Recommendation for a COUNCIL DECISION establishing that no effective action has been taken by Hungary in response to the Council Recommendation of 14 June 2019
Date: 2019-11-20
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

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 20.11.2019 COM(2019) 921 final  Recommendation for a COUNCIL DECISION establishing that no effective action has been taken by Hungary in response to the Council Recommendation of 14 June 2019 {SWD(2019) 941 final}  
 
 
Recommendation for a 

COUNCIL DECISION 

establishing that no effective action has been taken by Hungary in response to the 
Council Recommendation of 14 June 2019 

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  1466/97  on  the  strengthening  of  the 
surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular the fourth subparagraph of Article 10(2) thereof, 

Having regard to the Recommendation from the European Commission, 

Whereas:  

(1) 

(2) 

1 
2 
3 
4 

5 

In June 2018, the Council found in accordance with Article 121(4) of the Treaty that 
in  2017,  there  had  been  a  significant  observed  deviation  from  Hungary’s  medium-
term  budgetary  objective.  In  view  of  that  established  significant  deviation,  the 
Council  issued  a  Recommendation  on  22  June  20182,  recommending  that  Hungary 
take  the  policy  measures  necessary  to  address  that  deviation.  The  Council 
subsequently  found  that  Hungary  had  not  taken  effective  action  in  response  to  that 
Recommendation and issued a revised Recommendation on 4 December 20183. The 
Council subsequently found that Hungary had not taken effective action in response 
to that Recommendation either. 

On  14  June  2019,  the  Council  found  that  in  2018  a  significant  observed  deviation 
from  the  adjustment  path  toward  the  medium-term  budgetary  objective  had  again 
occurred  in  Hungary  and  issued  a  Recommendation  for  Hungary  to  take  the 
necessary  measures  to  ensure  that  the  nominal  growth  rate  of  net  primary 
government  expenditure4  does  not  exceed  3.3%  in  2019  and  4.7%  in  2020, 
corresponding to an annual structural adjustment of 1.0% of gross domestic product 
(GDP) in 2019 and 0.75% of GDP in 2020.5 The recommended effort for 2020 was 
deemed  appropriate,  contingent  on  compliance  with  the  requested  adjustment  in 
2019.  It  also  recommended  that  Hungary  uses  any  windfall  gains  for  deficit 

OJ L 209, 2.8.1997, p. 1. 
OJ C 223, 27.6.2018, p. 1. 
OJ C 460, 21.12.2018, p. 4. 
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 210, 21.6.2019, p. 4. 

EN 

1 

  EN 

 
 
 
                                                 
reduction,  while  budgetary  consolidation  measures  should  secure  a 
lasting 
improvement  in  the  general  government  structural  balance  in  a  growth-friendly 
manner.  The  Council  established  a  deadline  of  15  October  2019  for  Hungary  to 
report on the action taken in response to that Recommendation. 

On 26 September 2019, the Commission undertook an enhanced surveillance mission 
in Hungary for the purpose of on-site monitoring under Article -11(2) of Regulation 
(EC) No 1466/97. After having transmitted its provisional findings to the Hungarian 
authorities for comments, the Commission reported its findings to the Council on 20 
November  2019.  Those  findings  were  made  public.  The  Commission  report  finds 
that the Hungarian authorities intend to maintain the 2019 headline deficit target of 
1.8% of GDP as set in the 2019 Convergence Programme. For 2020, the authorities 
revised the deficit target to 1% of GDP, making it more ambitious than the 1.5% of 
GDP  target  indicated  in  the  2019  Convergence  Programme.  Thus,  the  Hungarian 
authorities plan to act upon the Recommendation of 14 June 2019 only with respect 
to the year 2020. 

target  from 

the  general  government  deficit 

On 15 October 2019, the Hungarian authorities submitted a report on action taken in 
response to the Council Recommendation of 14 June 2019.6 In the report, despite the 
more  favourable  macroeconomic  and  fiscal  developments  so  far  in  2019,  the 
the  2019 
authorities  maintain 
Convergence programme of 1.8% of GDP in 2019. For 2020, the authorities confirm 
the  target  of  a  headline  deficit  of  1.0%  of  GDP,  in  line  with  the  2020  budget,  and 
0.5% of GDP better than the target  included in  the 2019 Convergence Programme. 
The report recalls the high reserve (1% of GDP) included in the 2020 deficit target, 
which  is  aimed  at  managing  external  risks  and  which  could  be  spent  only  if  the 
deficit target  is  expected to  be met.  The report lists the deficit-increasing  measures 
contained in the “Economic Protection Action Plan” that the government adopted on 
30  May  2019,  which  aim  to  sustain  growth  in  the  years  to  come  at  a  rate  of  2 
percenage  points  higher  than  the  EU  average.  The  broad  range  of  economic 
programmes  listed  in  the  report  remain  largely  unquantified;  nor  does  the  report 
include  any  budgetary  projection  for  2019  and  2020.  Thereby,  the  report  does  not 
comply with the reporting requirement recommended by the Council. 

In 2019, based on the Commission 2019 autumn forecast, the growth of net primary 
government  expenditure  is  projected  at  6.8%,  well  above  the  recommended  rate  of 
3.3% (deviation of 1.3% of GDP). The structural balance is set to improve by 0.5% 
of GDP, against the recommended improvement of 1.0% of GDP (deviation of 0.5% 
of  GDP).  Therefore,  both  pillars  point  to  a  deviation  from  the  recommended 
adjustment. The reading of the expenditure benchmark is negatively impacted by the 
use of a lower GDP deflator underlying that indicator compared to current estimates. 
Also  the  smoothing  of  nationally-financed  investment  impacts  marginally  and 
negatively the reading of the expenditure benchmark. The structural balance, in turn, 
is  positively  impacted  by  the  higher  potential  growth  estimate  underlying  that 
indicator  but  negatively  impacted  by  revenue  shortfalls.  Taking  into  account  these 
factors,  the  overall  assessment  confirms  a  deviation  from  the  recommended 
adjustment in 2019.  

In 2020, based on the Commission 2019 autumn forecast, the growth of net primary 
government  expenditure is  projected to  be 7.5%, well above the recommended rate 

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

(3) 

(4) 

(5) 

(6) 

6 

EN 

2 

  EN 

 
                                                 
of  4.7%  (deviation  of  1.0%  of  GDP).  The  structural  balance  is  set  to  improve  by 
1.2% of GDP, 0.4 percentage points above the effort of 0.75% of GDP recommended 
by the Council. Therefore, the expenditure benchmark points to a risk of a deviation 
from the required adjustment while the structural balance points to compliance, with 
a  relatively  large  discrepancy.  Public  investment  has  been  steadily  increasing  in 
recent years to reach a level of 6.4% of GDP in 2019, by far the highest in the EU. In 
this context, the planned reduction in 2020 is seen as a longer lasting normalization 
of the public investment rate. While the reduction in investment is fully reflected in 
the  change  of  the  structural  balance,  the  smoothened  profile  of  investment  in  the 
expenditure  benchmark  results  in  an  overly  negative  indication  of  the  fiscal  effort 
given by the expenditure benchmark. The expenditure benchmark is also negatively 
impacted by the use of a lower GDP deflator compared to  current estimates. When 
taking  into  account  these  factors,  the  expenditure  benchmark  would  point  to 
compliance  with  the  requirement.  At  the  same  time,  the  structural  balance  is 
positively influenced by a higher point estimate of potential GDP growth underlying 
its  calculation  compared  to  the  medium-term  average  underlying  the  expenditure 
benchmark.  Taking  into  account  these  considerations,  the  overall  assessment 
concludes that Hungary would deliver the recommended adjustment in 2020. 

(7) 

The  above  findings  lead  to  the  conclusion  that  Hungary's  response  to  the  Council 
Recommendation of 14 June 2019 has been insufficient. The fiscal effort falls short 
of ensuring 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,  whereas  in  2020  the  planned  fiscal  effort  is  overall  consistent  with  the 
recommended adjustment, 

HAS ADOPTED THIS DECISION:  

Hungary  has  not  taken  effective  action  in  response  to  the  Council  Recommendation  of  14 
June 2019. 

Article 1 

This Decision is addressed to Hungary. 

Done at Brussels, 

Article 2 

For the Council 
The President 

EN 

3 

  EN