  which  includes  very  low  potential 
GDP growth in the aftermath of the crisis. In addition, the GDP deflator underlying 
the expenditure benchmark does not seem to account properly for the increased cost 
pressures  affecting  government  spending.  After  adjusting  for  those  factors,  the 
expenditure  benchmark  appears  to  adequately  reflect  the  fiscal  effort  but  it  still 
points to a deviation from the recommended adjustment.  

Since  the  Commission  autumn  2018  forecast,  which  was  the  basis  for  the  Council 
Recommendation  of  4  December  2018,  the  Hungarian  authorities  have  announced 
new  expansionary  measures  on  the  expenditure  side.  In  addition,  following  faster-
than-expected public wage growth in 2018, new wage increases for some categories 
were announced since autumn 2018. Finally, higher reserves in the budget, with the 
government’s  explicit  intention  to  fully  deplete  them  by  the  end  of  the  year,  have 
added  to  the  expenditure  projections  for  2019.  As  a  result,  the  deviation  from  the 
expenditure benchmark is expected to be significantly larger than the deviation found 
in the assessment performed in autumn 2018.  

to 

leads 

This 
the  Council 
Recommendation  of  4  December  2018  has  been  insufficient.  The  fiscal  effort  falls 
short  of  ensuring  that  the  nominal  growth  rate  of  net  primary  government 

that  Hungary’s 

the  conclusion 

response 

to 

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expenditure  does  not  exceed  3.3 %  in  2019,  which  would  correspond  to  an  annual 
structural adjustment of 1.0 % of GDP, 

HAS ADOPTED THIS DECISION:  

Hungary  has  not  taken  effective  action  in  response  to  the  Council  Recommendation  of  4 
December 2018. 

Article 1 

This Decision is addressed to Hungary. 

Done at Brussels, 

Article 2 

For the Council 
The President 

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