Recommendation for a COUNCIL RECOMMENDATION with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Hungary
Date: 2019-06-05
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Hungary, budget deficit, budgetary assessment, budgetary control, economic policy, gross domestic product, medium-term forecast, multilateral surveillance, stability pact, stability programme

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   EUROPEAN COMMISSION  Brussels, 5.6.2019  COM(2019) 534 final  Recommendation for a COUNCIL RECOMMENDATION with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective   in Hungary {SWD(2019) 534 final}  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to correcting the significant observed deviation from the adjustment path 
toward the medium-term budgetary objective  

in Hungary 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 121(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular the second subparagraph of Article 10(2) thereof, 

Having regard to the recommendation from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

In  accordance  with  Article  121  of  the  Treaty,  Member  States  are  to  promote  sound 
public finances over the medium term through the coordination of economic policies 
and multilateral surveillance in order to avoid the occurrence of excessive government 
deficits. 

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

On 22 June 2018, the Council found in accordance with Article 121(4) of the Treaty 
that a significant  observed deviation  from  the medium-term  budgetary objective of a 
general  government deficit of 1,0 % of GDP in structural terms occurred in Hungary 
in 2017. In view of that established significant deviation, on 22 June 2018, the Council 
recommended  Hungary2  to  take  the  necessary  measures  to  ensure  that  the  nominal 
growth rate of net  primary  government  expenditure3 does  not  exceed 2.8 % in  2018, 
corresponding  to  an  annual  structural  adjustment  of  1.0 %  of  GDP.  It  also 
recommended  that  Hungary  uses  any  windfall  gains  for  deficit  reduction,  thereby 
putting  the  country  on  an  appropriate  adjustment  path  toward  the  medium-term 
budgetary  objective.  On  4  December  2018,  the  Council  concluded  that  Hungary  had 

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

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that  basis,  on  4  December  2018 

not  taken  effective  action  in  response  to  the  Council  Recommendation  of  22  June 
issued  a  revised 
2018.  On 
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 GDP. 

the  Council 

(4) 

(5) 

(6) 

(7) 

In  2018,  based  on  the  Commission  2019  spring  forecast  and  the  2018  outturn  data 
validated  by  Eurostat,  the  growth  of  net  primary  government  expenditure  was  well 
above  the  expenditure  benchmark,  pointing  to  a  significant  deviation  (deviation  of 
1.3 % of GDP). The structural balance deteriorated to -3.7 % of GDP from -3.4 % of 
GDP in 2017, also pointing to a significant deviation from the recommended structural 
adjustment  (deviation  of  1.3 %  of  GDP).  The  size  of  the  deviation  indicated  by  the 
structural  balance  is  negatively  impacted  by  substantial  revenue  shortfalls  as  well  as 
higher investment expenditures amidst an overheating economy, while it is estimated 
to  have  marginally  benefitted  from  falling  interest  expenditure.  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  these  factors,  the  expenditure 
benchmark appears to adequately reflect the fiscal effort and still points to a significant 
deviation.  Taking  into  account  these  factors,  both  indicators  confirm  a  significant 
deviation from the requirements of the preventive arm of the SGP in 2018. 

On 5 June 2019, following an overall assessment, the Commission  considered that a 
significant  observed  deviation  from  the  adjustment  path  toward  the  medium-term 
budgetary objective exists in Hungary and issued a warning to Hungary in accordance 
with  Article  121(4)  of  the  Treaty  and  the  first  subparagraph  of  Article  10(2)  of 
Regulation (EC) No 1466/97.  

In  accordance with the second subparagraph of  Article 10(2) of Regulation  (EC) No 
1466/97, within one month of the date of the adoption of the warning, the Council is to 
address a recommendation to the Member State concerned to take the necessary policy 
measures.  Regulation  (EC)  No  1466/97  provides  that  the  recommendation  will  set  a 
deadline of no more than five months for the Member State to address the deviation. 
On  that  basis  a  deadline  of  15  October  2019  for  Hungary  to  address  the  deviation 
appears  appropriate.  Within  that  deadline,  Hungary  should  report  on  action  taken  in 
response to this Recommendation.  

Based on the output gap projections of the Commission 2019 spring forecast, Hungary 
will  remain  in  good  economic  times  in  2019  and  2020.  While  in  2019,  real  GDP  is 
estimated to grow in line with potential GDP (at 3.7 %), in 2020, real GDP growth (at 
2.8 %) is forecast to be lower than the growth potential (at 3.6 %). Hungary’s general 
government  debt  ratio  is  above  the  60 %-of-GDP  threshold.  Hence,  the  minimum 
required  structural  effort  prescribed  by  Regulation  (EC)  No  1466/97  and  the 
commonly  agreed  adjustment  matrix  under  the  preventive  arm  of  the  SGP,  which 
factors in the prevailing economic circumstances and possible sustainability concerns, 
amounts to at least 0.75 % of GDP for both 2019 and 2020. 

(8) 

Hungary's structural deficit has increased by 1.4 % of GDP in 2017 and by 0.3 % of 
GDP in 2018, to 3.7 % of GDP in 2018. It is projected in the Commission 2019 spring 
forecast  to  decrease  as  of  2019.  An  additional  effort,  necessary  to  correct  for  the 
cumulated deviations and to bring Hungary back on an appropriate consolidation path 

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following  the  slippages  since  2017,  should  complement  the  minimum  adjustment 
requirement  in  2019.  An  additional  effort  compared  to  that  resulting  from  the 
commonly agreeed adjustment matrix under the preventive arm of the SGP of 0.25 % 
of  GDP  in  2019  seems  appropriate  given  the  magnitude  of  the  observed  significant 
deviation from the recommended adjustment path towards the medium-term objective 
and it will accelerate adjustment back towards the medium-term budgetary objective. 
The  required  effort  for  2019  is  in  line  with  the  adjustment  recommended  by  the 
Council  on  4  December  2018.  For  2020,  the  minimum  adjustment  requirement  of 
0.75 %  of  GDP  seems  appropriate,  contingent  on  compliance  with  the  requested 
adjustment in 2019.  

(9) 

The  required  improvement  in  the  structural  balance  by  1.0 %  of  GDP  in  2019  and 
0.75 %  of  GDP  in  2020  is  consistent  with  a  nominal  growth  rate  of  net  primary 
government expenditure not exceeding 3.3 % in 2019 and 4.7 % in 2020. 

(10)  The  Commission  2019  spring  forecast  projects  an  improvement  in  the  structural 
balance by 0.4 % of GDP in 2019 and by a further 0.6 % of GDP in 2020. Therefore, a 
structural  improvement  of  1.0 %  of  GDP  in  2019  and  0.75 %  of  GDP  in  2020 
translates into the need to adopt measures of a total structural yield of 0.6 % of GDP in 
2019 and additonal measures of a structural yield of 0.2 % of GDP in 2020 compared 
to the current baseline in the Commission 2019 spring forecast.  

(11)  The  failure  to  act  upon  earlier  recommendations  to  correct  the  observed  significant 
deviation call for urgent action to put Hungary’s fiscal policy back on a prudent path.  

(12) 

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

(13)  Hungary  should  report  to  the  Council  on  action  taken  in  response  to  this 

Recommendation by 15 October 2019. 

(14) 

It is appropriate that this Recommendation be made public, 

HEREBY RECOMMENDS THAT HUNGARY: 

(1) 

(2) 

(3) 

take  the  necessary  measures  to  ensure  that  the  nominal  growth  rate  of  net  primary 
government  expenditure  does  not  exceed  3.3 %  in  2019  and  4.7 %  in  2020, 
corresponding  to  an  annual  structural  adjustment  of  1.0 %  of  GDP  in  2019  and 
0.75 %  of  GDP  in  2020,  thereby  putting  the  Member  State  on  an  appropriate 
adjustment path toward the medium-term budgetary objective; 

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

report  to  the  Council  by  15  October  2019  on  action  taken  in  response  to  this 
Recommendation;  the  report  should  provide  sufficiently  specified  and  credibly 
announced  measures  with  a  view  to  complying  with  the  required  adjustment  path, 
including  budgetary  impact  of  each  of  them,  as  well  as  updated  and  detailed 
budgetary projections for 2019-2020. 

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This recommendation is addressed to Hungary. 

Done at Brussels, 

For the Council 
The President 

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