REPORT FROM THE COMMISSION Hungary Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union
Date: 2020-05-20
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Hungary, budget deficit, budget policy, budgetary control, epidemic, gross domestic product, infectious disease, macroeconomics, public debt, stability pact

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 20.5.2020  COM(2020) 552 final  REPORT FROM THE COMMISSION Hungary  Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union  
 
 
REPORT FROM THE COMMISSION 

Hungary 

Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of 
the European Union 

1. 

INTRODUCTION  

On  20  March  2020,  the  Commission  adopted  a  Communication  on  the  activation  of  the 
general  escape  clause  of  the  Stability  and  Growth  Pact.   The  clause,  as  set  out  in  Articles 
5(1),  6(3),  9(1)  and  10(3)  of  Regulation  (EC)  1466/97  and  Articles  3(5)  and  5(2)  of 
Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe 
economic downturn. In its Communication, the Commission shared with the Council its view 
that, given the expected severe economic downturn resulting from the COVID-19 outbreak, 
the  current  conditions  permit  activation  of  the  clause.  On  23  March  2020,  the  Ministers  of 
Finance of the Member States agreed with the assessment of the Commission. The activation 
of  the  general  escape  clause  allows  for  a  temporary  departure  from  the  adjustment  path 
towards  the  medium-term  budgetary  objective,  provided  that  this  does  not  endanger  fiscal 
sustainability in the medium term. For the corrective arm, the Council may also decide, on a 
recommendation  from  the  Commission,  to  adopt  a  revised  fiscal  trajectory.  The  general 
escape  clause  does  not  suspend  the  procedures  of  the  Stability  and  Growth  Pact.  It  allows 
Member States to depart from the budgetary requirements that would normally apply while 
enabling  the  Commission  and  the  Council  to  undertake  the  necessary  policy  coordination 
measures within the framework of the Pact. 

Data notified by the Hungarian authorities on 31 March 2020 and subsequently validated by 
Eurostat1 show that the general government deficit in Hungary reached 2.0% of GDP in 2019, 
while  general  government  gross  debt  stood  at  66.3%  of  GDP.  According  to  the  2020 
Convergence Programme, Hungary plans a deficit of 3.8% of GDP in 2020, while the debt is 
planned at 72.6% of GDP. 

The  planned  deficit  figure  for  2020  provides  prima  facie  evidence  of  the  existence  of  an 
excessive deficit as defined by the Stability and Growth Pact.  

Against this background, the Commission has therefore prepared this report, which analyses 
Hungary’s compliance with the deficit and debt criteria of the Treaty. It takes into account all 
relevant  factors  and  gives  due  consideration  to  the  major  economic  shock  linked  to  the 
COVID-19 pandemic.  

1 

https://ec.europa.eu/eurostat/documents/2995521/10294648/2-22042020-AP-EN.pdf/6c8f0ef4-6221-1094-

fef7-a07764b0369f 

1 

 
 
 
 
 
                                                           
Table 1. General government deficit and debt (% of GDP) 

Deficit 
criterion 
Debt 
criterion 

General government 
balance 
General government gross 
debt 

2016 

2017 

2018 

2019 

2020 
COM 

2021 
COM 

-1.8 

-2.5 

-2.1 

-2.0 

-5.2 

-4.0 

75.5 

72.9 

70.2 

66.3 

75.0 

73.5 

Source: Eurostat, Commission 2020 spring forecast 

2. 

DEFICIT CRITERION  

Based on the 2020 Convergence Programme, Hungary’s general government deficit in 2020 
is expected to reach 3.8% of GDP, is above and not close to the Treaty reference value of 3% 
of GDP. 

The planned excess over the Treaty reference value in 2020 is exceptional, as it results from a 
severe economic downturn. Taking into account the impact of the COVID-19 pandemic, the 
Commission 2020 spring forecast projects a contraction of real GDP by 7% in 2020. 

The  planned  excess  over  the  Treaty  reference  value  is  not  temporary  based  on  the 
Commission 2020 spring forecast, which projects the deficit to remain above 3% of GDP in 
2021.  

In  sum,  the  planned  deficit  for  2020  is  above  and  not  close  to  the  3%  of  GDP  Treaty 
reference  value.  The  planned  excess  is  considered  to  be  exceptional  but  not  temporary  as 
defined by of the Treaty and the Stability and Growth Pact. Hence, the analysis suggests that 
prima facie the deficit criterion as defined by the Treaty and Regulation (EC) No 1467/97 is 
not fulfilled. 

3. 

DEBT CRITERION  

The  government  debt-to-GDP  ratio  decreased  from  70.2%  in  2018  to  66.3%  in  2019.  The 
debt-reducing  effect  stemming  from  real  GDP  growth  and  the  high  GDP  deflator,  both 
through  the  denominator  effect,  more  than  offset  the  marginally  debt-increasing  impact  of 
stock-flow adjustments.  

The notified data show that Hungary complied with the debt reduction benchmark in 2019, as 
the gap to the benchmark is -5.2% of GDP. 

The analysis thus suggests that the debt criterion is fulfilled based on the 2019 outturn data. 

4. 

RELEVANT FACTORS 

Article 126(3) of the Treaty provides that, if a Member State does not fulfil the requirements 
under one or both of those criteria, the Commission has to prepare a report. That report must 
also  “take  into  account  whether  the  government  deficit  exceeds  government  investment 
expenditure  and  take  into  account  all  other  relevant  factors,  including  the  medium-term 
economic and budgetary position of the Member State”. 

Those factors are further clarified in Article 2(3) of Regulation (EC) No 1467/97, which also 
provides  that  “any  other  factors  which,  in  the  opinion  of  the  Member  State  concerned,  are 

2 

 
 
 
 
 
relevant in order to comprehensively assess compliance with the deficit and debt criteria and 
which the Member State has put forward to the Council and to the Commission” need to be 
given due consideration. 

As specified in Article 2(4) of Regulation (EC) No 1467/97, as regards the deficit criterion, 
since  the  government  debt-to-GDP  ratio  in  2020  exceeds  the  60%  reference  value  and  the 
double condition is not met - i.e. that the deficit remains close to the reference value and that 
its  excess  over  the  reference  value  is  temporary  -  the  relevant  factors  cannot  be  taken  into 
account  in  the  steps  leading  to  the  decision  on  the  existence  of  an  excessive  deficit  on  the 
basis of the deficit criterion for Hungary. 

In the current  situation,  a key  additional factor to  take into consideration  regarding 2020 is 
the economic impact of the COVID-19 pandemic, which has a very substantial impact on the 
budgetary situation and  results in  a highly  uncertain outlook. The pandemic has also  led to 
the activation of the general escape clause. 

4.1. 

 COVID-19 pandemic 

The  COVID-19  pandemic  has  led  to  a  major  economic  shock  that  is  having  a  significant 
negative  impact  throughout  the  European  Union.  The  consequences  for  GDP  growth  will 
depend  on  the  duration  of  both  the  pandemic  and  of  the  measures  taken  by  national 
authorities and at European and global level to slow its spread, protect production capacities 
and  support  aggregate  demand.  Member  States  have  already  adopted  or  are  adopting 
budgetary  measures  to  increase  the  capacity  of  health  systems  and  provide  relief  to  those 
individuals  and  sectors  that  are  particularly  affected.  Significant  liquidity  support  measures 
and  other  guarantees  have  also  been  adopted.  Subject  to  more  detailed  information,  the 
competent statistical authorities are to examine whether those measures entail an immediate 
impact on the general government balance or not. Together with the fall in economic activity, 
those measures will contribute to substantially higher government deficit and debt positions. 

4.2 

Medium-term economic position  

Before  the  COVID-19  pandemic,  the  Hungarian  economy  was  on  track  for  a  gradual 
slowdown after years of outstanding growth. The Commission 2020 winter forecast expected 
real  GDP  growth  to  decrease  from  4.9%  in  2019  to  3.4%  in  2020  and  2.8%  in  2021.  The 
COVID-19  pandemic  changed  that  picture  radically.  Containment  measures  to  fight  the 
pandemic severely restrict  economic activity in  the short term.  The depth and length  of the 
recession is difficult to judge at this moment but early indicators point to a rapid decline in 
economic  activity  and  employment.  The  Commission  2020  spring  forecast  is  based  on  the 
assumption  that  the  sanitary  measures  will  largely  be  lifted  by  the  third  quarter  of  2020, 
enabling a rebound in output. Hungarian real GDP is projected to decrease by 7% in 2020. 
The  unemployment  rate  is  projected  to  rise  from  3.4%  in  2019  to  an  average  7%  in  2020. 
This a mitigating factor in the assessment of Hungary’s compliance with the deficit criterion 
in 2020. 

That projection is surrounded by an unusually high degree of uncertainty. The primary source 
of uncertainty is the duration of the pandemic and the containment measures.  

3 

 
 
4.3 

 Medium-term budgetary position 

Hungary has been under consecutive Significant Deviation Procedures since June 2018. Since 
then, the Council has issued bi-annual recommendations to which Hungary has not responded 
with  effective  action,  repeatedly  significantly  deviating  from  the  recommended  adjustment 
path. 

On 14 June 2019, Hungary was recommended to ensure that the nominal growth rate of net 
primary  government  expenditure  does  not  exceed  3.3%  (‘the  expenditure  benchmark’)  in 
2019,  corresponding  to  a  structural  adjustment  of  1.0%  of  GDP2.  The  overall  assessment 
points to a significant deviation from the recommended adjustment path towards the medium-
term budgetary objective in 2019 and over 2018-2019 taken together. 

The  Convergence  Programme  provides  information  on  new  measures  to  contain  the 
pandemic  and  to  support  the  economy.  Based  on  the  Convergence  Programme,  the  policy 
measures  adopted  so  far  to  mitigate  the  economic  and  social  impact  of  the  COVID-19 
pandemic are estimated to have a budgetary impact of 2.8% of GDP in 2020. However, those 
are  entirely  financed  through  reallocation  of  expenditures  within  the  budget,  reserves  and 
new taxes. The mitigating measures include measures aimed at supporting the labour market, 
tax reliefs for business and the costs related to the medical emergency. Additional measures 
to support the recovery (1.4% of GDP) and to support the labour market (0.4% of GDP) have 
been  announced  but  have  not  yet  been  adopted.  Overall,  while  total  revenue  remains 
unchanged compared to 2019, current expenditure is expected to increase substantially, only 
partly compensated by a cut in capital expenditure.  

In  2021,  according  to  the  Convergence  Programme,  the  deficit  is  expected  to  decrease  to 
2.7%  of  GDP.  The  recovery  in  tax  revenue  is  expected  to  be  modest,  whereas  current 
expenditure  is  expected  to  drop,  while  public  investment  is  projected  to  increase  sharply, 
supported  also  by  Union  funds.  In  the  medium  term,  the  Convergence  Programme  plans  to 
decrease the deficit to 2.2% in 2022 and to reach 1.6% of GDP in 2023 and 1.0% of GDP in 
2024.  Those  plans  are  based  on  macroeconomic  assumptions  that  assume  an  average  real 
GDP growth of around 4.4% in the 2022-2024 period. 

4.4.  Medium-term government debt position 

According  to  the  Commission  2020spring  forecast,  general  government  debt  is  expected  to 
rise from 66.3% of GDP in 2019 to 75.0% by 2020.  

The debt sustainability analysis has been updated with the Commission 2020 spring forecast. 
That analysis indicates that, notwithstanding risks, the debt position remains sustainable over 
the medium-term, which takes into account important mitigating factors (including the debt 
profile). In particular, while the government debt position has deteriorated as a result of the 
COVID-19 crisis, the debt ratio in the baseline is expected to be on a sustainable (declining) 
trajectory over the medium term.3 

2 Council Recommendation of 14 June 2019 with a view to correcting the significant observed deviation from 
the  adjustment path towards the  medium-term budgetary objective in Hungary (2019/C 210/02),  OJ C 210, 
21.6.2019, p. 4 

3 The baseline is based on the Commission Spring 2020 forecast. Beyond 2021, a gradual adjustment of fiscal 
policy is assumed, consistent with the EU economic and fiscal coordination and surveillance frameworks. Real 
GDP growth is projected according to the so-called EPC/OGWG T+10 methodology. In particular, (real) actual 

4 

 
 
                                                           
 
Graph 1: Government debt-to-GDP ratio, Hungary, % of GDP 

90

80

70

60

50

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Baseline

Adverse scenario

Source: Commission services 

4.5 

Other factors put forward by the Member State 

On  11  May  2020,  the  Hungarian  authorities  transmitted  a  letter  with  relevant  factors  in 
accordance with Article 2(3) of Regulation (EC) No 1467/97. The analysis presented in the 
previous sections already broadly covers the key factors put forward by the authorities.  

5. 

CONCLUSIONS 

According to the Convergence Programme, Hungary’s general government deficit in 2020 is 
planned to reach 3.8% of GDP, above and not close to the 3% of GDP Treaty reference value. 
The  planned  excess  over  the  reference  value  is  considered  to  be  exceptional  but  not 
temporary. 

The general government gross debt stood at 66.3% of GDP at the end of 2019, above the 60% 
of  GDP  Treaty  reference  value.  Hungary  complied  with  the  debt  reduction  benchmark  in 
2019.  

In line with the Treaty and the Stability and Growth Pact, this report also examined relevant 
factors. As specified in Article 2(4) of Regulation (EC) No 1467/97, as regards compliance 
with  the  deficit  criterion  in  2020,  since  the  government  debt-to-GDP  ratio  in  2020  exceeds 
the  60%  reference  value  and  the  double  condition  is  not  met  -  i.e.  that  the  deficit  remains 
close  to  the  reference  value  and  that  its  excess  over  the  reference  value  is  temporary  -  the 
relevant  factors  cannot  be  taken  into  account  in  the  steps  leading  to  the  decision  on  the 
existence of an excessive deficit on the basis of the deficit criterion for Hungary. 

Overall,  the  analysis  suggests  that  the  deficit  criterion  as  defined  in  the  Treaty  and  in 
Regulation (EC) No 1467/1997 is not fulfilled. 

GDP  growth  is  driven  by  its  potential  growth  and  affected  by  any  additional  fiscal  adjustment  considered 
(through the fiscal multiplier). Inflation is assumed to converge gradually to 2%. Interest rates assumptions are 
set in line with financial market expectations. Under the adverse scenario, higher interest rates (by 500 bps.) and 
lower GDP growth (by -0.5 pp.), with respect to the baseline, are assumed (throughout the projection horizon). 

5