Recommendation for a COUNCIL RECOMMENDATION on the 2019 National Reform Programme of Hungary and delivering a Council opinion on the 2019 Convergence Programme of Hungary
Date: 2019-06-05
Institutions: European Commission, Secretariat-General
Subjects: Hungary, budget deficit, corruption, economic policy, economic reform, independence of the judiciary, investment, labour market, stability pact, stability programme

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   EUROPEAN COMMISSION  Brussels, 5.6.2019  COM(2019) 517 final  Recommendation for a COUNCIL RECOMMENDATION on the 2019 National Reform Programme of Hungary and delivering a Council opinion on the 2019 Convergence Programme of Hungary    
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2019 National Reform Programme of Hungary and delivering a Council opinion 
on the 2019 Convergence Programme of Hungary 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(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 Article 9(2) thereof, 

Having regard to the recommendation of the European Commission, 

Having regard to the resolutions of the European Parliament, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

(2) 

On 21 November 2018, the Commission adopted the Annual Growth Survey, marking 
the start of the 2019 European Semester for economic policy coordination. It took due 
account  of  the  European  Pillar  of  Social  Rights,  proclaimed  by  the  European 
Parliament, the Council and the Commission on 17 November 2017. The priorities of 
the  Annual  Growth  Survey  were  endorsed  by  the  European  Council  on  21  March 
2019.  On  21  November  2018,  on  the  basis  of  Regulation  (EU)  No  1176/2011,  the 
Commission  also  adopted  the  Alert  Mechanism  Report,  in  which  it  did  not  identify 
Hungary as one of the Member States for which an in-depth review would be carried 
out.  
The 2019 country report for Hungary2 was published on 27 February 2019. It assessed 
Hungary’s  progress  in  addressing  the  country-specific  recommendations  adopted  by 
the Council on 13 July 2018, the follow-up given to the recommendations adopted in 
previous years and Hungary's progress towards its national Europe 2020 targets 

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OJ L 209, 2.8.1997, p. 1. 
SWD(2019) 1016 final. 

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(4) 

(5) 

(6) 

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On  30  April  2019,  Hungary  submitted  its  2019  National  Reform  Programme  and  its 
2019 Convergence Programme. In order to take account of their interlinkages, the two 
programmes have been assessed at the same time. 

Relevant country-specific recommendations have been addressed in the programming 
of  the  European  Structural  and  Investment  Funds  ('ESI  Funds')  for  2014-2020.  As 
provided  for  in  Article  23  of  Regulation  (EU)  No  1303/2013  of  the  European 
Parliament and of the Council3, where it is necessary to support the implementation of 
relevant  Council  recommendations,  the  Commission  may  request  a  Member  State  to 
review  and  propose  amendments  to  its  Partnership  Agreement  and  relevant 
programmes. The Commission has provided further details on how it would make use 
of  that  provision  in  guidelines  on  the  application  of  the  measures  linking  the 
effectiveness of the ESI Funds to sound economic governance4.  

Hungary  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth  Pact  and 
subject to the debt rule. In its 2019 Convergence Programme, the government plans an 
improvement of the headline deficit to 1.8% of GDP in 2019 from 2.2% in 2018. The 
deficit is  planned to  continue gradually improving thereafter to  1.2% in  2021 and to 
reach  a  balanced  budgetary  position  in  2023.  Based  on  the  recalculated  structural 
balance (5), Hungary would be close to its medium-term budgetary objective – which 
has been changed from a structural deficit of 1.5% of GDP in 2019 to 1.0% of GDP as 
of  2020  –  in  2022  and  would  achieve  it  in  the  following  year.  According  to  the 
Convergence  Programme,  the  general  government  debt-to-GDP  ratio  is  expected  to 
decline  gradually  to  below  60%  by  the  end  of  2022.  The  macroeconomic  scenario 
underpinning  those  budgetary  projections  is  plausible  for  2019  and  markedly 
favourable from 2020, which poses risks to the implementation of the deficit targets. 
At  the  same  time,  the  measures  needed  to  support  the  planned  deficit  targets  from 
2020 onwards have not been sufficiently specified. 

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 medium-term budgetary objective occurred in Hungary in 2017. In 
view  of  the  established  significant  deviation,  on  22 June  2018  the  Council 
recommended  Hungary  to  take  the  necessary  measures  to  ensure  that  the  nominal 
growth  rate  of  net  primary  government  expenditure6  does  not  exceed  2.8%  in  2018, 
corresponding  to  an  annual  structural  adjustment  of  1.0%  of  GDP.  On 4 December 
2018, the Council found that Hungary had not taken effective action in response to the 
Council  recommendation  of  22 June  2018  and  issued  a  revised  recommendation.  In 
the new recommendation, the Council asked Hungary to take the necessary measures 

Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 
laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the  European  Social 
Fund,  the  Cohesion  Fund,  the  European  Agricultural  Fund  for  Rural  Development  and  the  European 
Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European  Regional 
Development  Fund,  the  European  Social  Fund,  the  Cohesion  Fund  and  the  European  Maritime  and 
Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320). 
COM(2014) 494 final. 
Cyclically-adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission 
using the commonly agreed methodology. 
Net  primary  government  expenditure  comprises  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  4-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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(7) 

(8) 

(9) 

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.  On  XX  June  2019,  the  Council found  that  Hungary  had  not  taken  effective 
action  in  response  to  the  Council  recommendation  of  4 December  2018.  Moreover, 
based on 2018 outturn data Hungary was found to be in significant deviation from the 
recommended adjustment in 2018. 

in  2018.  On  XX  June  2019, 

In line with  Article 121(4) TFEU and Article 10(2) of Regulation  (EC)  No 1466/97, 
the  Commission  issued  a  warning  to  Hungary  on  5  June  2019  that  a  significant 
deviation from the adjustment path toward the medium-term budgetary objective was 
observed 
the  Council  adopted  a  subsequent 
Recommendation confirming the need 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.  Based  on  the  Commission  2019  spring  forecast,  there  is  a  risk  of  a  deviation 
from that recommendation in 2019. 

For 2020, the Council on XX June 2019 recommended Hungary to take the necessary 
measures  to  ensure  that  the  nominal  growth  rate  of  net  primary  government 
expenditure does not exceed 4.7%, corresponding to an annual structural adjustment of 
0.75%  of  GDP.  This  would  put  Hungary  on  an  appropriate  adjustment  path  towards 
the medium-term budgetary objective. Based on the Commission 2019 spring forecast 
under unchanged policies, there is a risk of a deviation from that requirement in 2020. 
Overall, the Council is of the opinion that significant further measures will be needed 
as of 2019 to comply with the provisions of the Stability and Growth Pact, in line with 
the recommendation addressed to Hungary on XX June 2019 with a view to correcting 
the significant observed deviation from the adjustment path toward the medium-term 
budgetary objective. 

The  overall  employment  rate  has  improved  significantly  amid  strong  economic 
expansion  but  has  not  benefited  all  groups  equally.  The  gaps  in  employment  and 
wages between skills groups and men and women remain wide in comparison with the 
EU average. The gender employment gap is wide partly due to the limited supply of 
good  quality  childcare.  Labour  market  outcomes  for  various  vulnerable  groups, 
including  Roma  and  people  with  disabilities,  are  weak.  Despite  its  reduction,  the 
Public Works Scheme, which is not effective in leading participants to the jobs in the 
primary  labour  market,  remains  sizeable.  Other  policies  to  help  unemployed  or 
inactive  people  find  work  or  training  are  insufficiently  targeted.  Developing  digital 
skills  could  help  improve  employability.  Recent  measures  are  designed  to  get  more 
retired  workers  back  into  jobs  and  to  increase  their  number  over  time.  Hungary’s 
overall  poverty  situation  has  been 
improving  since  2013.  The  duration  of 
unemployment  benefits  is  the  shortest  in  the  EU,  at  a  maximum  of  three  months, 
which is well below the average time needed to find a job. 

(10)  The share of people at risk of poverty and social exclusion is falling. There has been a 
clear  shift  from  social  benefits  towards  work-related  family  support  and  in-kind 
benefits,  which  are  however  not  sufficiently  targeted  to  the  poor.  While  home-
ownership subsidies have expanded, there has been no improvement in the supply of 
social housing. 

(11)  Education  outcomes  are  below  the  EU  average  and  show  wide  territorial  disparities. 
Early school leaving is higher and the tertiary education attainment rate lower than the 
EU average. The education system hinders social mobility.  Pupils are streamed early 

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into different types of schools, with wide gaps in education outcomes and employment 
paths.  The  proportion  of  schools  with  majority  Roma  participation  increased  from 
10%  in  2008  to  15%  in  2017.  The  impact  of  recent  measures  targeting  the  even 
distribution of disadvantaged pupils across schools is limited by the exemption of non-
state  schools  from  the  requirement  to  take  disadvantaged  pupils.  Disadvantaged 
children tend to be concentrated in vocational secondary schools where poorer levels 
of  basic  skills,  higher  dropout  rates  and  lower  pay  and  career  prospects  are  more 
prevalent.  The  low  participation  of  disadvantaged  groups,  in  particular  Roma,  in 
quality education is a missed opportunity to build up human capital. The shortage of 
teachers also remains a challenge. Teachers’ salaries have risen in recent years but are 
still relatively low, compared to other tertiary education graduates. The low number of 
students  participating  in  higher  education  is  not  in  line  with  the  strong  demand  for 
highly  skilled  workers  and  the  wage  premium  of  tertiary  graduates,  which  is  the 
highest  in  the  EU.  Hungarian  higher  education  institutions  have  the  lowest  financial 
autonomy in the EU. In addition, the April 2017 amendment of the Higher Education 
Act,  which  set  additional  requirements  for  international  universities  to  operate  in 
Hungary, raised further concerns over academic freedom. In 2018, the internationally 
highest  ranked  Hungarian  university  signalled  its  intention  to  leave  the  country 
because of the regulatory uncertainty created by this amendment. 

(12)  Health  outcomes  lag  behind  most  other  EU  countries,  reflecting  both  unhealthy 
lifestyles  and  the  limited  effectiveness  of  healthcare  provision.  The  prevalence  of 
smoking, alcohol use disorder and obesity is one of the highest in the EU. Hungarians 
are among the most likely in the EU to suffer premature death due to bad air quality. 
The  number  of  avoidable  deaths  is  one  of  the  highest  in  the  EU  partly  due  to 
inadequate  screening  and  primary  care  management.  There  are  significant  socio-
economic disparities in access to quality care. Public spending on healthcare is below 
the  EU  average  and  citizens  rely  on  out-of-pocket  payments  to  access  quality 
provision, which risks further widening the socio-economic health divide. The system 
remains strongly hospital-centred, with weaknesses in primary care, in particular early 
detection  and  prevention  of  chronic  diseases.  A  sizeable  shortage  of  healthcare  staff 
thwarts access to care in poorer areas. 

(13) 

Increasing  research  and  innovation  capacities  could  improve  Hungary’s  modest 
innovation performance and increase productivity. The low level of intellectual asset 
accumulation  is  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.  Smaller  firms  are 
especially  reluctant  to  innovate,  hindering  their  involvement  in  global  value  chains. 
Business  R&D  is  concentrated  in  a  few  large,  mainly  foreign-owned  companies  and 
benefits from generous government support. Supporting science-business cooperation 
would  contribute  to  better  innovation  performance  and  technology  transfer.  The 
quality of public science is suffering from inefficient R&D policies and underfunding 
as  public  sector  R&D  expenditure  is  well  below  the  EU  average.  Recent  policy 
measures, aiming to cut funding and limiting independency of academic and research 
fora are creating uncertainty in academic and research forums, which may result in the 
emigration of top research talent and risk a persistent decline in research quality. 

(14)  Weak local public transport connectivity and high commuting costs are contributing to 
unemployment  in  disadvantaged  areas.  The  poor  condition  of  the  road  and  rail 
networks hampers mobility and reduces travel safety, with more than half of the road 
network in bad condition, especially in disadvantaged regions. Transport networks are 

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centred  on  Budapest,  while  local  networks  and  transversal  connections  through  the 
country are not well developed. Road congestion is a growing challenge and a barrier 
to  productivity  in  Hungary’s  urban  areas.  Moreover,  greenhouse  gas  emissions  from 
road  transport  have  increased  strongly  in  the  last  5  years.  Inland  navigation  on  the 
Danube,  suffering  from  low  water  conditions,  could  be  improved  by  less  restrictive 
regulation.  

(15)  Energy  efficiency  in  the  residential  sector  remains  weak.  The  electricity  generation 
network  needs  to  be  prepared  for  the  growing  role  of  decentralised  renewable 
electricity  generation.  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  the  main  rivers.  Air  pollution  and  water  quality  remain  a 
concern.  The  main  sources  of  pollution  are  residential  solid  fuel  combustion, 
agriculture  and  transport  emissions.  The  circular  economy  is  still  in  an  initial  phase, 
recycling  of  municipal  waste  is  underdeveloped  and  economic  instruments  are 
insufficient to address Hungarian environmental challenges. 

(16)  Concerns remain over the prevention and prosecution of corruption. Several indicators 
suggest  that  Hungary's  exposure  to  corruption  has  increased  in  recent  years. 
Corruption  risks  and  favouritism  distort  the  allocation  of  resources  as  these  are  not 
channelled to the most productive firms. The functioning of the prosecution service is 
of  crucial  importance  to  fighting  corruption.  While  measures  to  fight  low-level 
corruption appear to have been applied with some success, 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 to contest such 
decisions.  The  prevention  of  corruption  is  further  hindered  by  public  institutions 
applying restrictions, including dissuasive fees on access to information.  

(17)  Checks and balances, which are crucial to ensuring judicial independence, have been 
further  weakened  within  the  ordinary  courts  system.  The  National  Judicial  Council 
faces  increasing  difficulties  in  counter-balancing  the  powers  of  the  President  of  the 
National  Office  for  the  Judiciary.  This  gives  rise  to  concerns  regarding  judicial 
independence.  Concerning  the  Administrative  Courts  Law,  it  is  noted  that  the 
government tabled a bill withdrawing the Act on the entry into force and transitional 
rules for the administrative courts on 30 May 2019. 

(18)  The  public  procurement  framework  has  improved  in  recent  years  but  obstacles  to 
competition remain. These include  the use of procedures with limited publicity, and 
systemic  irregularities  in  the  tendering  processes,  in  particular  related  to  inadequate 
selection and award criteria and unequal treatment of tenderers. While some indicators 
show improvements, the number of procedures with a single bidder are still high. The 
wider use of e-procurement could further increase efficiency and transparency.  

(19)  Hungary’s social dialogue structures and processes remain underdeveloped and do not 
allow  for  meaningful  involvement  of  the  social  partners  in  policy  design  and 
implementation. The deficiencies in stakeholder engagement and limited transparency 
undermine  the  evidence  base  for,  and  the  quality  of  policymaking.  This  results  in 
frequent  and  unpredictable  changes  in  regulations  and  discourages  high  value  added 
investments. 

(20)  Measures  have  been  taken  to  further  improve  the  tax  system  but  some  challenges 
remain.  The  tax  burden  on  labour  has  decreased  but  remains  high  for  low-income 

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earners.  Sector-specific  taxes  and  a  large  number  of  small  taxes  complicate  the  tax 
system and raise compliance costs, in particular for smaller firms.  

(21)  Regulatory  barriers  and  state  involvement  in  product  markets  hinder  the  selection  of 
efficient enterprises and limit competition. The authorities continue to entrust certain 
services to state-owned firms or private firms specifically created for these purposes. 
Certain tailor-made legislation and measures and ad hoc exemptions from competition 
scrutiny,  hinder  the  functioning  of  the  market  and  hamper  investment.  The 
unpredictability  of  the  legal  framework  is  a  further  problem,  especially  in  the  retail 
sector,  which  in  recent  years  has  faced  frequent  changes  to  regulations.  Legislation 
imposing an additional special authorisation for modifications to the use or design of 
retail  premises  has  been  introduced  in  the  past  year.  Regulation  of  professions  also 
remains restrictive. The lack of competition in these sectors may become  detrimental 
to innovation and efficiency. 

(22)  The  fight  against  aggressive  tax  planning  is  essential  to  make  tax  systems  more 
efficient  and  fair.  Spillover  effects  of  taxpayers'  aggressive  tax  planning  strategies 
between  Member  States  call  for  a  coordinated  action  of  national  policies  to 
complement  EU  legislation.  Hungary  has  taken  measures  against  aggressive  tax 
planning,  but  Hungary  records  relatively  high  capital  inflows  and  outflows  through 
special  purpose  entities,  which  have  no  or  little  effect  on  the  real  economy.  The 
absence  of  withholding  taxes  on  outbound  (i.e.  from  EU  residents  to  third  country 
residents)  dividend,  interest  and  royalty  payments  made  by  companies  based  in 
Hungary  may  lead  to  those  payments  escaping  tax  altogether,  if  they  are  also  not 
subject to tax in the recipient jurisdiction. 

(23)  The programming of EU funds for the period 2021-2027 could help address some of 
the  gaps  identified  in  the  recommendations,  in  particular  in  the  areas  covered  by 
Annex  D  to  the  country  report7.  This  would  allow  Hungary  to  make  the  best  use  of 
those funds in respect of the identified sectors, taking into account regional disparities. 

(24) 

In  the  context  of  the  2019  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Hungary’s  economic  policy  and  published  it  in  the  2019 
country  report.  It  has  also  assessed  the  2019  Convergence  Programme  and  the  2019 
National  Reform  Programme  and  the  follow-up  given  to  the  recommendations 
addressed  to  Hungary  in  previous  years.  It  has  taken  into  account  not  only  their 
relevance  for  sustainable  fiscal  and  socioeconomic  policy  in  Hungary,  but  also  their 
compliance with Union rules and guidance, given the need to strengthen the Union’s 
overall  economic  governance  by  providing  Union-level  input  into  future  national 
decisions.  

(25) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  2019  Convergence 
Programme and its opinion8 is reflected in particular in recommendation (1) below, 

HEREBY RECOMMENDS that Hungary take action in 2019 and 2020 to: 

1. 

2. 

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Ensure compliance with the Council recommendation of XX June 2019 with a view 
to correcting the significant deviation from the adjustment path toward the medium-
term budgetary objective. 

Continue the labour market integration of the most vulnerable groups in particular by 
upskilling,  and  improve  the  adequacy  of  social  assistance  and  unemployment 

SWD(2019) 1016 final. 
Under Article 9(2) of Council Regulation (EC) No 1466/97. 

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Improve  education  outcomes  and 

benefits. 
the  participation  of 
disadvantaged groups, in particular Roma in quality mainstream education. Improve 
health outcomes by supporting preventive health measures and strengthening primary 
health care. 

increase 

3. 

4. 

Focus  investment-related  economic  policy  on  research  and  innovation,  low  carbon 
energy and transport, waste infrastructure and energy and resource efficiency, taking 
into account regional disparities. Improve competition in public procurement. 

Reinforce  the  anti-corruption  framework,  including  by  improving  prosecutorial 
efforts  and  access  to  public  information,  and  strengthen  judicial  independence. 
Improve  the  quality  and  transparency  of  the  decision-making  process  through 
effective  social  dialogue  and  engagement  with  other  stakeholders  and  through 
regular, appropriate impact assessments. Continue simplifying the tax system, while 
strengthening it against a risk of aggressive tax planning.  Improve competition and 
regulatory predictability in services sector.  

Done at Brussels, 

For the Council 
The President 

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