COMMISSION STAFF WORKING DOCUMENT Country Report Hungary 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011
Date: 2020-02-26
Institutions: European Commission, Secretariat-General
Subjects: Hungary, economic situation, green economy, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 26.2.2020  SWD(2020) 516 final  COMMISSION STAFF WORKING DOCUMENT Country Report Hungary 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2020) 150 final}  
 
 
CONTENTS 

Executive summary 

1.  Economic situation and outlook 

2.  Progress with country-specific recommendations 

3.  Reform priorities 

3.1.  Public finances and taxation 
3.2.  Financial sector 
3.3.  Labour market, social policies, education and healthcare 

3.4.   Competitiveness, reforms and investment 
3.5.  Environmental sustainability 

Annex A: Overview Table 

Annex B: Commission debt sustainability analysis and fiscal risks 

Annex C: Standard Tables 

Annex D: Investment guidance on Just Transition Fund 2021-2027 for Hungary 

Annex E: Progress towards the Sustainable Development Goals (SDGs) 

References 

LIST OF TABLES 

Table 1.1: 
Table 2.1: 
Table 3.2.1: 
Table C.1: 
Table C.2: 
Table C.3: 
Table C.4: 
Table C.5: 
Table C.6: 
Table E.1: 

Key economic and financial indicators - Hungary 

Assessment of the implementation of 2019 country-specific recommendations (CSRs)  

Financial soundness indicators 

Financial market indicators 

Headline Social Scoreboard indicators 

Labour market and education indicators 

Social inclusion and health indicators 

Product market performance and policy indicators 

Green growth 

Indicators measuring Hungary’s progress towards the SDGs 

1 

4 

8 

15 

19 

19 
25 
27 
36 
50 

53 

62 

63 

69 

71 

76 

14 
17 
25 
63 
64 
65 
66 
67 
68 
71 

 
 
 
 
LIST OF GRAPHS 

Contributions to real GDP growth 

Contributions to unit labour cost growth 

Participation, unemployment and NEET rates 

Labour productivity and equipment investment 

Real net disposable income growth between 2008-2018 at different income levels 

Graph 1.1: 
Graph 1.2: 
Graph 1.3: 
Graph 1.4: 
Graph 1.5: 
Graph 1.6: 
Graph 1.7: 
Graph 1.8: 
Graph 1.9: 
Graph 1.10:  House price to income ratio 
Graph 2.1:  Overall multiannual implementation of 2011-2019 CSRs to date 
Graph 3.1.1:  Development of the GDP growth and fiscal impulse (differences between Hungary 

Net foreign currency assets by sector 

Decomposition of debt by sector 

Inflation and unit labour cost 

Export market share growth 

and the EU average), 2012-2018 

Graph 3.1.2:  Change in the structure of the expenditure in Hungary over the last 10 years and the 

difference, compared with the EU average 

Graph 3.1.3: 
Graph 3.1.4:  Central government cash expenditure 

Implicit interest rate of public debt in the EU 

Graph 3.1.4a:1. Income gap between wage earners and pensioners    2. Inequality of income 

distribution, 65 years+ 

In-work poverty rate in groups 

Graph 3.2.1:  Credit growth 
Graph 3.3.1:  Regional unemployment rate, 2018, % 
Graph 3.3.2:  Employment rate by age and gender in 2018 
Graph 3.3.3: 
Graph 3.3.4:  Change in the Gini coefficient due to tax and benefit policies: 2008-2018 
Graph 3.3.5:  Underachievement gap in reading by socio-economic status, percentage points 
Graph 3.3.6:  Ratio of average teacher's  gross salary over national gross wages 
Graph 3.3.7:  Unfilled general practicioner practices per 100,000 population by counties, 2018 
Graph 3.4.1:  Labour productivity relative to the EU average (at PPS) 
Graph 3.4.2:  Employment patterns and domestic value added in gross exports in selected 

countries 

Graph 3.4.3:  R&D expenditure 
Graph 3.4.4:  Adoption of selected Industry 4.0 technologies (average adoption rate of EU=100) 
Graph 3.4.5:  Assessment of product market functioning in the Global Competitiveness Index 2019 
Graph 3.4.6:  Average of voice and accountability and control of corruption indices in Worldwide 

Governance Indicator (EU average=100) 

Graph 3.4.7:  Detection of irregularities and their financial impact in the areas of European Structural 

and Investment Funds and Agriculture in 2014-2018 

Graph 3.4.8:  GDP per head and GDP growth (at purchasing power parity, 2008-2018) 

2 

8 
8 
9 
9 
10 
10 
11 
11 
12 
13 
15 

19 

19 
21 
23 

24 
25 
27 
28 
28 
30 
30 
32 
33 
36 

36 
37 
39 
40 

44 

45 
49 

 
 
 
LIST OF BOXES 

Box 2.1: EU funds and programmes to address structural challenges and to foster growth and 

competitiveness in Hungary 

Box 3.1.1: Increasing inequalities in the pension system 

Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights 

Box 3.4.1: Investment challenges and reforms in Hungary 

Box 3.4.2: Challenges and opportunities of the automotive industry in Hungary 

18 
24 
35 
38 
41 

3 

 
 
 
 
EXECUTIVE SUMMARY 

Hungary’s  robust  economic  growth  offers  a 
valuable  opportunity  to  engage  in  important 
structural  and  institutional  reforms  to  sustain 
durable  growth  over  the  longer  term.  In  recent 
years, Hungary has experienced a strong economic 
expansion  with  one  of  the  highest  GDP  growth 
rates  in  the  EU.  Employment  has  also  risen 
quickly.  Hungary’s  future  economic  development 
depends  on  the  economy’s  capacity  to  increase 
productivity, which requires a move away from the 
model  based  on  low  labour  costs  towards  a 
knowledge-based,  sustainable  economy  producing 
advanced  products.  Structural  and  institutional 
reforms  are  also  needed  to  ensure  the  optimal 
allocation  of 
resources.  The  current  good 
economic  environment  creates  an  opportunity  to 
address  the  main  challenges  of  the  economy,  in 
particular  related  to  the  shrinking  working-age 
population,  low  productivity  growth,  increasing 
inequalities and low efficiency of natural resource 
use (1). 

to 

to  withstand 
partly 

The  Hungarian  economy  continues  to  grow 
strongly.  Average  economic  growth  since  2014 
has  exceeded  4%  as  the  economy  has  recovered 
from the financial crisis. In 2019, the economy was 
international  growth 
the 
able 
slowdown, 
supportive 
thanks 
macroeconomic policies. Strong demand for labour 
has  continued  to  lift  employment,  while  wage 
growth has remained rapid due to labour shortages 
and  large  minimum  wage  increases.  Favourable 
labour  market  trends  have  helped  improve  living 
conditions  and  reduce  poverty.  Investment  has 
risen  to  a  record  level,  thanks  to  a  favourable 
economic  outlook,  easy  financing  conditions, 
supportive  fiscal  policy  and  a  large  inflow  of  EU 
funds. 

The expansion of the economy is set to reach its 
limits.  So  far,  economic  growth  has  relied  on 
increasing the number of workers, while output per 
worker  has  grown  modestly.  With  the  labour 
market  near  full  employment,  job  creation  may 
contribute  less  to  output  growth  in  the  coming 

(1)  This  report  assesses  Hungary’s  economy  in  light  of  the 
European  Commission’s  Annual  Sustainable  Growth 
Strategy  published  on  17  December  2019.  In 
this 
document, Commission sets out a new strategy  on how to 
address  not  only  the  short-term  economic  challenges  but 
also  the  economy’s  longer-term  challenges.  This  new 
economic agenda of competitive sustainability rests on four 
dimensions:  environmental  sustainability,  productivity 
gains, fairness and macroeconomic stability. 

years. The lack of available skilled labour is a key 
obstacle to productivity-enhancing investment and 
innovation.  Plans  for  a  reduced  government 
spending  and  the  low  growth  of  main  trading 
partners  may  also  restrict  Hungarian  economic 
growth in 2020 and 2021. 

Macroeconomic  policies  have  created  some 
risks  of  overheating.  Labour  costs,  boosted  by 
administrative wage increases, continue to outpace 
productivity growth. Rising production costs  have 
increased  inflation  and  worsened  exporters’  cost 
competitiveness.  Very  low  real  interest  rates  and 
homebuying  subsidies  have  contributed  to  the 
rapid  increase  in  house  prices.  Homebuilding  has 
not  kept  pace  with  housing  demand  because  of 
capacity  constraints  and  Budapest’s  property 
market shows signs of overheating. Easy financing 
government-
conditions, 
supported 
created 
opportunities  for  businesses  to  invest.  However, 
there is a risk of these resources not being used to 
support  long-term  economic  growth  benefiting 
society as a whole. 

including 

schemes, 

lending 

several 

have 

times 

instead  of  building 

Public  financial  management  has  tended  to 
increase spending and reduce taxes during good 
economic 
fiscal 
buffers.  This  procyclical  fiscal  policy,  combined 
with the absorption of EU funds, has contributed to 
above-EU-average  GDP  growth  over  the  past 
years.  Fiscal  planning  remains  narrowly  focussed 
on  the  annual  budget,  with  an  increasing  role 
played by budgetary reserves, partly related to the 
early  adoption  of  the  budget.  This  has  repeatedly 
led to heightened spending at the end of the fiscal 
year, resulting in public spending on lower quality 
stance. 
pro-cyclical 
projects 
Discretionary  measures  have  also  tended  to  be 
procyclical  while,  by  design,  the  tax  and  benefit 
system  provides  a 
limited  cushion  against 
economic  cycles.  As  a  result,  while  the  economy 
continues  to  perform  well,  public  finances  are 
improving  only  slowly  and  in  June  2019  the 
Council  launched  a  new  significant  deviation 
procedure  addressed  to  Hungary (2).  Public  debt, 
while  decreasing,  remains  high  for  Hungary’s 
income  level,  with  a  low  duration,  relatively  high 
exposure  to  changes  in  market  interest  rates  and 
high  refinancing  costs.  While  risks  are  limited  in 

fiscal 

and 

(2)  https://data.consilium.europa.eu/doc/document/ST-9078-

2019-REV-1/en/pdf 

4 

 
                                                           
                                                           
the  near  future,  the  ageing  population  increases 
fiscal sustainability risks in the long term. 

to 

for 

to  be  enhanced 

Increased  investment  in  research,  innovation, 
infrastructure  and  skills  are  essential  for 
improving  productivity  and 
long-term 
growth  that  benefits  society  as  a  whole.  Public 
and private investment as a share of GDP is high, 
but its composition could be better geared towards 
innovation 
raising  productivity.  Research  and 
capacities  need 
improve 
moderate 
innovation  performance.  Territorial 
improving 
inequality  could  be  alleviated  by 
infrastructure  and  public  services  in  deprived 
areas.  Investment  is  crucially  needed  in  skills, 
education  and  training  to  boost  future  economic 
growth  in  Hungary.  Other  relevant  investment 
spending items are childcare, healthcare and social 
inclusion.  Greening 
requires 
the 
investment  in  energy  efficiency,  climate  change 
resilience and waste management. The institutional 
framework  needs  to  improve  to  ensure  that  the 
economic and social benefits  of these investments 
are maximised.  

economy 

Hungary  has  made 
addressing 
the 
recommendations. 

limited  progress (3) 
2019 

in 
country-specific 

There  has  been  limited  progress  in  the  following 
areas: 

  Policy  action 

into  work  or 

to  get  more  people  from 
vulnerable  groups 
training` 
includes  the  extension  of  childcare  facilities 
and measures to enhance the transition from the 
public  works  scheme  to  the  primary  labour 
market. The government has announced certain 
measures to improve health care but these only 
address 
limited 
extent. The salaries of healthcare professionals 
cancer-screening 
and 
have 
programmes have started. Measures  have  been 
introduced  to  lower  the  school  drop-out  rate; 
however,  serious  challenges  remain  related  to 
social  mobility.  The  Hungarian  economy 
allocates  an  increasing  amount  of  funding  to 
investment  in  research  and  innovation  and 

the  recommendation 

increased 

to  a 

(3)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
country-specific  recommendation 
the 
overview table in the Annex. 

is  presented 

in 

Executive summary 

transport  but  framework  conditions  remain 
weak. The government plans to spend more on 
low-carbon  energy  and  to  improve  energy  and 
resource  efficiency,  and  measures  have  been 
taken  to  improve  waste  management.  Some 
legislative  changes  are  intended  to  improve 
competition  in  public  procurement  but  their 
impact  remains  to  be  seen.  While  some  steps 
have  been  taken  to  reduce  the  complexity  of 
the  tax  system,  no  significant  additional  effort 
has been made to reduce the risk of aggressive 
tax planning, apart from the implementation of 
European legislation. 

There has been no progress in the following areas: 

of 

by 

the 

reinforce 

including 

assistance 

  No  progress  has  been  made  in  improving  the 
adequacy 
and 
social 
unemployment  benefits.  No  progress  has  been 
anti-corruption 
made 
to 
improving 
framework, 
prosecutorial  efforts  and  access  to  public 
information.  No  progress  has  been  made  to 
the  persisting  concerns  regarding 
address 
regulatory 
judicial 
environment in services has not improved. The 
quality  and  transparency  of  decision-making 
and social dialogue is among the weakest in the 
EU and no steps have been taken to improve it.  

independence. 

The 

Hungary  performs  relatively  well  on  some 
indicators  of  the  Social  Scoreboard  supporting 
the  European  Pillar  of  Social  Rights  but 
significant  challenges  remain.  Employment 
outcomes  compare  well  with  EU  averages,  while 
the unemployment rate is one of the lowest in the 
EU. Income  inequality is close  to the EU average 
although  it  has  been  increasing.  Employment  and 
salary  gaps  between  genders  and  skills  groups 
remain  wide  compared  with  the  rest  of  the  EU. 
Labour  market  outcomes 
for  women  and 
vulnerable groups are below the EU average.  

Regarding  the  progress  in  reaching  the  national 
targets under the Europe 2020 Strategy, Hungary is 
performing  well  in  boosting  the  employment  rate, 
reducing relative poverty and reducing greenhouse 
gas  emissions.  More  effort  is  needed  to  raise 
research  and  development 
spending,  higher 
education  attainment,  energy  efficiency  and 
renewable  energy  use  and  to  reduce  early  school 
leaving.  

5 

 
                                                           
Executive summary 

country’s  corporate  tax  rules  may  be  used  for 
aggressive tax planning. 

and  Hungary’s 

institutional  quality  and 

  The institutional and governance framework 
affects  the  business  environment  and  the 
optimal allocation of resources. Over the past 
years, 
legislative 
predictability  have  been  relatively  weak  and 
deteriorating  compared  with  both  the  EU 
average 
regional  peers. 
Insufficient  stakeholder  involvement  weakens 
the quality and predictability of policy-making. 
public 
Despite 
recent  years, 
procurement 
fair 
recurrently  hinder 
systemic 
competition 
the 
undermining 
risk 
efficiency  of  the  selection  process.  Available 
indicators  still  point  to  significant  corruption 
risks.  There  still  has  not  been  enough 
determined  action  to  prosecute  corruption  in 
high-level cases. The weakening of checks and 
balances,  weak  accountability  and  obstacles  to 
access  to  public  information  hinder  the  fight 
against corruption.  

improvements 
framework 

factors 
and 

in 
in 

the 

in  work  or 
low,  also  due 

  Employment  increased  and  unemployment 
decreased  in  line  with  the  good  economic 
situation but not all groups benefited equally 
from  labour  market  expansion.  The  number 
training  remains 
of  women 
relatively 
limited 
to 
availability  of  childcare.  Outward  migration 
and population ageing put pressure on the size 
of  the  workforce.  A  majority  of  firms  in  the 
industry  and  building  sectors  report  labour 
shortages  as  a  factor  limiting  production.  The 
performance  of 
the  public  employment 
services, including the targeting and efficiency 
of policies to help people find or stay in work, 
could be improved. 

the 

  The  overall  poverty  situation  has  improved 
markedly  in  recent  years  but  challenges 
remain. Income inequality has been increasing, 
inequalities in access to public services persist 
and  the  proportion  of  people  experiencing 
difficult living conditions is among the highest 
in  the  EU  and  is  particularly  high  among 
families  with  several  children  and  the  Roma. 
Poverty  and  social  exclusion  are  concentrated 
in  certain  areas.  Key  elements  of  the  social 
safety  net  have  weakened  over  the  past  years. 

Overall,  Hungary’s  performance  in  achieving 
the  United  Nations  Sustainable  Development 
Goals  (SDGs)  is  average.  Hungary  performs 
relatively  well  in  the  indicator  measuring  decent 
work  and  economic  growth  (SDG  8).  However, 
significant  challenges  remain,  in  particular,  in 
improving the quality of education (SDG 4) (4).  

Key structural issues analysed in this report, which 
point 
to  particular  challenges  for  Hungary’s 
economy, are the following: 

chains 

economy 

innovation  performance  of 

  Despite  recent  improvement,  output  per 
worker remains among the lowest in the EU. 
to 
Domestic  companies  mainly  contribute 
international 
through 
production 
assembly-type  activities,  which  add  little  local 
value.  This  specialisation  is  related  to  the  still 
moderate 
the 
Hungarian 
increasing 
expenditure  on  research,  development  and 
innovation.  The  shortage  of  highly  skilled 
workers  is  a  key  obstacle  to  innovation. 
Cooperation among researchers and businesses 
is  weak,  hindering  knowledge  transfer  from 
domestic 
abroad, 
enterprises. 
of 
productivity-enhancing  digital  technologies  is 
among the lowest in the EU, and it is hindered 
by low digital skills. 

towards 
Hungary’s 

adoption 

smaller 

despite 

and 

  Restrictive  regulations  and  increasing  state 
involvement  hinder  the  proper  functioning 
of  the  markets.  Restrictive  product  market 
regulations hamper the evolution of  successful 
businesses,  which 
reduces  economy-wide 
productivity.  Selected  companies  benefit  from 
government  support  through  large  subsidies, 
tailor-made  regulations,  specific  agreements 
and  protection  from  competition.  Frequent 
regulatory changes lead to an unstable business 
environment  in  retail  trade  and  the  regulation 
of professions is still restrictive. The tax system 
remains  complex  even  after  simplification 
efforts,  and  there  are  indications  that  the 

(4)  Within  the  scope  of  its  legal  basis,  the  European  Semester 
can help drive national economic and employment policies 
towards the achievement of the United Nations Sustainable 
Development  Goals  (SDGs)  by  monitoring  progress  and 
ensuring closer coordination of national efforts. This report 
contains reinforced analysis and monitoring on the SDGs. A 
new  annex  (Annex  E)  presents  a  statistical  assessment  of 
trends in  relation to  SDGs  in  Hungary  during  the  past  five 
years, based on Eurostat’s EU SDG indicator set. 

6 

 
                                                           
Executive summary 

to 

Energy  Strategy  aims  to  increase  electricity 
generation from low-carbon sources to 90% of 
the  total  by  2030.  In  addition  to  nuclear, 
Hungary  intends  to  rely  more  on  renewable 
energy  sources,  mainly  solar  energy;  by 
contrast, wind energy does not have any role in 
the  government’s  current  plans.  The 
low 
energy  efficiency  of  housing  and  polluting 
residential  heating  methods  make  air  quality 
worse  and  both  point 
large  potential 
environmental and health  gains to be  achieved 
by  stepping  up  renovation  rates.  Greenhouse 
gas  emissions  from  transport  have  increased 
strongly over the last  five  years and emissions 
are  projected  to  continue  increasing  under 
current  policies.  The  government  intends  to 
transport  emissions  by  promoting 
address 
electromobility.  However,  questions  remain 
for  building 
concerning  plans 
charging 
infrastructure 
for  promoting  other 
and 
alternative  fuels.  Identifying  investment  needs 
in green technologies and sustainable solutions, 
and  securing  adequate  funding  will  be  key  to 
delivering on the climate and energy objectives 
and  shaping  a  new  growth  model.  Water 
quality and supply remain concerns. Hungary is 
only  at  an  early  stage  of  moving  towards  a 
circular economy and waste management needs 
to be improved to meet 2020 recycling targets. 
Institutional 
impede  more  effective 
implementation  of  environmental  laws  and 
policies.  These  environmental  challenges 
require  investment  and  institutional  capacity 
building. The Commission’s proposal for a Just 
Transition  Mechanism  under  the  next  multi-
annual  financial  framework  for  the  period 
2021-2027,  includes  a  Just  Transition  Fund,  a 
scheme  under 
dedicated 
InvestEU, and a new public sector loan facility 
with  the  EIB.  It  is  designed  to  ensure  that  the 
transition towards EU climate neutrality is fair 
in 
by  helping 
Hungary  to  address  the  social  and  economic 
consequences. Key priorities for support by the 
Just Transition Fund, set up as part of the Just 
Transition Mechanism, are identified in Annex 
D,  building  on  the  analysis  of  the  transition 
challenges outlined in this report. 

the  most  affected  regions 

Just  Transition 

issues 

The low and shrinking supply of social housing 
is becoming a challenge against a  backdrop of 
rapidly rising residential property prices. 

  Educational  outcomes  are  below  the  EU 
average  and 
large  differences  between 
schools  remain,  hindering  social  mobility. 
The  impact of the socio-economic background 
of pupils on their educational outcomes  is one 
of  the  strongest  in  the  EU.  Concentration  of 
disadvantaged  and  Roma  children  in  certain 
schools  has  increased  in  the  past  decade, 
particularly  in  cities.  The  incidence  of  early 
school  leaving  is  above  the  EU  average,  and 
especially high among Roma. The new strategy 
on  vocational  education  and  training  aims  to 
attract  more  students to vocational schools but 
makes  it  more  difficult  for  them  to  switch  to 
the general education path. The shrinking pool 
of  applicants  to  higher  education  is  likely  to 
tertiary  educational  attainment  rates, 
limit 
which  holds  back  innovation  and  productivity 
growth.  The 
is 
shortage 
increasingly challenging. 

teachers 

of 

  Although 

out-of-pocket 

improving,  health 

outcomes 
remain  worse  than 
in  most  other  EU 
countries, reflecting both unhealthy lifestyles 
and  the  limited  effectiveness  of  health  care. 
This  is  shown  by  Hungary’s  high  mortality 
rates from preventable causes. The public share 
of  health  spending  in  Hungary  is  considerably 
lower  than  the  EU  average.  Consequently,  an 
above-EU  average  number  of  Hungarians  rely 
on 
are 
increasingly  pushed  to  turn  to  private  care  to 
access  health  services,  with  repercussions  on 
social  equity  as  well  as  population  health 
outcomes.  The 
remains 
health 
excessively reliant on hospitals to provide care 
services,  with  insufficient  focus  on  primary 
care and prevention. Additional investment and 
reforms  are  necessary  to  rationalise  the  use  of 
resources  within  the  health  system,  reduce 
inequities of access and raise quality of care to 
EU standards. 

expenditure 

system 

and 

  Environmental  sustainability  is  a  challenge. 
Hungary  is  targeting  a  modest  reduction  in 
greenhouse  gas  emissions  from  current  levels 
by  2030,  mainly  through  the  phasing  out  of 
coal-fired  power  plants.  The  latest  National 

7 

 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth 

The  Hungarian  economy  enjoyed  outstanding 
growth in recent years. GDP has risen on average 
by  4%  each  year  since  2014  as  the  economy  left 
behind  the  legacy  of  the  financial  crisis  and 
macroeconomic  policies 
remained  supportive. 
GDP  per  capita  had  reached  over  70%  of  the  EU 
average  by  2018,  the  highest  level  since  the 
transition.  Domestic 
the 
economy resilient to the global slowdown in 2019. 
These  included  booming  construction  investment 
and 
introduction  of  new  models  to  the 
production lines of major automotive factories. 

tailwinds  also  kept 

the 

Graph 1.1:  Contributions to real GDP growth 

investment  is  responding  to  pent-up  demand, 
which is evident in historically low vacancy rates. 
Homebuilding  is  gradually  responding  to  rising 
house  prices,  the  improving  financial  situation  of 
households,  and  the  expansion  of  housing-related 
subsidy  schemes.  Investment  in  machinery  and 
equipment  has  also  risen  substantially,  thanks  to 
high capacity utilisation, easy financing conditions 
and foreign direct investment inflows. 

Productivity and potential growth 

Productivity  growth  has  picked  up  in  line  with 
equipment  investment,  but  remains  modest. 
Following the crisis, labour productivity stagnated 
and  the  convergence  in  income  per  capita  was 
mostly driven by the rising employment rate. The 
recent  rise  in  investment  has  also  brought  labour 
productivity gains. However, while the investment 
rate for equipment has already approached its pre-
labour  productivity  gains  have 
crisis  peak, 
remained  below 
the  2000-2007  average  (see 
Graph 1.2). Microeconomic factors, including low 
innovation  activity  and  the  slow  reallocation  of 
resources towards more productive firms, continue 
to 
(see 
Section 3.4.1).  Easy  financing  conditions  and 
institutional 
capital 
misallocation  (Cecchetti  and  Kharroubi,  2015; 
Restuccia 
also 
and  Rogerson,  2017; 
Section 3.4.2). 

factors  may 

productivity 

growth 

back 

hold 

lead 

see 

to 

Source: European Commission, Winter Forecast 2020 

Graph 1.2: 

Labour productivity and equipment investment 

Growth  is  set  to  slow  in  2020  as  the  business 
cycle  matures  and  temporary  factors  fade. 
Domestic  spare  capacity  has  been  absorbed  while 
the  external  environment  remains  a  drag  on 
exports. Fiscal consolidation is set to reduce public 
investment while private investment is expected to 
decelerate,  having  already  reached  a  high  level. 
Consumption is also projected to slow in line with 
moderating income growth (see Graph 1.1). 

is  at  a  record 

Investment  activity 
level. 
Construction investment is estimated to have risen 
to  15%  of  GDP  in  2019,  above  the  pre-crisis 
average  of  around  12%,  after  several  years  of 
subdued  building  activity.  Public 
investment, 
boosted  by  the  absorption  of  EU  funds  and  the 
electoral cycle, exceeded 6% of GDP in 2019, the 
highest  rate  in  the  EU.  Commercial  real  estate 

Source: Eurostat, Hungarian Central Statistical Office, 
European Commission Autumn 2019 Economic Forecast 

8 

-10-8-6-4-202468040506070809101112131415161718192021%, ppsChanges in inventoriesInvestment (GFCF)ConsumptionNet exportsReal GDP growthforecast24681012-4-20246895979901030507091113151719% of GDPAnnual change (%)Labour productivity growth (%)Equipment investment (% of GDP, right scale)(1) forecast for 2019 
  
 
  
1. Economic situation and outlook 

Potential  growth  is  set  to  slow  as  the  effect  of 
past  policy  measures  fades.  In  recent  years,  the 
economy  has  benefited  from  the  unfolding  effect 
labour  market 
of  earlier  measures  increasing 
participation,  notably  the  gradual  rise  of  the 
effective  retirement  age.  Tax  incentives  were  also 
created  to  raise  old-age  participation.  Changes  to 
the  tax  and  benefits  system  (affecting  labour  and 
consumption 
taxes,  unemployment  and  other 
benefits)  may  have  also  raised  participation  and 
long-run  GDP,  albeit  at 
the  cost  of  higher 
inequality  (Benczúr  et  al.,  2018).  Although  the 
government introduced some measures to increase 
old-age  participation,  the  retirement  age  is  set  to 
stabilise  at  65  years  from  2022  and  the  active 
population  is  projected  to  decrease,  in  line  with 
demographic trends. 

Labour market and social developments 

including 

The  labour  market  performs  strongly,  in  line 
with the good cyclical situation of the economy. 
Employment and participation continued to rise in 
2019.  Unemployment, 
long-term 
unemployment, fell to well below pre-crisis levels. 
Youth unemployment and the share of youth not in 
employment,  education  or  training  have  been 
improving  at  a  slower  pace  (see  Graph  1.3  and 
Table  C.3).  However,  vacancy  data  and  firms’ 
perceptions of labour shortages indicate that labour 
demand has cooled since mid-2019. 

Graph 1.3: 

Participation, unemployment and NEET rates 

recent 

Structural  challenges  persist  in  the  labour 
market.  Labour  shortages  remain  significant, 
in  sectors  employing  high-skilled 
especially 
improvements,  non-
workers.  Despite 
employment  is  higher  among  the  low  skilled  and 
people  with  disabilities  (see  Section  3.3.1).  It  is 
also  concentrated  geographically, 
less 
developed  regions  and  in  rural  areas.  While 
decreasing  in  size,  the  Public  Works  Scheme 
continues to employ over 2% of the workforce. 

the 

in 

In  the  tight  labour  market,  wages  have  been 
growing  rapidly.  According  to  national  accounts 
data,  wages  and  salaries  per  employee  grew  by 
8.1% in 2018 and accelerated further in 2019 to an 
estimated 8.8%. Sizeable minimum  wage hikes of 
8%  in  both  2019  and  2020  have  also  supported 
wage growth, which is projected to slow gradually 
in 2020 and 2021 as lower economic growth eases 
the  tightness  of  the  labour  market.  Employers’ 
to 
social  contribution  rates  should  continue 
decrease in line with the six-year wage agreement 
between  the  government  and  social  partners.  The 
decreasing  tax  wedge  limits  unit  labour  cost 
growth,  but  in  recent  years  it  still  rose  by  nearly 
4%  each  year  on  average,  and  only  a  modest 
slowdown is projected (see Graph 1.4). 

Graph 1.4:  Contributions to unit labour cost growth 

(1) NEET: not in education or employment 
Source: Eurostat 

Source: Eurostat, European Commission Autumn 2019 
Economic Forecast 

The  benefits  of  growth  have  been  unequally 
distributed.  Poverty  risks  decreased  markedly  in 
past years, but material and social deprivation rates 
remain among the  highest in  the EU. Poverty and 
territorial 
show  a 
social  exclusion 

strong 

9 

5860626466687072747678800510152025302000200120022003200420052006200720082009201020112012201320142015201620172018%%Activity rate 20-64 (rhs)Unemployment rate 15-74 (lhs)Long-term unemployment rate 15-74 (lhs)Youth unemployment rate 15-24 (lhs)NEET rate 15-24 (lhs)-6-4-202468101214040506070809101112131415161718192021percentage pointsEmployers' social contributionsWage per employeeLabour productivityUnit labour cost growthforecast   
   
1. Economic situation and outlook 

inflation  is  projected  to  remain  near  the  3% 
midpoint of the central bank’s target band over the 
coming years (see Graph 1.6). 

Graph 1.6: 

Inflation and unit labour cost 

(1) HICP excluding unprocessed food and energy. (2) total 
economy excluding public administration, education and 
health 
Source: Eurostat, European Commission Autumn 2019 
Economic Forecast 

Monetary  conditions  have  remained  loose.  In 
2019,  the  central  bank  signalled  that  downward 
risks to inflation had become stronger. Through its 
liquidity  operations  it  lowered  interbank  rates 
slightly  in  the  second  half  of  the  year.  The 
currency depreciated on a trade-weighted basis by 
about 4% compared to end-2018. The central bank 
introduced  another  round  of  its  subsidised  loan 
scheme  for  small  firms,  and  a  bond-buying 
programme for larger corporates (see Section 3.2). 

External position 

The  current  account  balance  turned  slightly 
negative  (-0.8%  of  GDP  in  the  third  quarter  of 
2019),  mostly  due  to  a  decreasing  trade  balance. 
This  level  is  in  line  with  the  current  account 
explained  by  fundamentals (5).  Export  growth 
slowed down since 2017 along with the demand of 
trade partners, while strong domestic demand kept 
import  growth  high.  The  increasing  absorption  of 
EU funds swelled the capital account balance, thus 

(5)  The  benchmark  is  derived  from  reduced-form  regressions 
capturing  the  main  determinants  of  the  saving-investment 
(e.g. 
balance, 
demography, resources), policy factors and global financial 
conditions. See also Coutinho, Turrini and Zeugner (2018). 

fundamental  determinants 

including 

concentration.  The  adequacy  of  key  elements  of 
the social safety net is weak. Inequality is not high 
in Hungary compared with the rest of the EU, but 
it  has  increased  over  the  last  decade  (see  Section 
3.3.2). While median income grew half as much as 
the  regional  average  between  2008-2018,  income 
growth for the top 5% of the distribution was much 
(see  Graph  1.5).  As  high-income 
higher 
households save a higher share of their income, the 
changing 
have 
contributed  to  the  persistently  high  household 
saving rate after the crisis. This is corroborated by 
in  wealth  concentration: 
the  recent 
financial  assets  held  by  the  wealthiest  20%  of 
households  rose  by  36%  between  2014-2017, 
while those of the remaining 80% rose by just 8% 
(MNB, 2019a). 

distribution 

increase 

income 

could 

Graph 1.5: 

Real net disposable income growth between 
2008-2018 at different income levels 

(1) CEE3 is the average of Czechia, Poland and Slovakia 
Source: Eurostat 

Inflation and monetary policy 

Strong demand and wage growth have fed into 
inflation.  Core  inflation  has  climbed  steadily  and 
drove  HICP  inflation  up  to  3.4%  in  2019.  A 
broader  set  of  measures  confirms  the  build-up  of 
price  pressures  in  the  economy.  Construction 
prices were growing by 9.5% in the third quarter of 
2019 while the GDP deflator was rising by 4.4% in 
the  same  period.  In  the  years  ahead,  slower 
economic growth is projected to ease the tightness 
labour  market  and  curtail  domestic 
of 
inflationary  pressure.  At  the  same  time,  imported 
inflation should remain subdued in line with global 
commodity  and  industrial  prices.  Overall,  HICP 

the 

10 

051015202530354020thMedian90th95th99thGrowth between 2008-2018 (%)Income percentileHungaryCEE3-2024681012-101234567803050709111315171921Annual change  (%)Annual change (%)HICPCore inflation (1)Private sector unit labour cost (2) (right scale)forecast      
      
                                                           
1. Economic situation and outlook 

based  on  manufacturing  unit  labour  cost  has 
appreciated by over 15% since the end of 2015 (6).  

international 

investment  position 
The  net 
continued to improve. It reached -49.2% of GDP 
by the third quarter of 2019, compared to -113.4% 
in 2009. This remains more negative than the level 
implied  by  fundamentals,  estimated  at  -24%  of 
GDP in 2019. However, the net stock of debt-type 
instruments  has  already  decreased  to  near  zero. 
External  deleveraging  is  increasingly  driven  by 
high  nominal GDP growth,  while the contribution 
of  financial  flows  has  diminished  in  line  with  the 
decreasing net lending of the economy. 

Graph 1.8:  Net foreign currency assets by sector 

the net lending of the economy remained positive. 
In  the  years  ahead,  new  export  capacities  and 
lower  domestic  demand  growth  are  projected  to 
stabilise  the  external  balance  with  the  current 
account deficit at less than 1% of GDP. 

Export  market share gains  fell behind regional 
peers  since  2016.  In  2016-2018,  Hungary  gained 
4%  in  export  market  shares,  less  than  the  10.7% 
average  of  Czechia,  Poland  and  Slovakia  (see 
Graph 1.7). This difference is mostly due to goods 
exports,  and  half  of  it  is  explained  by  the 
automotive industry. The manufacturing of internal 
combustion  engines  plays  a  particularly  important 
role  in  Hungary.  This  segment  was  hit  by  the 
diesel emissions scandal and the slow introduction 
of  new  emission  test  procedures  in  2017.  Major 
brands  operating  in  the  country  also  held  back 
production  for  company-specific  reasons.  In  line 
with 
in  2019, 
Hungarian  automotive  exports  started  to  make  up 
the ground lost in earlier years. 

the  roll-out  of  new  models 

Graph 1.7: 

Export market share growth 

Households include non-profit institutions. The central bank is 
classified into government. Data are not consolidated, and 
exclude special purpose entities.  
Source: Hungarian Central Statistical Office, Magyar 
Nemzeti Bank 

The  reduction  of  foreign  currency  debt  has 
lowered  Hungary’s  exposure  to  volatility  in 
international financial markets. Households and 
corporations  had  reduced  their  large  net  foreign 
currency  debt  stocks  by  2018,  also  supported  by 
government measures. Within the corporate sector, 
exporting  firms  earn  foreign  currency  revenues  to 
hedge  their  debt,  although  exposures  remain  in 

(6)  For this analysis, an export equation was estimated on data 
spanning  2000-2015.  In  the  model,  the  quarterly  growth 
rate of goods exports volume is explained with the growth 
of  world 
indicator  of  cyclical  demand 
fluctuations, by CPB Netherlands); the growth of corporate 
sector  capital  stock  (a  proxy  for  production  capacity, 
published by the central bank); and the real exchange rate 
based  on  manufacturing  unit  labour  cost  (by  ECB,  as  a 
measure of cost competitiveness). 

trade 

(an 

Calculated from nominal values. CEE3 is the average of 
Czechia, Poland and Slovakia 
Source: Source: Eurostat 

cost 

competitiveness  had 

Decreasing 
a 
measurable effect on trade performance. Strong 
business  investment  has  supported  export  growth 
in  recent  years  through  the  creation  of  new 
production  capacity.  However,  decreasing  cost 
competitiveness is estimated to have led to market 
share losses in the range of 0.5-1 percentage points 
per  year,  because  the  real  effective  exchange  rate 

11 

-12-10-8-6-4-20246810120506070809101112131415161718Annual change (%)Goods' contribution to export market share growthServices' contribution to export market share growthExport market share growthExport market share growth, CEE3-50-40-30-20-1001020040506070809101112131415161718% of GDPHouseholdsFinancial corporationsNon-financial corporationsGovernmentTotal economy      
   
                                                           
1. Economic situation and outlook 

Graph 1.9:  Decomposition of debt by sector 

Source: Eurostat 

The  authorities  have 
introduced  multiple 
interest  rates  through  market  segmentation, 
adding complexity to the financial markets. The 
central bank and various public institutions operate 
several  preferential  programmes,  further  reducing 
lending  rates  mainly  for  small  and  medium-sized 
enterprises (see also Section  3.2). Households can 
benefit  from  the  new  ‘prenatal’  funding  scheme, 
essentially  an  uncollateralised  personal  loan  with 
very low interest rates and the possibility of partial 
or  complete  debt  relief,  depending  on  the  birth  of 
additional children (see also Section 3.3.1). At the 
same  time,  the  government  has  issued  increasing 
amounts  of  high-yield  retail  bonds  with  limited 
secondary  trading,  with  the  declared  aim  of 
encouraging household saving (see Section 3.1.3). 
Besides  their  direct  fiscal  cost,  the  increasingly 
complex web of subsidised financial products may 
also crowd out  market-based  products and burden 
the  consolidated  balance  sheet  of  the  government 
with  credit  risk.  In  addition, 
the  authorities 
repeatedly  need  to  resort  to  fine-tuning  to  avoid 
arbitrage opportunities across market segments. 

Housing market 

House prices continued to grow rapidly, causing 
concerns  of  overvaluation  in  Budapest.  The 
national  house  price  index  for  existing  dwellings 
rose  by  7.7%  year-on-year  in  the  third  quarter  of 
2019, driven by rising incomes, low interest rates, 
expanding 
the 
anticipated increase in the value-added tax rate for 

government 

subsidies 

and 

construction  and  commercial  real  estate.  To 
mitigate these risks, the central bank extended the 
systemic risk buffer to unhedged foreign currency 
project  loans  in  autumn  2019.  Banks  have  also 
started to tighten credit conditions for commercial 
real  estate  project  loans.  The  foreign  currency 
denominated  debt  of  the  general  government  also 
decreased  as  maturing  bonds  were  mostly 
refinanced  in  domestic  currency.  Its  consolidated 
balance sheet with the central bank now has more 
foreign  currency  assets 
(see 
Graph 1.8). 

liabilities 

than 

Public finances 

The  general  government  deficit  is  projected  to 
shrink,  mostly  due  to  spending  restraint. 
Despite favourable economic growth, the headline 
deficit  widened  in  2017  and  2018  following 
procyclical  fiscal  policies  which,  in  2018,  led  the 
Council to launch a significant deviation procedure 
for Hungary. Procyclical fiscal loosening seems to 
have  reverted.  In  its  2019  autumn  forecast,  the 
Commission  projected  the  headline  deficit  to 
decline  from  2.3%  of  GDP  in  2018  to  1.8%  of 
GDP  in  2019.  The  improvement  is  mostly  driven 
by  the  moderate  increase  in  current  expenditure 
compared 
is 
expected  to  have  improved  by  0.5%  of  GDP  in 
2019,  which  is  below  what  was  recommended  by 
the  Council.  In  2020,  both  the  headline  and  the 
structural deficits are estimated to decrease further, 
thanks  also  to  the  moderating  public  investment 
rate. As a result, the debt-to-GDP ratio is expected 
to keep decreasing. 

to  GDP.  The  structural  deficit 

Financial sector 

The  credit  cycle  is  in  full  swing.  Credit  demand 
and  banks’  willingness  to  lend  remain  strong. 
Household  lending  (up  by  15.6%  year-on-year  in 
December  2019)  is  also  boosted  by  the  new 
‘prenatal’  financing  scheme  introduced  in  July 
2019. However, the stock of private sector debt has 
not risen relative to GDP. Household indebtedness 
remains  historically  low  at  18%  of  GDP  in  2019, 
well below the fundamental threshold of 33% (see 
Graph  1.9).  Consolidated  debt  of  non-financial 
corporations  amounted  to  49.7%  of  GDP  in  the 
third  quarter  of  2019,  which  is  higher  than  levels 
implied by fundamentals, but below the prudential 
threshold. The share of highly indebted enterprises 
seems to have risen, however (MNB, 2019b).  

12 

05010015020025003Q408Q109Q110Q111Q112Q113Q114Q115Q116Q117Q118Q119Q1% of GDPGovernmentHouseholdNon financial corporationsPrivate non-financial sector    
new  housing  as  of  1  January  2020.  The  central 
bank’s  index  shows  even  higher  price  increase  of 
14.7%.  The  house-price-to-income  ratio  is  at  the 
pre-crisis  average  for  the  total  economy,  while  it 
has  reached  very  high  levels  for  the  capital  city 
(see  Graph  1.10) (7).  Speculative  demand  and 
foreign  investors  have  contributed  to  the  rapid 
price  increases.  In  2018,  buyers  from  outside  the 
European  Union 
for  7.4%  of 
transactions in Budapest, a significant jump from a 
0.3%  share  in  2013.  While  overvaluation  appears 
geographically  contained,  it  may  spill  over  to  the 
rest of the country (Pellényi, 2019). 

accounted 

Graph 1.10:  House price to income ratio 

1. Economic situation and outlook 

18,000 units by 2019, but this level is still just half 
of the pre-crisis average. Capacity shortages in the 
construction  sector  have  led  to  cost  increases  and 
delays for most residential projects. The expiry of 
the  preferential  value-added  tax  rate  for  new 
housing  from  2020  and  tighter  environmental 
standards from 2021 has also held back the launch 
of  new  projects.  Industry  representatives  foresee 
decreasing  building  activity  from  2021  onwards, 
once  projects  currently  under  way  are  finalised 
(MNB, 2019c). 

Sustainable Development Goals 

Overall,  Hungary  performs  on  average 
in 
achieving  the  Sustainable  Development  Goals. 
According  to  Eurostat’s  Sustainable  Development 
Goals  (SDG)  indicators  (see  Annex  E),  Hungary 
has been making progress in several areas over the 
past  5  years.  Thanks  to  its  favourable  economic 
situation,  Hungary  performs  relatively  well  in  the 
indicators  measuring  decent  work  and  economic 
growth  (SDG 8).  Indicators  on  poverty  (SDG 1), 
hunger  (SDG 2)  and  sustainable  cities  (SDG 11) 
also improved. However, Hungary continues to lag 
behind  the  EU  average  in  the  levels  of  several 
indicators.  Moreover,  some  deterioration  can  be 
observed  in  indicators  of  clean  energy,  inequality 
and climate-related actions (SDG 7, 10 and 13).  

Price of a 80 m2 used apartment relative to annual average 
net income per person. Based on Bricongne et al. (2019), 
values above 12.5 indicate risk of a sharp price reversal. 
Source: European Commission based on HCSO and  MNB 

Low  household  indebtedness  and  moderating 
buy-to-let demand mitigate the associated risks. 
Rising  house  prices  do  not  seem  to  be  fuelled  by 
loose credit conditions. Household debt relative to 
income  is  still  low  and  the  number  of  new 
mortgages  even  fell  in  the  first  half  of  2019.    In 
parallel with the launch of the new high-yield retail 
government  bond  in  mid-2019,  the  price  level  of 
existing  dwellings  has  ceased  to  grow  since  the 
first quarter of the year. 

Housing  construction  responds  only  gradually 
to  robust  demand  due  to  capacity  constraints. 
The  number  of  newly  built  houses  has  more  than 
doubled  in  recent  years,  amounting  to  around 

(7)  Valuation  metrics  by  the  Commission,  which  refer  to  the 
total economy and are calculated over a shorter period, also 
indicate rising overvaluation of house prices. 

13 

68101214161801030507091113151719times average annual incomeTotal economyBudapest     
                                                           
 
1. Economic situation and outlook 

Table 1.1: 

Key economic and financial indicators - Hungary 

Source: Eurostat and ECB as of 4-2-2020, where available; European Commission for forecast figures (Winter forecast 2020 for 
real GDP and HICP, Autumn forecast 2019 otherwise) 

14 

2004-072008-122013-1620172018201920202021Real GDP (y-o-y)3.3-1.03.04.35.14.93.22.8Potential growth (y-o-y)3.10.31.72.93.74.33.93.8Private consumption (y-o-y)1.9-2.52.84.74.8...Public consumption (y-o-y)0.10.52.72.40.9...Gross fixed capital formation (y-o-y)4.2-4.43.718.717.1...Exports of goods and services (y-o-y)16.62.16.16.94.3...Imports of goods and services (y-o-y) 13.60.06.18.26.8...Contribution to GDP growth:Domestic demand (y-o-y)2.0-2.22.76.56.4...Inventories (y-o-y)-0.2-0.4-0.1-1.80.4...Net exports (y-o-y)1.51.60.4-0.5-1.7...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)-0.2-0.21.01.00.90.80.50.4Capital accumulation (y-o-y)1.40.60.71.01.62.11.91.8Total factor productivity (y-o-y)1.9-0.10.00.91.31.51.51.5Output gap2.3-3.3-0.92.03.43.72.51.6Unemployment rate7.110.27.54.23.73.43.43.4GDP deflator (y-o-y)4.23.32.53.74.54.23.73.0Harmonised index of consumer prices (HICP, y-o-y)5.54.90.62.42.93.43.33.1Nominal compensation per employee (y-o-y)7.92.51.37.06.27.86.56.4Labour productivity (real, person employed, y-o-y)3.8-0.30.12.42.7...Unit labour costs (ULC, whole economy, y-o-y)4.02.81.24.53.45.03.83.5Real unit labour costs (y-o-y)-0.2-0.6-1.20.8-1.00.80.10.5Real effective exchange rate (ULC, y-o-y)3.1-2.3-1.64.5-1.1-0.4-0.41.5Real effective exchange rate (HICP, y-o-y)3.1-0.8-1.71.8-0.5-0.8-0.81.0Net savings rate of households (net saving as percentage of net disposable income)6.25.37.26.66.9...Private credit flow, consolidated (% of GDP)13.20.7-1.70.74.3...Private sector debt, consolidated (% of GDP)81.4109.986.370.069.3...of which household debt, consolidated (% of GDP)24.836.323.618.617.8...of which non-financial corporate debt, consolidated (% of GDP)56.673.662.751.451.5...Gross non-performing debt (% of total debt instruments and total loans and advances) (2).9.811.85.6....Corporations, net lending (+) or net borrowing (-) (% of GDP)-2.92.03.12.41.3-0.4-0.8-0.9Corporations, gross operating surplus (% of GDP)22.323.025.024.925.125.124.924.7Households, net lending (+) or net borrowing (-) (% of GDP)1.82.95.13.13.12.83.02.9Deflated house price index (y-o-y).-7.09.39.310.9...Residential investment (% of GDP)4.43.12.12.73.0...Current account balance (% of GDP), balance of payments-7.7-1.12.92.3-0.5-1.4-1.0-0.8Trade balance (% of GDP), balance of payments-1.24.57.57.34.4...Terms of trade of goods and services (y-o-y)-0.7-0.50.6-0.6-1.1-0.10.30.0Capital account balance (% of GDP)0.51.93.00.92.6...Net international investment position (% of GDP)-92.3-103.4-72.5-54.9-52.0...NENDI - NIIP excluding non-defaultable instruments (% of GDP) (1)-30.9-48.5-23.8-8.8-4.2...IIP liabilities excluding non-defaultable instruments (% of GDP) (1)75.3112.182.362.158.8...Export performance vs. advanced countries (% change over 5 years)47.010.6-10.27.86.3...Export market share, goods and services (y-o-y)4.9-5.12.31.0-0.53.80.91.0Net FDI flows (% of GDP)-2.4-1.7-1.9-1.7-2.1...General government balance (% of GDP)-7.1-4.1-2.3-2.4-2.3-1.8-1.0-0.8Structural budget balance (% of GDP)..-1.8-3.7-3.8-3.3-2.1-1.5General government gross debt (% of GDP)62.478.076.472.970.268.266.764.4Tax-to-GDP ratio (%) (3)37.538.439.038.437.637.237.036.9Tax rate for a single person earning the average wage (%) (4)35.535.534.333.533.5...Tax rate for a single person earning 50% of the average wage (%) (4)19.626.534.333.533.5...forecast 
 
  
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

the 

Country 

track  record 

in 
Hungary  has  a  mixed 
implementing 
Specific 
Recommendations  (CSRs).  Since  the  start  of  the 
European Semester in 2011, Hungary has made at 
least  ‘some  progress’  on  52%  of  all  Country 
the 
Specific  Recommendations. 
recommendations 
‘no 
recorded 
progress’ (see Graph 2.1). Substantial progress has 
been  achieved  in  the  financial  sector,  for  instance 
in  improving  the  asset  quality  of  the  banks  and 
access to finance. 

of 
‘limited’  or 

48% 

Graph 2.1:  Overall multiannual implementation of 2011-

2019 CSRs to date 

(1) The overall assessment of the country-specific 
recommendations related to fiscal policy excludes 
compliance with the Stability and Growth Pact. 2011-2012 
annual assessment: Different CSR assessment categories. 
The multiannual CSR assessment looks at the implementation 
until 2020 Country Report since the CSRs were first adopted. 
Source: European Commission 

including 

Since  2011,  the  government  made  progress  in 
strengthening  public 
finances,  which,  has 
however  stalled  over  the  past  years.  It  has 
implemented  measures 
structural 
reforms  to reduce the budgetary deficit below  3% 
of  GDP.  As  a  result,  in  2013,  the  decision  on  the 
existence  of  an  excessive  deficit  was  abrogated. 
However,  the  structural  deficit  has  substantially 
deteriorated  since  2016,  which  led  the  Council  to 
conclude,  in  2018  and  2019,  that  the  structural 
balance  deviated  significantly  from  its  medium-
term budgetary objective. 

The  labour  market  situation  has  improved 
considerably  since  2011,  supported  by  the 
economic  upturn  as  well  as  measures 

implemented by the government. In the last nine 
years,  the  authorities  have  taken  several  measures 
to reduce the tax burden on labour. The employers’ 
social  contribution  was  gradually  reduced  from 
27%  in  2016  to  17.5%  in  2019.  The  government 
plans  to  continue  the  reduction  in  the  coming 
years.  The  tax  wedge  for  families  and  selected 
groups  was  reduced  even  further.  There  has  been 
some  progress  with  active  labour  market  policies. 
For  years,  the  authorities’  main  focus  was  the 
Public  Works  Scheme,  despite 
limited 
efficiency. By 2019, the number of participants in 
the  scheme  had  declined  significantly  on  account 
of  improving  labour  market  conditions  and  some 
policy measures.  

its 

to 

Hungary has made little progress on improving 
its  business  environment  and 
the  proper 
functioning of the markets. Hungary has received 
the  business 
improve 
recommendations 
environment  every  year  since 
the  European 
Semester  started.  These  recommendations  cover 
several  fields,  including:  administrative  burden; 
legislative  process; 
the 
public  procurement; 
environment; 
regulatory 
competition; 
corruption 
independence. 
judicial 
Digitalisation  of  taxation  and  public  procurement 
has led to some improvement.  

the 
and 

The quality of banking sector assets has greatly 
improved  and  lending  activity  has  picked  up. 
Between 2013 and 2015, Hungary received yearly 
recommendations  to  restore  lending  to  the  real 
economy,  to  reduce  burdens  on  banks  and  to 
improve asset quality. Since then, the banking tax 
and  the  level  of  non-performing  loans  held  by 
banks has dropped considerably.  

2019 

limited  progress 

in 
Hungary  has  made 
country-specific 
addressing 
the 
(see  Table  2.1).  Limited 
recommendations 
progress  has  been  made  in  integrating  vulnerable 
groups  into  the  labour  market.  Progress  has  been 
limited  in  reducing  the  complexity  of  the  tax 
system,  in  improving  health  outcomes  and  in 
boosting  competition 
in  public  procurement. 
Limited  progress  has  been  made  in  focusing 
investment-related  economic  policy  on  research 
transport 
and 
infrastructure,  waste  management  and  energy  and 
resource  efficiency,  taking  into  account  regional 
disparities.  Limited  progress  has  been  made 

low-carbon  energy, 

innovation, 

15 

No Progress8%Limited Progress40%Some Progress34%Substantial Progress11%Full Implementation7% 
   
2. Progress with country-specific recommendations 

the 

increasing 

participation 

towards 
of 
disadvantaged  groups  in  inclusive  mainstream 
education.  No  progress  has  been  made 
in 
improving  the  adequacy  of  social  assistance  and 
anti-corruption 
unemployment 
framework, 
judicial 
independence,  regulatory  environment  in  services 
or  the  quality  and  transparency  of  decision-
making, including the social dialogue. 

benefits, 
prosecutorial 

efforts, 

the 

request 

from  a  Member  State, 

Upon 
the 
Commission can provide tailor-made expertise via 
the Structural Reform Support Programme to help 
design  and  implement  growth-enhancing  reforms. 
Since  2018,  such  support  has  been  provided  to 
Hungary for 10 projects. In 2019, work started on 
legal analysis that will contribute to reforming the 
bankruptcy law, on implementing a tax compliance 
cost  survey  and 
the  performance 
improving 
measurements  of  the  tax  authority,  as  well  as  on 
improving  the  quality  and  access  to  primary  care 
services and the quality and relevance of the adult 
education system. 

16 

2. Progress with country-specific recommendations 

Table 2.1: 

Assessment of the implementation of 2019 country-specific recommendations (CSRs) (*) 

Source: European Commission 
(*) The assessment of CSR 3 does not take into account the contribution of the EU 2021-2027 cohesion policy funds. The 
regulatory framework underpinning the programming of the 2021-2027 EU cohesion policy funds has not yet been adopted 
by the co-legislators, pending inter alia an agreement on the multiannual financial framework (MFF). 

17 

Overall assessment of progress with 2018 CSR:  Limited progress CSR1: Ensure compliance with the Council Recommendation of 14 June 2019 with a view to correcting the significant deviation from the adjustment path towards the medium-term budgetary objective.  CSRs related to compliance with the Stability and Growth Pact will be assessed in spring once the final data are available. CSR2: Continue the labour market integration of the most vulnerable groups, in particular through upskilling, and improve the adequacy of social assistance and unemployment benefits. Improve education outcomes and increase the participation of disadvantaged groups, in particular Roma in quality mainstream education. Improve health outcomes by supporting preventive health measures and strengthening primary healthcare. Limited progress   Limited progress in integrating vulnerable groups in labour market.  Limited progress in  improving educational outcomes and increasing the participation of disadvantaged groups in inclusive mainstream education.  No progress in improving the adequacy of social assistance and unemployment benefits.  Limited progress in improving health care. CSR3: Focus investment-related economic policy on research and innovation, low-carbon energy, transport infrastructure, and waste management and energy and resource efficiency, taking into account regional disparities. Improve competition in public procurement. Limited progress  Limited progress in research and innovation.  Limited progress in low-carbon energy.  Some progress in low-carbon transport.  Limited progress in waste management.  Limited progress in energy and resource efficiency.  Limited progress in public procurement. CSR4: 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 the risk of aggressive tax planning. Improve competition and regulatory predictability in the services sector. Limited progress   No progress in reinforcing anti-corruption framework, improving prosecutorial efforts and access to public information.  No progress on strengthening judicial independence.  No progress in improving the quality of decision making.  Limited progress in reducing the complexity of the tax structure and strengthening it against aggressive tax planning.  No progress in improving the regulatory environment in the services sector.   
  
 
2. Progress with country-specific recommendations 

Box 2.1: EU funds and programmes to address structural challenges and to foster growth 
and competitiveness in Hungary 

Hungary is one of the countries benefiting most from EU support. In the current Multiannual Financial 
Framework, EU Cohesion policy funds (1) allocated to Hungary amount to €25.4 billion, i.e. around 2.9% of 
GDP annually. By the end of 2019, €26.7 billion (more than the total amount planned (2)) was allocated to 
specific  projects,  while  €10.3  billion  was  reported  as  spent (3)  showing  a  level  of  implementation  in  line 
with the EU average. 

EU  Cohesion  policy  funding  also  significantly  supports  structural  challenges  in  Hungary.  The 
Cohesion Policy programmes for Hungary have allocated EU Funding of  €4.9 billion for smart growth, €9 
billion  for  sustainable  growth  and  sustainable  transport  and  €7.3  billion  for  inclusive  growth.  In  2019, 
following a performance review (4), €1.2 billion have been made available within performing priorities for 
Hungary. 

innovation,  competitiveness  of  enterprises,  sustainable 

EU  Cohesion  policy  funding  is  contributing  to  major  transformations  of  the  Hungarian  economy. 
Cohesion policy funds are supporting growth and employment via investments, among others, in research, 
technological  development  and 
transport, 
employment  and  labour  mobility.  By  2019,  investments  driven  by  the  European  Regional  Development 
Fund and the Cohesion Fund contributed to building or modernising 454 km of roads, both at regional level 
and in connection with the TEN-T network; more than 140,000 households received broadband access; over 
65,000  citizens  benefitted  from  improved  wastewater  treatment  or  water  supply;  support  was  decided  for 
more  than  34,000  enterprises.  EU  Funds  contributed  to  the  reduction  of  greenhouse  gas  emissions  and 
developments linked to the digitalisation of public administration procedures ranging from electronic access 
to  the  real-estate  registry  to  digitalised  processes  for  tax  matters.  The  European  Social  Fund  supported 
605,000  people  by  Active  Labour  Market  Policies  and  training  initiatives,  upheld  inclusive  education,  by 
training  196,000  pupils  and  28,000  teachers  and  contributed  to  modernising  public  administration  by 
delivering competence development trainings for 114,000 public service professionals. Finally, in 2019 was 
launched a large scale EU funded programme for colon cancer screening, involving over 100,000 people by 
the end of the year.  

Agricultural and fisheries funds and other EU programmes also help to addressing investment needs. 
Hungary  benefits  from  funds  coming  from  the  European  Agricultural  Fund  for  Rural  Development  (€4.2 
billion),  the  European  Maritime  and  Fisheries  Fund  (€50.9  million)  and  EU  programmes  such  as  the 
Connecting  Europe  Facility  on  strategic  transport  networks  (€1,087  million)  and  Horizon  2020  (€275 
million, with beneficiaries including 192 small and medium-sized enterprises for €81 million). 

EU funding contributes to mobilising important private investment. European Structural and Investment 
Funds (ESIF) (5) supported programmes mobilise additional capital by allocating €2,291 million in the form 
of loans, guarantees and equity (6). This represents 7.1% of all decided allocations of ESIF.  

EU Funds invest substantial amounts on actions in line with the Sustainable and Development Goals 
(SDGs). In Hungary, ESIF supports 13 of the 17 SDGs and up to 93% of the expenditure is contributing to 
those.  

(1)  European Regional Development Fund, Cohesion Fund, European Social Fund, Youth Employment Initiative. 
(2)  Any extra commitment above 100% is eventually covered by national budgets. 
(3)  https://cohesiondata.ec.europa.eu/countries/HU 
(4)  Under the performance review (Article 22 of Regulation (EU) No 1303/2013), 5-7% of overall resources allocated are 

released to performing priority axes of the operational programmes, which includes national co-financing. 

(5)  European Regional Development Fund, Cohesion Fund, European Social Fund, European Agricultural Fund for Rural 

Development Fund and European Maritime and Fisheries Fund. 

(6)  Member  States’  reporting  on  financial  instruments  based  on  Article  46  of  Regulation  No  1303/2013,  cut-off  date 

31/12/2018. 

18 

 
 
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES AND TAXATION 

government effectiveness (see Section 3.4.2). This 
combination  is  shown  to  be  negatively  associated 
with productivity growth (Fournier and Johansson, 
2016).  

Graph 3.1.2:  Change in the structure of the expenditure in 

Hungary over the last 10 years and the 
difference, compared with the EU average 

3.1.1.  PUBLIC EXPENDITURES 

Fiscal  policy  was  procyclical  for  several  years, 
fuelling  growth  above  the  EU  average.  Fiscal 
policy in Hungary followed a different trend from 
that  prevailing  in  the  EU.  From  2013,  the  fiscal 
impulse, as measured by the change of the primary 
deficit  augmented  with  EU  transfers,  was  higher 
than the EU average (see Graph 3.1.1). This seems 
to have contributed to above-average GDP growth 
in  that  period.  Fiscal  policy  is  expected  to  have 
tightened starting from 2019.  

Graph 3.1.1:  Development of the GDP growth and fiscal 
impulse (differences between Hungary and 
the EU average), 2012-2018 

(1) The change reflects the difference between the 
average spending of the three years of 2005-2007 and 2015-
2017 in % of GDP. The gap to the EU presents the difference 
between the average spending of 2015-2017 in Hungary 
and that in the EU. General public service does not contain 
interest costs. 
Source: Eurostat 

(1) The fiscal impulse includes the change in the primary 
deficit and the change in current and capital transfers 
receivable from EU institutions; GDP growth gap = Hungarian 
GDP growth - EU average GDP growth 
Source: Eurostat 

Public  expenditure  is  highly  centralised  in 
fluctuated  at 
Hungary.  Primary  expenditure 
around  45%  of  GDP  over  the  last  decades,  which 
is  markedly  higher  than  the  levels  of  regional 
peers.  Since  2013,  several  service  delivery 
responsibilities  have  been  shifted  from  local  to 
central government level (see Section 3.4.4). As a 
result,  the  share  of  local  government  in  total 
spending  decreased  from  25%  to  13%  in  2017, 
which  is  markedly  lower  than  the  EU  average  of 
23%  (OECD,  2019a).  In  Hungary,  large  and 
low 
centralised  expenditure 

is  coupled  with 

structure 

last  decade, 

While  the  size  of  expenditure  was  stable  over 
the 
changed 
its 
significantly.  Over  the  last  decade  spending  on 
social protection, education and healthcare  shrunk 
by  3.4%  of  GDP,  while  spending  on  economic 
affairs and sport, culture and religion increased by 
3.1%.  The  bulk  of  the  drop  in  spending  on  social 
protection is explained by the cut in social benefits 
for  housing  and  against  social  exclusion,  albeit 
from  relatively  high  levels.  Currently,  public 
expenditure on social protection is lower by 4.5% 
of  GDP  than  the  EU  average  because  of  lower 
spending  on  pensions  and  unemployment  benefit. 
Public spending on healthcare slightly decreased in 
the last decade and is well below the EU average. 
Spending on education also decreased, although it 
is close to the EU average (see Graph 3.1.2). 

The  room  created  through  lower  spending  on 
human  capital  and  social  benefits  has  been 

19 

-3-2-10123412131415161718percentage pointsFiscal impulse gapGDP growth gap-5-4-3-2-101234EconomicaffairsSport,culture,religionGeneralpublicservicesHealthEducationSocialprotection% of GDPChange in the last decadeGap to the EU 
  
   
3.1. Public finances and taxation 

allocated  to  improve  the  state  involvement  in 
the  economy  and  on  the  category  of  ‘sport, 
culture  and  religion’.  Hungary  spends  the  most 
on  economic  affairs  in  the  EU  and  this  spending 
increased by 1.6% of GDP in the last decade. This 
reflects  the  increased  state  involvement  in  the 
economy  and  includes,  among  others,  investment 
grants for businesses, which amounted to 1.7% of 
GDP in 2016-2018, against an EU average of 0.6% 
of  GDP.  Spending  on  sports,  culture  and  religion 
also  increased  substantially  from  2010,  reaching 
by far the highest level in the EU (3.5% of GDP in 
2017). Spending on sport (1.2% compared with the 
EU average of 0.3%) is fuelled by the construction 
of  stadia,  sports  halls  and  several  big-ticket 
international sporting events. At the same time, the 
regular  sport  activity  of  the  Hungarians  is  one  of 
the  lowest  in  the  EU.  Overall,  inefficiencies  are 
found  to  be  high  in  spending  related  to  R&D, 
infrastructure  and  general  public  services.  In  the 
latter  two  spending  areas,  productivity  has  also 
deteriorated  between  2007  and  2016  (Cepparulo 
and Mourre, forthcoming). 

3.1.2.  TAXATION 

The  tax-to-GDP  ratio  remains  high  compared 
with  other  countries  in  the  region,  with  a  tax 
mix geared towards consumption taxes. Despite 
the  recently  introduced  large  tax  cuts  the  tax-to-
GDP  ratio  declined  only  from  39.5%  in  2016  to 
37.6%  in  2018  (European  Commission,  2019a). 
The  tax-rich  composition  of  the  GDP  and  the 
whitening  measures  slowed  the  decrease  of  the 
tax-to-GDP ratio. The ratio is in line  with  the  EU 
average, but above Hungary’s regional peers. The 
structure  of  taxation  differs  from  the  EU  average: 
Hungary relies more heavily on consumption taxes 
and 
level  of 
environmental  taxation,  which  decreased  over  the 
last decade, is broadly in line with the EU average 
(2.3% of GDP in 2018 vs 2.4%) and comes mainly 
from  energy,  including  transport  fuel  taxes.  Tax 
exemptions  for  district  heating  and  fuel  use  for 
agriculture,  railways  and  commercial  purposes 
increased over the last decade. There  is a  reduced 
VAT  rate  on  district  heating.  Some  subsidies 
remain  in  place  for  the  decommissioning  and 
reorganisation of the coal sector (OECD, 2018a).  

less  on  capital 

taxes.  The 

Tax burden on labour is decreasing but the tax 
wedge  for  low-income  earners  remains  high. 

The  employers’  social  contribution  was  reduced 
from  27%  in  2016  to  17.5%  by  2019  and  further 
cuts  are  planned  in 
the  coming  years.  The 
government  has  recently  adopted  measures  with 
the aim to provide even more support for families 
with  children.  From  2020,  mothers  with  at  least 
four children will be exempt from personal income 
tax,  and  the  child  tax  credit  keeps  expanding, 
reducing  the  tax  burden  of  some  low-income 
families.  However,  the  tax  wedge  for  low-income 
single  persons  earning  half  of  the  average  wage 
was  45%  in  2018,  15 percentage  points  above  the 
EU  average  (European  Commission,  2019a),  due 
also to the  flat  labour income tax system.  A large 
low-income  earners  are 
proportion  of  single 
eligible 
social 
targeted  scheme 
contribution 
covering  more  than  530,000  employees.  Even 
taking into account the preferential rates, their tax 
wedge remains above the EU average. 

for  preferential 

rates  under  a 

employer’s 

Large  foreign  capital  stocks,  coupled  with  the 
absence of withholding taxes on royalty, interest 
and  dividend  payments,  may  point  to  risks  of 
aggressive  tax  planning.  Inward  foreign  direct 
investment  (FDI)  represented  164%  of  GDP  in 
2017.  A  large  share  of  FDI  was  held  through 
special  purpose  entities  (SPEs),  suggesting  a 
decoupling  between  financial  and  real  economic 
activities.  More  recent  data  from  the  central  bank 
suggests  the  inward  stock  of  FDI  decreased 
significantly 
to  SPEs. 
in  2018,  mainly  due 
However,  the  proportion  of  FDI  held  in  SPEs 
(46%)  remained  among  the  largest  in  the  EU  in 
2018. At the same time, the outgoing income flows 
such  as  royalties,  interest  and  dividends  towards 
offshore  financial  centres  were  relatively  small  in 
tax 
2013-2017.  Nevertheless, 
system  holds  vulnerabilities  to  aggressive  tax 
planning; notably, the lack of withholding taxes in 
Hungary on outgoing income to offshore financial 
centers could provide an escape route for profits to 
leave  the  EU  without  paying  their  fair  share  of 
taxes (Ramboll and Corit, 2016). 

the  Hungarian 

tax 

implementing  European  and 
is 
Hungary 
to  curb 
initiatives 
internationally  agreed 
aggressive 
has 
planning.  Hungary 
implemented  many  of  the  provisions  of  the  Anti-
interest 
Tax  Avoidance  Directive,  such  as 
limitation  rules  and  controlled  foreign  company 
rules.  Other  provisions,  such  as  exit  tax  rules  and 
rules about hybrid mismatches, should be in place 

20 

3.1. Public finances and taxation 

3.1.3.  PUBLIC DEBT DEVELOPMENT AND 

MANAGEMENT 

in  debt-to-GDP  ratio, 
Despite  the  decline 
Hungary’s  gross  financing  need  as  a  share  of 
GDP remains the highest in the EU. Since 2012, 
the credit ratings of the Hungarian long-term debt 
have  improved  by  2-3  grades.  However,  despite 
these positive developments and the short maturity 
of  debt,  Hungary’s  implicit  interest  rate  on  debt 
was the highest in the EU every year between 2012 
and  2018.  Also,  as  a  consequence  of  relatively 
high  debt  and  low  duration,  Hungary’s  annual 
financing  need,  at  18%  of  GDP  in  2018,  was  the 
highest in the EU (European Commission, 2019b). 

Graph 3.1.3:  Implicit interest rate of public debt in the EU 

Source: Eurostat 

The  public  debt  ratio  has  fallen  significantly, 
but  remains  high  for  Hungary’s  income  level. 
After  peaking  at  80.8%  of  GDP  in  2011,  public 
debt fell to 70.2% of GDP in 2018. More than half 
of  the  debt  reduction  took  place  in  2017-2018 
thanks  mainly  to  high  nominal  GDP  growth. 
Temporary  factors,  however,  slowed  the  process, 
as the authorities stepped up the absorption of EU 
funds  by  pre-financing  from  the  domestic  budget. 
Contingent  liabilities  remain  high  in  Hungary.  At 
the  end  of  2018,  public  guarantees  for  non-
government units stood at 5.2% of GDP, above the 
0.5% average of Czechia, Poland and Slovakia. 

The  share  of  domestic 
in  debt 
financing  increased  considerably.  The  share  of 
foreign-currency-denominated 
decreased 
from  above  50%  of  total  debt  in  2011  to  below 

investors 

debt 

for  new 

transparency 

from  2020  onwards.  Furthermore,  Hungary 
transposed  into  national  law  EU  Directive,  which 
provides 
for 
tax  planning.  The 
intermediaries  involved 
effectiveness of these new measures in limiting the 
scope for aggressive tax planning and their impact 
on  corporate  income  tax  revenue  in  the  medium 
term will need to be assessed.  

rules 

in 

Measures  to  reduce  the  size  of  the  shadow 
economy  have  produced  significant  benefits. 
The value-added tax gap (the revenue loss relative 
to  the  total  VAT  liability)  is  estimated  to  have 
decreased  from  21%  in  2013  to  around  9%  in 
2018.  This  trend  is  expected  to  continue  due  to 
past  and  current  reforms,  such  as  the  introduction 
the  promotion  of 
of  online  cash 
electronic payments through the payment terminal 
installation  programme  and 
the  compulsory 
electronic  invoicing  system.  The  online  invoicing 
system  will  be  extended  to  all  invoices  as  of  July 
2020, with the ultimate aim of generating pre-filled 
VAT declarations for all companies. 

registers, 

income 

Tax  compliance  costs,  while  decreasing  in  the 
past  decade,  remain  among  the  highest  in  the 
EU.  E-filing  of  personal 
taxes  has 
increased significantly, from 30% of total personal 
income  tax  returns  in  2009  to  55.4%  in  2017 
(European  Commission,  2019a).  Tax  debt,  which 
could be an indication of possible challenges in tax 
compliance, has decreased by more than 50% since 
in  2009-2018,  medium-sized 
2014.  However, 
companies  needed  277  hours  per  year  to  comply 
with 
is 
significantly  above  the  EU  average  of  170  hours 
per year. The time to comply with VAT refunds is 
also  among  the  highest  in  the  EU  (WB-PWC, 
2019).  

tax  requirements,  which 

their  main 

decrease 

Hungary  has  taken  steps  to  gradually  reduce 
the complexity of its tax system. The government 
plans  to  reduce  the  number  of  taxes  from  60  in 
2019 to below 40 by the end of 2020. As of 2020, 
the simplified tax rate for small companies (KIVA) 
simplified 
will 
entrepreneurial  tax  (EVA)  will  be  abolished  and 
the four different social security contributions paid 
by  employees  will  be  merged  into  a  unified 
contribution.  Still,  a  number  of  special  sectoral 
taxes persist, even though their weight in total tax 
revenues has been decreasing over the past years. 

12%, 

the 

to 

21 

012345672009201020112012201320142015201620172018%Range of EU countriesHungaryEU   
3.1. Public finances and taxation 

some  point.  However,  Hungarian  retail  bonds  can 
be  resold  to  the  government  at  any  time  with  a 
small discount. This feature does not prevent retail 
their  bonds  and 
bond  owners  from  selling 
replacing  them  with  bonds  from  the  wholesale 
market,  where  the  interest  increases  due  to  the 
shock. Experience shows that households can react 
rapidly  to  the  changing  market.  In  2019,  many 
households  replaced  their  retail  bonds  with  the 
new  MÁP+,  because  it  offered  a  higher  interest 
than the earlier issuances.  

3.1.4.  DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

In  the  short  and  medium  term,  Hungary  faces 
low  fiscal  sustainability  risks.  As  shown  by  the 
debt  sustainability  analysis,  as  well  as  the  short-
term  fiscal  sustainability  indicators  S0  and  S1 (8), 
Hungary does not face significant fiscal risks in the 
near  future  (European  Commission,  2020  and 
Annex  B).  The  downward  path  of  general 
government  debt  helps  explain 
these  results. 
Nevertheless, there are some indications that could 
pose  potential  challenges  to  the  fiscal  side  of  the 
economy. The low primary balance, high share of 
short-term  debt,  high  gross  financing  needs  and 
relatively  high  yield  spreads  could  deteriorate 
public finances in the future, especially in case  of 
rapid changes in financial markets’ perceptions. 

The  long-term  sustainability  of  public  finances 
remains a challenge,  mainly due  to ageing. The 
country  is  expected  to  face  an  increase  in  age-
related costs of 3.3% of GDP until 2070, driven by 
public expenditure on pensions (1.9% of GDP) and 
on  healthcare  and  long-term  care  expenditure 
(1.0% of GDP). As a result, the sustainability gap 
indicator  S2 (9)  (2.7%  of  GDP)  indicates  medium 
fiscal  sustainability  risks  for  Hungary  in  the  long 
term (see Annex B). In addition, pension adequacy 
is  creating  additional  challenges  to  the  long-term 
sustainability  of  public  finances.  There 
is  a 
income  gap  between  new  and  old 
growing 

(8)  The  S0  indicator  aims  to  provide  early  detection  of  fiscal 
stress stemming from risks up to 1 year ahead, making use 
of the signalling power of its components. The S1 indicator 
measures  the  required  fiscal  adjustment  needed  in  2021-
2025 to reduce the public debt to 60% of GDP by 2033. 
(9)  The  S2  indicator  shows  the  required  adjustment  of  the 
current structural primary balance fulfil the infinite horizon 
inter-temporal  budget  constraint,  including paying  for  any 
additional expenditure arising from an ageing population. 

18%  in  October  2019.  Measures  to  increase  the 
share of domestic investors allowed assets divested 
by  foreign  investors  to  be  absorbed.  The  central 
bank offered preferential arrangements to domestic 
banks  to  buy  government  bonds.  As  a  result,  the 
share of bonds had increased from around 12% in 
2012 to around 25% of banks’ assets by 2019. The 
government  also  launched  various  retail  bonds  at 
very attractive rates, including the so-called MÁP+ 
in  June  2019.  The  new  products  increased  the 
retail  share  in  total  government  debt  from  around 
2% in 2010 to 30% in 2019, against an EU average 
of around 5% in 2018. 

The  increasing  reliance  on  retail  investors 
increases the cost of debt servicing in Hungary, 
which was already among the highest in the EU. 
On  average,  retail  bonds  offer  a  yield  of  200-400 
basis  points  above  the  rates  available  on  financial 
markets, thus increasing the annual debt servicing 
cost.  In  addition,  financial  institutions  receive 
commissions  from  the  debt  management  agency 
when  selling  retail  bonds,  the  costs  of  which 
amounted 
in  2018. 
to  over  0.1%  of  GDP 
Furthermore,  interest  revenue  from  retail  bonds 
became exempt from tax in 2019, further widening 
the  gap  between  the  available  after-tax  yield  for 
retail  and  institutional  investors.  By  contrast,  the 
increasing  retail  share  may  temporarily  reduce 
yields on  the  wholesale  market,  which  may offset 
some of the costs of the retail bonds. 

of 

the 

The  shift  to  the  retail  market  also  seems  to 
impede 
borrowing 
lengthening 
maturities.  Retail  investors  tend  to  invest  shorter 
term  than  institutional  investors.  The  share  of 
government debt having a term below one year has 
doubled  over  the  last  decade,  reaching  18%  in 
2018,  well  above  the  share  of  2.5%  of  regional 
peers.  The  average  term  to  maturity  for  Hungary 
also  remained  quite  low,  at  4.3  years  in  2018. 
Thus,  in  spite  of  improving  credit  ratings  which 
should allow  for better  market access, Hungary is 
moving 
the  opposite  direction  of  OECD 
countries,  where  debt  maturity  increased  to  7.9 
in  2018  (OECD,  2019c).  The  shorter 
years 
maturity  implies  a  relatively  higher  exposure  to 
changes in market interest rates. 

in 

Due to their design, retail bonds can behave like 
short term securities in case of market stress. In 
financial turbulences, bond prices go down, which 
reduces the incentive to sell, and stops the drop at 

22 

                                                           
3.1. Public finances and taxation 

pensioners  and  between  pensioners  and  wage 
earners,  which  may  lead  to  additional  spending 
when the gap is corrected (see Box 3.1.1). 

scrutiny,  risks  resulting  in  public  spending  on 
lower  quality  projects,  with  the  marginal  costs 
potentially exceeding the marginal beneﬁt. This as 
also added to procyclical fiscal policies. 

3.1.5.  FISCAL FRAMEWORK 

Graph 3.1.4:  Central government cash expenditure 

In  the  absence  of  strong  automatic  stabilisers, 
discretionary  measures  need  to  ensure  fiscal 
stabilisation. With a flat income tax system, low-
duration  of  unemployment  benefits,  and  a  strong 
reliance  on  less  cyclical  indirect  taxes,  built-in 
stabilisers  offer  little  cushion  to  the  economy  if 
there 
to  help 
macroeconomic  stabilisation,  fiscal  policy  must 
therefore resort to more discretionary measures. 

is  a  downturn. 

In  order 

have 

shown 

a 
Discretionary  measures 
procyclical  bias 
in  recent  years.  Public 
investments  increased  sharply,  contributing  to 
capacity constraints in the construction sector and 
crowding out private investment. The timing of the 
multi-step social contribution rate cut is contingent 
on  the  pace  of  wage  growth,  which  implies  faster 
tax  cuts  in  a  booming  economy.  Finally,  a  large 
component  of  budgetary  reserves,  the  so-called 
‘Country Protection Fund’ (0.8% of GDP in 2020), 
can  only  be  spent  if  this  does  not  endanger  the 
deficit target  — implying higher expenditure only 
in good times but lower spending in a downturn. 

in 

have 

authorities 
revenues 

In  recent  years,  the  authorities  have  tended  to 
exhaust  the  budget  at  the  end  of  the  year 
leading  to  the  so-called  ‘December  fever’.  In 
recent years, partly due to the early adoption of the 
tended 
budget, 
to 
the 
underestimate 
their  budgetary 
projections  and  to  create  high  budgetary  reserves. 
Thus,  large  unexpected  revenues  have  repeatedly 
to  budgetary  plans.  These, 
appeared  relative 
together  with 
the  reserves,  have  been  spent 
towards  the  end  of  the  year,  through  a  series  of 
government  decisions  and  without  the  need  to 
involve  the  Parliament,  on  non-recurrent  items 
such  as  current  and  capital 
(see 
Graph 3.1.4).  Heightened  spending  at  the  end  of 
ﬁscal  years,  with  limited  parliamentary  or  public 

transfers 

Source: Hungarian State Treasury 

to 

the  domestic 
The  recent  amendments 
numerical  fiscal  rules  brought  forward  some 
welcome  streamlining  and  clarifications.  In 
December  2019,  the  Parliament  amended  the 
Hungarian fiscal rules. The so-called debt formula, 
which has never been applied due to its lax escape 
clause,  was  abolished.  The  discrepancy  in  the 
calculation  of  the  public  debt  ratio  between  the 
Maastricht  and  the  domestic  definition  was  also 
removed.  It  was  replaced  by  a  new  provision 
whereby  a  number  of  pre-defined  debt-changing 
factors  (e.g.  pre-financing  of  EU  funds,  statistical 
reclassifications)  need  not  be  taken  into  account 
during  the  within-the-year  or  ex-post  evaluations 
of  compliance  with  the  debt  rule.  The  adopted 
changes  should  make  the  monitoring  mandate  of 
the  Fiscal  Council,  which  issued  its  first  ex  post 
assessment  report  of  all  domestic  rules  in  June 
2019, more straightforward. However, the new set-
up  may  still  not  be  conducive  to  a  longer  fiscal 
planning  horizon,  and  the  focus  is  expected  to 
remain narrowly on the annual budget. 

23 

 - 500 1 000 1 500 2 000 2 500 3 000 3 50010111213141516171819HUF billion   
3.1. Public finances and taxation 

Box 3.1.1: Increasing inequalities in the pension system 

Widening income inequalities add to the sustainability challenge of public spending. The correction of such 
inequalities  generally  leads  to  additional  expenditure.  Since  2016,  wages  have  increased  much  faster  than 
pensions. According to the law, pensions are rising in line with inflation. In addition, in years  when GDP 
grows faster than 3.5%, pensioners receive a premium linked to economic growth. The premiums amounted 
to 0.9%, 1.2% and 1.4% of total pension benefits in 2017, 2018 and 2019, respectively. On top of that, the 
government  provided  ad  hoc  compensation  to  pensioners  (food  and  utility  vouchers),  amounting  to  an 
annual increase of 0.7%, in 2018 and 2019. The premium and the ad hoc compensation are one-off items 
and are disregarded when setting the next year’s pension. Overall, pensions increased by 2.8%, while wages 
grew on average by 9.2% annually in the last five years. As a result, the benefit ratio,  which is the ratio of 
average pension over average net wage, declined from 67% in 2015 to 53% in 2019 (see Graph 3.1.4a).  

Given the rules of pension entitlements, fast wage growth results in a sharp widening of income gaps among 
pensioners as well. Pension benefits are based on average earnings during a career. To ensure comparable 
values, annual earnings are revalued by the net average wage growth up to one year before retirement. For 
example, the pensions set in 2021 include the recent years with fast wage growth, while the pensions set in 
2016 do not. As a result, the nominal pension benefits of pensioners  who will retire in 2021 will be 35% 
higher than those of pensioners who retired five years earlier with the same career path. The five year gap 
was only 1% in 2016.  

Graph 3.1.4a:1. Income gap between wage earners and pensioners    2. Inequality of income distribution, 65 years+ 

(1) 2.: s80/s20 income quantile share ratio. CEE3 is the average of Czechia, Poland and Slovakia 
Source: HSCO, Commission's calculation, Eurostat 

Inequalities are expected to rise further due to policy measures introduced in past years. While the pension 
indexation  rules  caused  the  largest  increase  in  inequality  in  the  last  five  years  (see  the  right  panel  of 
Graph 3.1.4a), several other policy measures also add to the challenge. In 2011, the flat personal income tax 
was introduced. The shift decreased the net income of low-income earners, while it increased the net income 
of high-income earners. The widening income gap is reflected in the pensions, as pension benefits are based 
on  net  income.  In  2013,  Hungary  abolished  the  cap  on  pension  contributions.  The  elimination  of  the  cap 
increases  budgetary  revenues  now,  as  high-income  earners  pay  more  contributions.  However,  it  increases 
future  pension  expenditure,  as  the  incidence  of  extra-high  pensions  will  also  rise.  Both  measures  increase 
benefits for high-income pensioners, which increases inequality in the age group above 65. It is also likely to 
increase the long-term cost of pensions, as high-income groups also tend to live longer.  

24 

40%45%50%55%60%65%70%11.21.41.61.822.21011121314151617181920%salariespensionsBenefit ratio2.42.62.83.03.23.43.60708091011121314151617%HungaryCEE3   
3.2.  FINANCIAL SECTOR 

liquid 

sector 

is  well  capitalised, 
The  banking 
profitable, 
resilient.  Banks 
and 
comfortably  meet  liquidity  and  capital  adequacy 
requirements.  Their  profitability  remained  strong 
both  in  2018  and  in  the  first  half  of  2019  but 
included  a  significant  amount  of  one-off  items, 
especially  provisions  write-backs.  The  ratio  of 
non-performing  loans  continued  to  decrease  and 
new  loans  are  deemed  healthy,  due  partly  to 
macro-prudential 
state 
maintains a strong presence in the financial sector 
and has difficulty to divest. New lending continued 
to  be  strong,  supported  by  high  demand  and  the 
supply  of  subsidised  loans,  which  do  not  seem  to 
be  fully  justified  in  the  currently  very  good 
economic circumstances. 

requirements. 

The 

Graph 3.2.1:  Credit growth 

Source: European Central Bank (ECB) 

Loans  are  still  growing  strongly.  According  to 
European  Central  Bank  (ECB)  data,  by  end-
December  2019,  the  balance  sheet  of  monetary 
financial  institutions  in  euro  had  grown  by  5.8% 
year-on-year to €133 billion or 96.8% of GDP. The 
loan  stock  of  non-financial  enterprises  grew  by 
14.1%,  while  household  loans  were  up  by  16.5% 
(see  also  Chart  3.2.1).  Household  loans  started 
especially  to  pick  up  in  July  due  mostly  to  the 

Table 3.2.1: 

Financial soundness indicators 

loan 

schemes.  Market 

subsidised 
lending 
conditions, except for price, have not changed, and 
the share of fixed-rate loans has been increasing, in 
line  with  the  central  bank’s  policies.  Banks’ 
government  bond  share  in  the  banks’  assets 
remained the highest in the EU. Non-bank finance 
is  modest  and  dependent  on  EU  funds.  At  end-
2019, the corporate bond market was only 1.5% of 
GDP  while  corporate  bank  loans  where  17%  of 
GDP.  

for 

subsidised 

The  widespread  availability  of 
financing 
loan 
the  need 
questions 
programmes.  The  government  uses  retail  bank 
loans  for  social  policy  purposes  and  the  central 
bank  continues  with  subsidised  programmes  for 
businesses. The ‘prenatal’ baby loan introduced in 
July  2019  attracted  a  great  deal  of  interest  from 
mostly  affluent  households  and  to  some  extent 
squeezed  out  housing  loans.  In  January  2019,  the 
central  bank  launched  the  Funding  for  Growth 
Scheme “Fix” for small firms with an envelope of 
HUF 1,000 billion  and  in  July  2019  it  started  the 
Bond  Funding  for  Growth  Scheme  for  large 
corporates  with  an  envelope  of  HUF 300 billion. 
The  terms  of  the  central  bank’s  bond  purchase 
programme  are  much  looser  than  comparable 
corporate  bank  loans  (e.g.  no  covenants  and 
collateral,  no  principal  payment  till  maturity,  no 
pre-determined  loan  purpose,  etc.).  Such  bonds 
thus bring  more risk to the balance sheets of both 
the  central  bank  and  the  commercial  banks. 
Furthermore,  after  this  programme  expires,  the 
businesses  are  expected  to  continue  to  face  the 
same  impediments when issuing bonds. Given the 
good  health  of 
the 
abundance  of  market  funding  on  good  terms,  the 
extent  of  public  intervention  in  the  bank  credit 
market  appears  excessive  and  may  crowd  out 
market  lending.  The  abundance  of  competing 
financing  schemes  also  creates  incentives  and 

the  banking  sector  and 

(1) Consolidated data 
Source: ECB - CBD2  Consolidated Banking data 

25 

201420152016201720182019Q2Non-performing loans19.415.211.98.45.35.0o/w NFC sector26.023.415.59.84.44.3o/w HH sector26.620.417.512.29.88.6Coverage ratio58.757.760.359.1-63.3Return on equity(1)-21.90.311.714.514.613.9Return on assets(1)-2.0-0.11.31.51.61.5Total capital ratio17.016.918.016.216.317.9CET 1 ratio13.713.715.914.214.516.1Tier 1 ratio13.813.915.914.214.516.3Loan to deposit ratio89.178.674.571.872.775.5 
  
 
 
  
 
3.2. Financial sector 

IT  systems.  The  central  bank  has  established  a 
directorate  to  foster  Fintech  developments,  issued 
its Fintech Strategy and runs a regulatory sandbox. 
to  substantially 
The  central  bank  also  aims 
improve financial literacy, which is a major hurdle 
for  migration  of  financial  services  to  electronic 
channels. The instant payment system will start in 
March  2020.  Nevertheless,  the  close  cooperation 
of  all  the  authorities  concerned  (e.g.  Ministries  of 
Finance and Justice and the central bank) is needed 
to provide a supportive regulatory environment for 
financial  innovation.  Local  Fintech  and  e-money 
businesses  still  face  hurdles  when  entering  the 
market and big tech firms have started to expand.  

Despite efforts, the use of cash in the economy is 
widespread  and  even  growing.  Currency  in 
circulation rose from about 8% of GDP in 2010 to 
15.5%  of  GDP  in  September  2019.  At  the  same 
time, the transactions and the volume of bank card 
payments  are  also  continuously  increasing  (by 
17%  and  21%  year-on-year,  respectively,  in  the 
second  quarter  of  2019).  The  use  of  cash  is 
encouraged  by,  among  others, 
financial 
transaction tax (IMF, 2019a) and the large size  of 
the 
informal  economy.  Section  3.1  discusses 
several  measures,  recently  introduced,  that  are 
successfully  contributing  to  reduce  the  size  of  the 
electronic 
and 
informal 
transactions.  In  November  2019,  the  banking 
association  proposed 
reduction 
measures,  e.g.  cash 
for  businesses, 
obligatory  electronic  payments,  abolishing  the 
financial  transaction  tax,  changing  incentives  for 
cash withdrawals and payments.  

further  cash 
limits 

economy 

increase 

the 

The  Hungarian  state  still  owns  a  considerable 
line  with 
part  of  the  banking  system.  In 
commitments  made  to  the  European  Commission, 
MKB  Bank  shares  were  introduced  to  the  stock 
exchange in June 2019 but no transaction has been 
recorded so far. Budapest Bank (the eighth largest 
bank) is still state-owned despite plans to privatise 
it. The state also maintains minority stakes in Erste 
Bank  Hungary,  which  it  also  plans  to  divest.  The 
central  bank  will  ensure  that  in  the  privatisation 
and  consolidation  process  the  ultimate  beneficial 
owners  can  be  identified  and  are  fit  and  proper. 
The  conflict  of  interest  due  to  central  bank’s 
the  Budapest  Stock 
in 
majority  ownership 
Exchange,  which  it  supervises,  has  still  not  been 
resolved. 

expectations  for  firms  to  look  for  funds  with  the 
least strings attached, reducing demand for better-
monitored programmes (Kállay, 2015). In addition, 
banks offer the same or very similar conditions for 
the 
hinder 
competition. 

loans,  which 

subsidised 

can 

The banking sector is stable and would remain 
resilient  under  adverse  macro  developments. 
Banks  maintain  adequate  financial  resilience  and 
sound solvency ratios (see Table 3.2.1). Based on 
ECB  data,  their  capital  increased  further  by  mid-
2019 and was above the EU average. According to 
the  central  bank,  all  banks  would 
remain 
adequately  capitalised  in  a  stress  scenario.  The 
central  bank  has  prepared  resolution  plans  for  all 
banks  and  together  with  the  Single  Resolution 
Board is in the process of finalising loss absorption 
capacity  requirements  for  all  banks  (minimum 
requirement for own funds and eligible liabilities). 
Addressing  all  impediments  to  non-performing 
loan resolution identified in 2014 by the European 
Bank  for  Reconstruction  and  Development  would 
help creditors in a future possible downturn.  

to 

Bank profits remained strong in 2018 and in the 
first  half  of  2019,  partly  due  to  one-off  items. 
The  average  return  on  equity  for  all  institutions 
was  14.5%  in  2018  and  13.9%  in  the  first  half  of 
2019. The slightly lower profitability in 2019 was 
due 
lower 
increased  operating  costs  and 
impairment  reversal.  The  profits  still  include 
items  e.g.  write-back  of 
significant  one-off 
provisions. Interest income improved due to strong 
credit  growth,  which  also  helped  net  fee  income. 
However, 
intensifying 
competition  are  gradually  eroding  margins, 
bringing operating efficiency into focus.  

interest  rates  and 

low 

Hungarian  banks  maintain 
their  relative 
operational  inefficiency.  Operating  costs  relative 
to  assets  (1.7%  in  the  second  quarter  of  2019) 
remain  very  high  compared  with  the  EU  average 
(0.7%),  while  the  cost-to-income  ratio  (67.3%)  is 
close to the EU average (64.7%). To improve cost 
efficiency,  the  central  bank  has  been  advocating 
substantial  consolidation 
the  sector  and 
trimming of the branch networks.  

in 

Digitalisation would support efficiency but both 
banks  and  consumers  need  to  improve  their 
digital  skills.  Banks  have  started  engaging  with 
new technologies and are modernising their legacy 

26 

3.3.  LABOUR MARKET, SOCIAL POLICIES, EDUCATION AND 

HEALTHCARE 

3.3.1.  LABOUR MARKET 

line  with 

The  general  labour  market  situation  improved 
in 
the  good  cyclical  economic 
situation. In 2018, the employment rate for the 20-
64  age  group  reached  74.4%,  which  is  above  the 
EU average of 73.2%. The unemployment rate for 
the  15-74  age  group  fell  to  3.7%,  below  the  EU 
average  of 6.8%. Youth  unemployment (10.2% in 
2018)  and  the  rate  of  youth  not  in  employment, 
education  or  training  (NEET)  (10.7%  in  2018) 
have  been  improving,  although  the  reduction  in 
both indicators is slowing.  

Despite  favourable  trends,  not  all  groups 
benefited  equally  from  the  expansion.  The  gaps 
in employment between  genders and skills groups 
remain  wide  in  EU  comparison.  Labour  market 
outcomes for various vulnerable groups improved, 
the  Roma 
including  people  with  disabilities, 
population  and  women  with  care  responsibilities, 
but remained  well below average outcomes in the 
Hungarian  workforce.  Despite  its  reduction  in 
recent  years,  the  Public  Works  Scheme  continues 
to  employ  about  2%  of  total  employment.  The 
NEET  rate  differs  between  regions,  varying  from 
6.5% in Budapest to 16.6% in Northern Hungary. 

Graph 3.3.1:  Regional unemployment rate, 2018, % 

(1) Hungary, NUTS2: Unemployment rate, 2018 
Percentage of population aged 20-64 
Source: Eurostat 

Unemployment  rates  vary  to  a  great  extent 
across regions and skill groups. The difference in 
unemployment  rates  between  the  highest  and 
lowest performing regions was more than threefold 
in 2018, with a rate of 2.0% in West Transdanubia 
versus  6.6%  in  the  Northern  Great  Plain.  The 
unemployment rate of the low-skilled was 9.5% in 

the  second  quarter  of  2019,  compared  with  3.0% 
among  the  medium-skilled  and  1.3%  among  the 
tertiary  graduates.  The  duration  of  unemployment 
benefits remains one of the shortest in the EU, at a 
maximum  of  3  months,  which  is  significantly 
shorter than the average time needed to find a job. 
The  average  duration  of  unemployment  in  2018 
was slightly above 1 year. 

Labour shortages reached a tipping point in the 
third  quarter  of  2019.  In  the  first  half  of  2019, 
labour  shortages  kept  rising  and  the  majority  of 
firms in the industry and building sectors reported 
labour  shortages  as  a  factor  limiting  production. 
Shortages  grew  fastest  in  Hungary  within  the  EU 
and reached a historical high. They were evident in 
knowledge-intensive  services,  education,  health 
and  social  care.  By  the  end  of  2019,  in  line  with 
the expected slowdown in GDP growth, shortages 
started to decline. 

Outward migration puts pressure on the size of 
the  workforce.  According  to  the  Labour  Force 
Survey,  the  number  of  Hungarian  nationals  (aged 
20-64)  living  abroad,  mostly  in  Austria,  Germany 
and  the  United  Kingdom,  increased  by  almost 
200,000 between 2012-2018 (based on Hárs, 2019 
and  more recent data  for 2018). This outflow  was 
partly offset by the inflow of returning Hungarian 
nationals  and  non-EU  workers.  According  to  the 
Hungarian  Central  Statistical  Office,  40,000 
foreign  workers  were  employed  in  Hungary  in 
2018.  Furthermore,  a  significant  share  of  the 
45,000  workers 
temporary 
employed 
employment agencies were non-EU citizens. 

by 

to  address 

Policy  responses  to  demographic  challenges 
family  support  scheme. 
focus  on  a  new 
Government  attempts 
the  below-
replacement  fertility  rate  (1.49  in  2018)  include 
offering preferential loans to credit-worthy married 
couples,  where the  women is between the  ages of 
18  and  40  years.  The  loan  can  progressively  turn 
into  a  grant  if  children  are  born  or  adopted.  The 
programme  started  in  July  2019,  so  its  impact 
remains  to  be  seen.  Early  analyses  show  that  the 
eligible  couples  are  more  likely  to  belong  to  the 
higher strata of the income distribution. In the first 
quarter  of  the  programme,  55%  of  borrowers 
belonged  to  the  top  income  quintile  (MNB, 
2019b). 

27 

 
 
3.3. Labour market, social policies, education and healthcare 

average.  At  the  same  time,  wage  dispersion  has 
continued  to  increase  from  an  already  high  level. 
The  tax  wedge  for  low  incomes  has  decreased 
markedly  since  2016  but  remains  above  the  EU 
average  (see  Section  3.1.2).  Significant  minimum 
wage  increases  since  2016  (45%)  improved  its 
adequacy,  though  the  level  remains  low  in  EU 
comparison. The public work allowances remained 
nominally  unchanged  since  2017  and  it  now 
amounts  to  only    around  50%  of  the  minimum 
wage. In-work poverty increased for workers with 
temporary  contracts  and  for  lone  parents  (see 
Graph 3.3.3).  

Graph 3.3.3:  In-work poverty rate in groups 

Source: Eurostat 

There  is  scope  to  improve  the  targeting  and 
sustainability  of  active  labour  market  policies. 
The  Public  Works  Scheme  continues  to  be  the 
main active labour market policy, both in terms of 
spending and the number of participants. In 2019, 
the  government  launched  an  Economic  Recovery 
Programme  with  a  pilot  project  in  50  settlements, 
aiming  to  facilitate  the  transition  of  workers  from 
public  works  to  the  primary  labour  market.  Other 
active 
from 
insufficient links to social and health services, and 
limited outreach. In autumn 2018, the government 
started  to  transform  the  employment  departments 
of  the  government  offices  with  the  aim  to  better 
understand  local  labour  demand  and  improve  the 
matching between jobseekers and vacancies.  

labour  market  policies 

suffer 

Graph 3.3.2:  Employment rate by age and gender in 2018 

Source: Eurostat 

Limited childcare provision is one of the drivers 
of the gender employment gap and low fertility. 
In  the  past  nine  years,  Hungary  has  not  made 
progress  towards  the  Sustainable  Development 
Goal 5 (gender equality). The employment rate of 
women  has  increased  (see  annex  Annex  C). 
However,  the  difference  between  the  employment 
rates  of  men  and  women  aged  20-64  remained  at 
15.3  percentage  points  in  2018,  above  the  EU 
average  of  11.6  pps.  Among  Roma,  the  gender 
employment  gap  is  even  larger.  The  impact  of 
parenthood on women’s labour market activity was 
at 35.8 pps in 2018, well above the EU average of 
26.8  pps.  Policies  that  lower  the  childcare  burden 
for mothers can increase the fertility rate (Doepke 
and  Kindermann,  2019),  and 
they  have  a 
particularly strong impact on the decision to have a 
first  and  second  child  (Hétfa,  2019).  However, 
these  tools  remain  underutilised  in  Hungary.  The 
share  of  children  under  the  age  of  3  enrolled  in 
childcare  increased from 13.8% in 2017 to 16.5% 
in 2018, but it is still well below the EU average of 
35.1%  and  the  Barcelona  objective  of  33%.  The 
government’s  nursery  development  programme 
plans  to  increase  the  number  of  crèche  places  to 
70,000 by 2022 from the 48,000 in 2018.  

Despite 
increasing  employment  and  wages, 
some groups of low-skilled workers continue to 
face challenges in terms of wage adequacy. The 
employment rate  of low-skilled  workers increased 
to over 55% in 2018, which ranks close to the EU 

28 

02040608010015-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-74MaleFemale% of population051015202530350506070809101112131415161718% of employedTotalTemporaryPart-timeLone parents  
    
3.3. Labour market, social policies, education and healthcare 

poverty or social exclusion decreased, the poverty 
gap,  which  measures 
the  depth  of  poverty, 
widened from 17% in 2017 to 24% in 2018.  

the  EU  averages 

Children  experience  higher  deprivation  rates 
compared  with  the  rest  of  the  population.  The 
severe  material  deprivation  rate  among  children 
(15.2%)  and  families  with  three  or  more  children 
(22.0%)  was  among  the  highest  in  the  EU,  well 
above 
(6.4%  and  6.7%). 
Deprivation,  including  housing  deprivation,  is 
among  the  reasons  for  a  relatively  high  share 
(1.3%)  of  children  under  State  care,  which 
indicates  a  need  to  strengthen  prevention (11).  In 
2019,  close  to  half  of  Hungarian  Roma  (43.4%) 
faced severe material deprivation, and around four 
in ten people suffering from it were Roma.   

Poverty  and  social  exclusion  show  strong 
territorial  concentration.  In  the  least  developed 
districts,  where  one  in  ten  Hungarians  live,  the 
average income per taxpayer was hardly above the 
minimum  wage.  A  quarter  of  the  population  in 
South  Transdanubia,  North  Great  Plain  and  North 
Hungary was at risk of poverty or social exclusion. 
Residential isolation of Roma is one of the highest 
in  the  EU  (European  Commission,  2019c).  In 
2019,  the  government  announced  a  long-term 
programme,  targeting  300  of  the  least  developed 
municipalities  with close to 3% of the population, 
providing  intensive  social  work  and  improving 
access  to  services.  The  programme  has  already 
the 
started 
population is below 14  years  of age (compared to 
15%  nationwide),  and  41%  live  in  segregated 
areas. 

localities,  where  24%  of 

in  31 

Income  inequality  has  increased  over  the  past 
decade  and  inequalities  in  access  to  public 
services remain high. In 2018, the incomes of the 
richest  20%  of  the  population  were  4.4  times 
higher than those of the bottom 20%, up from 3.6 
times higher in 2008. The ratio remained below the 
EU  average  (5.17),  but  the  increase  has  been  one 
of  the  highest  in  the  EU.  Changes  in  the  tax  and 
benefit  system  favoured  the  upper  deciles  of 

share of people lacking at least 5 of 13 items or household 
or personal deprivation. 

(11)  Statement  of 

the  ombudsman,  14  December  2017 

https://www.ajbh.hu/-/eroforrasokat-a-megelozesre-es-az-
alapellatasra-az-ombudsman-a-gyermekek-csaladbol-valo-
elsodlegesen-anyagi-okbol-torteno-kiemelesek-
gyakorlatarol 

The  performance  of  the  public  employment 
services  could  be  improved.  Caseload  continues 
to be high and staff turnover has increased in some 
counties  (also  partly  due  to  the  recent  practice  of 
hiring  staff  on  renewable  fixed-term  contracts  in 
such counties). Outreach efforts are limited and the 
public  employment  services  and  measures  are  not 
tailored  to  the  specific  needs  of  marginalised 
groups, e.g. the Roma. 

involvement 

Social  partners’ 
in  policy 
initiatives and implementation remains limited. 
The  main tripartite body for social dialogue is the 
Permanent  Consultation  Forum  of  the  Private 
Sector  and  the  Government  (VKF).  Members  of 
the Forum are selected by the Government and do 
not  include  some  of  the  traditional  trade  unions 
and  employers’  organisations.  The  decisions  of 
VKF are not binding. Even though all topics  with 
labour market relevance might be discussed in the 
Forum, discussions in recent years were limited to 
wage-related 
issues.  Sectoral  social  dialogue 
bodies  are  too  weak  to  exert  any  influence  on 
cross-sectoral 
partners’ 
involvement  in  the  preparation  and  review  of 
policies 
to  general  public 
limited 
consultations,  with  insufficient  time  allocated  for 
consultation and  written reaction. In 2019, among 
others,  the  government  failed  to  consult  social 
partners  on  the  tax  package  for  2019,  and  the 
allocation  of  funding  between  different  types  of 
active 
labour  market  policies.  The  weak 
institutional  framework  impacts  social  partners’ 
capacity to influence national decision-making. 

is  mostly 

decisions. 

Social 

3.3.2.  SOCIAL POLICIES 

The  overall  poverty  situation  has  improved 
markedly. In 2018, one in five Hungarians was at 
risk  of  poverty  or  social  exclusion,  for  the  first 
time  below  the  EU  average.  This  represented 
908,000  people  fewer  than  in  2008  (the  national 
Europe  2020  goal 
the 
considerable  improvement,  the  severe  material 
deprivation  rate  (10.1%)  and  the  material  and 
social  deprivation 
still 
rate 
significantly  above  the  EU  averages  of  5.9%  and 
12.8% (10).  While  the  number  of  people  at  risk  of 

is  450,000).  Despite 

(20.1%)  were 

(10)  The severe material deprivation rate  is the share of people 
lacking  at  least  4  of  9  items  of  mainly  household 
deprivation. The material and social deprivation rate is the 

29 

                                                           
                                                                                   
3.3. Labour market, social policies, education and healthcare 

income  distribution  which  contributed  to  the 
increased  level  of  income  inequality  in  Hungary 
(see Graph 3.3.4) (European Commission, 2019d).  

Graph 3.3.4:  Change in the Gini coefficient due to tax and 

benefit policies: 2008-2018 

Source: European Commission 

The adequacy of the social safety net weakened 
over  the  past  decade.  Social  transfers  reduce  the 
poverty rate in Hungary by 48.8%, which is one of 
the  highest  in  the  EU.  This  is  mainly  driven  by 
family benefits during parental leave. The poverty-
reducing  impact  of  other  benefits  is  low.  The 
minimum  income  benefit  has  been  unchanged 
since  2012  and  now,  at  15%  of  the  minimum 
wage, it is one of the least adequate in the EU (12). 
The  public  works  wage  also  decreased  relative  to 
the  minimum  wage,  from 77% in 2013 to 55% in 
2019.  Social  protection  for  casual  and  seasonal 
workers  is  limited.  Labour  shortages  strongly 
too,  affecting  service 
affect  social  services 
provision  and  constraining  support  to  families  in 
need.  

than 

property  prices  grew  fastest  in  the  EU.  Property 
prices  grew  much  faster 
incomes  (see 
Graph 1.10  and  MNB,  2019c).  While  there  is 
generous  state  support  for  buying  a  flat,  which  is 
accessible  mainly  for  middle-income  households, 
there is no scheme for improving the affordability 
of  renting  for  the  poor  and  lower-middle  income 
households.  The  private  rental  of  apartments  is 
weakly  regulated  and  remains  largely  in  the  field 
of  the  informal  economy,  which  creates  risks  for 
both  owners  and  tenants,  discourages  longer  term 
contracts  and  deters  professional  real  estate 
developers  (Habitat,  2017;  MNB,  2019c).  The 
municipal  flats  for  social  rental  constituted  only 
1.1%  of  the  housing  stock  in  2018.  While  the 
above  trends  restrict  the  possibility  of  exiting 
homelessness,  the  main  policy  response  was  to 
introduce penalties for homeless people staying in 
public areas. 

3.3.3.  EDUCATION AND SKILLS 

Educational  outcomes  are  below 
the  EU 
average  and  large  differences  remain.  By  the 
age  of  15,  basic  skills  are  significantly  below  the 
EU and regional averages (European Commission, 
2019e) and have decreased over the last decade.  

Graph 3.3.5:  Underachievement gap in reading by socio-

economic status, percentage points 

flats 

lived 

A  significant  share  of  the  population  lives  in 
the 
inadequate  housing.  In  2018,  7.5%  of 
population 
that  were  both 
in 
overcrowded  and  suffered  from  lack  of  natural 
light,  lack  of  indoor  toilet  and  bathroom  or  a 
leaking roof. This share was among the highest in 
the EU, well above the EU average (3.9%). It was 
particularly  high  among  families  with  three  or 
more  children  (22.9%,  against  the  EU  average  of 
8.4%) and Roma (European Commission, 2019c). 

The  shortage  of  affordable  rental  housing 
hinders mobility. In the past five years, residential 

(1) Underachievement gap in reading between the bottom 
and top quater of the socia-economic index 
Source: OECD, PISA 2018 

(12)  According  to  the  benchmarking  exercise  on  minimum 
income  in  Social  Protection  Committee.  See  draft  Joint 
Employment Report 2020.  

impact 

The 
socio-economic 
background  on  their  educational  outcomes  is 

pupils’ 

of 

30 

-5.0-4.0-3.0-2.0-1.00.01.02.03.04.05.0BGEEPLROELFRCYIEPTLVBESEITLUFICZSKNLSIUKMTATESDELTDKHU05101520253035404550EEFIIEHRUKPLLVSIDKSENLITATPTMTDEFRLTCYCZBEELLUSKHUROBG    
                                                           
  
3.3. Labour market, social policies, education and healthcare 

2018, against the decreasing trend at EU level (EU 
average  at  10.6%).  The  rate  is  particularly  high 
among  Roma  (65.3%)  and  in  the  least  developed 
districts  (GYERE,  2019).  Participation  of  17  and 
18  year-olds  in  secondary  education  dropped 
sharply  between  2011-2016  (from  98%  to  85%), 
after the age of compulsory education was lowered 
from  18  to  16  in  2012.  While  studying  for  a 
vocational  qualification  will  be  supported  with  a 
study  grant,  the  new  law  on  vocational  education 
also  introduces  penalties  for  parents  if  their  child 
finishes  education  without  at 
least  a  partial 
qualification.  As  dropping  out  concerns  mostly 
schools with a high concentration of disadvantaged 
learners,  this  measure  may  further  worsen  the 
situation  of  disadvantaged  families  instead  of 
promoting  diversity  and  equity  in  the  school 
system. 

The  new  law  on  vocational  education  and 
training  aims  to  attract  more  students  to  both 
vocational  tracks.  The  law  has  introduced  major 
changes  in  the  vocational  tracks,  without  an 
evidence-based analysis of the previous reform of 
2015.  Vocational  grammar  schools  —  the  path 
with a higher element of general education — were 
renamed  ‘technical  schools’  (technikum)  and  will 
lead  to  both  general  secondary  education  and 
vocational  qualifications;  however,  there  will  be 
no possibility to transfer from these schools with a 
secondary  school 
leaving  certificate  (matura) 
before the  final exam in the fifth year. Vocational 
less  academically 
secondary  schools  — 
inclined  pupils  —  will  be  renamed  ‘vocational 
schools’ (szakképző iskola) and will no longer lead 
to  matura.  The  wage  disadvantage  of  vocational 
secondary  school  graduates  increases  by  age, 
indicating  the  lack  of  transferability  of  skills 
acquired in these schools (Köllő, 2018). Switching 
between  professions  or  between  educational 
pathways remains difficult by the reduced general 
education  content  starting  in  the  first  year  of 
vocational  schools.  As  from  September  2020, 
vocational  teachers  will  become  employees  under 
the  Labour  Code  and  their  salaries  will  no  longer 
be  paid  according  to  the  unified  pay  scale  and 
career model of teachers. 

for 

one of the strongest in the EU (see Graph 3.3.4). 
Schools  are  increasingly  characterised  by  the 
similar socio-economic background of their pupils, 
with  concentrations  of  disadvantaged  pupils  in 
certain  schools.  The  share  of  schools  with  over 
50% of Roma students increased from around 9% 
in  2008  to  around  14%  in  2018.  Performance-
based  selection  starting  at  the  age  of  10  leads  to 
under-achieving  pupils  being  separated  from  their 
high-achieving  peers  and  this  possibly  contributes 
to  the  high  share  of  underachievers  in  Hungary 
(25.3%  vs  an  EU  average  of  21.7%)  (European 
Commission,  2019).  The  difference  in  reading 
performance  between  pupils  enrolled  in  general 
education and vocational programmes exceeds 100 
score points, corresponding to around three to four 
years  of  schooling.  The  share  of  disadvantaged 
students  admitted  to  higher  education  was  very 
low  at  1.4%  in  2017,  and  the  share  of  Roma  was 
only 0.8% (MTA, 2020; KSH, 2018). 

removed 

Reduced  autonomy  and  differences 
in  the 
regulatory  framework  for  schools  based  on 
their  status  are  affecting  equity  and  limit  anti-
segregation  measures.  Legislative  changes  in 
2011  restricted  schools’  autonomy  on  teaching 
content,  textbook  choice  and  management  of 
financial  and  human  resources.  Licences  for 
textbooks of independent publishers can no longer 
be extended as of 2019. A 2019 amendment to the 
School  Education  Act 
the  State’s 
obligation of obtaining the opinion of the teaching 
staff,  pupils,  parents  and  national  minorities  on 
school  head  appointments.  Non-State  schools  are 
exempt  from  some  legislative  restrictions  and  in 
particular  have  broader  room  to  select  their 
students, 
impact  and 
limiting 
desegregation  measures. 
enforceability 
Concentration  of  disadvantaged  and  Roma 
children 
continuously 
between  2008  and  2018  (MTA,  2020),  partly 
reflecting the demography of the locality in which 
the  school  is  located.  The  low  effectiveness  and 
equity in the school system are likely to be linked 
to the low level of curricular autonomy, the lack of 
socioeconomic  diversity  within  schools  and  low 
teacher  salaries  (European  Commission,  2018a, 
p. 98). 

thereby 
of 

increased 

schools 

the 

in 

In  2018  the  early  school  leaving  rate  remained 
above 
the  EU  average  with  no  sign  of 
improvement.  The  rate  of  early  leavers  from 
education and training remained stable at 12.5% in 

is 

teachers 

The  shortage  of 
increasingly 
challenging.  The  teacher  workforce  is  ageing:  in 
2017, 41% of teachers were aged 50 or over, while 
only  6%  were  under  30.  Dropout  rates  in  initial 
teacher  education  are  high  and  fewer  than  half  of 

31 

3.3. Labour market, social policies, education and healthcare 

the graduates actually enter the profession (13).The 
number  of  new  entrants  is  not  sufficient  to 
compensate 
the  number  of  retirements.  The 
shortage is most significant in disadvantaged areas, 
for science  subjects and foreign languages,  and in 
vocational education and training. Low salaries are 
one factor: the teacher starting salary is one of the 
lowest in the EU (Eurydice, 2018; OECD, 2019d). 
Teachers’  salaries  were  last  corrected  in  2013  to 
close  the  gap  with the  national average  wage  (see 
Graph 3.3.6). By 2019, the level of teacher’s salary 
compared  to  the  national  average  wage  dropped 
again  close  to  the  level  prevailing  before  the 
correction. Phasing out the independent monitoring 
and  evaluation  of  the  trends  of  teacher  shortage 
and other aspects of education limits the potential 
of quality policy-making. 

Graph 3.3.6:  Ratio of average teacher's  gross salary over 

national gross wages 

Hungary  faces  problems  retaining 
its  highly 
educated workforce and is the only country in the 
EU  where  the  highly  educated  are  more  likely  to 
emigrate  than  the  less-qualified  groups  (Hárs, 
2019). The coincidence of a low tertiary attainment 
rate and a high wage premium for graduates points 
to  a  shortage  of  highly  skilled  labour  (Muraközy 
and González Vázquez, 2020).  

3.3.4.  HEALTH AND LONG-TERM CARE 

The  life  expectancy  of  Hungarians  lags  behind 
that  of  most  other  Europeans  and  differs 
significantly  by  gender  and  level  of  education. 
At  76  years  in  2017,  life  expectancy  of  the 
Hungarian  population  remained  the  lowest  among 
Visegrád  countries,  nearly  five  years  lower  than 
the  EU  average  (80.9  years).  Differences  in  life 
expectancy  by  gender  and  level  of  educational 
attainment  are  significantly  larger  than  those 
observed  across  the  EU  as  a  whole:  on  average, 
women  live  almost  seven  years  longer  than  men 
(EU: 5.2  years), and 30-year  old  men  with a high 
level of education live 12.5 years longer than those 
with  a 
low  level  of  education.  These  stark 
differences  in  health  outcomes  partly  reflect  the 
greater  concentration  of  behavioural  risk  factors, 
as  well  as  large  differences  in  income  and  living 
standards.  

(1) average of teachers with no and 10 years experience, 
with Bsc and Msc  degrees 
Source: HCSO, Acts on Budget, Act on public education 

The  growing  demand  for  a  highly-skilled 
workforce is not  met by a sufficient number of 
tertiary  graduates.  The  employment  rate  of 
recent tertiary graduates in 2018 was 91.5% (vs an 
EU  average  of  85.5%),  reflecting  strong  demand 
for  highly  skilled  workers.  At  the  same  time,  the 
tertiary  educational  attainment  rate  among  30-34 
year-olds  stood  at  33.7%  in  2018,  well  below  the 
EU  average  (40.7%).  The  dropout  rate  is  around 
30%  on  average  and  60%  among  students  who 
have  to  self-finance  their  studies.  In  parallel, 

(13)  Source: KIR-STAT database. 

rates  of  mortality 

High  mortality  rates  from  preventable  causes 
reflect  the  high  prevalence  of  risk  factors  and 
the 
limited  effectiveness  of  public  health 
measures.  In  2016,  Hungary  had  one  of  the 
highest 
from  preventable 
causes (14) in the EU (325.2 vs 161.5 per 100,000 
inhabitants in the EU). Against the backdrop of an 
above-average  prevalence  of  risk  factors  (i.e. 
smoking,  alcohol  consumption,  poor  nutrition  and 
low  physical  activity)  and  low  spending  on 
prevention  (2.6%  of  current  health  spending  vs 
3.1% in the EU), this indicates substantial scope to 
strengthen public health interventions in Hungary. 
Mortality  rates  from  breast  and  colorectal  cancer 
are  also  among  the  highest  in  the  EU,  reflecting 
limited  investment  in  screening  and  public  health 
programmes.  In  2019,  health  authorities  began 
cancer 
implementing 

a  national 

colorectal 

(14)  Preventable  mortality  is  defined  as  deaths  among  people 
aged  less  than  75  years  that  could  have  been  avoided 
through public health and prevention interventions. 

32 

0.500.550.600.650.700.750.800.850607080910111213141516171819Ratio    
                                                           
                                                           
3.3. Labour market, social policies, education and healthcare 

screening  programme  supported  by  EU  funds 
(AEEK, 2019a). 

response,  the  government  appointed  budgetary 
supervisors for the most indebted hospitals. 

Public  spending  on  health  is  low,  and  a  high 
reliance  on  out-of-pocket  payments  constrains 
access  for  poorer  households,  exacerbating 
disparities 
in  access  to  care.  Total  health 
spending in Hungary is significantly lower than the 
EU  average,  both  as  a  share  of  GDP  (6.9%  vs 
9.8%  in  the  EU)  and  in  euro  per  capita  terms 
(€1,468 vs €2,884 in the EU). The public share of 
health spending is also lower than the EU average, 
partly  reflecting  the  narrow  scope  of  the  benefit 
package.  As  a  result,  out-of-pocket  spending 
accounts  for  a  significantly  larger  share  of  total 
health  spending  (26.9%  vs  15.8%  in  the  EU). 
Nearly  half  of  out-of-pocket  spending  is  used  for 
medicines,  which  account  for  31%  of  total  health 
spending.  Although  the  share  of  spending  on 
medicines  is  much  higher  than  the  EU  average 
(18%),  it  is  lower  when  measured  in  euro  per 
capita 
levels  of  out-of-pocket 
spending, coupled with limited financial protection 
mechanisms  and  an  above-average  incidence  of 
deepen 
informal 
inequality  of  access  to  healthcare  and  create 
significant 
for 
risks  of 
Hungarian households.  

financial  hardship 

terms.  High 

payments 

(ESPN, 

2018) 

excessively 

fragmented, 

There  is  further  scope  for  rationalising  the  use 
of  resources  and  improving  the  quality  of 
hospital  care.  Despite  improvements  in  the  past 
decade,  discharge  rates  (20  vs  17  per  1,000 
population),  average  length  of  stay  (9.6  vs  7.9 
days)  and  number  of  beds  (7  vs  5  per  1,000 
population)  remain  consistently  above  the  EU 
average,  pointing  to  an  excessive  reliance  on 
hospitals  to  provide  care.  The  hospital  network 
remains 
hindering 
efficiency  and  quality  of  care.  Over  the  last 
decade,  day  surgery  for  selected  procedures  has 
been  gradually  introduced  into  the  Hungarian 
health system, yet its take-up has been low relative 
to  other  EU  countries.  Moreover,  the  current 
hospital  payment  system  has  not  been  regularly 
adjusted  to  reflect  the  real  cost  of  health  services 
provided.  The  obsolete  hospital  payment  system, 
together  with  low  decision-making  autonomy  at 
institutional 
rising 
level,  has  contributed 
hospital  debt  which,  despite  regular  bailouts  from 
central  government,  continues 
to  accumulate, 
having reached €161.5 million in September 2019, 
i.e.  0.3%  of  GDP  (State  Treasury,  2019).  In 

to 

Although  authorities  started  addressing  the 
problem of health workforce shortages, regional 
disparities remain an issue. Compared to the EU 
average,  in  2017  Hungary  had  a  slightly  lower 
(3.3  vs  3.6  per  1,000 
number  of  doctors 
population), and a lower number of nurses (6.5 vs 
8.5  per  1,000  population).  Large  outflows  of 
skilled health professionals seeking better working 
conditions abroad or in the  fast-growing domestic 
private  sector  have  exacerbated  the  issue  of 
physician  shortages  in  the  public  health  care 
sector.  In  response,  the  government  expanded  its 
medical  residency  support  programme  and  raised 
the  salaries  of  health  professionals,  especially 
those of specialists, some of which have increased 
up to 60% over the last five years. Although wages 
remain  low  from  an  EU  perspective,  pay  raises 
may have contributed to slowing down outflows of 
medical staff, as suggested by the slight increase in 
the number of practising physicians and decreases 
in  the  requests  for  foreign  work  permits  in  recent 
years.  The  negative  effect  of  physician  shortages 
on  access 
their  uneven 
geographic  distribution,  while  shortages  within 
each county are mostly concentrated in rural areas 
(OECD/European Observatory, 2019).  

is  exacerbated  by 

Graph 3.3.7:  Unfilled general practicioner practices per 

100,000 population by counties, 2018 

Counties constitute level 3 of the Nomenclature of Territorial 
Units for Statistics (NUTS) 
Source: AEEK, Eurostat 

for 

Strengthening  primary  care  remains  a  key 
condition 
improving  effectiveness  and 
equity  of  access  to  care.  Although  general 
practitioners  (GPs)  formally  act  as  gatekeepers  to 
higher  levels  of  care,  their  low  number,  limited 

33 

 
3.3. Labour market, social policies, education and healthcare 

formal  competencies  and  the  lack  of  performance 
incentives to avoid unnecessary referrals hinder the 
effectiveness  of  primary  care  and  reduce  the 
attractiveness  of  the  profession.  The  low  number 
of  GPs  creates  disparities  in  access  to  primary 
care,  as  evidenced  by  the  constantly  increasing 
number  of  vacant  GP  practices  and 
their 
concentration in poorer counties (see Graph 3.3.7). 
Another  concern  for  the  future  supply  of  GPs 
relates  to  their  age  composition,  as  their  average 
age  rose  from  55  in  2012  to  58  in  2018  (NEAK, 
2019).  In  recent  years,  health  authorities  have 
implementing  pilot  projects  aimed  at 
started 
integrating  GP  practice  with  the  work  of  other 
health  professionals  (e.g.  physiotherapists)  and 

expanding  their  competences,  showing  promising 
results (AEEK, 2019b; SHCP, 2017).  

although 

Ongoing long-term care reforms support a shift 
towards  community-based  care,  but  the  supply 
of  services  remains  limited  relative  to  needs. 
institution-
Long-term  care  provision  remains 
de-
the 
centred, 
EU-financed 
institutionalisation  process 
for  children  and 
persons with disabilities is currently ongoing. The 
2018 revision of the nursing fee for home care will 
significantly  increase  its  amount  in  four  years. 
However, the supply of services and cash benefits 
is still weak. 

34 

3.3. Labour market, social policies, education and healthcare 

Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights 

The  European  Pillar  of  Social  Rights  serves  as  compass  for  a  renewed  process  of  upward  convergence 
towards better working and living conditions in the European Union. It sets out twenty essential principles 
and rights in the areas of equal opportunities and access to the labour market; fair working conditions; and 
social protection and inclusion. 

Hungary  performs  relatively  well  on  some  indicators  of  the  Social  Scoreboard  supporting  the 
European  Pillar  of  Social  Rights,  but  significant  challenges  remain.  The  employment  rate  is  slightly 
above  the  EU  average  and  unemployment  well  below.  Inequality  is  lower  than  in  many  other  Member 
States,  although  it  is  increasing.  Gaps  in  employment  and  pay  between  genders  and  skills  groups  remain 
wide  compared  with  the  rest  of  the  EU.  Labour  market  outcomes  for  women  and  vulnerable  groups, 
including Roma and people with disabilities, are weak. The Public Works Scheme has decreased markedly, 
but is still oversized and not effective in leading participants to jobs in the primary labour market. 

The  share  of  people  at  risk  of  poverty  or  social  exclusion  decreased,  but  the  depth  of  poverty  has 
significantly worsened (from 16.7% in 2017 to 24.1% in 2018), pointing to a limited redistributive capacity 
of social transfers. Challenges related to human capital formation include a high rate of early school leaving, 
especially  among  the  Roma  population,  and  the  level  of  individuals’  digital  skills.  Childcare  provision  is 
among the lowest in the EU, with only 16.5% of children under the age of 3 in formal childcare.  

More  action  is  needed  as  regards  the  provision  of  long-term  social  housing  and  other  inclusion 
measures.  In  Hungary,  rough  sleeping  is  criminalised  without  addressing  its  root  causes  and  without 
providing policy solutions in line with the Pillar principle on housing and assistance for the homeless. 

Improvements have taken place in a number of areas. The growth in per capita real adjusted disposable 
income of households was better than the EU average, with a 21 percentage points increase since 2008. The 
self-reported  unmet  need  for  medical  care  dropped  to  0.8%,  well  below  the  EU  average  of  2%.  The 
proportion of children under 3 years of age in formal childcare increased to 16.5% in 2018 from 13.8% in 
2017,  which  is  a  step  towards  the  Barcelona  target.  Hungary  has  invested  significant  amounts  of  EU  and 
national funds into addressing the limited provision of childcare by creating new places in créches.  

35 

3.4. COMPETITIVENESS, REFORMS AND INVESTMENT 

3.4.1.  PRODUCTIVITY AND INVESTMENT TRENDS 

(Andrews  et  al.,  2015),  areas  where  Hungary  lags 
behind the most innovative economies. 

risen  amid 
to  historically  high 

Productivity  growth  has  picked  up  since  2016 
thanks to the strong cyclical upturn. Investment 
favourable  economic 
has  also 
levels.  While 
conditions 
demand  conditions 
there 
remain  supply-side  barriers  to  investment  (see 
Box 3.4.1) and productivity  growth, especially  for 
smaller firms. 

remain  supportive, 

Graph 3.4.1:  Labour productivity relative to the EU average 

(at PPS) 

tasks 

(e.g.  marketing) 

The  shortage  of  skills  limits  local  firms’  ability 
to add  more value to global production chains. 
Hungarian  firms  typically  focus  on  ‘midstream’ 
fabrication  activities,  which  contribute  less  to  the 
value of final products than upstream (e.g. design) 
or  downstream 
(Ali-
Yrkkö and Rouvinen, 2015; see Graph 3.4.2). This 
specialisation  pattern  persists  even 
in  recent 
greenfield foreign direct investment across Central 
Eastern Europe (Stöllinger, 2019). Domestic firms 
may  gradually  acquire  other  tasks  (e.g.  research 
and  development,  support  services)  that  improve 
their value capture, but this process is gradual and 
not  guaranteed  (Szalavetz,  2017).  High  value-
added  activities  of  global  value  chains  could  be 
attracted  by  offering  cutting-edge  skills  and 
knowledge (Jensen and Pedersen, 2012), which are 
(see  also 
in 
Section 3.3.3).  Among  smaller  enterprises,  low 
innovation activity, a lack of production scale and 
a shortage of skilled employees are the key barriers 
to  productivity  growth  and  to  participating  in 
global value chains (HIPA, 2019). 

in  Hungary 

limited 

supply 

Graph 3.4.2:  Employment patterns and domestic value 

added in gross exports in selected countries 

(1) CEE3 is the average of Czechia, Poland and Slovakia 
Source: Eurostat 

the  EU  average 

There remains significant room for productivity 
catch-up. Value added per worker remained about 
30%  below 
in  2018  (see 
Graph 3.4.1). Three main factors contribute to this 
productivity  gap:  (i)  even  the  most  productive 
domestic  firms  tend  to  fall  behind  the  global 
frontier;  (ii)  Hungarian  firms’  position  in  global 
value  chains  limits  their  value  added;  (iii)  less 
productive firms still have disproportionately large 
market shares. 

that  of 

The  innovation  system  does  not  adequately 
support the growth of leading firms. Contrary to 
international  experience,  productivity  growth  of 
the most efficient Hungarian firms has been slower 
than 
they  have 
progressively fallen behind the global productivity 
frontier  (Muraközy  et  al,  2018).  The  productivity 
of  national  frontier  firms  could  benefit  from  less 
cumbersome  product  market 
regulations  and 
in  higher  education  and  research 
excellence 

laggard  firms,  and 

(1) Non-fabrication workers are identified by their 
occupation codes based on the classification of Timmer et 
al. (2019) 
(2) The share of domestic value added in gross exports is 
calculated with input-output models 
Source: Commission calculations based on Eurostat, World 
Input-Output Database (TImmer et al., 2015) 

36 

6570758003040506070809101112131415161718EU average = 100HungaryCEE3CZHUPLSISKATDEFISE30354045505560657030354045505560Domestic value added  in gross export (%)Share of non-fabrication workers in manufacturing employment (%) 
     
  
3.4. Competitiveness, reforms and investment 

promote  innovation  but  also  warrant  monitoring 
against misuse.  

Graph 3.4.3:  R&D expenditure 

(1) CEE3 is the average of Czechia, Poland and Slovakia 
Source: Eurostat 

The  shortage  of  talent  and  skill  limits  the 
innovative activity of Hungarian enterprises. In 
2018,  28%  of  enterprises  performed  innovation, 
which is below the EU (34%) and regional (39%) 
average  (EIB,  2019) (15).  Obstacles  to  innovation 
include the limited supply of highly skilled labour. 
Tertiary  education  attainment  rates  are  among  the 
lowest in the EU (see Section 3.3.3). The  number 
of  science,  engineering  and  computing  graduates 
was  11.9  per  1,000  population  in  the  25-34  age 
group, compared to the EU average of 18.3.  

Weak cooperation limits the country’s research 
and innovation capacity. Participation in Horizon 
2020 projects is modest, highlighting the low level 
of  international  cooperation  by  research  entities. 
As a result, Hungarian scientific performance lags 
behind  the  EU  average  in  terms  of  highly  cited 
international  co-publications. 
publications  or 
Cooperation  with  the  business  sector  is  mostly 
limited  to  large  companies  due  to  the  lack  of 
demand and capacity of smaller firms. Researchers 
seldom bring  their results to the  market. The  roll-
out  of  the  8  Higher  Education  and  Industry 
Cooperation Centres (FIEKs), aimed at improving 
academia-business cooperation, continued in 2019. 

(15)  Regional peers include Czechia, Poland and Slovakia. Data 
of  the  latest  Community  Innovation Survey  refer  to  2016. 
They  show  that  29%  of  Hungarian  firms  performed 
innovation, compared to an EU average of 50.6%. 

There  are  barriers  to  the  growth  of  more 
efficient  businesses.  The  persistence  of  low-
productivity  firms  is  a  drag  on  the  average 
productivity  level  of  the  economy  (MNB,  2018), 
and  points  to  resource  misallocation  due  to  weak 
business  dynamics.  Productivity  growth  within 
companies  is  recovering,  but  the  reallocation  of 
resources towards more efficient firms has slowed 
compared  to  the  pre-crisis  years  (Muraközy  et  al, 
2018).  The 
firms, 
particularly  in  services,  is  another  sign  of  weaker 
business  dynamics  (Bauer  et  al.,  forthcoming). 
Slow  resource  reallocation  may  be  linked  to 
institutional  features  such  as  weak  competitive 
pressure 
for 
reorganisation and market exit (see Section 3.4.2). 

slowing  entry  of  new 

inefficient  mechanisms 

and 

Research and innovation 

Strengthening  the  research  and 
innovation 
capacity  of  domestic  firms  could  secure  long-
term  growth  and  competitiveness.  According  to 
the  European  Innovation  Scoreboard  (European 
Commission,  2019f),  Hungary 
is  a  moderate 
innovator with an increasing performance, and has 
progressed towards Sustainable Development Goal 
9.  There  is  scope  for  improvement  by  increasing 
the  supply  of  high-skilled  labour,  raising  R&D 
expenditure  in  the  public  sector  and  encouraging 
cooperation among potential innovators.  

Spending  on  R&D  is  increasing  slowly,  but 
remains  below  the  2020  target.  R&D  spending 
increased from 0.98% of GDP in 2008 to 1.53% of 
GDP  in  2018.  This  value  is  high  among  Central 
Eastern European countries, but lower than the EU 
average  of  2.11%  and  Hungary’s  2020  target  of 
1.8%  (see  Graph  3.4.3).  The  increase  over  the 
years took place in the business sector, while R&D 
spending  in  the  public  sector  decreased  by  0.09% 
of GDP between 2008 and 2018. 

Public  support  for  private  R&D 
is  large. 
According  to  the  State  Aid  Scoreboard,  business 
R&D  and  innovation  expenditure  benefited  from 
state  subsidies  worth  0.35%  of  GDP  in  2017,  the 
highest  level  in  the  EU.  Tax  exemption  schemes 
include  tax  credits  for  small  and  medium-sized 
enterprises when buying tangible assets; and a tax 
(above 
credit 
investments 
HUF 100 million) 
in  research,  which  can  be 
carried  forward  for  12  years.  Such  incentives  can 

large-scale 

for 

37 

    
                                                           
3.4. Competitiveness, reforms and investment 

Box 3.4.1: Investment challenges and reforms in Hungary 

Investment rose to a record high level in 2019, exceeding 28% of GDP. Investment growth was broad-based 
across  sectors  and  asset  types.  Firms  on  balance  expect  to  increase  their  investment  further,  albeit  to  a 
moderating  extent  (DUIHK,  2019;  EIB,  2019).  However,  detailed  data  and  surveys  show  an  uneven 
landscape.  Data  from  the  Hungarian  Central  Statistical  Office  indicate  a  decreasing  investment  rate  for 
smaller enterprises in recent years. Based on survey evidence, the proportion of investing firms decreased by 
7 percentage points to 69% in 2019 and it is lower than the EU average of 85% (EIB, 2019). A quarter of 
firms report having invested less than what would be optimal, compared with 15% of companies across the 
EU. Investment in intellectual property products, at 2.8% of GDP in 2018, remains below the EU average of 
4.1%. 

According to firms’ perceptions, the  main obstacle to investment is by  far the  availability of skilled staff; 
three  quarters  of  surveyed  firms  considered  it  to  be  an  significant  barrier  (EIB,  2019).  To  a  smaller  but 
growing  extent,  investment  is  also  hampered  by  uncertainties  concening  the  economic  outlook,  labour 
market  regulations  and  energy  costs.  Due  to  low  interest  rates  and  multiple  subsidised  financing 
opportunities (see Section 3.2), the availability of finance is a less frequently cited obstacle compared with 
regional peers. 

Selected barriers to investment and priority actions underway: 

The limited availability of skilled labour is an obstacle for investment and innovation, especially for smaller 
and  less  productive  firms  that  cannot  afford  wages  as  high  as  their  larger  counterparts.  The  cyclical 
slowdown  of  economic  growth  may  alleviate  labour  shortages  to  some  extent  (see  Section  1).  However, 
progress to improve education outcomes is slow and the impact of such policies takes hold only gradually. 
Therefore, the low level of basic competences, limited supply of  tertiary education graduates (see  Section 
3.3.3) and lack of digital skills remain bottlenecks for investment in the medium term.  

Recent  changes  have  increased  government 
influence  over  scientific  institutions.  A  National 
Science Policy Council (NTT) was set up to advise 
the  government  on  strategic  issues  and  supervise 
the  National  Research, 
the  operation  of 
Development and Innovation Fund. In addition, the 
research 
the  Hungarian 
Academy  of  Sciences  was  separated  from  the 
the  newly 
Academy  and 
founded  Eötvös  Loránd  Research  Network 
(ELKH). Through the appointment of  members to 

institute  network  of 

reorganised  under 

the  new  bodies,  the  government  has  increased  its 
influence over the R&D field, creating uncertainty 
to  guarantee  scientific  freedom.  An  increasing 
proportion  of  public  sector 
researchers  are 
considering  leaving  for  the  private  sector  or 
abroad;  these  intentions  are  particularly  high 
among talented, young and competitive researchers 
(Nyírő  et  al.,  2019).  Policy  uncertainty  may 
the  successful  Momentum 
negatively 
(Lendület) Programme, under which the Hungarian 
Academy  of  Sciences  attracts  young  researchers 

impact 

38 

 
3.4. Competitiveness, reforms and investment 

contributing 

forthcoming), 

business solutions and Industry 4.0 technologies is 
among the lowest in the EU (see Graph 3.4.4, and 
Szabo, 
to  weak 
productivity  growth  in  the  post-crisis  years (16). 
Several  policy  measures  are  in  place  to  improve 
the  digitalisation  of  businesses.  The  Modern 
Enterprises Programme aims to raise awareness of 
digital  technologies,  and  offers  financial  support 
for technology adoption. The Artificial Intelligence 
Coalition  was  set  up  in  2018,  to  draw  up  the 
national artificial intelligence strategy. 

Graph 3.4.4:  Adoption of selected Industry 4.0 technologies 
(average adoption rate of EU=100) 

RFID = Radio Frequency Identification. Data refer to 2018 or 
the closest available year. CEE3 is the average of Czechia, 
Poland and Slovakia 
Source: Eurostat 

Digital  public  services  continue  to  develop. 
Since  2016,  the  proportion  of  e-government  users 
have  increased  from  38%  to  55%,  but  it  remains 
well  below  the  EU  average  of  67%.  Re-use  of 
information  across  administrations,  and 
the 
sophistication  of  services  are  particular  areas  for 
improvement.  Since  2018,  most  public  bodies 
must provide electronic channels for those services 
where  one’s  physical  presence  is  not  required  by 
law. For businesses, the  use  of the  online channel 
is  mandatory.  To  support  these  services,  the 
authentic digital mailbox and the e-delivery service 
have  been  renewed  for  both  citizens  and  public 
administration  offices,  and  a  new  e-delivery 
service  has  been  launched  for  businesses.  A  new 
customizable e-government point of single contact 

(16)  Based on Gál et al. (2019), the lower adoption of selected 
technologies  compared  with  the  EU  may  have  reduced 
productivity growth by 1 percentage point per year. 

from  abroad.  If  established  researchers  exit  the 
system,  it  could  become  an  obstacle  for  future 
European  Research  Council  and  Horizon  2020 
participations.  Moreover,  the  end  of  the  Central 
European  University’s  academic  operations  in 
Hungary,  the  largest  Horizon  2020  beneficiary, 
risks  cutting  off  the  access  of  local  partner 
universities to international R&D programmes.  

Unclear  governance  and  a  limited  involvement 
of stakeholders have so far prevented Hungary 
from  grasping  the  full  benefits  of  smart 
specialisation.  The  mobilisation  of  innovation 
actors  throughout  the  smart  specialisation  process 
has been unbalanced and piecemeal. Recent efforts 
to set up Territorial Innovation Platforms can help 
to  improve  the  engagement  of  stakeholders,  and 
reach  a  more  selective  definition  of  investment 
priorities and improved  monitoring. Still,  frequent 
institutional 
for 
coordination and the distribution of tasks. 

challenge 

changes 

are 

a 

Digitalisation 

has 

connectivity 

improved 
Broadband 
significantly. 82% of the population has access to 
an  ultrafast  broadband  network,  compared  with 
60% in the EU. The Superfast Internet Programme 
intends  to  provide  all  Hungarian  households  with 
at  least  30  Mbps  broadband  internet  service  by 
2023.  While  coverage  is  relatively  good,  mobile 
broadband use is still the lowest in the EU with 70 
subscriptions  per  100  people,  against  100  in  the 
EU. This may be because prices for mobile phone 
users  are  among  the  highest  in  Europe.  Sectoral 
taxes (one levied on phone calls and text messages, 
and  another  on  network  infrastructure)  add  to 
service costs and may also reduce the demand for 
data services (Nagy et al., 2017).  

Digital  skills  remain  below  the  EU  average. 
Only half of people aged 16-74 have at least basic 
digital skills (58% in the EU). Skills shortages can 
hinder  digitalisation 
the  business  sector, 
in 
particularly  in  less  productive  firms  (Gál  et  al., 
2019).  To  improve  the  population’s  digital  skills, 
the  government  launched  a  Digital  Education 
Strategy  in  2016.  The  working-age  population  is 
targeted by the Digital Workforce Programme, the 
results of which remain to be seen. 

Hungarian  firms  lag  behind  in  the  integration 
of digital technology. The adoption rate of digital 

39 

0%20%40%60%80%100%120%3D printingUse ofrobotsRFIDBig dataanalysisCloudcomputingUltrafastbroadbandHUCEE3     
                                                           
3.4. Competitiveness, reforms and investment 

portal has also been set up as a common platform 
for e-government services. 

3.4.2.  MARKET FUNCTIONING AND BUSINESS 

ENVIRONMENT 

Market functioning  

Exemptions  from  competition  law  also  increase 
regulatory  uncertainty,  as  market  participants  in 
affected  sectors  do  not  know  what  forces  are 
shaping future market structures (OECD, 2016). 

Graph 3.4.5:  Assessment of product market functioning in 

the Global Competitiveness Index 2019 

Business leaders perceive barriers to the proper 
functioning of markets. Hungary ranks the lowest 
in  the  EU  in  terms  of  product  market  functioning 
in the Global Competitiveness Index (WEF, 2019; 
see Graph 3.4.5). Manufacturing and services face 
different  environments.  The  government  tends  to 
sign strategic agreements with large manufacturing 
(81  such  agreements  were  concluded 
firms 
between 2012-2019, mostly in manufacturing) and 
their  investment  projects  benefit  from  significant 
government  support  (Éltető-Antalóczy,  2017).  On 
the other hand, service activities face more barriers 
to  competition.  Hungary  scores  below  the  EU 
average 
Services  Trade 
Restrictiveness  Index,  due  to  the  prevalence  of 
horizontal  policy  measures,  quotas  and  licences 
(OECD, 2018b).  

the  OECD 

in 

examiners, 

intervention 

the  services 

State 
sector 
in 
hampers  competition.  The  provision  of  several 
services  is  entrusted  to  state-owned  or  private 
firms,  specifically  created  for  these  purposes  (e.g. 
training  of  driving 
information 
technology  services  to  the  public  sector,  textbook 
publishing,  waste  management  public  services, 
mobile  payments,  tobacco  trade),  which  operate 
without  competition.  The  government  can  exempt 
certain  mergers  and  acquisitions 
the 
competition  scrutiny  by  declaring  the  transaction 
to  be  of  national  strategic  interest.  Over  the  last 
five  years, 
this 
extraordinary power more than 20 times, in a range 
of sectors including energy, banking, broadcasting, 
tobacco and media. In 2018, more than 470 media 
outlets  merged  into  one  ownership  without  the 
scrutiny  of  the  Competition  Authority  and  Media 
Authority, significantly increasing concentration in 
the  sector.  The  lack  of  competition  can  be 
efficiency. 
innovation 
detrimental 

the  government  has  used 

from 

and 

to 

Source: World Economic Forum 

Hungary  has  the  highest  number  of  regulated 
professions  (over  500)  in  the  EU (17).  A  reform 
still in progress aims to revise the legal framework 
for regulated professions and reduce the number of 
regulated professions. While the existing rules are 
being  analysed  at  national 
identify 
potential  areas  for  deregulation,  it  is  not  yet 
possible to assess the progress of the reform. 

level 

to 

Frequent  introductions  and  subsequent  repeals 
of  measures  have  contributed  to  an  unstable 
business environment in retail trade. The ban on 
loss-making  business  activity  has  been  removed 
following  European  Commission’s  action.  The 
unclear application of the special authorisation for 
outlets  above  400 m2  and  the 
legislation  on 
expansion  of  retail  premises  remains  a  source  of 
uncertainty for retailers. Restrictions on large units 
held  back  efficiency  gains  in  the  retail  sector  and 
raised consumer prices (Berezvai, 2018). 

(17)  According 

to 

the  Regulated  Professions  database 

(https://ec.europa.eu/growth/tools-databases/regprof/) 

40 

1234567Distortive effect oftaxes andsubsidiesExtent of marketdominanceCompetition inservicesScale of 1 (worst) to 7 (best)Range of EU Member StatesHungaryEU average     
                                                           
3.4. Competitiveness, reforms and investment 

Box 3.4.2: Challenges and opportunities of the automotive industry in Hungary 

The automotive industry plays a crucial role in the Hungarian economy. In 2018, it generated 
16.5%  of  export  revenue  and  4.3%  of  gross  value  added,  accounted  for  2.6%  of  domestic 
employment, and hosted 11.4% of the inward foreign direct investment stock at the end of 2018. 
In all these dimensions, the sector has a greater role in the Hungarian economy than in the rest of 
the EU, as with other Central Eastern European countries. The sector has contributed significantly 
to economic growth, adding on average 0.4 percentage points to annual GDP growth since 2010. 
Yet, in the longer term, the industry faces increasing global and domestic challenges and its role 
is  at  risk,  due  to  a  combination  of  rising  labour  costs;  tightening  environmental  standards; 
technological change in the form of alternative drivetrains and autonomous vehicles; and  trade-
policy-related risks to global supply chains. This box takes stock of the various forces that create 
a need to adapt in the automotive industry. 

The  first  challenge  concerns  the  position  of  Central  Eastern  European  countries  in 
automotive  supply  chains.  As  with  the  rest  of  the  region,  Hungary  specialises  in  ‘midstream’ 
fabrication activities within the automotive supply chain that contribute modestly to the final value 
of a completed vehicle. In Hungary, every euro automotive export generates just 40 cents of value 
added,  including  supplier  industries,  compared  with  75  cents  in  Germany (1).  Domestic  value 
added could rise with the involvement of more Hungarian suppliers or if foreign-owned companies 
took  on  service  activities  that  generate  more  value  added  (‘functional  upgrading’).  The 
participation  of  domestic  suppliers  is  hindered  by  skill  shortages  at  the  level  of  workers  and 
managers,  limitations  in  manufacturing  capacity  and  product  development  capabilities  (HIPA, 
2019). There is some evidence of functional upgrading in foreign-owned companies; for example, 
the number and the employment of automotive R&D centres in Hungary is growing. However, the 
acquisition  of  more  advanced  tasks  could  be  limited  by  structural  features  of  the  automotive 
supply chain. Lead firms and their global suppliers maintain tight control over design and strategic 
R&D activities, which are typically concentrated around the headquarters (2). More sophisticated 
service tasks could be attracted to local subsidiaries through improving human capital and national 
R&D  capabilities,  which  can  offer  strategic  advantages  to  lead  firms,  such  as  access  to  cutting-
edge  technologies.  One  promising  example  is  the  recently  built  ZalaZone  test  facility  and  the 
autonomous mobility research cluster developing around it.  

The second challenge concerns the ongoing shift towards electromobility. Electric drivetrains 
consist of significantly less components than internal combustion engines. Thus, the auto industry 
supply  chain  could  become  shorter,  limiting  the  potential  for  domestic  value  capture.  Firms 
located  in  Hungary  have  already  started  to  diversify  into  electromobility  by  stepping  up  the 
production  of  electric  drivetrains  in  existing  factories;  Hungary  has  also  attracted  significant 
foreign direct investment in battery manufacturing recently. If these new capacities are completed, 
Hungary could account for about 10% of European car battery production. However, batteries are 
technically simple and can be produced with little labour input. With a high share of material costs 
and falling prices due to technological advancement, the sector could see profit margins squeeze in 
the medium term. On the other hand, these assembly facilities might serve as a stepping stone to 
attract later investment in research and development.  Electric vehicle production could  also take 
off  thanks  to  the  start-up  manufacturer  Fox  Automotive.  The  government’s  e-mobility  strategy 
(Jedlik  Ányos  Plan  2.0)  plans  to  expand  the  charging  infrastructure  for  electric  vehicles,  and  to 
support domestic research and development in electric mobility. 

The  third  group  of  challenges  stems  from  international  regulatory  change  and  policy 
uncertainty.  The  European  automotive  industry  has  found  it  difficult  to  adjust  to  tightening 
emission  standards;  compliance  with  tightening  emission  targets  weighs  on  profitability.  Rising 
tariffs  in  certain  segments  of  international  trade  are  also  adding  to  production  costs  and  the 
prospect of even larger trade barriers holds back investment. In a period of technological change 

41 

3.4. Competitiveness, reforms and investment 

and  squeezing  profitability,  firms  may  decide  to  reconfigure  their  global  supply  chains.  So  far, 
Central  Eastern  Europe,  including  Hungary,  has  overall  benefitted  from  these  changes  thanks  to 
still  favourable  labour  costs,  agglomeration  benefits  from  the  presence  of  several  suppliers,  and 
geographical  proximity  to  headquarters (3).  The  share  of  the  four  Visegrad  countries  in  EU  car 
production has risen  from 22.3% in 2014 to 23.9% in 2018. However, there is competition both 
from lower-cost production sites (potentially outside the European Union) and from host countries 
where  the  increasing  use  of  Industry  4.0  technology  might  bring  a  revival  of  production.  The 
region’s  specialisation  in  cost-sensitive  midstream  activities  was  historically  driven  by  the  cost 
advantage compared to Western Europe, but in the longer term this is expected to erode as wages 
catch up with real convergence. The adoption of Industry 4.0 technologies (especially robots and 
smart  factories)  could  boost  efficiency.  So  far,  about  a  quarter  of  domestic  suppliers  have 
embraced these technologies (PWC, 2018; HIPA, 2019). Several schemes are already in place to 
support this process, but the availability of skilled workers remains a bottleneck.  

Preserving cost competitiveness while improving local capabilities remains a dual challenge 
for  the  local  automotive  industry.  The  government  has  started  to  move  beyond  the  traditional 
strategy  of  attracting  assembly-line  production  to  the  country  through  investment  incentives  by 
encouraging  local  R&D  activities  and  launching  several  targeted  programmes  for  potential  local 
suppliers. However, the underlying issues of skills shortages and modest innovation capacity need 
to  be  addressed  by  more  comprehensive  measures  to  improve  education  outcomes  (see  Section 
3.3.3) and the performance of the R&D system (see Section 3.4.1).  

(1)  2016 figures in the OECD Trade in Value Added (TiVA) database. 
(2)  Burger  et  al.  (2018)  find  evidence  on  the  positive  effect  of  functional  upgrading  on  value  capture.  Studies  showing 
gradual functional upgrading in the Hungarian and CEE auto industry include Éltető et al. (2015), Pavlínek and Ženka 
(2011).  Stöllinger  (2019)  finds  that  even  recent  greenfield  FDI  flows  show  specialisation  in  fabrication  activities. 
Belderbos et al. (2013) discuss home bias in R&D. The effect of industry characteristics on upgrading possibilities is 
described by Sturgeon et al. (2009). 

(3)  Similarly,  Rugraff  and  Sass  (2014)  find  that  the  automotive  component  suppliers  saw  the  global  crisis  as  an 

opportunity to upgrade and expand their local operations. 

transposed 

The deteriorating enforcement of Single market 
rules  is  a  drag  on  investment.  The  transposition 
rate  of  directives  decreased  while  the  number  of 
increased.  There  are  significant 
infringements 
delays  in  transposing  directives  and  complying 
with Court rulings, and a significant proportion of 
directives  are 
incorrectly.  Better 
compliance  with  Single  market  rules  and  their 
consistent  application  would  support  market 
integration  and  lead  to  productivity  and  welfare 
gains (18).  In  addition,  the  number  of  notifications 
of  draft  technical  regulations  under  the  Single 
Market  Transparency  Directive  is  low.  In  2018, 
Hungary notified only 9 drafts, which may indicate 
that  it  is  missing  the  opportunity  to  improve  its 
integration  in  the  Single  market  by  preventing 
barriers to trade. 

(18)  The  full  transposition  of  Single  market  rules  into  national 
legislation could raise welfare by an estimated 0.87%, and 
the  elimination  of  infringement  proceedings  could  add  a 
further 1.3% (WIFO, 2019). 

hindering 

restructuring, 

The  insolvency  framework  offers  limited  help 
for 
resource 
reallocation  to  more  productive  enterprises. 
Personal costs from entrepreneurial failure are high 
in Hungary due to a long time to discharge, which 
can  discourage  failing  entrepreneurs  from  starting 
over.  The  existing  inability  of  creditors  to  initiate 
restructuring  and  the  lack  of  priority  for  new 
financing  over  unsecured  creditors 
impedes 
restructuring.  The 
early  warning 
mechanisms,  pre-insolvency  regimes  and  special 
insolvency  procedures  for  small  firms  hinder 
effective  prevention  and  streamlining  (Adalet-
McGowan and Andrews, 2018). 

lack  of 

Public procurement 

There is still significant  room for improvement 
in  competition  on  the  procurement  market, 
which  remains  vulnerable  to  anticompetitive  and 
corruption  practices.  It  is  still  too  early  to  assess 
whether those activities carried out in 2019  might 
generate any long-term impact on competition and 

42 

 
 
                                                           
3.4. Competitiveness, reforms and investment 

Commission  has  carried  out  in  recent  years, 
serious, systemic deficiencies and irregularities has 
been  identified,  showing  that  there  is  room  for 
substantial further improvements.  

including 

The integration of environmental, sustainability 
into  procurement 
and  social  policy  goals 
supplier  qualification, 
process, 
technical  specifications,  award  criteria  and 
contract  conditions  remains  a  challenge.  The 
Commission’s audits show that the use of strategic 
criteria  often 
concerning 
compliance  with  competition  and  equal  treatment 
principles. Raising awareness through training and 
guidance  materials  on  the  use  of  quality-based 
criteria in tender selection is essential for ensuring 
that  contracting  authorities,  especially  at  the  local 
level, are able to use public procurement correctly 
and as a strategic tool for sustainable development.  

issues 

leads 

to 

Institutional  performance  and  the  business 
environment  

Hungary’s  ranking  on  business  environment 
scoreboards  is  consistent  with  its  income  level. 
The overall ranking of Hungary is relatively low in 
EU comparison, in line with its level of economic 
development,  and  has  not  changed  over  the  last 
decade  (WEF,  2019;  IMD,  2019,  World  Bank, 
2019;  DUIHK,  2019).  The  ranking  has  improved 
in  some  areas  of  the  economic  policy,  including 
taxation,  macroeconomic 
the 
flexibility  of  employment  legislation.  However, 
the overall ranking has not improved over the last 
decade due to the decline in institutional quality.  

stability 

and 

performance 

Better  institutions  are  key  to  avoiding  the 
middle-income  trap.  There  is  a  well-established 
relationship between the quality of institutions and 
economic 
(Acemoglu-Robinson, 
2010). Although investment in physical capital can 
increase  productivity  even  with  weak  institutions, 
its marginal effect fades after a certain point due to 
the  risk  of  misallocation.  The  productivity  impact 
of  investing  in  human  capital  and  innovative 
institutions, 
capacity 
especially with the control of corruption, and voice 
and  accountability  (Rodríguez-Pose  and  Ketterer, 
2019).  In  Hungary,  these  two  indicators  have 
(see  Graph  3.4.6). 
deteriorated  significantly 
Corruption  risks  and  weak  accountability  distort 
the  allocation  of  resources,  as  these  are  not 
necessarily  channelled  to  the  most  productive 

increases  with  better 

market  dynamics.  The  proportion  of  contracts 
awarded where there was just one bidder remained 
high over the last years and  one of the highest in 
the  EU.  Transport  and  medical  equipment 
purchases, as well as financial services display the 
highest  single  bidding  rate  among  the  sectors 
analysed. This hinders the ability of public bodies 
to achieve best value for money. A sound analysis 
of  the  existing  risks  for  competition  is  missing  to 
achieve  a  more  effective  procurement  policy  with 
sustainable  results.  Efforts  focused  on  a  legal  and 
regulatory  framework  do  not  prove  sufficient 
without a good understanding of such risks. 

to 

to 

facilitate  SME  access 

Efforts 
the 
procurement  market  are  yielding  results. 
Hungary  has  performed  above  the  EU  average  in 
the proportion of awards for which the winner was 
an SME. This could be a result of the fact that the 
percentage of calls  for tenders that  were  split into 
lots has also scored above average. 

The progressive digital transformation of public 
procurement  supports  transparency.  Electronic 
submission  of  offers  in  procurement  procedures 
above  the  Directive  thresholds  has  reached  as 
much  as  99%  in  2019  in  Hungary.  However,  the 
interoperability  of  the  different  existing  public 
procurement  electronic  platforms,  as  well  as 
further  development  of  new  functionalities,  in 
particular, a functionality allowing bulk export for 
contract  award  notices,  is  essential  for  improving 
availability  of 
and 
accessibility 
data 
comprehensive statistics. 

the 

a 

the 

The public procurement control system showed 
weaknesses  in  previous  years.  Hungary  tops  the 
EU  anti-fraud  agency’s  (OLAF)  list  of  countries 
where 
financial 
agency  made 
recommendation  to  recover  EU  funds  due  in  part 
to  deficiencies  observed  in  public  procurement 
(see  Graph  3.4.7).  Several  Commission  audits  on 
public  procurement  carried  out  in  2017-2018 
identified  systemic 
in  particular 
related  to  discriminatory  or  restrictive  exclusion, 
selection  or  award  criteria,  and  unequal  treatment 
of  bidders.  In  2019,  the  Commission  imposed 
around  €1  billion  of  financial  corrections  due  to 
deficiencies  in  the  public  procurement  related 
management and control system. This has been the 
highest financial correction in the EU in the 2014-
2020  period.  Despite  increased  control  of  public 
procurement  after  each  horizontal  audit  that  the 

irregularities, 

43 

3.4. Competitiveness, reforms and investment 

firms. They also slow down business dynamics and 
productivity  growth  in  general  (Akcigit  et  al., 
2018). 

Graph 3.4.6:  Average of voice and accountability and 
control of corruption indices in Worldwide 
Governance Indicator (EU average=100) 

(1) Figures refer to the average scores of the two indicators 
on a scale of 0-5 (2) CEE3: Czechia, Poland and Slovakia 
Source: Worldwide Governance Indicator 2019 

indicators, 

the  political 

Political  influence  in  the  civil  service  may 
reduce  government  performance.  According  to 
influence  and 
survey 
favouritism in the civil service is high in Hungary 
(Dahlström  et  al.,  2015;  WEF,  2017). The  factors 
considered  essential  to  reduce  these  risks  are  the 
transparent 
protection  from  dismissal  and  a 
advancement  system  in  the  civil  service.  The 
protection against dismissal weakened as a lack of 
loyalty and failure to conform to superiors’ values 
have become valid grounds for dismissal in the last 
decade.  In  2008-2018  the  basic  salary  unit  of  the 
career/seniority-based 
civil 
servants  was  frozen.  During  this  period  superiors 
decided  on  salary  increase,  which  weakened  the 
seniority-based  remuneration  system.  In  2019,  the 
protected status of the civil service decreased with 
the  abolition  of  the  career-based  advancement 
system.  The  protection  of  the  civil  service  from 
undue influence is particularly important in public 
procurement  control  and  the  management  of  the 
national wealth of the state-owned enterprises.  

remuneration 

of 

Low transparency of the policy-making process 
environment. 
may 
impact 
Stakeholder 

engagement, 

regulatory 

business 

affect 

the 

by 

applying 

assessment and ex post evaluations are key factors 
for  improving  regulatory  environments  (OECD, 
2018b).  Hungarian  legislation  provides  for  the 
mandatory  use of public consultation,  ex ante and 
ex  post  impact  assessments.  In  practice,  however, 
the consultations and impact assessments are rather 
formal  or  symbolic  (SGI,  2018,  Hungary  report 
page  25-26,  see  also  section  3.3.1)  and  are  often 
bypassed 
legislative 
procedures, such as individual member’s bills and 
urgent  procedures  (EUPACK,  2019).  As  a  result, 
Hungary  scores  low  among  EU  members  in 
stakeholder  engagement  in  developing  primary 
law,  consultation  with  civil  society,  the  use  of 
instruments  (SGI,  2019),  and 
evidence-based 
regulatory  quality 
(WGI,  2019).  Lack  of 
meaningful  consultation  and  impact  assessment 
leads  to  a  learning-by-doing  approach,  which 
contributes  to  frequent  changes  to 
legal 
framework.  

special 

the 

to 

laws  adds 

Frequent  changes  to  legislation  reduce  legal 
certainty.  The  Hungarian  Parliament  amended 
around  half  of  the  laws  in  force  on  average  each 
year  between  2012  and  2018.  The  turnover  rate 
was  particularly  high  in  2017,  when  it  reached 
77%.  The  same  rates  were  less  than  20%  in 
Slovakia  and  Austria  in  the  same  period.  The 
the 
frequent  use  of  omnibus 
complexity.  Hungarian  laws  amended  seven  other 
laws on average between 2016 and 2018, which is 
higher  than  the  regional  average  of  4.5 (19).  Fast-
track legislation, combined with the high turnover 
of  laws,  reduces  transparency  and  the  stability  of 
the legal framework. It increases compliance costs 
for  businesses  and  it  can  discourage  innovation 
and  high  value-added 
investments.  Selective 
regulations have proliferated. Over the last decade, 
more  than  70  pieces  of  legislation  have  targeted 
specific  people  or  institutions.  Sometimes,  such 
tailor-made 
legislations  penalise  (e.g.  sector-
specific  taxes);  in  other  cases,  they  grant  benefits 
(e.g.  easing  conflict  of 
rules  and 
qualification  requirements  for  a  specific  public 
office) or monopolies.   

interest 

(19)  These figures are based on information available on official 
websites  of  national  legislations  (njt.hu,  isap.sejm.gov.pl, 
slov-lex.sk, ris.bka.gv.at). 

44 

75777981838587899193950506070809101112131415161718HungaryCEE3  
                                                           
3.4. Competitiveness, reforms and investment 

in 

corruption 

2017).  When  not  initiated  ex  officio,  the  majority 
of  notifications 
cases  were 
transmitted  by  the  National  Protective  Service. 
Nevertheless,  statistics  suggest  that  investigation 
and  prosecution  may  be  less  effective  in  Hungary 
compared  to  other  Member  States  (European 
Commission,  2019i).  OLAF  finds  significantly 
more irregularities related to EU funds in Hungary 
than in other countries and, in contrast to all other 
Member  States,  also  much  more  than  the  number 
of  cases  reported  by  the  national  authorities  (see 
Graph  3.4.6).  The  number  of  investigations  in 
Hungary  between  2014-2018  that  closed  with  an 
OLAF recommendation, was the second highest in 
Hungary  among  Member  States.  The  indictment 
rate  of  OLAF  judicial  recommendations  (45%) 
was  above  the  EU  average  (36%)  between  2012-
2018  (European  Commission,  2019i),  but  below 
that of other registered cases in the Prosecution in 
the  last  10  years  (58%)  (Office  of  the  Prosecutor 
General,  2019).  It  remains  to  be  seen  whether  the 
increasing  number  of  corruption  cases  will  be 
reflected  in  a  higher  number  of  indictments  and 
convictions as well.  In recent years, the number of 
convicted  persons  has  remained  broadly  stable: 
250 in 2014 and 254 in 2017.  

Graph 3.4.7:  Detection of irregularities and their financial 

impact in the areas of European Structural and 
Investment Funds and Agriculture in 2014-2018 

(1) financial impact as % of payment 
Source: European Commission 

The effectiveness of the justice system  

Persistent  concerns  over  judicial  independence 
may  impact  the  business  environment.  The 
independence, efficiency and quality of the justice 
system  are  essential  elements  for  the  business 
environment and crucial to enhancing productivity 
and  ensuring  sustainable  economic  growth  (Voigt 
et  al.,  2015).  Following  deterioration  until  2019, 
the latest data for perceived judicial independence 
shows  improvement  based  on  the  forthcoming 
2020  EU  Justice  Scoreboard.  Developments  of 
checks  and  balances  in  the  Hungarian  courts 
system have however continued to raise concerns. 
This  has  been  confirmed  by  a  statement  of  the 
Group  of  States  against  Corruption  (GRECO),  a 
report  of  the  European  Association  of  Judges  and 
by  a  report  of  the  Council  of  Europe  Human 
Rights  Commissioner.  The  National  Judicial 
Council  faced  increasing  difficulties  in  counter-
balancing  the  powers  of  the  President  of  the 
National  Office  of 
(European 
Commission,  2019g).  The  Parliament  recently 
adopted  a  new  piece  of  legislation  in  December 
2019, introducing structural changes that may have 
a  significant  impact  on  the  organisation  of  the 
justice  system.  There  was  no  consultation  of 
relevant  stakeholders  before  the  adoption  of  the 
law. 

the  Judiciary 

Fight against corruption 

Corruption  remains  an  area  of  concern.  The 
Indicators  and  other 
Worldwide  Governance 
indices  show  a  continuous  decline  in  Hungary’s 
performance  on  controlling  corruption  and  its 
position  is  among  the  lowest  in  the  EU  (WGI, 
2019,  TI,  2020).  More  recent  survey  data  shows 
that 48% of businesses consider corruption to be a 
serious  problem  for  their  company  when  doing 
business  in  Hungary,  which  remains  higher  than 
the EU average and Hungary’s own score in 2015 
but  an  improvement  on  its  2017  score.  The  share 
of  companies  that  think  corruption  is  widespread 
in  public  procurement  managed  by  national  and 
somewhat 
local 
(European Commission, 2019h). 

authorities 

increased 

has 

The  number  of  corruption  cases  recorded  by 
the  prosecution 
increased. 
According  to  data  from  the  Prosecutor  General’s 
Office,  the  number  of  recorded  corruption  cases 
has  increased  to  2,046  in  2018  (from  1,123  in 

services  has 

Determined systematic action to prosecute high-
level  corruption  is  lacking.  According  to  the 
Prosecutor  General’s  Office,  most  corruption-
related cases involve public officials, typically tax 

45 

0.00.51.01.52.02.53.03.54.04.5Detected by OLAFDetected by nationalauthorities%HUEU average    
3.4. Competitiveness, reforms and investment 

access to foreign investment data. This continues a 
trend  started 
to 
increased  uncertainty  about  the  interpretation  of 
the access to information legislation. 

in  2012,  which  contributes 

Dissuasive  practices 
for  accessing  public 
information  can  deter  citizens  and  non-
governmental  organisations  from  exercising 
their  constitutional  rights.  Out  of 
the  300 
complaints addressed by the National Authority for 
Data  Protection  and  Freedom  of  Information  in 
2019,  about  10%  concerned 
the  unjustified 
application  of  fees (22).  Between  2013-2016,  in 
over  70%  of  the  500  court  cases  regarding  access 
to  information,  the  courts  ruled  in  favour  of  the 
data  requestors  (Kúria,  2018).  According 
to 
independent  research,  proactive  disclosure  of  data 
also 
challenge,  with  70%  of 
municipalities  failing  to  publish  the  minimum 
required  information  on  their  website  (BI-CRCB, 
2019).  Moreover,  only  a  small  proportion  of 
authorities  provide  statistics 
the  National 
Authority  for  Data  Protection  and  Freedom  of 
Information on requests received (NAIH, 2019). 

remains 

to 

a 

framework. 

The  prevailing  degree  of  media  freedom  may 
not  provide  appropriate  support  for  the  anti-
corruption 
Several  mutually 
supporting  principles,  in  particular  transparency, 
accountability,  press  freedom  and  an  active  civil 
society,  are  key  in  the  fight  against  corruption 
(IMF,  2019).  Hungary  ranks  among  the  lowest  in 
the  EU  for  media  freedom  and  its  position  has 
deteriorated  in  recent  years  (Freedom  House, 
2019;  RSF,  2019).  The  concentration  of  media 
outlets  under  a  single  centralised  holding  in  2018 
exacerbated  the  overall  risk  to  media  pluralism 
(Brogi et al., 2019).  

3.4.3.  SECTORAL POLICIES 

Transport infrastructure 

Rising  demand  is  expected  to  put  further 
low  quality  of  transport 
pressure  on  the 
infrastructures.  Strong  economic  growth  has 
increased  the  volume  of  road  transport  by  14% 

Service)   https://mkogy.jogtar.hu/jogszabaly?docid=A190
0059.TV  

(22)  According to NAIH, fees applied generally range from €40 
to  €100.  NAIH  developed  a  system  of  criteria  to  judge 
whether a fee and its amount are justified.   

and customs officials. While some high-level cases 
have been prosecuted, there is a general perception 
of impunity among the business community. While 
43%  of  Hungarian  respondents  believe  that  petty 
corruption is punished appropriately, only 19% of 
businesses agree that those caught bribing a senior 
official  are  likely  to  be  appropriately  sanctioned, 
which  is  a  low  proportion  in  EU  comparison 
(European Commission, 2019h). 

at 

to 

be 

allocation, 

the  Central 

in  July  2018, 

Changes  in  the  organisational  structure  of  the 
prosecution  service  have  yet  to  prove  their 
effects.  Following  the  changes  introduced  to  the 
criminal  procedure 
the 
law 
prosecution  service  has  centralised  corruption 
investigations 
Investigative 
Prosecution  office  and  five  regional  investigative 
prosecution  offices.  The  effects  of  this  measure, 
aiming  to  improve  professional  management  and 
case 
seen. 
remain 
Recommendations by GRECO on key institutional 
and  organisational  aspects  of  the  prosecution 
service,  such  as  reviewing  the  appointment  rules 
for  the  position  of  the  Prosecutor  General  to 
safeguard  independence  from  political  influence, 
the  introduction  of  strict  criteria  to  guide  and 
justify decisions to remove cases from subordinate 
prosecutors  and  the  review  of  how  disciplinary 
proceedings are handled with a view to enhancing 
accountability  and 
transparency,  remain  only 
partly implemented (20) (Council of Europe, 2018). 
Accountability for decisions to close investigations 
is  a  matter  of  concern  as  there  are  no  effective 
remedies  against  decisions  of  the  prosecution 
service not to prosecute alleged criminal activity.  

Restrictions  on  access  to  information  continue 
to  hinder  corruption  prevention.  The  indicator 
on  access  to  information  deteriorated  from  6  to  3 
on  a  scale  of  10  between  2010-2019 (SGI,  2019). 
The  current  score  is  the  lowest  in  the  EU.  While 
the  Freedom  of  Information  Act  has  not  been 
touched, piecemeal changes to other sectoral laws 
have continued, corroding the overall transparency 
and 
framework.  One 
example  is  an  amendment  to  the  law  on  foreign 
representations (21) 
restrictions  on 

access-to-information 

introducing 

(20)  Some of these have already been criticized in 2012 by the 

Venice Commission 

(21)  2019.  évi  LIX.  Törvény  egyes  közszolgálati 

törvények  módosításáról  (Act  59,  of  2019  on 
Amendment 

Laws 

on 

of 

tárgyú 
the 
Public 

46 

                                                           
                                                                                   
3.4. Competitiveness, reforms and investment 

in  higher 

and  insufficient  maintenance  of  the  waterway 
cause operational difficulties for inland navigation, 
resulting 
times  delays  and 
transit 
operational  costs.  The  upgrading  of  the  inland 
navigation  infrastructure  and  the  regular  and 
internationally  coordinated  maintenance  of  the 
river  would  help  to  make  navigability  more 
transhipment 
reliable.  Limited  multimodal 
possibilities  in  the  main  ports  along  the  Danube 
constitute  major  bottlenecks.  A  programme  to 
develop  ports  across  the  country  was  launched  in 
2019 to address this. 

Energy sector and climate 

is  weak. 

The  energy  efficiency  of 
the  Hungarian 
In  addition,  Hungary’s 
economy 
commitment  in  its  National  Energy  and  Climate 
Plan (23) is assessed to be unambitious in terms of 
the 2030 EU energy efficiency targets, considering 
the level of efforts needed to achieve the collective 
EU goal. Energy poverty is significant in Hungary, 
as 
their 
consumption expenditure on energy. 

the  poorest  spend  around  16%  of 

overall 

Hungary  imports  more  than  one-fourth  of  its 
electricity  consumption.  In  2017,  around  half  of 
the  country’s  domestic  electricity  production  is 
from  nuclear,  one  quarter  came  from  natural  gas, 
15% from coal and lignite, and just over 10% from 
renewable energy sources. In spite of a good level 
interconnection, 
of 
electricity 
infrastructure  projects 
implementing  planned 
would  lead  to  cheaper  electricity  imports  from 
Western  Europe.  Hungary  is  striving  to  diversify 
its gas imports through new supply routes through 
neighbouring Romania and Croatia. These projects 
would reduce the price premiums of the Hungarian 
wholesale electricity and gas markets compared to 
Western  Europe,  which  would  be  beneficial  for 
affordability and competitiveness reasons  for both 
households and businesses. 

just  1%  of  gross 

Low-carbon  renewable  sources  are  improving. 
inland  energy 
In  2017, 
low-carbon 
consumption  was  covered 
renewable  sources,  while  the  highly  polluting 
biomass  contributed  to  approximately  10%.  From 
this  low  base,  solar  installations  show  a  rapid 

from 

road  maintenance 

between  2012-2018  (measured  in  ton-kilometres) 
while  the  number  of  passenger  cars  rose  by  22%. 
As a result, road congestion has increased (INRIX, 
rose 
2019).  Spending  on 
recently with the launch of an upgrade programme 
for the long neglected lower-class road network. It 
has  started  to  reverse  the  earlier  decline  in  road 
quality, but 61.5% of the road network remains in 
inadequate  or  bad  condition  according  to  Magyar 
Közút, 
the  ones  managed  by 
municipalities. Road development plans maintain a 
focus on building new  motorways and  high-speed 
roads. This could reduce the high centralisation of 
the  network  towards  the  capital.  However,  with 
motorway  density  already  at  the  level  of  Austria, 
sound,  economic  cost-benefit  analyses  of  new 
projects will be crucial to prevent overspending. 

especially 

A more attractive public transport system could 
increase  labour  mobility  and  help  mitigate  the 
environmental  impact  of  transport.  Although 
public  transport  in  Hungary  accounts  for  a  larger 
share  of  trips  than  the  EU  average,  this  not  the 
result of high customer  satisfaction, but the  effect 
of lower income, through a lower motorisation rate 
(Fiorello  et  al.,  2016).  As  income  growth  makes 
personal cars more affordable, the attractiveness of 
public  transport  will  need  to  improve.  In  the  case 
of train services, Hungary ranks among the lowest 
in  the  EU  (European  Commission,  2018b;  WEF, 
2019),  although  ongoing 
in  rail 
connectivity  and  the  rolling  stock  may  bring 
improvements.  In  remote,  largely  rural  areas,  a 
well-functioning  public  transport  service  can  also 
help 
to  reduce  unemployment  through  lower 
commuting costs (Pogonyi, 2014).  

investments 

The high number of road accidents is a burden 
on the economy and society. The number of road 
fatalities  per  car  or  per  kilometres  driven  remains 
among the highest in the EU. The quality of roads 
and  the  vehicle  fleet  play  a  key  role  in  this  poor 
safety  record.  The  low  protection  of  pedestrians, 
cyclists and motorcyclists is a particular cause for 
concern;  their  40%  share  in  road  fatalities  is  well 
above  the  EU  average  of  29%.  Thus,  low  road 
safety  may  deter  individuals  from  soft  transport 
modes  that  could  otherwise  ease  road  congestion 
and air pollution. 

Despite  some  action,  the  inland  navigation 
infrastructure  continues  to  suffer  from  several 
deficiencies. Low water conditions on the Danube 

(23) The Commission will assess, in the course of 2020, the final 
National  Energy  and  Climate  Plan  submitted  by  Hungary 
on 22 January 2020.  

47 

                                                           
3.4. Competitiveness, reforms and investment 

benefits  are  mostly  seen  in  Budapest  and  more 
developed regions, but remain weak elsewhere. 

performing 

regions  were 

Economic  convergence  to  the  EU  average  has 
not  reduced  income  differences  within  the 
country.  Since  2008,  income  per  capita  has 
converged  to  the  EU  average  in  every  region (25). 
Differences  between  regions  in  GDP  per  capita 
started to decrease, but this process was uneven at 
the  more  detailed  county  level  (see  Graph  3.4.8). 
Hence,  disparities  within  regions  widened.  The 
best 
the  main 
manufacturing hubs, concentrated in the northwest. 
Some of the less developed counties in the east and 
the  south  started  to  benefit  from  foreign  direct 
investment,  and  they  also  enjoyed  a  higher-than-
average increase in the employment rate, but their 
income levels remain among the lowest in the EU. 
Budapest,  the  region  with  the  highest  GDP  per 
capita,  grew  slower  than  the  national  average  in 
the  last  decade,  while  its  labour  productivity  was 
slightly  decreasing (26).  These  trends  are  largely 
due  to  regional  differences  in  investment  rates, 
which have been closely aligned with productivity 
dynamics. 

Less  developed  regions  are  losing  population. 
Labour  market  conditions  are  better  in  the  more 
developed  central  and  western  regions,  and  the 
least  developed  regions  lost  around  0.3%  of  their 
population  annually  through  internal  migration 
between  2010-2018.  Migration 
to  be 
the  younger  and  better 
concentrated  among 
educated  population, 
thus  negative  migration 
balances are risks for regional growth prospects. 

tends 

Improving  local  amenities  in  disadvantaged 
areas  would  help  to  halt  population  loss  and 
ignite agglomeration effects. The more developed 
regions  benefit  from  a  concentration  of  skilled 
workers, good transport connections and proximity 
to  main  trade  partners,  which  attracted  significant 

(25)  In  Hungary,  8 

the 
regions  constitute 
Nomenclature  of  territorial  units  for  statistics  (NUTS), 
while 19 counties (‘megye’) and the capital city constitute 
NUTS  level  3.  In  the  remainder  of  this  section,  ‘region’ 
refers to NUTS 2 units. 

level  2  of 

(26)  GDP  per  capita  in  Budapest  is  about  twice  the  national 
average,  at  139%  of  the  EU  average  at  purchasing  power 
parity. However, this figure is inflated by the concentration 
of  company  headquarters  in  the  city.  In  terms  of  average 
wages,  Budapest  is  just  25.5%  ahead  of  the  country,  also 
due  to  a  more  skilled  workforce.  Per  capita  disposable 
income  in  Budapest  even  lagged  behind  the  national 
average by 1.7% in 2017. 

increase  (reaching  1,140 MW  in  mid-2019,  up 
from 720 MW at the end of 2018), and this trend is 
set  to  continue  in  the  future  (reaching  3,000 MW 
by 2022, 6,000 MW by 2030 and expected to reach 
12,000  by  2040).  However,  there  remain  many 
untapped  opportunities  in  renewable  energies, 
including in the heating sector, which could help to 
green  the  economy.  The  expansion  of  the  Paks 
power plant is expected to ensure sufficient power 
generation  capacities  and  to  contribute  to  the  low 
carbon  electricity  generation.  However,  both  the 
feasibility  and 
the 
financing  conditions  have  still  not  been  made 
public. So far less than 40% of the revenues from 
CO2  quotas  were  spent  on  climate  and  energy 
purposes in 2013 to 2018 (European Commission, 
2019j).  

impact  assessments  and 

The  draft  National  Energy  and  Climate  Plan 
shows significant investment needs. According to 
the  draft  National  Energy  and  Climate  Plan, 
investment needs  will amount to up to €45 billion 
until  2030,  representing  around  3.5%  of  the 
Hungarian GDP each year. These needs are related 
in particular to improving energy the efficiency of 
buildings,  investments  in  renewable  energy  and 
sustainable  mobility,  in  order  to  meet  energy  and 
climate objectives. The  final  plan  was adopted by 
the  government  on  9 January  together  with  next 
National  Energy  Strategy,  with  energy  mix 
scenarios up to 2030. The Commission will assess 
these documents in the course of 2020. 

3.4.4.  REGIONAL DISPARITIES 

Regional  disparities  are  significant  in  Hungary 
in terms of economic development,  labour  market 
and  education  outcomes,  and  demographic  trends. 
109  out  of  174  districts  are  classified  as  having  a 
disadvantaged  status (24).  For  historical  reasons, 
the  capital plays a disproportionately  large role in 
the economy, while regional economic centres are 
weak. Urbanisation is relatively low, as 30% of the 
population  lives  in  villages.  Large  areas  are 
populated with very small settlements: one-third of 
all municipalities have fewer than 500 inhabitants. 
these  spatial  features,  agglomeration 
Due 

to 

(24)  Districts (‘járás’) constitute level 1 of Local Administrative 
Units  (LAU).  The  classification  into  disadvantaged  status 
is established by Government regulation 290/2014. 

48 

                                                           
                                                           
3.4. Competitiveness, reforms and investment 

regional  GDP. 

investment  and  created 

foreign  direct 
local 
agglomeration  effects.  In    the  least  developed 
regions,  less  than  25%  of  the  population  has 
tertiary  education,  and  R&D  expenditure  remains 
below  0.5%  of 
In  cities, 
uncoordinated  suburban  sprawl  has  not  been 
followed  by  investment  in  infrastructure,  and  city 
centres are often losing function. Rural areas suffer 
from  weak  transport  links  and  faltering  public 
services, including education and health care. This 
impacts  the  quality  of  life,  hinders  local  market 
integration  and  ultimately  contributes 
the 
depopulation  of  disadvantaged  areas.  Some  of 
these challenges can be addressed by two flagship 
programmes,  the  Hungarian  Village  Programme 
and  the  Modern  Cities  Programme  (aimed  at  23 
major  settlements),  which  provide  significant 
funding for infrastructure and public services. 

to 

Graph 3.4.8:  GDP per head and GDP growth (at purchasing 

power parity, 2008-2018) 

Regions and counties constitute levels 2 and 3 of the 
Nomenclature of territorial units for statistics (NUTS) 
Source: Eurostat, Hungarian Central Statistical Office 

has 

development 

become 
Territorial 
centralised.  Sub-national  levels  of  government 
play  a  decreasing  role  in  implementing  public 
investment  or  other  growth-friendly  public 
expenditure  such  as  education  or  R&D.  While  in 
2007, more than 35% of public investment accrued 
to  the  local  government  level,  its  share  in  total 
public  investment  fell  to  around  22%  in  2018  as 
local  public  investment  decreased  from  1.5%  to 
1.3% of GDP.  

49 

0246810121416050100150Convergence of GDP per capita to EU average between 2008-2018 (percentage points)GDP per capita in 2008 (% of EU average)Regions (NUTS 2)Counties (NUTS 3)National average =8.1 percentage pointsNational average in 2008 = 62.6%   
3.5.  ENVIRONMENTAL SUSTAINABILITY 

faces 

several 

Hungary 
environmental 
challenges.  Air  pollution  in  Hungary  has  serious 
health and economic consequences. The country is 
also  still  at  an  early  stage  of  moving  towards  the 
circular  economy  and  EU  2020  recycling  targets 
risk  not  being  met.  Furthermore,  concerns  remain 
about water quality. Hungary has an abundance of 
biodiversity, which can be sustainably exploited. 

Circular  economy:  air  quality  and  transport, 
water and waste 

is  a  major  environmental 
Air  pollution 
challenge.  In  2017,  the  emission  of  nitrogen 
dioxide  (NO2)  and  particulate  matter  (PM10) 
exceeded  the  air  quality  standards  of  the  EU  in 
several  air  quality  zones (27).  The  persistent 
breaches  of  air  quality  standards  have  severe 
health  and  environmental  repercussions.  In  2016, 
over  13,000 premature  deaths  in  Hungary  were 
attributable to bad air quality, mostly to particulate 
matter  (EEA,  2019a).  The  main  sources  of  air 
pollution include residential solid fuel combustion, 
agriculture  and  transport  emissions.  Weak  energy 
efficiency in the residential sector also adds to the 
problem.  

to 

There  is  room  to  improve  energy  efficiency  in 
the residential sector. Hungary is at risk of failing 
to  meet  its  2020  energy  saving  target.  This  is 
largely  due 
the  high  household  energy 
consumption  per  capita,  which  remains  12% 
higher  than  the  EU  average  despite  considerably 
lower  income  levels.  Stricter  energy  efficiency 
standards  for  new  buildings  will  come  into  force 
from  2021.  However, 
large 
potential  for  refurbishing  the  existing  housing 
stock,  public  buildings  and  district  heating 
networks as well as in increasing energy efficiency 
of  small  firms.  In  addition,  the  regulated  price  of 
energy – for gas, among the lowest in the EU – can 
improve  energy 
decrease 
efficiency. 

there  remains  a 

incentive 

the 

to 

Polluting  fuel  types  are  widely  used  for 
of 
residential  heating.  Around 
households  in  the  lowest  income  quintile  lack 
access  to  gas  or  district  heating,  mostly  in  rural 

one-third 

(27)  Breaches  of  standards  for  nitrogen  dioxide  (NO2)  were 
registered in 2 out of 10 air quality zones (Budapest, Pécs) 
and  for  particulate  matter  (PM10)  in  5  air  quality  zones 
(including Budapest, Pécs and Sajó Valley). 

areas, and use  more expensive and polluting solid 
fossil fuels and wood for heating. They can remain 
trapped  in  energy  poverty,  because  at  the  same 
time,  they  cannot  afford  to  improve  the  energy 
efficiency of their dwellings. As a social transfer in 
kind, local governments often distribute solid  fuel 
(lignite)  with  high  sulphite  content.  All  this 
contributes  significantly  to  the  poor  air  quality 
(Government, 2017, 2019). 

technologies 

low  carbon 

in  parallel  with 

the  next  decade, 

There is scope to increase the role of low-carbon 
and  renewable  energy  in  electricity  generation. 
Electricity  consumption  is  expected  to  increase 
over 
the 
electrification of the economy. By 2030 up to 90% 
of  Hungary's  electricity  generation  might  come 
(nuclear  and 
from 
renewables  together).  Hungary  intends  to  rely 
more  on  renewable  energy  sources,  mainlysolar 
energy. However, as it turns out from the recently 
adopted National Energy Strategy, wind generation 
capacities  will  stay  at  current  levels  in  the 
electricity  mix,  which 
leaves  an  untapped 
opportunity for the country. According to the Plan, 
the share of renewables will reach only 21% in the 
energy mix in 2030. 

Fossil  fuel  subsidies  are  disbursed  in  Hungary 
mainly in the form of excise duty and value added 
tax  reductions  and  exemptions  in  various  sectors, 
such as district heating and fuel use in agriculture, 
railways,  inland  water  transport,  air  transport  and 
commercial  purposes.  Some  subsidies  remain  in 
place  for  the  decommissioning  and  reorganisation 
of the coal sector, for example lignite penny, early 
retirement  scheme  for  miners  and  support  for 
decommissioning and reorganisation. 

are 

externalities 

Transport 
sizeable, 
particularly  affecting  the  environment.  The 
estimated total external costs of transport for road, 
rail  and  inland  waterways  amount  to  6%  of 
Hungary’s  GDP.  They  include costs  related  to 
accidents,  environment  (air  pollution,  climate 
change, the costs related to energy production, i.e. 
the  well-to-tank emissions,  noise, habitat damage) 
and,  road  congestion  costs (28).  Accident  costs 
make  up  43%  due  to  the  high  number  of  road 
fatalities, and about a third of the costs relate to the 

(28)  A significant part of the total external cost of congestion is 
already internalised by the willingness of the users to travel 
in congested situation. 

50 

 
                                                           
                                                           
3.5. Environmental sustainability 

in 

remains 

slightly increased in 2018 in Hungary compared to 
2013,  from  378  to  381  kilograms  per  year  per 
inhabitant,  and  remains  below  the  EU  average 
importance, 
(488 kg).  Although  decreasing 
landfilling  of  municipal  waste 
the 
predominant  waste  management  method,  with  a 
49.6%  share  in  2018.  As  a  result,  Hungary  is 
considered  at  risk  of  not  meeting  the  2020 
municipal waste recycling target of 50% according 
to  the  Commission’s  2018  early  warning  report. 
Hungary did not meet targets for packaging waste 
recycling  in  2012-2017.  Measures  have  been  in 
place  since  2018  to  improve  the  glass  packaging 
recycling rate. The investment needed to reach the 
EU  recycling  targets  is  estimated  at  around  €500 
million  in  2021-2035  (European  Commission, 
2019k, p. 67). 

regarding 

increasing, 

the  EU  average 

Despite  plans,  the  change  to  a  more  circular 
economy  remains  challenging.  Hungary  is  well 
resource 
below 
productivity  (€0.81/kg  versus  €2.04/kg  in  the  EU 
in  2018).  Furthermore,  while 
the 
circular  (secondary)  material  use  rate  remains 
below  the  EU  average  (6.4%  in  2016  against  an 
EU average of 11.7%). Hungary has just started to 
prepare a national circular economy action plan, a 
new waste management plan and a waste strategy. 
A  Circular  Economy  Platform  was  established  in 
association  with 
for 
Sustainable  Development  in  Hungary  with  91 
companies.  The  key  challenges  are  the  lack  of 
institutional coordination and the lack of dedicated 
funding.  Hungary  has  a  national  sustainable 
development strategy for 2012-24, and is working 
on  implementing  the  sustainable  development 
goals (European Commission, 2019l, p. 37). 

the  Business  Council 

integrate 

environmental  aspects 

The central bank has launched some initiatives 
that 
in 
financing.  In  2019,  the  central  bank  adopted  a 
green  programme  to  support  financial  services 
aiming  at  the  preservation  of  the  environment.  It 
also launched a consultation on various areas, such 
as  environmental  risk  management  systems  in 
banks,  green  financial  products,  standards  for 
green  products,  green  covered  bonds  and 
regulatory changes to reduce the use of paper. The 
central  bank  also  presented  a  new  programme  of 
preferential capital requirements on green housing 
loans  for  credit  institutions.  The  application  of 
is  widely 
green  public  procurement 

tools 

environment.  Addressing  these  challenges  would 
lead  to  progress  on  Sustainable  Development 
Goals  3  (Good  health),  8  (Economic  growth),  11 
(Sustainable cities) and 13 (Climate action). 

details 

Hungary’  draft  National  Energy  and  Climate 
Plan  aims to cap transport emissions by relying 
on  electromobility.  The  draft  plan  allows  for  a 
30%  increase  in  CO2  emissions  in  the  transport 
sector  by  2030  compared  to  2005  levels.  Existing 
support  for  electromobility,  including  grants,  tax 
benefits and support to charging stations is planned 
to  be  complemented  by  further  policy  measures. 
However, 
charging 
infrastructure  will  be  built  and  how  other 
alternative  fuels  will  be  promoted  is  not  yet 
available.  A  stronger  role  for  other  alternative 
fuels,  shared  mobility,  public  transport  and  a 
address 
modal 
the 
environmental  burden  of 
transport.  Although 
consideration  of  external  environmental  cost  is 
best  encouraged  by  making  the  vehicle  tax  rate 
dependent on CO2 emissions, there are no plans to 
introduce a CO2-based vehicle tax. 

shift  would  help 

how 

the 

on 

to 

Water quality remains a concern. Less than 10% 
of  Hungarian  rivers  and  lakes  have  a  good 
ecological  status.  Water  supply  and  sanitation  is 
still  not  fully  compliant  with  the  Drinking  Water 
Directive, and water affordability remains an issue 
for  the  low-income  population.  A  large  share  of 
the  network  is  in  poor  shape;  25.6%  of  the  water 
entering  the  network  generates  no  revenue  due  to 
leaks  (MEKH,  2019).  Regulated  tariffs  do  not 
cover  the  maintenance  costs  of  many  water  and 
wastewater  companies,  while  the  utility  tax  also 
burdens them. As a result of underinvestment, the 
number  of  reported  faults  in  the  drinking  water 
network  doubled  between  2012-2017  and  rose  by 
50% in the wastewater grid (Századvég, 2018).  

Natural resources offer untapped opportunities 
for  sustainable  economic  development.  The 
share of agricultural land used for organic farming, 
at  3.9%,  is  significantly  below  the  EU  average  of 
7%.  The  protected  areas  of  the  Natura  2000 
network, covering almost 20,000 km2, can provide 
natural  water  purification  as  well  as  destinations 
for sustainable tourism.  

waste 

Municipal 
remains 
comparatively  low,  but  it  continues  to  rely  on 
landfilling.  Municipal  waste  generation  has 

generation 

51 

3.5. Environmental sustainability 

emissions.  The  greenhouse  gas  intensity  of  the 
Hungarian  economy  is  the  eighth  highest  in  the 
EU.  However,  Hungary  is  among  the  lowest 
emitters of greenhouse gases per person in the EU. 
Greenhouse gas emission is  spatially concentrated 
in  Heves  and  Baranya  counties.  The  coal  plant  in 
Mátra (Heves county), which produces up to 15% 
of  electric  power,  is  the  major  source,  accounting 
for  14%  of  national  CO2  emissions.  In  addition, 
two open-cast lignite mines operate in the vicinity 
of  the  power  plant.  Coal  mining  and  energy 
generation  in  Heves  county  and  energy-intensive 
industries  (treatment  and  disposal  of  waste  and 
manufacture of cement) in Baranya county remain 
major employers. 

The phasing out of traditional coal-fired power 
plants  in  the  energy  industry  is  supposed  to 
reduce  greenhouse  gas  emissions.  According  to 
the  draft  National  Energy  and  Climate  Plan 
reduce 
submitted  by  Hungary, 
greenhouse gas emissions by at least 40% by 2030 
compared  with  1990,  it  is  planned  to  phase  out 
traditional coal-fired power plant operations in the 
industry  and  reduce  greenhouse  gas 
energy 
emissions to 7.3 million tonnes of CO2 equivalent.  

in  order 

to 

The  transformation  of  the  coal  region  and  the 
energy  intensive  industries  would  benefit  from 
tailor-made measures.  A comprehensive strategy 
encompassing  economic,  technological  and  social 
aspects could cushion the effects of transformation 
in the two affected counties, where unemployment 
exceeds the national average. On the coal region’s 
initiative,  a  regional  renewable  energy  cluster  has 
been  started.  A  smart  specialisation  strategy  is  to 
be  developed  and  implemented  outlining  new 
economic opportunities for the region. In addition, 
the transition would also require significant efforts 
to  re-cultivate  and  restore  the  land  and  areas 
affected  by  mining  operations, 
furthermore 
training  to  maintain  the  workers  employability.  A 
medium-term  strategy  to  change  the  economic 
structure  of  the  two  counties,  based  on  the 
involvement  of  the  local  communities,  would 
industrial 
transition 
support 
transformation.  The  European  Commission  has 
proposed  a  Just  Transition  Fund  to  support  the 
people and regions most affected (see Annex D). 

their 

and 

encouraged 
but 
challenging for contracting authorities.  

supported, 

and 

remains 

Climate change and action 

losses 

Hungary  is  increasingly  affected  by  climate 
change.  The  economic 
incurred  from 
extreme  weather  and  climate-related  events  has 
been close to the EU average in per capita terms in 
the  last  decades  (EEA,  2019b).  Only  2%  of  the 
losses  were  insured,  which  is  one  of  the  lowest 
figure  in  the  EU.  Floods  may  cause  1.5%  loss  of 
GDP  and  this  risk  is  concentrated  in  particular  in 
three  counties  (World  Bank,  2017).  The  annual 
average  temperature  in  the  Carpathian  basin  is 
expected  to  increase  by  1-2°C  in  2021-2050. 
Agriculture,  forestry  and  tourism  are  the  most 
exposed  to  the  more  frequently  expected  floods, 
droughts  and  heatwaves  (ITM,  2020).  Investment 
into  green  measures,  such  as  water  retention  in 
cities,  protection  against  cloudburst  events  and  of 
riverbanks are key in climate adaptation. 

Hungary has committed to decrease greenhouse 
gas emission by 7% relative to its 2005 levels by 
2030.  National  projections  indicate  that  existing 
measures  will  deliver  a  shortfall  of  3 percentage 
points  relative  to  this  target.  Transport  emissions 
are  projected  to  continue  increasing  with  current 
policies.  Additional  measures,  as  set  out  in  the 
national  energy  and  climate  plan  in  contrast,  are 
projected  to  result  in  an  overachievement  by 
an 
points.  Hungary 
9 percentage 
overachiever on its greenhouse gas emissions 2020 
target.  By  2018,  emissions  compared  to  2005  fell 
by 10% altogether and the 2020 target is expected 
to be met with a wide margin. The national action 
plan on climate change adopted in January 2020 to 
implement  the  2018  strategy  foresees  mostly 
preparatory action on adaptation (studies, mapping 
etc.). Some negative trends go against the declared 
intentions  and  increase  vulnerability  to  climate 
change, such as the reduction of urban green areas 
that reinforces the heat island effect. 

remains 

Just transition 

A  coal  plant  and  some  energy-intensive 
industries  represent  the  most  acute  transition 
challenges  in  Hungary.  Hungary’s  economy  is 
relatively energy intensive, with both primary and 
final energy consumption levels well above the EU 
average. Thus, energy plays a key role in reducing 

52 

ANNEX A: OVERVIEW TABLE 

Commitments  

Summary assessment (29)  

2019 country-specific recommendations (CSRs)  

CSR 1: Ensure compliance with the Council 
Recommendation of 14 June 2019 with a view to 
correcting the significant deviation from the 
adjustment path towards the medium-term budgetary 
objective.  

The compliance assessment with the 
Stability and Growth Pact will be 
included in Spring when final data for 
2019 will be available.  

Hungary has made Limited Progress in addressing 
CSR 2  

CSR 2: Continue the labour market integration of the 
most vulnerable groups, in particular through 
upskilling, and improve the adequacy of social 
assistance and unemployment benefits. Improve 
education outcomes and increase the participation of 
disadvantaged groups, in particular Roma in quality 
mainstream education. Improve health outcomes by 
supporting preventive health measures and 
strengthening primary healthcare.  

Continue the labour market integration of 
the most vulnerable groups, in particular 
through upskilling, and  

  Limited Progress The labour market 

situation of vulnerable groups has improved 
in recent years and the size of the public 
works scheme has decreased. These 
improvements were mostly driven by 
cyclical factors which mostly contributed to 
the increase of low-skilled male 
employment. Gaps in employment and/or 
wages remain relatively large. Policy action 
remains includes, announcement of new 
nursery school places, pilot for facilitation 
of transition from the public works scheme 

(29)  The  following  categories  are  used  to  assess  progress  in  implementing  the  country-specific  recommendations  (CSRs):  
No  progress:  The  Member  State  has  not  credibly  announced  nor  adopted  any  measures  to  address  the  CSR.  This  category 
covers a number of typical situations to be interpreted on a case by case basis taking into account country-specific conditions. 
They include the following:  

no legal, administrative, or budgetary measures have been announced  
in the national reform programme, 
in any other official communication to the national Parliament/relevant parliamentary committees or the European Commission, 
publicly (e.g. in a press statement or on the government's website); 
no non-legislative acts have been presented by the governing or legislative body; 
the  Member  State  has  taken  initial  steps  in  addressing  the  CSR,  such  as  commissioning  a  study  or  setting  up  a  study  group  to 
analyse possible measures to be taken (unless the CSR explicitly asks for orientations or exploratory actions). However, it has 
not proposed any clearly-specified measure(s) to address the CSR. 

Limited progress: The Member State has:  
announced certain measures but these address the CSR only to a limited extent; and/or 
presented  legislative  acts  in  the  governing  or  legislative  body  but  these  have  not  been  adopted  yet  and  substantial  further,  non-

legislative work is needed before the CSR is implemented; 

presented non-legislative acts, but has not followed these up with the implementation needed to address the CSR. 
Some progress: The Member State has adopted measures  
that partly address the CSR; and/or  
that address the CSR, but a fair amount of work is still needed to fully address the CSR fully as only a  few of the measures have 
been implemented. For instance, a measure or measures have been adopted by the national Parliament or by ministerial decision 
but no implementing decisions are in place.  

Substantial progress: The Member State has adopted measures that go a long way towards addressing the CSR and most of them 

have been implemented.  

Full implementation: The Member State has implemented all measures needed to address the CSR appropriately.  

53 

 
                                                           
 
improve the adequacy of social assistance 
and unemployment benefits.  

Improve education outcomes and increase 
the participation of disadvantaged groups, in 
particular Roma in quality mainstream 
education.  

A. Overview Table 

to the primary labour market.  

  No Progress No relevant legal, 

administrative or budgetary measures have 
been announced. With one exception (the 
nursing fee), social assistance benefits, 
including most importantly the minimum 
income benefit and the unemployment 
benefit, have remained nominally 
unchanged and their adequacy has been 
further eroded. As part of a multiannual 
measure announced back in 2018, the 
nursing fee has been slightly increased 
nominally. However, as this change is not 
new and affects only persons with serious 
disabilities and those who care for them, 
there are no grounds for a more favourable 
assessment of the CSR implementation. 
Despite the good economic performance, 
income inequalities have increased over the 
last decade as the increase of social 
transfers has not kept pace with the 
improving economy. There has been no 
change in the duration of unemployment 
benefits.  

  Limited Progress Educational outcomes 

are below the EU average (PISA 2018) and 
large differences between schools remain. 
Schools are increasingly characterised by 
the similar socio-economic background of 
their pupils, with concentrations of 
disadvantaged pupils in certain schools. 
Performance-based selection starting at the 
age of 10 leads to under-achieving pupils 
being separated from their high-achieving 
peers and this may contribute to the high 
proportion of underachievers in Hungary. In 
addition, the gap in pupil performance 
between socio-economically advantaged 
and disadvantaged schools is the largest in 
the EU. The segregation of Roma children 
and socio-economically disadvantaged 
children (receiving regular child benefit) 
deteriorated continuously between 2008 and 
2018, the major determining factor being 
separation between schools within cities and 
towns. After a strong increase in majority-
Roma-segregated schools between 2008 and 
2016, there is slower growth/stagnation in 
their share since 2016.  

Improve health outcomes by supporting 
preventive health measures and 
strengthening primary healthcare.  

  Limited Progress The Member State has 
announced certain measures but these 
address the CSR only to a limited extent. 

54 

A. Overview Table 

Salaries have been increased in healthcare 
(8% in 2019, 14% in January 2020), which 
is relevant also for strengthening primary 
care. Steps have been taken to improve 
cancer screening: the EU-funded 
programme finally reached a stage where 
actual screening happens and initial steps 
have been taken to extend the programme. 
Although it has improved significantly over 
the last decade, the life expectancy of 
Hungarians remains the lowest among the 
VisegrÃ¡d countries, nearly five years lower 
than the EU average. Differences in life 
expectancy by gender and educational 
attainment level are much larger than those 
observed across the EU as a whole, 
reflecting large differences in income and 
living standards, as well a greater 
concentration of risk factors among men 
and people with a lower level of education. 
Mortality rates from causes that are deemed 
preventable (e.g. breast and colorectal 
cancer) are among the highest in the EU, 
signalling the high prevalence of risk factors 
and the limited effectiveness of public 
health measures. In response, in 2019 the 
Hungarian authorities started implementing 
the national colon cancer screening 
programme that was developed in 2017 with 
the support of EU funds. More than 300,000 
citizens in the target population (50-70) 
were invited to take the faecal occult blood 
test in 2019, with a take-up rate of about 
30%. Moreover, to tackle the high incidence 
of behavioural risk factors among the 
Hungarian population, in January 2019 the 
Hungarian authorities increased the public 
health product tax on a selection of products 
(e.g. alcoholic beverages, sugary drinks and 
high-salt foods) by about 20%. Public 
health expenditure in Hungary is 
significantly below the EU average, partly 
reflecting the narrow scope of the benefits 
package. Consequently, the health system 
relies to a much greater degree on out-of-
pocket spending for its financing, which, as 
evidenced by Hungary’s high rate of 
catastrophic spending on health, has 
regressive consequences for access to care. 
Overall, health care provision remains 
excessively hospital-centric and primary 
care does not yet play a sufficiently 
important role. There have been some 
efforts to shift volumes of care to the 
outpatient sector and to promote group 

55 

A. Overview Table 

practice for general practitioners and greater 
task-sharing between doctors and other 
health professionals (e.g. nurses, 
physiotherapists and dieticians). Although 
recent pilot projects seem to show 
promising results, the appropriateness of 
current funding and the scalability potential 
of these initiatives remain unclear: more 
time is needed to make a more accurate 
assessment.  

Hungary has made Limited Progress in addressing 
CSR 3  

  Limited Progress Limited progress. R&D 
spending increased from 0.98% of GDP in 
2008 to 1.53% in 2018. This level is high 
for Central Eastern European countries, but 
remains below the EU average of 2.11% 
and Hungary’s 2020 target of 1.8%. Public 
support for private R&D is considerable. 
Business R&D and innovation expenditure 
benefited from state subsidies amounting to 
0.36% of GDP in 2017, the highest level in 
the EU. However, the shortage of talent and 
skill limits the innovative activity of 
Hungarian enterprises. Obstacles to 
innovation include the limited supply of 
highly skilled labour. Tertiary education 
attainment rates are among the lowest in the 
EU. Recent changes have increased 
government influence over scientific 
institutions.  

  Limited Progress Low-carbon renewable 
sources are improving. Both in the next 
multiannual financial framework 
programming period and the draft national 
energy and climate plan the government 
aims to prioritise investments in renewable 
energy sources (mainly solar, however, 
wind energy is not preferred by regulation 
in force), energy efficiency measures and 
electromobility.  

CSR 3: Focus investment-related economic policy 
on research and innovation, low-carbon energy, 
transport infrastructure, and waste management and 
energy and resource efficiency, taking into account 
regional disparities. Improve competition in public 
procurement.  

Focus investment-related economic policy 
on research and innovation,  

low-carbon energy,  

transport infrastructure, and  

  Some Progress Spending on road 

maintenance rose recently with the launch 
of an upgrade programme for the long 
neglected lower-class road network. It has 
started to reverse the earlier decline in road 
quality, but 61.5% of the road network 

56 

A. Overview Table 

remains in inadequate or bad condition 
according to Magyar Kozut. Road 
development plans maintain a focus on 
building new motorways and high-speed 
roads. This could reduce the high 
centralisation of the network towards the 
capital. However, with motorway density 
already at the level of Austria, sound, 
economic cost-benefit analyses of new 
projects will be crucial to prevent 
overspending on motorways. Hungary’s 
draft national energy and climate plan aims 
to cap transport emissions by relying on 
electromobility. However, details on how 
the charging infrastructure will be built and 
how other alternative fuels will be promoted 
is not yet available. A stronger role for other 
alternative fuels, shared mobility, public 
transport and a modal shift would help to 
address the environmental burden from 
transport. The attractiveness of public 
transport is key to helping labour mobility 
and mitigating the environmental impact of 
transport. In the case of train services, 
Hungary ranks among the lowest in the EU.  

  Limited Progress Limited progress. 
Although decreasing in importance, 
landfilling remains the predominant waste 
management method; as a result of which 
Hungary is considered at risk of not meeting 
the 2020 municipal waste recycling target of 
50%. Analysis has shown that Hungary did 
not meet targets for packaging waste 
recycling in 2012-2015. But measures have 
been in place since 2018 to improve the 
glass packaging recycling rate. Hungary has 
just started to prepare a national circular 
economy action plan, a new waste 
management plan and a waste strategy. A 
circular economy platform was set up in 
2018 in association with the Business 
Council for Sustainable Development in 
Hungary with 91 companies.  

  Limited Progress Hungary is at risk of 

failing to meet its 2020 energy saving 
target. This is largely due to high household 
energy consumption per capita, which 
remains 12% higher than the EU average 
despite considerably lower income levels. 
Stricter energy efficiency standards for new 
buildings will come into force from 2021. 
Both in the next multiannual financial 
framework programming period and the 

waste management and  

energy and resource efficiency, taking into 
account regional disparities.  

57 

Improve competition in public procurement.  

A. Overview Table 

draft national energy and climate plan the 
government aims to prioritise investments 
in renewable energy sources (mainly solar, 
however, wind energy is not preferred by 
regulation in force), energy efficiency 
measures and electromobility. The coal 
regions in transition initiative might be 
applicable for transforming a lignite-fired 
power plant (Matra) into a biomass-fired 
plant, combined with solar panel 
installation.  

  Limited Progress In 2019, some measures 
were taken to improve competition in public 
procurement, even if they have yet to 
produce visible results. Ongoing 
digitalisation helps simplify public 
procurement procedures, reducing 
administrative burdens and thus further 
facilitating access to the procurement 
market. An amendment to the Public 
Procurement Act adopted in 2019 abolished 
a type of procedure used in the national 
regime for tenders below EU thresholds, 
which the Commission considered to be 
non-transparent and a barrier to 
competition. Competition in public 
procurement is still relatively weak. The 
proportion of tenders with a single bid has 
remained high over the last 5 years. 
Transparency in public procurement has 
continued to improve. Easy accessibility of 
public procurement data, which would be 
crucial in monitoring anomalies, is not 
ensured, as there is no progress in the public 
administration and public service 
development operational programme to 
make the e-procurement database 
downloadable/searchable (including 
contract award notices).  

Hungary has made Limited Progress in addressing 
CSR 4  

CSR 4: 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 the risk of aggressive 
tax planning. Improve competition and regulatory 
predictability in the services sector.  

Reinforce the anti-corruption framework, 
including by improving prosecutorial efforts 

  No Progress There is no determined 

systematic action to prosecute high-level 

58 

A. Overview Table 

corruption. According to the Prosecutor 
General’s Office, most corruption-related 
cases involve public officials, typical cases 
involving tax and customs officials. While 
some high-level cases have been 
prosecuted, there is a general perception of 
impunity among the business community. 
Hungary reports relatively few cases, while 
OLAF finds much more in Hungary than in 
other countries. Restrictions on access to 
information hinder corruption prevention 
and the application of fees for accessing 
public information has a deterrent effect on 
citizens and NGOs exercising their 
constitutional right. While the Freedom of 
Information Act has not been touched, 
piecemeal changes to other sectoral laws 
have continued, corroding the overall 
transparency and access-to-information 
framework.  

  No Progress Following deterioration until 
2019, the latest data for perceived judicial 
independence shows improvement based on 
the forthcoming 2020 EU Justice 
Scoreboard. Developments of checks and 
balances in the ordinary courts system have 
however continued to raise concerns. This 
has been confirmed by a statement of the 
Group of States against Corruption 
(GRECO), a report of the European 
Association of Judges and by a report of the 
Council of Europe Human Rights 
Commissioner. The National Judicial 
Council faced increasing difficulties in 
counter-balancing the powers of the 
President of the National Office of the 
Judiciary (European Commission, 2019g). 
The Parliament recently adopted a new 
piece of legislation in December 2019, 
introducing structural changes that may 
have a significant impact on the 
organisation of the justice system. There 
was no consultation of relevant stakeholders 
before the adoption of the law.  

  No Progress Stakeholder engagement in 

developing primary law is the lowest among 
the EU countries in the OECD. The 
indicators on regulatory quality and the use 
of evidence-based instruments rank 
Hungary in the bottom group of countries in 
the EU. A lack of meaningful consultation 
and impact assessment leads to a learning-
by-doing approach, which contributes to 

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.  

59 

A. Overview Table 

frequent changes to the legal framework. 
Several tailor-made legal acts penalise 
actors (e.g. sector-specific taxes); in other 
cases, they grant benefits (e.g. easing 
conflict of interest rules and qualification 
requirements for a specific public office) or 
monopolies.  

  Limited Progress While there have been 
some improvements aimed at simplifying 
the tax system, there is still a significant 
amount of complexity. The advertising tax 
was suspended in July 2019 and several 
employer contributions are expected to be 
integrated in a single contribution. Sector-
specific taxes distort the economy. The 
indicators measuring the presence of 
aggressive tax planning have improved in 
recent years. However, there has been no 
significant effort to prevent aggressive tax 
planning besides the implementation of EU 
directives.  

  No Progress No progress has been made in 
improving the competition environment in 
the services sector. Certain services 
continue to be entrusted to state-owned or 
private firms specifically created for these 
purposes. No changes have been made to 
improve the functioning of the retail sector.  

Continue simplifying the tax system, while 
strengthening it against the risk of 
aggressive tax planning.  

Improve competition and regulatory 
predictability in the services sector.  

Europe 2020 (national targets and progress)  

Employment  rate  target  set  in  the  National  Reform 
Programme (NRP): 75%. 

The  employment  rate  of  the  20-64  age  group 
continued to improve and reached 74.4% in 2018 and 
75.4% in the third quarter of 2018. It is above the EU 
average (73.2% in 2017). 

R&D target set in the NRP: 1.8% of GDP 

Expenditure  on  R&D  increased  by  0.18  percentage 
points to 1.53% of GDP in 2018.  

greenhouse 

National 
target:  
+10%  in  2020  compared  with  2005  (in  sectors  not 
included in the EU emissions trading scheme)  

emissions 

gas 

By 2018, emissions fell by 10% compared with 2005. 
The  2020  target  is  expected  to  be  met  by  a  wide 
margin. 

2020 renewable energy target: 13%  

Although  in  2018  the  preliminary  renewable  share 
(12.5%)  was  close  to  the  2020  target  (13%),  it 
decreased from 2017 (13.5%), owing to  lower share 
of  renewables  in  heating  and  cooling,  However,  the 
share  of  renewables  rose  above  8%  in  electricity 

60 

 
 
A. Overview Table 

generation.  

Energy efficiency, 2020 energy consumption targets:  

Hungary's  2020  energy  efficiency  target  is  24.1 
million  tons  of  oil  equivalent  (Mtoe)  expressed  in 
primary  energy  consumption  (14.4  Mtoe  expressed 
in final energy consumption)  

 The  increasing  trend  in  both  primary  and  final 
energy  consumption  amid  strong  economic  growth 
came  to  a  halt  in  2018  and  both  indicator  remained 
unchanged  compared  to  2017  (reaching  respectively  
24.5  and  18.5  Mtoe).  These  values  are  above  the 
respective  2020  targets,  implying  that  more  efforts 
need  to  be  made  in  the  remaining  two  years.  Final 
energy  consumption  target  will  be  difficult  to  meet 
without additional measures. 

Early school/training leaving target: below 10%.  

In 2018, the early school leaving remained at 12.5%, 
above  the  EU  average  of  10.6%.  The  rate  has  not 
improved since 2010. 

Tertiary  education  target:  34%  of  population  aged 
30-34.  

The tertiary education attainment rate for 30-34-year 
olds increased to 33.7% in 2018, which is close to the 
national  target,  but  significantly  below  the  EU 
average of 40.7%. 

Target  for  reducing  the  number  of  people  at  risk  of 
poverty or social exclusion, expressed as an absolute 
number of people: 450,000.  

In  2018,  the  population  at  risk  of  poverty  or 
exclusion was 908,000 lower than in 2008. Hungary 
significantly overachieves its national target. 

61 

 
 
ANNEX B: COMMISSION DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

62 

General government debt projections under baseline, alternative scenarios and sensitivity tests2018201920202021202220232024202520262027202820292030Gross debt ratio70.268.266.764.461.458.756.353.651.048.446.043.641.3Changes in the ratio (-1+2+3)-2.7-2.0-1.5-2.2-3.0-2.7-2.4-2.7-2.6-2.6-2.5-2.4-2.2of which(1) Primary balance (1.1+1.2+1.3)0.10.61.41.61.51.21.01.11.11.21.21.21.2(1.1) Structural primary balance (1.1.1-1.1.2+1.1.3)-1.4-0.90.20.91.01.01.01.11.11.21.21.21.2(1.1.1) Structural primary balance (bef. CoA)-1.4-0.90.20.90.90.90.90.90.90.90.90.90.9(1.1.2) Cost of ageing-0.1-0.1-0.1-0.2-0.2-0.3-0.3-0.4-0.4(1.1.3) Others (taxes and property incomes)0.00.00.00.00.00.00.00.00.0(1.2) Cyclical component1.51.71.10.70.50.20.00.00.00.00.00.00.0(1.3) One-off and other temporary measures0.0-0.20.00.00.00.00.00.00.00.00.00.00.0(2) Snowball effect (2.1+2.2+2.3)-4.1-3.4-1.8-1.3-1.6-1.5-1.4-1.6-1.5-1.4-1.2-1.2-1.0(2.1) Interest expenditure2.42.42.42.42.22.01.91.81.71.61.51.41.3(2.2) Growth effect-3.4-3.0-1.8-1.8-1.9-1.7-1.6-1.7-1.6-1.5-1.3-1.2-1.0(2.3) Inflation effect-3.2-2.8-2.4-2.0-1.9-1.8-1.7-1.6-1.6-1.5-1.4-1.3-1.3(3) Stock-flow adjustments1.62.01.70.70.00.00.00.00.00.00.00.00.0Note: For further information, see the European Commission Debt Sustainability Monitor (DSM) 2019. b. For the medium term, the risk category (low/medium/high) is based on the joint use of the S1 indicator and of the DSA results. The S1 indicator measures the fiscal adjustment required (cumulated over the 5 years following the forecast horizon and sustained after that) to bring the debt-to-GDP ratio to 60 % by 2034. The critical values used are 0 and 2.5 pps of GDP. The DSA classification is based on the results of five deterministic scenarios (baseline, historical SPB, higher interest rate, lower GDP growth and negative shock on the SPB scenarios) and the stochastic projections. Different criteria are used such as the projected debt level, the debt path, the realism of fiscal assumptions, the probability of debt stabilisation, and the size of uncertainties. c. For the long term, the risk category (low/medium/high) is based on the joint use of the S2 indicator and the DSA results. The S2 indicator measures the upfront and permanent fiscal adjustment required to stabilise the debt-to-GDP ratio over the infinite horizon, including the costs of ageing. The critical values used are 2 and 6 pps of GDP. The DSA results are used to further qualify the long term risk classification, in particular in cases when debt vulnerabilities are identified (a medium / high DSA risk category). [2]Thechartspresentaseriesofsensitivitytestsaroundthebaselinescenario,aswellasalternativepolicyscenarios,inparticular:thehistoricalstructuralprimarybalance(SPB)scenario(wheretheSPBissetatitshistoricalaverage),theStabilityandGrowthPact(SGP)scenario(wherefiscalpolicyisassumedtoevolveinlinewiththemainprovisionsoftheSGP),ahigherinterestratescenario(+1pp.comparedtothebaseline),alowerGDPgrowthscenario(-0.5pp.comparedtothebaseline)andanegativeshockontheSPB(calibratedonthebasisoftheforecastedchange).Anadversecombinedscenarioandenhancedsensitivitytests(ontheinterestrateandgrowth)arealsoincluded,aswellasstochasticprojections. Detailed information on the design of these projections can be found in the FSR 2018 and the DSM 2019.HU - Debt projections baseline scenario[1]Thefirsttablepresentsthebaselineno-fiscalpolicychangescenarioprojections.Itshowstheprojectedgovernmentdebtdynamicsanditsdecompositionbetweentheprimarybalance,snowballeffectsandstock-flowadjustments.Snowballeffectsmeasurethenetimpactofthecounteractingeffectsofinterestrates,inflation,realGDPgrowth(andexchangerates in some countries). Stock-flow adjustments include differences in cash and accrual accounting, net accumulation of assets, as well as valuation and other residual effects.[3] The second table presents the overall fiscal risk classification over the short, medium and long term. a. For the short-term, the risk category (low/high) is based on the S0 indicator. S0 is an early-detection indicator of fiscal stress in the upcoming year, based on 25 fiscal and financial-competitiveness variables that have proven in the past to be leading indicators of fiscal stress. The critical threshold beyond which fiscal distress is signalled is 0.46. 303540455055606570758020172018201920202021202220232024202520262027202820292030Debt as % of GDP -HUBaselineEnhanced lower GDP growth scenarioAdverse combined scenarioEnhanced higher interest rate scenario30405060708020172018201920202021202220232024(% of GDP)Stochastic debt projections 2020-2024 -HUp10_p20p20_p40p40_p60p60_p80p80_p90p50Baseline303540455055606570758020172018201920202021202220232024202520262027202820292030Debt as % of GDP -HUBaselineHistorical SPB scenarioSGP scenario303540455055606570758020172018201920202021202220232024202520262027202820292030Debt as % of GDP -HUBaselineHigher interest rate scenarioNegative shock on the SPBLower GDP growth scenarioBaselineHistorical SPBLower GDP growthHigher interest rateNegative shock on SPBStochastic projectionsRisk categoryLOWLOWLOWLOWLOWMEDIUMDebt level (2030)41.347.744.044.449.4Debt peak year20192019201920192019Percentile rank41.0%55.0%Probability debt higher22.0%Dif. between percentiles36.9MEDIUMLong termMEDIUM(S2 = 2.7)S1S2Short termLOW(S0 = 0.3)DSALOWDebt sustainability analysis (detail)Medium termLOWLOW(S1 = -2.7) 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial market indicators 

(1) Latest data Q3 2019. Includes not only banks but all monetary financial institutions excluding central banks. 
(2) Latest data Q2 2019. 
(3) Quarterly values are annualized. 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

63 

201420152016201720182019Total assets of the banking sector (% of GDP)(1)107.2100.2101.896.594.291.2Share of assets of the five largest banks (% of total assets)49.349.449.849.650.0-Foreign ownership of banking system (% of total assets)(2)47.647.047.746.347.245.2Financial soundness indicators:(2)              - non-performing loans (% of total loans)19.415.211.98.45.45.0              - capital adequacy ratio (%)17.016.918.016.218.517.9              - return on equity (%)(3)-21.90.311.714.514.713.9Bank loans to the private sector (year-on-year % change)(1)-3.5-8.13.36.411.014.4Lending for house purchase (year-on-year % change)(1)-6.1-10.3-0.74.810.99.5Loan-to-deposit ratio(2)89.178.674.571.872.775.5Central bank liquidity as % of liabilities(1)3.74.95.13.92.82.5Private debt (% of GDP)90.783.276.670.069.3-Gross external debt (% of GDP)(2) - public46.341.136.629.727.626.4    - private79.172.368.857.158.158.8Long-term interest rate spread versus Bund (basis points)*364.6293.7305.3264.5266.2276.6Credit default swap spreads for sovereign securities (5-year)*179.2139.1131.398.680.275.7 
 
 
    
 
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

(1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).       
(2) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within two weeks.       
(3) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2019.       
(4) Reduction in percentage of the risk of poverty rate, due to social transfers (calculated comparing at-risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation).       
(5) Average of first three quarters of 2019 for the employment rate, unemployment rate and gender employment gap. 
Source: Eurostat 

64 

201420152016201720182019 5Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)11.411.612.412.512.5:Gender employment gap (pps)13.313.714.015.315.315.5Income inequality, measured as quintile share ratio (S80/S20)4.34.34.34.34.4:At-risk-of-poverty or social exclusion rate(1) (AROPE)31.828.226.325.619.6:Young people neither in employment nor in education and training (% of population aged 15-24)13.611.611.011.010.7:Dynamic labour markets and fair working conditionsEmployment rate (20-64 years)66.768.971.573.374.475.2Unemployment rate(2) (15-74 years)7.76.85.14.23.73.4Long-term unemployment rate (as % of active population)3.73.12.41.71.41.2Gross disposable income of households in real terms per capita(3) (Index 2008=100) 100.8104.9110.2115.3121.1:Annual net earnings of a full-time single worker without children earning an average wage (levels in PPS, three-year average)112561148011712:::Annual net earnings of a full-time single worker without children earning an average wage (percentage change, real terms, three-year average)2.723.454.46:::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction(4)43.642.043.846.448.8:Children aged less than 3 years in formal childcare14.415.415.613.816.5:Self-reported unmet need for medical care2.52.61.31.00.8:Individuals who have basic or above basic overall digital skills (% of population aged 16-74):50.051.050.0:: 
 
    
 
C. Standard Tables 

Table C.3: 

Labour market and education indicators 

* Non-scoreboard indicator       
(1) Long-term unemployed are people who have been unemployed for at least 12 months.       
(2) Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included.       
(3) PISA (OECD) results for low achievement in mathematics for 15 year-olds.       
(4) Impact of socio-economic and cultural status on PISA (OECD) scores.       
(5) Average of first three quarters of 2019. Data for youth unemployment rate is seasonally adjusted.  
Source: Eurostat, OECD 

65 

Labour market indicators201420152016201720182019 5Activity rate (15-64)67.068.670.171.271.972.6Employment in current job by durationFrom 0 to 11 months14.413.814.013.212.9:From 12 to 23 months9.09.29.510.310.4:From 24 to 59 months19.718.619.120.020.9:60 months or over56.658.257.456.455.8:Employment growth* (% change from previous year)4.62.23.71.92.41.9Employment rate of women(% of female population aged 20-64)60.262.164.665.766.867.5Employment rate of men (% of male population aged 20-64)73.575.878.681.082.183.0Employment rate of older workers* (% of population aged 55-64)41.745.349.851.754.456.4Part-time employment* (% of total employment, aged 15-64)6.05.74.84.34.24.5Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)10.811.49.78.87.36.7Transition rate from temporary to permanent employment(3-year average)38.038.537.232.631.2:Youth unemployment rate (% active population aged 15-24)20.417.312.910.710.211.3Gender gap in part-time employment4.23.63.63.63.84.4Gender pay gap(2) (in undadjusted form)15.114.014.014.2::Education and training indicators201420152016201720182019Adult participation in learning(% of people aged 25-64 participating in education and  training)3.37.16.36.26.0:Underachievement in education(3):28.0::::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)34.134.333.032.133.7:Variation in performance explained by students' socio-economic status(4):21.4:::: 
 
    
 
C. Standard Tables 

Table C.4: 

Social inclusion and health indicators 

* Non-scoreboard indicator       
(1) At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income.        
(2) Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay 
their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone.       
(3) Percentage of total population living in overcrowded dwellings and exhibiting housing deprivation.       
(4) People living in households with very low work intensity: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months.       
(5) Ratio of the median individual gross pensions of people aged 65-74 relative to the median individual gross earnings of 
people aged 50-59.       
(6) Fixed broadband take up (33%), mobile broadband take up (22%), speed (33%) and affordability (11%), from the Digital 
Scoreboard. 
Source: Eurostat, OECD 

66 

201320142015201620172018Expenditure on social protection benefits* (% of GDP)Sickness/healthcare4.94.85.05.15.0:Disability1.51.41.31.21.1:Old age and survivors10.710.29.59.39.0:Family/children2.52.32.32.22.2:Unemployment0.50.40.40.30.3:Housing0.30.30.30.30.4:Social exclusion n.e.c.0.10.10.10.10.1:Total20.519.518.818.618.1:of which: means-tested benefits0.90.70.80.70.8:General government expenditure by function (% of GDP)Social protection16.515.414.814.514.0:Health5.04.85.24.84.8:Education4.65.15.14.95.1:Out-of-pocket expenditure on healthcare28.428.327.527.726.9:Children at risk of poverty or social exclusion (% of people aged 0-17)*43.941.836.133.631.623.8At-risk-of-poverty  rate(1) (% of total population)15.015.014.914.513.412.8In-work at-risk-of-poverty rate (% of persons employed)7.06.79.39.610.28.4Severe material deprivation rate(2)  (% of total population)27.824.019.416.214.510.1Severe housing deprivation rate(3), by tenure statusOwner, with mortgage or loan14.813.911.917.214.17.0Tenant, rent at market price30.924.232.223.722.014.3Proportion of people living in low work intensity households(4) (% of people aged 0-59)13.612.89.48.26.65.7Poverty thresholds, expressed in national currency at constant prices*564058577231605976636370665923702143Healthy life yearsFemales6.16.15.96.46.7:Males6.26.05.96.76.7:Aggregate replacement ratio for pensions(5)0.60.60.60.70.60.6Connectivity dimension of the Digital Economy and Society Index (DESI)(6):43.753.559.663.6:GINI coefficient before taxes and transfers*50.952.549.949.848.8:GINI coefficient after taxes and transfers*28.028.628.228.228.1: 
 
    
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

1 Value added in constant prices divided by the number of persons employed.       
2 Compensation of employees in current prices divided by value added in constant prices.       
3 The methodologies, including the assumptions, for this indicator are shown in detail here: 
http://www.doingbusiness.org/methodology.        
4 Average of the answer to question Q7B_a. "[Bank loan]: If you applied and tried to negotiate for this type of financing over 
the past six months, what was the outcome?". Answers were codified as follows: zero if received everything, one if received 
75% and above, two if received below 75%, three if refused or rejected and treated as missing values if the application is still 
pending or don't know.       
5 Percentage population aged 15-64 having completed tertiary education.       
6 Percentage population aged 20-24 having attained at least upper secondary education.       
7 Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       
8 Simple average of the indicators of regulation for lawyers, accountants, architects and engineers.       
9 Aggregate OECD indicators of regulation in energy, transport and communications (ETCR). 
* Please be aware that the indicator values from 2003 to 2013 are comparable, however the methodology has considerably 
changed in 2018 and therefore past vintages cannot be compared with the 2018 PMR indicators. 
Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation 
indicators); SAFE (for outcome of SMEs' applications for bank loans). 

67 

Performance indicators201320142015201620172018Labour productivity per person1 growth (t/t-1) in %Labour productivity growth in industry1.144.238.76-2.10-1.13-4.31Labour productivity growth in construction9.785.007.85-20.5711.617.95Labour productivity growth in market services-0.17-2.75-0.19-0.134.658.59Unit Labour Cost (ULC) index2 growth (t/t-1) in %ULC growth in industry2.88-0.07-1.935.505.739.56ULC growth in construction-5.66-9.83-5.3216.36-6.82-5.31ULC growth in market services-0.750.63-0.491.731.990.27Business environment201320142015201620172018Time needed to enforce contracts3 (days)605605605605605605Time needed to start a business3 (days)7.07.07.07.07.07.0Outcome of applications by SMEs for bank loans40.671.010.390.380.820.49Research and innovation201320142015201620172018R&D intensity1.391.351.351.191.331.53General government expenditure on education as % of GDP4.605.105.104.905.10:Employed people with tertiary education and/or people employed in S&T as % of total employment373636363536Population having completed tertiary education5202021212122Young people with upper secondary education6848584848485Trade balance of high technology products as % of GDP0.460.28-0.040.240.33-0.09Product and service markets and competition2003200820132018*OECD product market regulation (PMR)7, overall2.111.541.331.32OECD PMR7, retail0.791.442.061.12OECD PMR7, professional services82.863.023.052.15OECD PMR7, network industries93.311.871.731.50 
 
  
 
C. Standard Tables 

Table C.6:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 prices)   
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)   
          Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)   
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR)   
          Waste intensity: waste (in kg) divided by GDP (in EUR)   
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP.    
Weighting of energy in HICP: the proportion of 'energy' items in the consumption basket used for the construction of the HICP.   
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change).   
Real unit energy cost: real energy costs as % of total value added for the economy.   
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 
EUR).   
Real unit energy costs for manufacturing industry excluding refining: real costs as % of value added for manufacturing sectors.   
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP.   
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000 -100 000 GJ; figures 
excl. VAT.   
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste.   
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP.   
Proportion of GHG emissions covered by EU emissions trading system (ETS) (excluding aviation): based on GHG emissions.   
(excl. land use, land use change and forestry) as reported by Member States to the European Environment Agency.   
Transport energy intensity: final energy consumption of transport activity including international aviation (kgoe) divided by 
gross value added in transportation and storage sector (in 2010 EUR).   
Transport carbon intensity: GHG emissions in transportation and storage sector divided by gross value added in transportation 
and storage sector (in 2010 EUR).   
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels.   
Aggregated supplier concentration index: Herfindahl index covering oil, gas and coal. Smaller values indicate larger 
diversification and hence lower risk.   
Diversification of the energy mix: Herfindahl index covering natural gas, total petrol products, nuclear heat, renewable 
energies and solid fuels. Smaller values indicate larger diversification.   
* European Commission and European Environment Agency - 2018 provisional data. 
Source: European Commission and European Environment Agency (Share of GHG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes and GDP); Eurostat (all other indicators).  

68 

Green growth performance201320142015201620172018MacroeconomicEnergy intensity kgoe / €0.240.230.230.230.230.22Carbon intensity kg / €0.560.540.550.550.55-Resource intensity (reciprocal of resource productivity)kg / €0.981.211.141.071.101.23Waste intensity kg / €-0.16-0.14--Energy balance of trade % GDP-6.3-6.1-4.1-3.1-3.7-3.8Weighting of energy in HICP%17.0416.9915.9715.4014.5414.42Difference between energy price change and inflation p.p.-11.7-10.9-2.7-0.5-1.6-1.5Real unit of energy cost% of value added17.817.118.019.0--Ratio of environmental taxes to labour taxesratio0.160.180.190.190.20-Environmental taxes% GDP2.52.52.52.62.52.4Sectoral Industry energy intensity kgoe / € 0.150.150.140.150.150.15Real unit energy cost for manufacturing industry excl. refining% of value added17.716.416.516.6--Share of energy-intensive industries in the economy% GDP7.947.877.948.378.117.92Electricity prices for medium-sized industrial users€ / kWh0.100.090.090.080.080.08Gas prices for medium-sized industrial users€ / kWh0.040.040.040.030.030.03Public R&D for energy % GDP0.040.000.010.010.020.02Public R&D for environmental protection% GDP0.020.010.010.010.010.01Municipal waste recycling rate%26.430.532.234.735.037.4Share of GHG emissions covered by ETS*%33.232.932.231.632.431.6Transport energy intensitykgoe / €0.690.750.800.790.810.84Transport carbon intensitykg / €0.770.820.820.730.730.73Security of energy supplyEnergy import dependency%50.159.853.955.862.6-Aggregated supplier concentration indexHHI65.976.652.057.567.9-Diversification of energy mixHHI21.621.321.422.122.622.8 
    
 
ANNEX D: INVESTMENT GUIDANCE ON JUST TRANSITION FUND 

2021-2027 FOR HUNGARY 

Building  on  the  Commission  proposal (30),  this  Annex  presents  the  preliminary  Commission  services’ 
views on priority investment areas and framework conditions for effective delivery for the 2021-2027 Just 
Transition  Fund  investments  in  Hungary.  These  priority  investment  areas  are  derived  from  the  broader 
analysis  of  territories  facing  serious  socio-economic  challenges  deriving  from  the  transition  process 
towards a climate-neutral economy of the Union by 2050 in Hungary, assessed in the report. This Annex 
provides the basis for a dialogue between Hungary and the Commission services as well as the relevant 
guidance  for  the  Member  States  in  preparing  their  territorial  just  transition  plans,  which  will  form  the 
basis for programming the Just Transition Fund. The Just Transition Fund investments complement those 
under  Cohesion  Policy  funding  for  which  guidance  in  the  form  of  Annex  D  was  given  in  the  2019 
Country Report for Hungary (31). 

The  Mátra power plant in Heves county  with the  associated two coal mines is the biggest CO2 emitter. 
The  Baranya  county  relies  heavily  on  energy-intensive  industries  (treatment  and  disposal  of  non-
hazardous  waste  and  manufacture  of  cement)  where  process  related  greenhouse  gas  emissions  intensity 
significantly exceed the EU average. 

The  Mátra  power  plant  produces  15%  of  the  total  electric  power  but  accounts  for  nearly  50%  of  the 
energy sector emissions (32). 2,500 people work in the two coal mines and the coal power plant. Coal is 
used for heating, especially in the poorest households, and contributes significantly to the greenhouse gas 
emissions.  Moving  away  from  fossil  fuel  production  is  likely  to  lead  to  a  substantial  reconversion  of 
extraction  sites  and  energy-generating  plants.  As  a  result,  a  significant  number  of  people  directly  or 
indirectly employed by the  fossil  fuel  value chain could be affected by the  shift to a greener economy. 
Workers affected by this transition would need to be equipped with new and in-demand skills to increase 
their employability prospects and receive tailored support by employment services to find new jobs. The 
smart  specialisation  strategies  (33)  provide  an  important  framework  to  set  priorities  for  innovation  in 
support  of  economic  transformation.  The  Just  Transition  Fund  has  the  potential  to  promote  economic 
diversification and reskilling and increase the attractiveness of the county for investments, 

In order to tackle these transition challenges, priority investment needs have been identified to cover the 
socio-economic costs of the transition. Key actions of the Just Transition Fund could  target in particular: 

 

 

 

 
 
 
 

investments in the deployment of technology and infrastructures for affordable clean energy, in 
greenhouse gas emission reduction, energy efficiency and renewable energy; 
investments in enhancing the circular economy, including through waste prevention, reduction, 
resource efficiency, reuse, repair and recycling; 
investments  in  regeneration  and  decontamination  of  sites,  land  restoration  and  repurposing 
projects; 
upskilling and reskilling of workers; 
job-search assistance to jobseekers; 
active inclusion of jobseekers; 
technical assistance. 

The  carbon  intensity  of  the  industry  in  Baranya  county  highlights  the  scale  of  the  decarbonisation 
challenge, suggesting that many firms (including local SMEs that provide services for the industry) would 
be  likely  to  undergo  by  2030  significant  restructuring  in  their  industrial  processes.  As  a  result,  a 

(30)  This Annex is to be considered in conjunction with the EC proposal for a Regulation of the European Parliament and of the 
Council  on  the  Just  Transition  Fund  2021-2027  (COM(2020)22)  and  the  EC  proposal  for  a  Regulation  of  the  European 
Parliament and of the Council laying down common provisions on the European Regional Development Fund, the European 
Social Fund Plus, the Cohesion Fund, and the European Maritime and Fisheries Fund and financial rules for those and for the 
Asylum and Migration Fund, the Internal Security Fund and the Border Management and Visa Instrument (COM(2020)23) 

(31) SWD(2019) 1016 final 
(32) The second coal power plant of the country, in Oroszlány (Komárom-Esztergom county) is no longer in operation. It has been 

deactivated but not yet closed. 

(33) As defined in Article 2(3) of Regulation No 1303/2013 (CPR) 

69 

 
                                                           
D. Investment guidance on Just Transition Fund 2021-2027 for Hungary 

significant  number  of  people  directly  or  in-directly  employed  by  the  value  chain  related  to  energy-
intensive  industries  could  be  at  risk.  Active  Labour  Market  Policies  aimed  at  equipping  those  affected 
with skills and competences in demand by employers could provide a valuable off-setting contribution. 
Providing targeted job search support to ensure a rapid transition into new employment would be equally 
important for reducing negative social impact. Based on this preliminary assessment, it appears warranted 
that the Just Transition Fund also intervenes in this region. 

Industrial  sites  in  this  area,  performing  activities  listed  in  Annex  I  to  Directive  2003/87/EC  employ  a 
substantial  number  of  workers  and  their  activity  is  at  risk  due  to  their  high  greenhouse  gas  emissions. 
Support  to  investments  to  reduce  the  emissions  could  be  considered,  provided  that  they  achieve  a 
substantial  reduction  of  emissions  (going  substantially  below  the  relevant  benchmarks  used  for  free 
allocation under Directive 2003/87/EC) and on the condition that the investments are compatible with the 
European Green Deal. 

In  order  to  tackle  these  transition  challenges,  investment  needs  have  been  identified  for  making  the 
regional economy more modern and competitive. Key actions of the Just Transition Fund could target in 
particular: 

 

 

 

 
 
 
 

investments in the deployment of technology and infrastructures for affordable clean energy, in 
greenhouse gas emission reductions, energy efficiency and renewable energy; 
investments  in  research  and  innovation  activities  and  fostering  the  transfer  of  advanced 
technologies; 
investments in enhancing the circular economy, including through waste prevention, reduction, 
resource efficiency, reuse, repair and recycling; 
upskilling and reskilling of workers; 
job-search assistance to jobseekers; 
active inclusion of jobseekers; 
technical assistance. 

70 

 
ANNEX E: PROGRESS TOWARDS THE SUSTAINABLE 

DEVELOPMENT GOALS (SDGS) 

Assessment of Hungary’s short-term progress towards the SDGs (34) 

Table E.1 shows the data for Hungary and the EU-28 for the indicators included in the EU SDG indicator 
set used by Eurostat for  monitoring progress towards the SDGs in an EU context (35). As the short-term 
trend at EU-level is assessed over a 5-year period, both the value at the beginning of the period and the 
latest available value is presented. The indicators are regularly updated on the  SDI dedicated section of 
the Eurostat website. 

Table E.1: 

Indicators measuring Hungary’s progress towards the SDGs 

(34)  Data  extracted  on  9  February  2020 

from 

the  Eurostat  database 

(official  EU  SDG 

indicator 

set; 

see 

https://ec.europa.eu/eurostat/web/sdi/main-tables).  

(35)  The EU SDG indicator set is aligned as far as appropriate with the UN list of global indicators, noting that the UN indicators are 
selected for global level reporting and are therefore not always relevant in an EU context. The EU SDG indicators have strong 
links with EU policy initiatives. 

(Continued on the next page) 

71 

 
 
                                                           
 
  
 
E. Progress towards the Sustainable Development Goals (SDGs) 

Table (continued) 

(Continued on the next page) 

72 

 
 
 
   
 
E. Progress towards the Sustainable Development Goals (SDGs) 

Table (continued) 

(Continued on the next page) 

73 

 
 
 
   
 
E. Progress towards the Sustainable Development Goals (SDGs) 

Table (continued) 

(Continued on the next page) 

74 

 
 
 
   
 
E. Progress towards the Sustainable Development Goals (SDGs) 

Table (continued) 

Source: Eurostat 

75 

 
 
 
 
 
   
 
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