COMMISSION STAFF WORKING DOCUMENT Accompanying the documents 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 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: 2019-11-20
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  SWD(2019) 941 final  COMMISSION STAFF WORKING DOCUMENT Accompanying the documents 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  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   {COM(2019) 921 final} - {COM(2019) 922 final}  
 
COMMISSION STAFF WORKING DOCUMENT 
Accompanying the documents 

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 

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 

1. 

INTRODUCTION 

Since 2013, Hungary has been subject to the preventive arm of the Stability and Growth Pact, 
which requires sufficient progress towards the medium-term budgetary objective. Hungary’s 
general  government  debt  remains  above  60%  of  GDP  and  it  is  expected  to  diminish  at  a 
satisfactory pace in line with the debt-reduction benchmark.  

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, the Council on 22 June 2018 issued a recommendation for Hungary to 
take the necessary measures to ensure that the nominal growth rate of net primary government 
expenditure1 does not exceed 2.8% in 2018, corresponding to an annual structural adjustment 
of 1.0% of GDP2.  

On  4  December  2018,  the  Council  found  that  Hungary  had  not  taken  effective  action  in 
response to the 22 June 2018 recommendation and issued a revised recommendation. In the 
revised recommendation the Council asked 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  GDP3.  It  recommended 
Hungary  to  use  any  windfall  gains  for  reducing  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. The Hungarian authorities 
submitted their report on action taken in response to Council recommendation (hereafter: "the 
report")  on  15  April  2019.  Moreover,  on  20  March  2019,  the  Commission  undertook  an 
enhanced  surveillance  mission  in  Hungary  for  the  purpose  of  on-site  monitoring  under  the 

1  

2  

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. 
Council Recommendation of 22 June 2018 with a view to correcting the significant observed deviation 
from  the  adjustment  path  toward  the  medium-term  budgetary  objective  in  Hungary  (OJ  C  223, 
27.6.2018, p. 1). 
Council  Recommendation  of  4  December  2018  with  a  view  to  correcting  the  significant  observed 
deviation from the adjustment path toward the medium-term budgetary objective in Hungary (OJ C 460, 
21.12.2018, p. 4-5). 

1 

 
 
 
  
                                                 
Article  -11(2)  of  Council  Regulation  (EC)  No  1466/97  and  subsequently  reported  to  the 
Council on 5 June 2019 and made its findings public. On 14 June 2019, the Council adopted a 
decision establishing that no effective action was taken by Hungary in response to the Council 
Recommendation of 4 December 2018.  

Moreover, on 14 June 2019 the Council decided in accordance with Article 121(4) TFEU that 
an  observed  significant  deviation  from  the  adjustment  path  towards  the  medium-term 
budgetary  objective  occurred  in  Hungary  in  2018.  In  view  of  the  established  significant 
deviation,  the  Council  on  14  June  2019  issued  a  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  and  4.7%  in  2020,  corresponding  to  an  annual 
structural adjustment of 1% of GDP in 2019 and 0.75% of GDP in 2020. The recommended 
effort  for  2020  was  deemed  appropriate,  contingent  on  compliance  with  the  requested 
adjustment  in  2019.  It  also  recommended  Hungary  to  use  any  windfall  gains  for  deficit 
reduction,  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 October 2019 for Hungary to report on action taken in response 
to the recommendation. 

On 9 July 2019, the Council addressed recommendations to Hungary within the context of the 
European  Semester.  In  the  area  of  public  finances,  the  Council  recommended  that  Hungary 
ensure compliance with the Council Recommendation of 14 June 2019 with a view to correct 
the  significant  deviation  from  the  adjustment  path  toward  the  medium-term  budgetary 
objective. 

The Hungarian  authorities delivered their  report  on action taken in  response to  that Council 
Recommendation (hereafter:  "the  report") on 15  October 2019. Moreover, on 26 September 
2019  the  Commission  undertook  an  enhanced  surveillance  mission  in  Hungary  for  the 
purpose of on-site monitoring under the Article  -11(2) of Regulation (EC) No 1466/97. The 
findings of the enhanced fiscal surveillance mission were subsequently made public.  

Section  2  of  this  document  presents  macroeconomic  developments  and  outlook  in  2019-20. 
Sections 3 presents fiscal developments in 2019 and updated budgetary projections for 2020. 
Section  4  assesses  compliance  with  the  Council  Recommendation  of  14  June  2019,  while 
Section 5 proposes a new adjustment path for 2020. Section 6 concludes. 

2. 

MACROECONOMIC DEVELOPMENTS AND OUTLOOK 2018-2019  

GDP growth in 2018 was revised by the Hungarian Central Statistical Office to 5.1% up from 
4.9%. Strong growth persisted in the first half of 2019 as domestic tailwinds in construction 
and  the  automotive  industry  managed  to  offset  the  adverse  impact  of  the  global  slowdown. 
However,  these  temporary  factors  are  set  to  fade  by  the  end  of  2019  and  GDP  growth  is 
expected to drop from 4.6% in 2019 to 2.8% in 2020. Slower economic growth is set to limit 
further employment gains while a less tight labour market is also forecast to reduce real wage 
growth.  Consequently,  household  consumption  growth  is  projected  to  slow  in  2020. 
Investment  growth  is  forecast  to  slow  on  account  of  a  drop  in  public  investments.  Export 
growth  is  set  to  remain  modest,  in  line  with  sluggish  growth  on  main  export  markets.  The 
current  account  slipped into a  deficit in  2018 which is  projected to  widen in  2019, but then 
narrow in 2020 thanks to slowing import demand. 

Inflation is projected to decrease due to cooling domestic demand and wage growth, as well 
as lower imported inflation. The Harmonised Index of Consumer Prices inflation is forecast at 

2 

 
 
3.4%  in  2019  and  3.1%  in  2020.  Rising  construction  costs  have  fed  into  the  GDP  deflator, 
which  is  forecast  to  rise  by  4.2%  in  2019.  Easing  capacity  constraints  in  construction  are 
expected to slow the rise of prices, and this will contribute to a slowdown of the GDP deflator 
in 2020 to 3.7%. 

The Commission GDP growth forecast for 2019 and 2020 was revised up since spring 2019, 
on the back of data revisions, and higher-than-projected GDP growth in the first half of 2019. 
In particular, investment and net export projections were increased. When assessing the level 
of  nominal  GDP  and  household  consumption  in  2020,  the  latest  Commission  forecast  is 
broadly  similar  to  the  authorities’  assessment  in  the  2019  Convergence  Programme,  whose 
macroeconomic  scenario  also  provided  the  basis  for  the  2020  budget.  This  is  the  result  of 
statistical  revisions  in  2018 and more favourable  developments  in  2019, but  lower expected 
growth  rates  in  2020  than  the  authorities’  projections.  For  compensation  of  employees  the 
authorities’ projections remain more favourable than the Commission forecast. 

Based  on  the  Commission  2019  spring  forecast  and  the  commonly  agreed  methodology  for 
calculating  the  cyclical  position  of  the  economy,  the  positive  output  gap  is  projected  to 
become wider in 2019 and to narrow in 2020. 

Table 1: Macroeconomic developments and forecast 

3. 

FISCAL DEVELOPMENTS AND OUTLOOK 2018-2019 

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  Council  Regulation 

3 

CP 2019RevisedCP 2019COMCP 2019COMReal GDP (% change)4.95.14.04.64.02.8Private consumption (% change)5.44.84.64.94.73.8Gross fixed capital formation (% change)16.517.110.317.03.82.1Exports of goods and services (% change)4.74.35.15.15.24.0Imports of goods and services (% change)7.16.86.56.25.44.0Contributions to real GDP growth:- Final domestic demand6.26.45.16.73.72.6- Change in inventories0.20.40.0-1.40.30.0- Net exports-1.5-1.7-1.0-0.60.10.2Output gap13.33.42.53.72.12.5Employment (% change)2.22.41.11.91.30.2Unemployment rate (%)3.73.73.33.42.93.4Labour productivity (% change)2.72.93.02.82.72.7HICP inflation (%)2.92.92.73.42.83.1GDP deflator (% change)4.54.53.84.23.23.7Comp. of employees (per head, % change)9.66.29.27.88.16.5Net lending/borrowing vis-à-vis the rest of the world (% of GDP)2.22.11.50.62.11.2Source:Commission 2019 autumn forecast (COM); 2019 Convergence Programme (CP 2019).201820192020Note:1In % of potential GDP, with potential GDP growth recalculated by Commission services on the basis of the programme scenario using the commonly agreed methodology. 
 
 
 
 
(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  and  made  its  findings  public.  The  Commission  report  finds  that,  despite  a 
better carry-over from 2018 and higher than expected nominal growth in the first two quarters 
of  2019,  the  Hungarian  authorities  continue  to  target  a  headline  deficit  of  1.8%  of  GDP  in 
2019 that had been approved with  the 2019 budget  in  July 2018 and confirmed in  the 2019 
Convergence  Programme.  That  policy  implies  an  improvement  in  the  underlying  structural 
deficit  in  2019  which,  however,  is  far  from  the  adjustment  required  by  the  Council 
recommendation. 

The mission also finds that the government's target for 2020 is a headline deficit of 1.0% in 
ESA (accrual) terms, the same as announced in the 2020 budget adopted on 12 July 2019, and 
0.5%  of  GDP  better  than  the  target  of  1.5%  of  GDP  included  in  the  2019  Convergence 
Programme.  The  improvement  builds  on  expected  strong  growth,  improvement  in  tax 
collection and contained expenditure growth. However, some revenue measures that underpin 
the  2020  deficit  target  remain  to  be  specified.  That  policy  implies  an  improvement  in  the 
underlying structural  deficit  in  2020 which is  above the adjustment required by the Council 
recommendation.  

Updated budgetary projections for 2019 and 2020 and reported action 

In their report on action taken, the authorities maintain the general government deficit target 
from  the  2019  Convergence  programme  of  1.8%  of  GDP  in  2019.  This  is  despite  the  more 
favourable macroeconomic and fiscal developments so far in 2019. For 2020, the authorities 
confirmed 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 Report. As a result, the 
budget is planned to reach a deficit of 0.7% of GDP in 2021 and 0.4% of GDP in 2022 and a 
balanced position in 2023. 

The report highlights that the unchanged 2019 deficit target is accompanied by changes in the 
revenue and expenditure sides of the budget. Compared to the 2019 Convergence Programme, 
the authorities expect higher tax revenues, partly compensated by reduced financing from EU 
funds by 0.3% of GDP on EU-funded projects due to financial corrections related to projects 
completed  in  2017  and  2018.  However,  the  deficit-improvement  resulting  from  these 
developments  is  expected  to  be  fully  absorbed  by  extra  spending.  In  particular,  higher 
expenditure  is  expected  in  relation  to  nationally-financed  investment,  the  extension  of  the 
housing subsidies and measures included in the Family Protection Action Plan (known also as 
the ‘demography programme’4), in particular the pre-natal baby support and the car purchase 
subsidy).  Higher  expenditure  is  also  linked  to  pensions,  due  to  the  payment  of  the  pension 
supplement  and  pension  premium  following  higher  inflation  and  economic  growth  than 
anticipated by the government.  

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 used only if the deficit target  is  to  be 
met. The report lists the expansionary fiscal measures contained in the “Economic Protection 
Action Plan” that the government adopted on 30 May 2019, which the government expects to 

4 The ‘demography programme’ includes measures such as expanded house purchase subsidies; a subsidised pre-
natal loan for young women, which is partly convertible to a capital grant after the birth of a second additional 
child after taking the loan, and fully convertible after the third additional child; a car purchase subsidy for large 
families;  the  increase  of  places  in  nurseries;  and  the  exemption  of  women  with  four  or  more  children  from 
personal income tax. 

4 

 
 
                                                 
support dynamic growth in the years to come and thereby to ensure a high level of revenues. 
The  report  also  recalls  that  the  key  priority  of  the  2020  budget  is  to  support  demographic 
developments through the expansionary ‘demography programme’. On the consolidation side, 
the  report  refers  to  efforts  aimed  at  enhancing  collection  efficiency  undertaken  in  the  past, 
most  notably  the  introduction  of  the  online  invoicing  system  as  of  July  2018  as  well  as 
initiatives at international level to fight aggressive tax planning and the changes implemented 
by  the  authorities  following  the  EU  Anti  Avoidance  Tax  Directive.  These  measures  also 
contributed to the reduction in the estimated VAT gap (from 21% in 2013 to 9% in 2018). For 
2020, according to the report, tax compliance measures are currently under development, in 
line  with  the  authorities'  plan  to  boost  competitiveness,  aimed  at  simplifying  administrative 
tax  obligations,  increase  the  efficiency  of  tax  collection  and  extend  the  use  of  electronic 
means  of  payment.  A  timeline  for  these  measures  is  missing.  Finally,  the  report  recalls  the 
measures  introduced  in  recent  years  to  reduce  labour  taxation,  improve  tax  collection  and 
simplifying  the  tax  system.  Among  these,  the  reduction  in  employer’s  social  security 
contribution rate, the introduction of simplified tax schemes (Kata and Kiva), and additional 
simplifications in the taxation system for SMEs. 

Contrary  to  what  was  required  by  the  Council  recommendation,  the  report  does  not  contain 
any  fiscal  projection,  neither  of  aggregates  nor  of  individual  budgetary  items  or  categories. 
Moreover, the authorities do not quantify the budgetary impact of the discretionary measures 
and spending programmes listed in  the report. Table 2 presents  those measures listed in  the 
report with their estimated impact coming from subsequent exchanges with the authorities and 
the 2019 Convergence Programme.  

Table  2:  Discretionary  revenue  measures  included  in  the  Commission  2019  autumn 
forecast (fiscal impact in % of GDP) 

5 

20192020RevenuesIncrease in road tolls 0.1Reductionofemployer'ssocialsecuritycontribution(SSC)rate(ratereductionfrom22%to19.5% in 2018 and to 17.5% from 1st July 2019)-0.3-0.5Socialsecuritycontributionexemptionofretiredemployeesandexemptionofretailgovernmentbondsfrominteresttaxandreductionoffinancialtransactiondutyforhouseholds-0.1Othersmallertaxmeasures,including:(i)thethirdstepinincreasingfamilyallowancesaftertwochildren;(ii)increaseinthethresholdforKIVA;(iii)changestocorporatetaxation(grouptaxation,incentivesforinvestment);(iv)reductionoffinancialtransactiondutyforhouseholds;(v)exemptionofnewlyissuedretailgovernmentbondsfromincometax;(vi)reductionofthebanklevy;(vii)selectiveVATratecutsoninternetservices,restaurantservices, fish, edible offal of swine, Braille-displays and printers-0.2-0.1Other revenue measures in the Economic Action Protection Plan-0.1TOTAL-0.5-0.7Source:Commission 2019 spring forecasts (COM); Commission calculations.Note:The budgetary impact in the table as included in the Commission 2019 autumn forecast. A positive sign implies that revenue/expenditure increases as a consequence of this measure. The net impact on the deficit is calculated as a difference between renevues and expenditure. 
 
 
 
 
Table 3: Discretionary fiscal measures listed in the report (fiscal impact in % of GDP) 

Based on the Commission autumn 2019 forecast, the general government deficit is projected 
to decrease to 1.8% of GDP in 2019. This is in line with the authorities’ budgetary target. Tax 
revenues  remain  buoyant,  on  the  back  of  favourable  macroeconomic  developments.  The 
increase remains, however, below nominal GDP growth, partly due to a 2 percentage point cut 
in  employers’  social  security  contributions.  Despite  a  financial  correction  of  0.3%  of  GDP, 
the absorption of EU funds is also expected to increase compared to 2018, reaching its peak 
over  the  current  Multiannual  Financial  Framework.  The  only  factor  contributing  to  the 
deficit’s  reduction  is  the  moderate  increase  in  total  current  expenditure  compared  to  GDP, 
taking  also  into  account  the  full  use  of  free  reserves  in  the  budget.  Interest  expenditure  is 
expected to remain stable as a share of GDP, due to the high premium offered by new retail 
bonds  launched  in  June  2019.  The  deficit-reducing  contribution  of  current  spending  is  only 
partly  offset  by  an  increase  in  capital  expenditure  resulting  from  the  implementation  of  the 
programme  to  develop  villages,  the  take-up  of  the  pre-natal  loan  under  the  ‘demography 
programme’ and to higher-than-foreseen national co-payments to EU funded projects.  

The  general  government  deficit  is  projected  by  the  Commission  2019  autumn  forecast  to 
decrease in 2020 to 1% of GDP, in line with the authorities’ budgetary target. The level of EU 
funds  absorption  is  assumed  to  decline  by  0.5%  of  GDP.  Tax  revenues  are  expected  to 
continue  increasing  but  at  a  lower  rate  compared  to  the  previous  year,  as  the  economy  is 
expected  to  slow  and  following  the  measures  included  in  the  Economy  Protection  Action 

6 

20192020RevenuesIncrease in road tolls 0.1Reductionofemployer'ssocialsecuritycontribution(SSC)rate(ratereductionfrom22%to19.5% in 2018 and to 17.5% from 1st July 2019)-0.3-0.5Socialsecuritycontributionexemptionofretiredemployeesandexemptionofretailgovernmentbondsfrominteresttaxandreductionoffinancialtransactiondutyforhouseholds-0.1Othersmallertaxmeasures,including:(i)thethirdstepinincreasingfamilyallowancesaftertwochildren;(ii)increaseinthethresholdforKIVA;(iii)changestocorporatetaxation(grouptaxation,incentivesforinvestment);(iv)reductionoffinancialtransactiondutyforhouseholds;(v)exemptionofnewlyissuedretailgovernmentbondsfromincometax;(vi)reductionofthebanklevy;(vii)selectiveVATratecutsoninternetservices,restaurantservices, fish, edible offal of swine, Braille-displays and printers-0.2-0.1Other revenue measures in the Economic Action Protection Plan-0.1ExpenditureExpenditure measures in the Economic Action Protection Plan0.20.0Demography programme, including the extension of homebuying subsidies0.30.7Hungarian Village programme0.3Net impact on the budget balance-1.3-1.3Note:The budgetary impact in the table as estimated by the authorities. A positive sign implies that revenue/expenditure increases as a consequence of this measure. The net impact on the deficit is calculated as a difference between renevues and expenditure. 
 
 
 
 
 
Plan, in particular the further cut of employers’ social security contributions by 2 percentage 
points.  Except  for  interest  spending,  current  expenditure  growth  is  expected  to  remain 
moderate, thus contributing to the deficit reduction. The drop in capital expenditure (by 1% of 
GDP), following also a lower absorption of EU funds, is only partly offset by higher capital 
transfers  due  to  the  increasing  take-up  of  the  ‘demography  programme’.  These  projections 
assume  almost  the  full  use  of  the  substantially  high  level  of  free  reserves  (1%  of  GDP) 
foreseen in the budget.  

As a consequence of the fiscal developments described above, according to  the Commission 
autumn  2019  forecast,  the  structural  deficit  is  estimated  to  improve  from  3.8%  of  GDP  in 
2018  to  3.3%  in  2019.  The  net  impact  of  one-off  measures  amounted  to  -0.2%  of  GDP, 
consisting of a deficit-improving effect of assets sales of 0.1% GDP and a deficit-increasing 
one-effect  of  0.3%  of  GDP  related  to  a  correction  of  EU  funding.  In  2020,  the  structural 
deficit is estimated to improve to 2.1% (see Table 4). 

A positive risk to the 2020 budget balance forecast comes from possibly higher revenues, in 
case  some  of  the  currently  unspecified  revenue  measures  are  adopted  in  time.  On  the  other 
hand, higher expenditure could materialize in relation to public investments and the measures 
in the ‘demography programme’, whose take-up was higher than expected in 2019. 

The  composition  of  the  budget  and  its  adjustments  in  nominal  and  structural  terms  are 
presented in Table 4. 

General government debt developments 

In 2018, the general government debt-to-GDP ratio reached 70.2%. The general government 
debt-to-GDP ratio is projected by the Commission to further decrease to 68.2% in 2019 and 
66.7%  in  2020,  thanks  to  the  improving  budgetary  position  and  the  projected  high  nominal 
GDP growth.  

In 2018, Hungary complied with the debt rule as the government debt-to-GDP ratio remained 
below the debt-reduction benchmark. A similar conclusion is reached for 2019 and 2020 on 
the basis of the Commission 2019 autumn forecast. 

7 

 
 
 
 
 
 
Table 4: Composition of the budgetary adjustment 

Table 5: Debt developments 

8 

2018OutturnCP 2019Update October 2019COMCP 20192020 BudgetCOMRevenue44.444.644.744.143.343.643.3of which:- Taxes on production and imports18.418.218.418.118.018.518.1- Current taxes on income, wealth, etc.6.76.97.06.87.07.26.9- Social contributions12.312.012.012.011.711.711.8- Other (residual)7.07.57.37.16.66.36.5Expenditure46.746.446.545.944.844.644.3of which:- Primary expenditure44.343.944.143.542.442.341.9of which:Compensation of employees+Intermediate consumption18.117.617.917.516.716.717.1Compensation of employees10.510.110.310.19.89.810.0Intermediate consumption7.57.57.67.36.96.97.2Social payments13.112.813.012.612.512.512.3Subsidies1.71.21.21.61.31.21.5Gross fixed capital formation5.86.86.56.46.35.55.4Other (residual)5.65.55.65.55.76.45.5- Interest expenditure2.42.52.42.42.42.42.4General government balance (GGB)-2.3-1.8-1.8-1.8-1.5-1.0-1.0Primary balance0.10.60.60.60.81.41.4One-off and other temporary measures0.00.0-0.2-0.20.00.00.0GGB excl. one-offs-2.3-1.8-1.6-1.6-1.5-1.0-1.6Output gap13.42.5n.a.3.72.1n.a.2.5Cyclically-adjusted balance1-3.8-3.0n.a.-3.5-2.5n.a.-2.1Structural balance2-3.8-3.0n.a.-3.3-2.5n.a.-2.1Structural primary balance2-1.4-0.5n.a.-0.9-0.1n.a.0.22Structural (primary) balance = cyclically-adjusted (primary) balance excluding one-off and other temporary measures.Source:Convergence Programme (CP); Commission 2019 autumn forecasts (COM); Commission calculations.1Output gap (in % of potential GDP) and cyclically-adjusted balance according to the programme as recalculated by Commission on the basis of the programme scenario using the commonly agreed methodology.(% of GDP)201920202018OutturnCP 2019Update October 2019COMCP 20192020 BudgetCOMGross debt ratio170.269.268.568.266.766.766.7Change in the ratio-2.7-1.6-1.8-2.0-2.5-2.5-1.5Contributions2:1. Primary balance-0.1-0.6-1.4-0.6-0.8-1.4-1.42. “Snow-ball” effect-4.1-2.7-3.0-3.4-2.3-1.8-1.83. Stock-flow adjustment1.61.82.62.00.70.71.7Notes:Source:2 The snow-ball effect captures the impact of interest expenditure on accumulated debt, as well as the impact of real GDP growth and inflation on the debt ratio (through the denominator). The stock-flow adjustment includes differences in cash and accrual accounting, accumulation of financial assets and valuation and other residual effects. Commission 2019 autumn forecast (COM); Convergence Programme (CP), Comission calculations.(% of GDP)201920201 End of period. 
 
 
 
 
4. 

COMPLIANCE WITH THE COUNCIL RECOMMENDATION OF 14 JUNE 2019 

On  14  June  2019,  the  Council  recommended  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 and 4.7% in 2020, corresponding to an annual structural adjustment of 1% of 
GDP  in  2019  and  0.75%  of  GDP  in  2020.  The  recommended  effort  for  2020  was  deemed 
appropriate, contingent on compliance with the requested adjustment in 2019.  

In  2019,  based  on  the  Commission  2019  autumn  forecast,  both  pillars  point  to  a  risk  of  a 
deviation  from  those  requirements.  The  nominal  growth  rate  of  net  primary  government 
expenditure is projected to be well above the recommended reference rate in 2019 (deviation 
of 1.3% of GDP). The structural balance is estimated to improve by 0.5% of GDP, to -3.3% of 
GDP,  falling  short  of  the  recommended  adjustment  (deviation  of  0.5%  of  GDP).  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 that both indicators point to a risk of a deviation 
in 2019 from the requirements of the Council Recommendation of 14 June 2019. 

In  2020,  based  on  the  Commission  2019  autumn  forecast,  the  nominal  growth  rate  of  net 
primary government expenditure is expected to exceed the applicable expenditure benchmark 
of  4.7%,  leading  to  a  deviation  of  1%  of  GDP  from  the  requirement  set  in  the  Council 
Recommendation for 2020. On the contrary, the structural balance is expected to improve by 
1.2%  of  GDP,  reaching  a  deficit  of  2.1%  of  GDP.  This  improvement  is  above  the  effort  of 
0.75%  of  GDP  recommended  by  the  Council  by  0.4%  of  GDP  (Table  6).  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  (3.9%)  underlying  its  calculation  compared  to  the  medium-term 
these 
average  (3.0%)  underlying 
considerations, 
the 
recommended adjustment in 2020. 

the  expenditure  benchmark.  Taking 

the  overall  assessment  concludes 

that  Hungary  would  deliver 

into  account 

9 

 
 
 
 
 
 
 
 
Table 6: Compliance with the Medium-Term Budgetary Objectiveor the required 
adjustment towards it 

5. 

PROPOSED ADJUSTMENT PATH TO THE MEDIUM-TERM BUDGETARY OBJECTIVE AND 
REQUIRED FISCAL EFFORT 

Based on the Commission 2019 autumn forecast, Hungary’s structural balance is estimated to 
improve  from  -3.8%  of  GDP  in  2018  to  -3.3%  of  GDP  in  2019  and  -2.1%  in  2020, 
approaching  albeit  still  far  away  from  its  medium-term  budgetary  objective.  Hungary  is 
projected  to  remain  in  good  economic  times,  as  its  projected  output  gap  of  +2.5%  in  2020 
well  exceeds  +1.5%  of  potential  GDP.  In  addition,  in  2020,  real  GDP  growth  (at  2.8%)  is 
forecast to be lower than the growth potential (at 3.9%). Finally, the general government debt 
is set to remain above the 60%-of-GDP threshold. The required structural effort prescribed by 

10 

(% of GDP)201820192020Medium-term objective (MTO)-1.5-1.5-1.0Structural balance2 (COM)-3.8-3.3-2.1Structural balance based on freezing (COM)-3.6-3.3Position vis-a -vis the MTO3Not at MTONot at MTONot at MTORequired adjustment41.01.00.75Corresponding expenditure benchmark52.83.34.7      Change in structural balance6-0.30.51.2      One-year deviation from the required adjustment7-1.3-0.50.4      Two-year average deviation from the required adjustment7-1.3      Net public expenditure annual growth corrected for one-offs86.36.87.5      One-year deviation adjusted for one-offs9-1.3-1.3-1.0      Two-year deviation adjusted for one-offs9-1.9Finding of the overall assessmentSignificant deviationDeviationComplianceNotesSource:4 Based on the position vis-à-vis the MTO, the cyclical position and the debt level (See European Commission:Vade mecum on the Stability and Growth Pact, page 38.). In case of a SDP, the requirement corresponds to the Council recommendation when available, otherwise it refers to the Commission recommendation to the Council.1 The most favourable level of the structural balance, measured as a percentage of GDP reached at the end of year t-1, between  spring forecast (t-1) and the latest forecast, determines whether there is a need to adjust towards the MTO or not in year t.  A margin of 0.25 percentage points (p.p.) is  allowed in order to be evaluated as having reached the MTO.2  Structural balance = cyclically-adjusted government balance excluding one-off measures.3 Based on the relevant structural balance at year t-1.Commission 2019 autumn forecast; Commission calculations.5  Reference rate for the growth of net government expenditure. It is expressed in real terms until 2017 and in nominal terms from 2018 onwards.6 Change in the structural balance compared to year t-1. Ex post assessment (for 2018) is carried out on the basis of Commission 2019 spring forecast. 7  The difference of the change in the structural balance and the corrected required adjustment. 8 Net public expenditure annual growth (in %) corrected for discretionary revenue measures, revenue measures mandated by law and one-offs (nominal)9 Deviation of the growth rate of public expenditure net of discretionary revenue measures, revenue increases mandated by law and one-offs from the applicable reference rate in terms of the effect on the structural balance. The expenditure aggregate used for the expenditure benchmark is obtained following the commonly agreed methodology. A negative sign implies that expenditure growth exceeds the applicable reference rate. Compliance with the required adjustment to the MTOStructural balance pillarExpenditure benchmark pillarSetting the required adjustment to the MTOBackground budgetary indicators1 
 
 
 
Regulation (EC) No 1466/97 and the matrix5 of requirements, which factors in the prevailing 
economic circumstances and sustainability concerns, amounts to 0.75% of GDP in 2020. That 
fiscal effort seems  appropriate, in light of the overall macro-fiscal developments against the 
backdrop  of  the  expected  deceleration  of  economic  activity  in  the  next  years  as  cyclical 
factors,  which  have  been  supporting  growth  in  recent  years,  are  expected  to  gradually  wear 
off. 

The  Commission  2019  autumn  forecast  expects  Hungary’s  structural  deficit  to  improve  by 
1.2%  of  GDP  in  2020,  while  the  expenditure  benchmark  points  to  a  deviation  from  the 
requirement.  Taking into account the factors influencing both  the structural  balance  and the 
expenditure benchmark, a structural improvement of 0.75% of GDP in 2020 does not translate 
into the need to adopt additional structural measures in 2020 compared to the current baseline 
in the Commission 2019 autumn forecast. Based on current projections, the budget for 2020 
adopted by the Hungarian government is expected to deliver the required effort.  

Based on the Commission forecast, the above-mentioned 0.75% of GDP structural adjustment 
in  2020  is  consistent  with  a  nominal  growth  rate  of  net  primary  government  expenditure  of 
4.7% of GDP. 

6. 

CONCLUSION 

On  14  June  2019,  the  Council  recommended  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 and 4.7% in 2020, corresponding to an annual structural adjustment of 1% of 
GDP in 2019 and 0.75% of GDP in 2020.  

In the  report on action taken in  response to  the  recommendation, the authorities retain their 
initial general government deficit target of 1.8% of GDP for 2019. At the same time, for 2020 
the authorities plan to reach a deficit, of 1% of GDP, which is lower compared to the target of 
1.5% of GDP set in the 2019 Convergence Programme.  

The  Commission  2019  autumn  forecast  projects  a  general  government  deficit  for  2019  and 
2020  in  line  with  the  authorities’  current  target.  This  implies  an  improvement  of  both  the 
headline  and  structural  balance  in  both  years.  However,  while  in  2019,  based  on  the 
Commission  2019  autumn  forecast,  both  the  expenditure  benchmark  and  the  structural 
balance  pillars  point  to  a  deviation  from  the  fiscal  effort  recommended  by  the  Council,  for 
2020,  the  overall  assessment  concludes  that  Hungary  would  deliver  the  recommended 
adjustment.  Overall,  Hungary  has  not  delivered  the  recommended  improvement  in  the 
structural balance, nor has it contained net primary government expenditure as requested by 
the Council in June. 

In light of an insufficient response to the Council Recommendation of 14 June 2019 overall, it 
is appropriate to address to Hungary a revised recommendation. A revised recommendation to 
improve Hungary's structural balance by 0.75% of GDP in 2020 relative to 2019 would put 
Hungary  on  an  appropriate  adjustment  path  towards  the  medium-term  budgetary  objective  . 
Such  an  improvement  is  consistent  with  a  nominal  growth  rate  of  net  primary  government 
expenditure not exceeding 4.7% of GDP in 2020. 

5  “Commonly  agreed  position  on  Flexibility  within  the  SGP”,  formally  endorsed  by  ECOFIN  Council  on  12 
February 2016, available at: http://data.consilium.europa.eu/doc/document/ST-14345-2015-INIT/en/pdf 

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