COMMISSION STAFF WORKING DOCUMENT In-depth review for Hungary Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2023 European Semester – Spring Package
Date: 2023-05-24
Institutions: European Commission, Secretariat-General
Subjects: European Semester, Hungary, competitiveness, economic policy, energy policy, fiscal policy, inflation, interest, macroeconomics, property market

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 24.5.2023  SWD(2023) 639 final  COMMISSION STAFF WORKING DOCUMENT In-depth review for Hungary Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2023 European Semester – Spring Package {COM(2023) 600 final} - {SWD(2023) 628 final} - {SWD(2023) 629 final} - {SWD(2023) 630 final} - {SWD(2023) 631 final} - {SWD(2023) 632 final} - {SWD(2023) 633 final} - {SWD(2023) 634 final} - {SWD(2023) 635 final} - {SWD(2023) 636 final} - {SWD(2023) 637 final} - {SWD(2023) 638 final} - {SWD(2023) 640 final} - {SWD(2023) 641 final} - {SWD(2023) 642 final} - {SWD(2023) 643 final} - {SWD(2023) 644 final}  
 
 
Hungary 

In-Depth Review 2023 

 
 
 
 
 
 
 
 
 
 
 
On  the  basis  of  this  in-depth  review  for  Hungary  undertaken  under 
Regulation  (EU)  No  1176/2011  on  the  prevention  and  correction  of 
macroeconomic  imbalances,  the  Commission  has  considered  in  its 
Communication “European Semester – 2023 Spring Package” (COM(2023) 
600 final) that: 

Hungary  is  experiencing  imbalances.  Vulnerabilities  related  to  very  strong  price 
pressures  and  external  and  government  financing  needs  have  increased  and are 
significant.  Inflation  has  risen  significantly  and  has  not  yet  started  moderating 
visibly.  Should inflation  remain elevated  for  an extended  period,  it  would  further 
undermine  cost  competitiveness  and  could  leave  financing  costs  elevated.  The 
large current account deficit was strongly increased by the higher energy prices in 
2022,  and  short-term  external  debt  has  risen.  Improvements  in  the  current 
account  this  year  and  next  hinge  on  the  expected  further  moderation  of  energy 
prices,  but  the  current  account  deficit  is  nonetheless  forecast  to  remain  non-
negligeable  in  2023  and  2024.  The  high  energy  intensity  of  the  economy  is 
important  for  current  account  dynamics.  The  government  deficit  has  been  large, 
only partly driven by the policy responses to the pandemic and the energy crises, 
and accounts for much of the external borrowing of the economy. The government 
debt  ratio  decreased  thanks  to  marked  nominal  GDP  growth,  but  that  may  be 
challenged  by  a  slowdown  in  activity  and  the  persistence  of  high  deficits. 
Sovereign  borrowing  costs  have  increased  since  2021,  and  the  government  is 
facing  an  increasing  interest  burden,  while  debt  maturity  is  still  relatively  low. 
House  prices  doubled  over  five  years  but  price  increases  halted  in  late  2022. 
However,  the  likelihood  of  a  substantial  nominal  price  drop  seems  limited  amid 
low  household  indebtedness,  and  also  in  light  of  the  current  high  inflation 
environment. Policy inconsistencies have exacerbated the identified vulnerabilities. 
Effective  coordination  and  clear  demarcation  of  macroeconomic  policies, 
underpinned  by  a  strong  institutional  policy  framework,  is  instrumental  to 
safeguard  fiscal  and  external  sustainability  as  well  as  to  anchor  expectations. 
Timely  and  full  implementation  of  structural  reforms  included  in  Hungary’s 
Recovery  and  Resilience  Plan  is  expected  to  help  reduce  macroeconomic 
vulnerabilities and support growth and adjustment in the medium term. 

 
 
 
 
 
 
CONTENTS 

1.  Introduction 

2.  Assessment of macroeconomic vulnerabilities 

3.  Thematic chapter: Pro-cyclical policy mix 

LIST OF TABLES 

Table 2.1: 
Table 2.2: 
Table 3.1: 
Table 3.2: 
Table 3.3: 
Table 3.4: 

Selected economic and financial indicators (Part 1), Hungary 
Selected economic and financial indicators (Part 2), Hungary 
Selected policy (Part 1) 
Selected policy (Part 2) 
Selected housing market indicators, Hungary 
Selected household debt indicators, Hungary 

LIST OF GRAPHS 

Graph 2.1:  The current account and its financing 

Graph 2.2:  Net international investment position and projections 

Graph 2.3:  Price and cost developments, Hungary 

Graph 2.4: 

Indicators of external competitiveness 

Graph 2.5:  Labour cost shares in manufacturing and services, Hungary 

Graph 2.6:  Housing market developments (house price and valuation + construction), Hungary 

Graph 2.7:  Deficit and public debt developments (% of GDP), Hungary 

Graph 2.8:  Structure of the general government debt and average term to maturity, Hungary 

Graph 2.9:  Components of gross fixed capital formation deflator growth and consumer price inflation 

Graph 3.1:  Structural primary balance and output gap, Hungary 

Graph 3.2:  Discretionary fiscal measures adopted since 2020 (% of GDP, cumulative) 

Graph 3.3:  GDP forecast errors and expenditure surprises compared to annual budget plans 

Graph 3.4:  Fiscal governance indicators, Hungary 

Graph 3.5: 

Inflation and monetary policy developments between 2017-2023 

4 

6 

26 

24 
25 
28 
30 
37 
38 

7 

9 

10 

12 

13 

16 

18 

19 

23 

27 

27 

31 

33 

36 

 
 
 
 
 
 
 
1. 

INTRODUCTION 

In  2022,  over  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic 
Imbalances Procedure (MIP), Hungary was not subject to an in-depth review to assess its 
vulnerabilities. (1) The 2023 Alert Mechanism Report published in November 2022 concluded that 
an in-depth review (IDR) should be undertaken for Hungary this year, with a view to examine newly 
emerging vulnerabilities and their implications. (2) The AMR found that in Hungary, concerns related 
to external sustainability, cost competitiveness, fiscal sustainability and house price developments 
continued increasing. The current account deficit widened in 2021 and was forecast to rise further, 
and the exchange rate had been on a depreciating trend. Unit labour costs increases had been very 
large for years and continued to be strong, with cost competitiveness maintained through nominal 
depreciation. Nominal house price growth had recently been among the highest in the EU, amidst 
limited  supply  and  an  estimated  overvaluation  of  house  prices.  The  government  deficit  remained 
high. 

After  strong  GDP  growth  in  2021  which  continued  into  2022  the  Hungarian  economy 
contracted in the second half of 2022, with substantial new challenges emerging. (3) The 
economic recovery from the COVID-19 crisis that was sustained by strong fiscal stimulus came to 
an end in 2022, following the surge in energy prices in the wake of Russia’s invasion of Ukraine, 
and  globally  tightening  financing  conditions.  GDP  growth  slowed  from  7.1%  in  2021  to  4.6%  in 
2022,  and  further  deceleration is projected  to  0.5%  in  2023.  Inflation  rose  from  an  already  high 
5.2% in 2021 to 15.3% in 2022. Price increases were driven by rising commodity prices, currency 
depreciation,  strong  domestic  demand  and  high  wage  growth,  and  tax  hikes.  Interest  rates  rose 
since  2021  but  fiscal  policy  remained  expansionary  through  2022  and  certain  measures  such  as 
interest  rate  caps  on  bank  deposits  and  various  loans.  The  pass-through  from  energy  and  food 
prices  to  consumer  prices  was  initially  mitigated  by  price  caps  on  motor  fuel  and  certain  food 
items, and low utility prices for households. The phase-out of some of these caps and the increase 
of residential energy prices from August 2022 mechanically adds to 2023 inflation. Thus, inflation 
is set to rise to 16.4% in 2023 before easing to 4% in 2024 thanks to  the expected progressive 
moderation  of  energy  prices  and  the  cooling  down  of  demand.  Hungary’s  current  account  deficit 
soared  in  2022  to  8.2%  of  GDP  mostly  due  to  high  energy  import  costs,  but  it  is  projected  to 
narrow in 2023-2024 in line with lower energy prices and the moderation of import demand. Going 
forward, unexpected external shocks could adversely affect the current account and fiscal balances. 
If inflation becomes entrenched at a high level, debt financing costs could also remain elevated.  

This  in-depth  review  presents  the  main  findings  of  the  assessment  of  macroeconomic 
vulnerabilities  for  Hungary.  The  assessment  is  backed  by  a  thematic  section  on  pro-cyclical 
biases in economic policies in Hungary. Vulnerabilities related to external balances, competitiveness 
and  housing  in  Hungary  are  also  discussed  in  horizontal  thematic  notes  that  were  recently 
published. (4) The MIP assessment matrix is published in the 2023 Country Report for Hungary. (5) 

(1)  European Commission (2022), European Semester Spring Package 2022, COM(2022) 600 final. 
(2)  European Commission (2022), Alert Mechanism Report 2023, COM (2022) 381 final. 
(3)  European Commission (2023), European Economic Forecast: Spring 2023, Institutional Paper 200. 
(4)  European Commission (2023), External Sustainability Analysis: Thematic Note to Support In-Depth Reviews, European 
Economy: Institutional Papers, 196. European Commission (2023), Inflation Differentials in Europe and Implications for 
Competitiveness: Thematic Note to Support In-Depth Reviews, European Economy: Institutional Papers, 198. European 
Commission (2023), Housing Market Developments: Thematic Note to Support In-Depth Reviews, European Economy: 
Institutional Papers, 197.  

(5)  European Commission (2023), Country Report Hungary 2023, SWD(2023) 617 final. 

4 

 
                                                 
 
2.  ASSESSMENT OF MACROECONOMIC 
VULNERABILITIES 

Gravity, evolution and prospects 

The long upswing of the Hungarian economy since 2013 was bolstered by expansionary 
policies  and  ended  amid  deteriorating  macroeconomic  fundamentals.  The  Hungarian 
economy enjoyed a robust expansion before the COVID-19 pandemic, with GDP growth averaging 
close to 4% per year between 2013-2019. This was supported by several factors, including strong 
global  growth,  low  energy  prices,  easy  financing  conditions,  and  the  cyclical  recovery  of  the  real 
estate market and bank lending. In parallel, after achieving low budget deficit, price stability, and 
reduced reliance on external and foreign currency financing by the mid-2010s, fiscal and monetary 
policies  became  accommodative in the  second half of  the  decade,  giving  further  impetus  to  GDP 
growth  through  fiscal  expansion,  low  interest  rates,  credit  subsidies  and  currency  depreciation. 
Some concerns emerged already by 2019: the current account turned from earlier surpluses to a 
small deficit, inflation crawled above the central bank target of 3%, construction costs and house 
prices soared. Policy stimulus strengthened during and after the COVID-19 pandemic, helping the 
economy to recover swiftly  from the short-lived  recession in 2020, and prolonging the expansion 
until early 2022. At the same time, the current account deficit widened, inflation accelerated, and 
public  debt  shifted  to  a  higher  path.  These  trends  were  magnified  by  changes  in  the  global 
economic  environment  in 2022,  as  financing  conditions  tightened,  and  energy  prices  skyrocketed. 
These shocks sent the Hungarian economy into recession in the second half of 2022. 

The current account balance deteriorated since 2016 and this trend was exacerbated by 
the rising energy bill in 2022. On 5 April 2023 the Commission published a horizontal thematic 
note  on  external  sustainability,  which  also  covers  Hungary.  The  following  analysis  builds  on  the 
results on this note. The current account balance turned into a deficit of 3.9% in 2021, from a 4.5% 
of GDP surplus in 2016, driven by an 8.4 percentage point deterioration of the trade balance. This 
was mainly caused by strong import demand, although in recent years exports were also hindered 
by supply chain disruptions and the persistent impact of the COVID-19 pandemic on international 
tourism. In 2021, the current account was already below the estimated level that is consistent with 
the  economy’s  fundamentals,  although  still  above  the  level  required  to  stabilise  the  net 
international  investment  position  over  the  next  10  years. (6)  The  current  account  deficit  widened 
further to 8.2% in 2022 as the energy trade deficit widened by 5.3 percentage points compared to 
2021. (7)  From  a  saving-investment  perspective,  the  transition  from  earlier  current  account 
surpluses  to  a  deficit  initially  reflected  rising  private  sector  investment  which  lowered  the  net 
financing position of non-financial corporations. In 2020, the rise in the current account deficit was 
driven by the large net borrowing of the government. Since 2021, the government began to reduce 

(6)  The fundamental-based current account norm is estimated by taking into account the country’s income level, demographic 
trends, economic structure and financial development. Details of the methodology are described by Coutinho, L., A. Turrini 
and S. Zeugner (2018): Methodologies for the Assessment of Current Account Benchmarks. European Economy: Discussion 
Papers, 086. 

(7)  While the horizontal note used the data up until Q3 2022, the data here has been updated with the information for the 

whole 2022, where it became available. The main messages remained unchanged. 

5 

 
                                                 
 
2. 

Assessment of macroeconomic vulnerabilities 

its  deficit,  but  the  position  of  the  private  sector  worsened.  This  was  particularly  pronounced  for 
non-financial  corporations,  which  moved  from  net  lending  of  2.1%  of  GDP  in  Q1  2021  to  net 
borrowing  of  -3.9%  of  GDP  by  the  end  of  2022,  driven  by  high  investment  and  inventory 
accumulation. 

The  current  account  is  expected  to  improve  substantially  in  2023  and  2024,  owing  to 
lower energy prices, but will remain in deficit. It is forecast to improve to around -3% of GDP 
by  2024  mainly  driven  by  the  improving  trade  balance.  Nonetheless,  the  current  account  will 
remain below the balanced level suggested by economic fundamentals. The energy trade balance is 
set  to  improve  due  to  lower  expected  energy  import  costs,  while  the  non-energy  balance  is 
projected to increase with the slowdown of domestic demand. The forecast remains highly sensitive 
to the evolution of energy prices, as a uniform 10% increase in oil, gas and electricity import prices 
is estimated to worsen the trade balance by some 0.4% of GDP. The capital account surpluses are 
forecast to increase going forward, and an improvement in net lending/borrowing is projected for 
2023  and  2024.  The  transfers  from  the  EU  budget  under  the  RRF  and  the  MFF  represent  an 
important external financing source for Hungary, projected at around 2.5% of GDP on average per 
year between 2022 and 2026 (in net terms). From the sectoral perspective, the improvement after 
2022 is expected to be driven by lower net borrowing of the corporate sector, while the net lending 
of  households  is  projected  to  decline.  The  government  borrowing  is  expected  to  decrease 
somewhat, although it is set to remain substantial in 2023 and 2024. 

Graph 2.1: The current account and its financing 

Source: European Commission services 

EU  fund  inflows and  foreign  direct  investment  (FDI)  play  an  important  role  in  external 
financing, but external borrowing also increased in recent years. The net inflow of EU funds 
amounted to an annual average 2.7% of GDP since Hungary’s accession to the EU in 2004. About 
0.8 percentage point of these appeared directly in the current account balance, while the rest were 
capital transfers. In 2022, net transfers from the EU amounted to 2.2% of GDP, almost entirely in 
the  form  of  capital  transfers.  Net  FDI  inflows  fluctuated  between  1-2%  of  GDP  in  recent  years, 
rising to 2.2% in 2022. FDI flows were shaped by several trends: steady inflows through greenfield 
investments and reinvested earnings, outward investment by Hungarian firms, and repurchases of 
foreign  stakes  in  Hungarian  companies,  sometimes  by  the  government.  Portfolio  debt  and  other 
investment showed net outflows in the years before the pandemic crisis, but these turned into net 
inflows over recent years.  

The net international investment position (NIIP) has remained broadly stable as a share 
of GDP, but short-term external debt has increased since 2019. Hungary has a NIIP close to 

6 

-20-15-10-505101520080910111213141516171819202122% of GDPb) Current account financingDebt flows (net) NENDI excl reservesDirect investment (net)Portfolio investment, equity and inv. fund shares (net)Official reserves (net)Net errors and omissionsNet lending/borrowing (CA+KA)-15-551515161718192021222223*24*% of GDPa) Current accountGoods, fcastServices, fcastGoods excl energyEnergy balanceServices excl travelTravel balancePrimary inc. bal.Second. inc. bal.Current accountNet lending/borrowing      
2. 

Assessment of macroeconomic vulnerabilities 

-49%  of  GDP  in  2022  (see  Graph  2.2  a).  This  mainly  reflects  the  stock  of  inward  foreign  direct 
investment, while the NIIP excluding non-defaultable instruments stood at -5.3% of GDP. The NIIP 
had improved until 2019, driven by private and public debt reduction. Since 2019 the NIIP remained 
broadly stable as a share of GDP, because high nominal GDP growth offset the accumulation of net 
external liabilities. Gross external debt, which decreased from 147.5% of GDP in 2011 to 53.3% by 
the end of 2019, increased again to 65.1% at the end of 2022. (8) Short-term external debt (up to 
one year, based on remaining maturity) also decreased until 2018, but it has risen more recently, to 
20.8% of GDP at the end of 2022. Foreign reserves stood at some 22.5% of GDP (EUR 39.8 bn) in 
March 2023, exceeding short-term external debt, and amounting to slightly less than 3 months of 
2022 imports.  

The outlook for the NIIP over the medium term is stable, but sensitive to energy prices 
and  financing  conditions.  As  shown  by  the  NIIP  projections  for  the  next  ten  years  under  the 
baseline  scenario  of  no-policy  change  and  an  unchanged  trade  balance  beyond  the  forecast 
horizon, i.e., after 2024, the NIIP of Hungary is projected to improve somewhat to around -39% of 
GDP in 2032 (see Graph 2.2 b). Due to the uncertainty regarding the assumptions underlying the 
baseline  projection,  alternative  scenarios  are  also  considered.  Graph  2.2  b  shows  the  impact  of 
alternative  assumptions  for  energy  import  prices  after  2024  (Scenarios  1  and  2). (9)  Further 
scenarios show the sensitivity of NIIP projections to slower EU funds absorption in the short-term 
(Scenario  3)  and  to  higher  interest  rates (Scenario  4). (10)  The  NIIP  could  reach  in  2032  levels  of 
around -24% of GDP or -55% under Scenarios 1 and 2, respectively. While alternative assumptions 
under Scenario 3 hardly affect the NIIP evolution beyond the short term. Under Scenario 4, the NIIP 
is projected to worsen to -52% of GDP by 2032. 

(8)  These data refer to external debt excluding debt related to foreign direct investment and Special Purpose Entities (SPEs). 

The statistical treatment of Special Purpose Entities (SPEs) does not significantly influence Hungary’s current account, but it 
affects the assessment of the gross external position. Differences can be particularly important for gross external debt 
when excluding stocks related to foreign direct investments (which are influenced by internal financing choices of 
multinational companies). With the inclusion of SPEs and FDI-related debt, gross external debt rose from 98.9% of GDP at 
the end of 2019 to 152.1% in 2022.  

(9)  Scenario 1 assumes higher trade balance in 2025 and beyond by 2 pp of GDP compared to the baseline scenario, due to 

lower energy prices relative to the baseline. The more pessimistic Scenario 2 is the mirror image of Scenario 1, i.e. 
assuming lower trade balance in 2025 and beyond by 2 pp of GDP compared to the baseline. 

(10)  Scenario 3 reflects a situation with no absorption in 2023 and 2024 of the RRF funds and structural funds from the 2021-
2027 Multiannual Financial Framework, followed by a catching-up of EU fund absorption in later years. This also alters the 
dynamics of the trade balance and GDP growth, but it is not assumed to affect the risk premium on Hungary’s external 
liabilities. Scenario 4 assumes that the yields on Hungary’s external liabilities are permanently higher by 100 bps than in 
the baseline, driven by a higher risk premium on Hungarian government bonds. 

7 

                                                 
Graph 2.2: Net international investment position and projections 

2. 

Assessment of macroeconomic vulnerabilities 

Source: European Commission services 

Hungary  currently  has  the  highest  inflation  rate  in  the  EU,  due  to  broad-based 
inflationary pressures. On 5 April 2023 the Commission published a horizontal thematic note on 
inflation  differentials  in  Europe  and  their  implications  for  competitiveness,  which  also  covers 
Hungary.  This  analysis  builds  on  the  findings  of  that  note.  Inflation  exceeded  the  EU  average 
already before the pandemic, and it rose above the target band (3% ± 1 percentage point) of the 
central  bank  by  mid  2021.  It  increased  persistently  in  the  second  half  of  2021  and  in  2022, 
appearing  to  peak  at  26.2%  in  January  2023.  The  factors  behind  high  inflation  include  higher 
energy costs, rising agricultural prices due to severe droughts in 2022, expansionary policies up to 
early 2022 that contributed to strong wage and consumption growth in recent years, and tax hikes 
in  2022,  coupled  by  currency  depreciation (Graph  2.3  a). (11)  Inflation is  forecast  to  recede  in the 
coming  quarters,  owing  to  lower  commodity  prices,  the  appreciation  of  the  forint  since  autumn 
2022,  and  weakening  demand.  Real  wages  have  been  falling  since  Q4  2022,  and  private 
consumption  is  projected  to  decline  in  2023.  The  expected  disinflation  path  assumes  tight 
monetary  and  fiscal  policies  and  restrained  minimum  wage  growth  in  2024.  Upside  risks  to  the 
inflation  outlook  are  high  wage  growth  in  a  tight  labour  market,  and  a  de-anchoring  of  price 
expectations, which could increase the persistence of inflation. 

(11)  Tax hikes included the increase of sector-specific taxes in retail, insurance and telecom, higher taxes on unhealthy foodstuff 
and on financial transactions, the introduction of a new tax on airport departures and the valorisation of excise duties, for a 
combined effect of 0.4% of GDP in 2022. A full pass-through of these taxes on consumers could have theoretically added 
0.7 percentage points to inflation in 2022 and further 0.3 percentage points in 2023. Inflation trends are analysed in detail 
by Cohn Bech, E., K. Foda and A. Roitman (2023): Drivers of Inflation, Hungary. IMF Selected Issues Paper SIP/2023/004. 

8 

-150-100-5005015Q416Q417Q418Q419Q420Q421Q422Q4% of GDPa) NIIP by sectorGeneral governmentPrivate sectorMFI (excl central bank)Central bank (incl reserves)Net int'l investment position (NIIP)-60-50-40-30-20-1002122232425*26*27*28*29*30*31*32*% of GDPb) NIIP projectionsScenario 1Scenario 2Scenario 3Scenario 4Baseline   
 
                                                 
Graph 2.3: Price and cost developments, Hungary 

2. 

Assessment of macroeconomic vulnerabilities 

*indicates COM forecast  
Source: Eurostat, ECB and European Commission services 

The strong economic expansion and  policy measures have boosted wage growth. Wages 
and  salaries  per  employee  grew  by  an  annual  average  of  10.3%  in  2020-2022,  in  line  with  the 
tightness  of  the  labour  market,  high  inflation,  public  sector  salary  increases  and  minimum  wage 
hikes. Public sector wages grew by a cumulative 43% since 2019, compared to 32% growth in the 
private  sector.  Wage  increases  within  the  public  sector  focused  on  certain  groups  (such  as  the 
military, law enforcement and health care) and mainly aimed to make up for real wage losses in 
the 2010s. The minimum wage rose by some 56% between January 2019 and January 2022, while 
the minimum wage for skilled workers rose by  52%, and in a period of tight labour markets and 
robust  demand  growth, it contributed  to  high  nominal  wage  growth. (12)  As  of  January  2023,  the 
minimum wage rose by further 16%, based on forward-looking inflation expectations for 2023. The 
impact  of  wage  increases  on  companies’  profitability  was  partly  offset  by  permanent  employer 
social contribution cuts and rising prices (see box and Graph 2.3 b). Labour costs grew faster than 
labour productivity, and unit labour cost rose by an annual average 6.6% in 2020-2022, while the 
value-added deflator increased by an annual average 9.3% in the same period. 

Hungary’s export competitiveness is sensitive to price and cost developments. Hungarian 
companies  are  strongly  integrated  into  global  value  chains,  and  its  export  structure  appears 
sophisticated based on the share of high-tech products or knowledge intensity (e.g., as measured 
by the Economic Complexity Index). However, Hungary mainly contributes to the creation of these 
products  by  assembly  activities  that  require  limited  knowledge,  generate  little  domestic  value 
added  and  are  therefore  sensitive  to  production  costs.  This  functional  specialisation  pattern 
remains  typical  of  recent  greenfield  FDI  flows (13),  partly  because  economic  development  policies 
have  supported  cost  competitiveness  over  the  last  decade,  while  progress  in  non-price 
competitiveness  was  weak  (see  Graph  2.4  a).  Employer  social  contributions  have  been  cut 
significantly since 2016, the corporate income tax rate was reduced to 9% in 2017, and state aid 
to enterprises has been among the highest in the EU, at 2.1% of GDP in 2015-2019 (compared to 

(12)  The minimum wage for skilled workers appliers for employees in occupations that require at least secondary education 

level. For earlier experience on the inflationary effect of minimum wage hikes in Hungary, see Harasztosi P. and A. Lindner 
(2019): Who Pays for the Minimum Wage? American Economic Review 109: 2693-2727. 

(13)  Grieveson, R. et al. (2021), Avoiding a trap and embracing the megatrends: Proposals for a new growth model in EU-CEE, 

wiiw Research Report, No. 458, The Vienna Institute for International Economic Studies (wiiw), Vienna. 

9 

-2024681012141618202224262018201920202021202220232024year-on-year change (%)a) Decomposition of inflationGoods and servicesFoodEnergyHICPCOM-8-6-4-2024681012141618201620172018201920202021202220232024Annual change (%)b) Decomposition of unit labour cost growth in the economyEffect of changes in employer social contributionsContribution of average wage growthContribution of labour productivity growthUnit labour costValue added deflatorCOM forecast      
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

the  EU  average  of  1%)  according  to  the  2022  State  Aid  Scoreboard.  At  the  same  time,  the 
productivity  gap  vis-à-vis  the  EU  has  not  decreased  significantly  despite  widespread  subsidised 
financing schemes that aimed to stimulate investment (see Chapter 3 for further details). Hungary 
has remained in the lowest group of “emerging innovators” in the European Innovation Scoreboard, 
while  the  Worldwide  Governance  Indicators  showed  a  gradual  decline  in  the  dimensions  of  voice 
and accountability, regulatory quality, and control of corruption in the decade up to 2021. 

Cost  competitiveness  has  recently  been  supported  by  nominal  exchange  rate 
depreciation  and  tax  cuts.  The  real  effective  exchange  rate  based  on  unit  labour  cost 
depreciated  by  some  10%  since  2017,  in  contrast  to  most  of  Hungary’s  regional  peers.  These 
competitiveness  gains  were  largely  driven  by  an  18%  depreciation  of  the  nominal  effective 
exchange rate since 2016 (see Graph 2.4 c and 2.4 d). In the same period, the export market share 
measured at constant prices rose moderately (see Graph 2.4 b), and it stagnated at current prices. 
Shift-share analysis shows that Hungary’s export specialisation patterns were not a major drag on 
export market shares, except in 2021, when semiconductor and material  shortages disrupted the 
automotive  and  electronic  industries  that  constitute  an  important  share  of  Hungary’s  exports. 
Easing supply chain constraints could have helped the recovery of the export market share in 2022.  

Recent  FDI  inflows  in  cost-sensitive and  energy-intensive  sectors  can  boost  the  export 
market share in the near term but create challenges for Hungary’s growth model in the 
longer  run.  Recent  greenfield  investments  have  been  concentrated  in  battery  production, 
amounting to EUR 7.1 bn (4.8% of GDP) between 2018-2022. By 2021 Hungary became the third 
largest manufacturer of batteries for electric vehicles globally, with an annual production capacity 
of 28 GWh. Another project worth EUR 7.3 bn is expected to be completed by 2025, adding further 
100  GWh  production  capacity.  These  investments  can  provide  the  local  automotive  industry  with 
critical  components.  However,  the  substantial  investment  grants  supporting  these  projects  use 
significant  fiscal  resources  to  create  an  industrial  structure  that  is  import,  labour  and  energy 
intensive. Although battery manufacturing has a high growth potential, it is characterised by falling 
prices  that  can  put  a  pressure  on  domestic  value  generation  and  the  terms  of  trade.  The  labour 
demand of recent FDI projects has been increasingly satisfied by inward migration due to domestic 
skills  shortages.  Meanwhile,  Hungary  has  a  comparative  disadvantage  in  energy-intensive 
industries due to the scarcity of domestic energy resources. These factors can limit the long-term 
benefits of battery investments on the current account balance. 

10 

Graph 2.4: Indicators of external competitiveness 

2. 

Assessment of macroeconomic vulnerabilities 

On panel a), a score of 0 (corresponding to the centre of the graph) represents the least favourable value among EU 
members, while 1 (corresponding to the outermost point of each axis) corresponds to the most favourable value. State 
aid is measured as a percentage of GDP; 2021 data refer to 2019 to avoid bias from pandemic-related schemes. The 
European Innovation Survey variable is the composite index. The World Governance Indicators variable is the average of 
the six individual indicators. 
Source: Eurostat, World Governance Indicators database, Commission services calculations.  

11 

9095100105110115120125130135201520162017201820192020202120222015=100c) ULC-based real exchange rateCZHUPLROSKappreciation9095100105110115120125130201520162017201820192020202120222015=100b) Export market shareCZHUPLROSK-40-30-20-10010203010111213141516171819202122Cumulative change since 2010 (%)d) Decomposition of real exchange rate movementsin HungaryContribution of employer social contributionsContribution of relative unit wage costContribution of nominal exchange rateCumulative change of ULC based real exchange rateappreciationHourly labourcost in eurosEffective tax rateon capitalLabourproductivity atPPSEuropeanInnovationSurveyWorldGovernanceIndicatorsState aida) Drivers of export competitivenessin Hungary20122021Factors of price and costcompetitivenessFactors of non-price competitiveness      
 
 
 
 
 
 
 
 
2. 

Assessment of macroeconomic vulnerabilities 

Box: The evolution of the labour and profit shares in Hungary since 2016 

The share of labour income in value added (i.e., the labour share) fell in Hungary by 5 percentage 
points (pps) between 2016 and 2022, and conversely the profit share rose. This box lays out some 
possible explanations for these developments. (14) 

Graph 2.5: Labour cost shares in manufacturing and services, Hungary 

Source: Eurostat and European Commission services 

The recent evolution of labour shares seems to be also linked to the significant decrease 
of  labour  taxes.  In  December  2016  a  tripartite  agreement  was  signed  to  significantly  cut 
employer  social  contributions  over  six  years.  Between  2016  and  2022  the  social  contribution  tax 
rate  fell  from  27%  in  2016  to  13%  in  2022,  and  the  1.5%  training  levy  was  also  abolished  in 
2022.  In  a  competitive  labour  market  such  as  the  Hungarian,  with  low  worker  unionisation  and 
fragmented,  enterprise-level  wage  bargaining,  these  tax  cuts  could  have  been  expected  to  boost 
net  wages  and  labour  supply,  but  to  leave  the  long-term  level  of  the  labour  share  unaffected. 
Instead, while wages and salaries remained stable as a share of gross value added between 2016 
and  2022  in  the  total  economy,  the  labour  share  (i.e.,  the  compensation  of  employees,  including 
employer social contributions, as a share of gross value added) fell from 50.5% in 2016 to 45.2% 
in 2022. At first sight, this suggests that the tax cuts have not been fully passed on to workers in 
the form of higher net salaries and employment.  

There were important sectoral differences in the evolution of the labour share: it rose by 
1.6 pps in manufacturing but fell by 5.9 pps in market services (i.e., services excluding real estate 
and  the  public  sector). (15)  This  could  partly  reflect  differences  in  labour  market  tightness  as 
average wages and salaries grew 10.3 pps more in manufacturing than in market services. It could 
also be due to the stronger unionisation of labour in manufacturing. At the same time, the effective 
employer  social  contribution  rate  also  fell  more  in  manufacturing,  suggesting  either  that 
manufacturing could progressively benefit from more social contribution deductions (16), or that tax 
compliance was initially higher in manufacturing. 

(14)  Long-run trends in Hungary and the EU were recently analysed by Kónya, I., J. Krekó and G. Oblath (2020): Labor shares in 
the old and new EU member states – Sectoral effects and the role of relative prices. Economic Modelling 90: 254-272. 

(15)  For all services, the decrease amounted to 6.9 pps. The expansion of self-employment accounted for a minor part of this 
change: the labour share decreased by 5.3 pps between 2016 and 2022 in services excluding real estate and public 
services, when the mixed income of the self-employed is reclassified as labour compensation (assuming that its average 
level is equal to the compensation per employee in each economic branch). 

(16)  Such deductions are available for selected groups, such as young and elderly workers, young mothers, and unskilled 

workers. 

12 

30354045505560000204060810121416182022% of gross value addeda) ManufacturingWages and salariesCompensation of employees30354045505560000204060810121416182022% of gross value addedb) Services excl. real estate and public administrationWages and salariesCompensation of employees 
     
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

Several  factors  increased  the  profit  share  in  recent  years.  The  profit  share  in  the  total 
economy  rose  by  5.3  pps  between  2016  and  2022,  mirroring  the  fall  of  the  labour  share.  In 
addition to the incomplete pass-through of labour tax cuts to wages in services, other factors could 
have also played a role: 

  Years  of  high  investment  boosted  the  capital  stock,  leading  to  higher  amortisation. 
The consumption of fixed capital increased by 1.2 pps of gross value added between 2016 and 
2021. This was especially pronounced in manufacturing, where the ratio rose by 4.6 pps, and net 
operating  surplus  accounted  for  a  decreasing  share  of  value  added.  However,  this  effect  was 
marginal for market services.  

  In  2022,  commodity  price  increases  significantly  boosted  the  profit  share  in  a  few 
industries, while most economic branches saw falling profitability. The widening spread 
between oil product prices and crude oil import costs created windfall revenues in oil  refining, 
which is estimated to have increased the aggregate profit share by some 0.6-0.7 pps. (17) Higher 
commodity prices also boosted nominal revenues in agriculture, mining and utilities: unit profit 
increases  in  these  sectors  increased  the  aggregate  profit  share  by  2.2  pps.  In  most  other 
economic branches, the profit share fell in 2022. 

  Financial considerations could have encouraged companies to build up profit buffers. 
Corporate  debt  has  risen  from  48.8%  of  GDP  in  2019  to  59.2%  by  the  end  of  2022,  partly 
because currency depreciation revalued foreign currency loans in the sector. Profit buffers could 
have also financed liquidity hoarding during the pandemic, and a build-up of inventories during 
more recent supply chain disruptions.  

  Barriers to product market competition might have increased the pricing power of the 
service  sector. (18)  However,  the  profit  share  in  services  decreased  in  2022,  which  suggests 
that pricing power is also dependent on aggregate demand and past increases in profit shares 
are not necessarily permanent. 

Overall, the analysis suggests pressures on exporters’ price and cost competitiveness, as the slight 
increase in the profit share of manufacturing was driven by capital deepening, and the net profit 
share  (excluding  amortisation)  decreased  since  2016.  It  also  suggests  that  market  power  could 
have contributed to price increases in services, and weak competition can also hinder disinflation if 
companies aim to preserve profit margins instead of competing on prices for customers.  

In  the  medium  term  there  could  be  pressure  for  the  wage  share  to  rise  due  to  the 
shortage  of  skilled  workers  and  demographic  headwinds.  Challenges  with  the  long-term 
sustainability  of  public  finances  due  to  ageing  and  other  factors  might  also  require  Hungary  to 
increase  more  tax  revenues.  Both  are  factors  that  could  potentially  undermine  Hungary’s 
competitiveness if not matched by productivity enhancing reforms. 

(17)  Hungary maintained access to Russian oil imports even after sanctions were introduced on the Russian economy in 2022. 

The spread between Brent and Ural crude oil blends (the latter being a proxy to Hungary’s Russian oil import costs) widened 
from some 2 USD/barrel before Russia’s invasion of Ukraine to 25 USD/barrel in 2022. This improved the refinery margin of 
Hungary’s only oil refinery significantly. Based on the financial data of the Hungarian oil company MOL, better refinery 
margins thanks to the continuous access to Russian oil imports boosted the nominal gross value added of manufacturing 
by 6.5-7.0%. This is estimated to have improved the 2022 profit share by 3.3-3.7 pps in manufacturing, and by 0.6-0.7 pps 
in the total economy. A special windfall tax reallocated much of this income to the budget, but due to the statistical 
classification of this tax, it does not affect gross operating surplus in the national accounts. 

(18)  See e.g., OECD (2021): OECD Economic Surveys: Hungary 2021. OECD Publishing, Paris. 

13 

 
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

House  prices  have  grown  briskly  in  Hungary  in  the  last  decade.  On  5  April  2023  the 
Commission published a horizontal thematic note on housing, which also covers Hungary. Since the 
price recovery started in 2013, house prices have tripled, outpacing income growth, with a further 
acceleration since 2020. Housing affordability has become more pressing with the price-to-income 
ratio  having  already  exceeded  its  pre-global  financial  crisis  peak.  In  2022,  house  prices  were 
estimated to be  overvalued by more than 20% by in-house valuation models of the Commission 
(Graph  2.6  b).  The  rise  of  incomes,  low  interest  rates,  increasing  construction  costs  but  also 
government policies supporting demand have contributed to rising house prices.  

Recent  trends  in  house  prices  are  partly  explained  by  untargeted  fiscal  support 
schemes. (19) A limited grant scheme for families with young children was substantially extended 
in 2016 through easing limits on geographical coverage, the value and size of the dwelling. A VAT 
refund for new housing and a preferential loan tier were also added to the grant scheme. Further 
extensions increased the available amount (in 2018) and offered additional support to transactions 
in small settlements. The central bank also operated a temporary loan scheme in 2021-2022 for 
the purchase or construction of energy-efficient housing. Finally, a temporary prenatal loan scheme 
for young households was introduced in 2019 for three years, and a significant part of those loans 
was used for home purchases. (20) This scheme has recently been extended until the end of 2024. 
In 2022 subsidised schemes accounted for 37% of all household loan disbursements, compared to 
less  than  4%  in  2018.  From  2021,  homes  purchased  through  these  subsidy  schemes  have  also 
been exempted from the 4% capital transfer duty. Overall, the budgetary cost of housing subsidies 
amounts to some 0.6% of GDP (see Table 3.1 for further details on these measures). 

Housing  supply  has  been  hindered  by  frequent  regulatory  changes  and  rising 
construction costs. Building activity has remained low by historical standards since 2013 and has 
been unable to meet the housing demand (Graph 2.6 c). This is partly due to frequent regulatory 
changes  that  created  uncertainty  and  may  have  discouraged  some  real  estate  developers  from 
starting  new  projects. (21)  Furthermore,  years  of  high  public  investment  contributed  to  labour  and 
material shortages, driving up construction costs for dwellings. 

The  outlook  is  for  an  easing  of  housing  market  overvaluation,  but  the  risk  of  a 
substantial nominal price drop seems limited in the current high inflation environment. 
At the time of writing, the first signs of a housing market turning point have already appeared. In 
Q4  2022  the  number  of  housing  market  transactions  dropped  by  9.8%  year-on-year,  while  the 
value  of  new  mortgages  fell  by  53.9%  after  the  interest  rates  on  new  market-based  mortgages 
rose  by  some  6  percentage  points  over  previous  levels  and  the  central  bank’s  green  mortgage 
programme  ended.  In  Q4  2022  house  prices  decreased  by  2%  quarter-on-quarter,  while  annual 
growth  slowed  to  16.5%  from  its  peak  of  24.9%  in  Q2  2022.  The  borrowing  capacity  of  most 

(19)  Suggestive evidence for the role of government support schemes is provided by MNB (2022): Financial Stability Report, 
November 2022. Magyar Nemzeti Bank. See also Plöchl K. and Obádovics Cs. (2021): A CSOK-támogatást igénylők 
vizsgálata az előzetes gyermekvállalás és az ingatlanszerzés mértéke szempontjából egy hitelintézet adatai alapján. 
Hitelintézeti Szemle, 20: 80-109 (in Hungarian). 

(20)  Under this scheme, newlywed couples can borrow up to HUF 10 million at a subsidised interest rate. If they have at least 2 
additional children following the disbursement of the loan, the loan is partially forgiven, i.e., it partly transforms into a 
capital grant from the budget (with 3 children the loan is fully forgiven). It is estimated that 60% of these loans were 
utilised for housing, and that 63-73% of all loans were additional (i.e., the remainder were replacing market-based loans); 
see Fellner Z., Marosi A. and Szabó B. (2021): A babaváró kölcsön hitelpiaci és reálgazdasági hatásai. Közgazdasági 
Szemle, 68: 150-177 (in Hungarian). 

(21)  Five changes to the value added tax (VAT) rate on new housing occurred since 2016 as a temporary VAT reduction to 

stimulate construction was repeatedly extended, most recently to projects that receive a building permit in 2023-2024. A 
permanent VAT rate reduction was also introduced in 2020 for certain brownfield residential projects. Further volatility in 
building permits was created by repeated delays in the introduction of tighter energy efficiency standards for new buildings, 
from an initially expected 1 January 2022 to 1 July 2024. 

14 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

households is set to remain limited due to a nexus of high house price levels, very high mortgage 
rates  and  a  deterioration  of  real  incomes.  High  inflation  can  support  the  correction  of  housing 
overvaluation  without  a  large  decline  in  nominal  house  prices.  As  most  borrowers  are  not 
excessively indebted,  forced  home sales are not expected to exert significant downward pressure 
on  prices  either.  Public  investment  is  set  to  decrease,  which  might  alleviate  material  and  labour 
shortages  for  residential  construction,  and  limit  construction  cost  increases.  Ongoing  projects  are 
expected to sustain dwelling construction in 2023, but higher financing costs and weaker demand 
are set to reduce building activity in 2024. 

Graph 2.6: Housing market developments (house price and valuation + construction) 

Source: Eurostat, ECB, Hungarian Central Statistical office and European Commission services 

Household indebtedness is low. Household debt remains among the lowest in the EU at 19% of 
GDP in 2022. The introduction of loan-to-value and payment-to-income limits in 2015 ensured that 
lending  was  concentrated  among  less  risky  borrowers  in  the  recent  credit  cycle.  The  number  of 
mortgage originations remained lower than before 2008, and net mortgage flows averaged 1.2% 
of  households’  disposable  income  between  2015-2022,  compared  to  2.8%  between  2004-2008. 
Although  interest  rates  have  risen  sharply  in  2022,  their  pass-through  to  mortgage  rates  is 
mitigated  by  the  high  share  of  mortgages  that  have  long  interest  fixation  periods.  Moreover,  a 
regulatory  cap  was  introduced  on  variable  mortgage  rates  in  January  2022,  and  it  was  later 
extended to mortgages with an interest period up to 5 years. This measure is in force until 30 June 
2023. Decreasing real incomes may put pressure on households’ abilities to meet their mortgage 
payments once the regulatory cap on mortgage rates is lifted.  

15 

-40-30-20-100102030405060060810121416182022% deviation of current priceb) Housing market overvaluationModel-based valuations gapPrice to income vs. hist. avg.Price to rent vs. hist. avg.Overall valuation gap050100150200250300-25-20-15-10-5051015202508Q409Q410Q411Q412Q413Q414Q415Q416Q417Q418Q419Q420Q421Q422Q42015=100Rate of change y-o-y (%)a) House price and mortgage growthMFI loans for house purchase (y-o-y growth rate)Real House Price Index (2015=100), right axisNominal House Price Index (2015=100), right axis010,00020,00030,00040,00050,00060,000c) Construction of dwellingsDwellings built by natural personsDwellings build by enterprises and other buildersNumber of dwellings builtNumber of building permits issued050100150200250300HUF bnd) New loans to householdsConsumer and other loansPrenatal baby support loansOther subsidised housing loansMNB Green Home ProgrammeMarket-based housing loans      
2. 

Assessment of macroeconomic vulnerabilities 

The  banking  sector  is  liquid  and  well  capitalised,  but  recent  policy  interventions  have 
weighed  on  profitability.  The  banking  sector  has  abundant  liquidity  and  its  deposits  at  the 
central bank amount to 35.7% of total assets. The tier 1 capital ratio of the banking sector stood at 
16.3% in Q3 2022, close to the EU average. The NPL ratio stood at 3.3% in Q3 2022, and potential 
losses on these were provisioned adequately. Foreign currency lending has practically disappeared 
for  households,  but  still  exists  for  corporates,  and  it  is  predominant  in  commercial  real  estate, 
where  borrowers  do  not  necessarily  have  a  natural  hedge  through  export  revenue.  The  banking 
sector remained profitable in 2022 but return on equity fell to 10.5%. Bank profitability depends 
strongly  on  government  policies.  On  the  one  hand,  banks  earn  steady  revenues  from  subsidised 
lending schemes and by placing their excess liquidity at the central bank at a high interest rate. On 
the  other  hand,  banks  must  pay  a  sector-specific  tax  that  was  increased  in  2022,  and  they  also 
bear  the  burden  of  the  regulatory  cap  on  variable  mortgage  rates.  Furthermore,  banks  hold  a 
substantial  amount of government bonds (16.7% of GDP or 14.8% of bank assets). These bonds 
are  mostly  held  to  maturity;  thus,  their  declining market  value  has  not  affected  banks’  profits  in 
2022. Still, their low yields have weighed on banks’ profitability. 

The  government  debt-to-GDP  ratio  decreased  in  recent  years  thanks  to  nominal  GDP 
growth,  but  the  budget  deficit  remains  elevated.  The  public  debt  to  GDP  ratio  was  on  a 
declining  trend  until  2019  but  jumped  by  14  percentage  points  to  79.3%  in  2020,  due  to  the 
economic  contraction  and  the  deployment  of  government  support  measures  in  response  to  the 
COVID-19 crisis (Graph 2.7). It then eased to 73.3% of GDP by 2022, largely driven by nominal GDP 
growth,  while  the  primary  budget  balance  improved  in  2021  and  2022.  The  pace  of  the  debt 
reduction  is  expected  to  slow  down  in  the  coming  years  due  to  lower  nominal  growth  and 
persistently  high  headline  deficits,  with  the  debt  ratio  projected  at  71.1%  in  2024.  Although  the 
government  began  to  rein  in  expenditure,  primarily  investment,  in  2022,  deficit  reduction  in  the 
medium term is complicated by the legacy of permanent expansionary measures introduced since 
2020, the slower growth of tax bases, higher interest expenditure and the fading of demographic 
tailwinds from the gradual  increase in the retirement age between 2012 and 2022. According to 
the Commission’s assessment, Hungary faces high fiscal sustainability risks over the medium term 
and medium ones over the long term. (22)  

(22)  Public debt projections are subject to uncertainty around the baseline assumptions. Consequently, different alternative 
(deterministic and stochastic) scenarios are systematically performed in the Commission’s DSA to complement the 
traditional baseline, including assumptions of more stringent macroeconomic and financial conditions which may lead to 
additional debt sustainability risks in the medium term. See the DSA in the Commission Country Report 2023 for the latest 
risk classification and Debt Sustainability Report 2022 (April 2023) for methodological details. 

16 

                                                 
Graph 2.7: Deficit and public debt developments (% of GDP), Hungary 

2. 

Assessment of macroeconomic vulnerabilities 

Source: Eurostat, Commission services calculations 

Over  the  last  decade  Hungary’s  debt  structure  improved  significantly,  but  tighter 
financing  conditions  in  2022  led  to  higher  foreign  debt  issuance.  The  share  of  foreign-
currency-denominated and external debt fell substantially since the early 2010s and the average 
term  to  maturity  increased  to  some  6  years  by  the  beginning  of  2023  (albeit  still  below  the  EU 
average of 7.9). Domestic banks and households have played an increasing role in debt financing 
over the years. Fixed-rate retail bonds had become the second most important financing source by 
2022, but demand for these instruments decreased substantially amid soaring inflation. The debt 
management  agency  adapted  by  higher  issuances  of  inflation-linked  and  foreign-denominated 
bonds. The share of foreign currency debt rose from 20.6% at the end of 2021 to 25.7% in March 
2023, and the debt management strategy for 2023 increased the ceiling for this ratio from 25% to 
30%.  At  the  same  time,  buybacks  by  the  debt  management  agency  reduced  annual  foreign 
currency  redemptions  to  just  0.6%  of  GDP  annually  over  2024-2026.  The  modest  role  of  local 
institutional  investors,  such  as  insurance  corporations  and  pension  funds,  limits  the  scope  for 
further increasing the duration of domestically held government debt, as retail investors and banks 
have a preference for shorter debt maturities, typically up to 5 years. (23)  

The Hungarian government faces a rising interest burden. The 10-year yield rose by 314 bps 
since the beginning of 2022 to 7.7% by 28 April 2023, while the spreads to German 10-year bonds 
widened  by  64  bps.  Deteriorating  macroeconomic  fundamentals  and  the  uncertainty  regarding 
Hungary’s  access  to  EU  funds  left  Hungary  exposed  to  shifts  in  market  sentiment.  The  resulting 
volatility increased exchange rate risk and compounded the rise in risk spreads. In January 2023, 
S&P  lowered  Hungary’s  credit  rating  by  one  grade  to  BBB-,  while  Fitch  revised  the  outlook  of  its 
BBB rating from stable to negative. Moody’s did not revise its BBB rating in March 2023. Given the 
relatively  low  average  term  to  maturity  of  the  central  government  debt,  the  rising  share  of 
inflation-linked  bonds,  continued  high  government  deficits  and  somewhat  high  gross  financing 
needs (24), interest expenditure is expected to soar, from 2.2% of GDP in 2019 to 4.3% in 2024. 

(23)  The assets of insurance corporations and pension funds amounted to just 10.1% of GDP in 2021, the second lowest value 
in the EU. Private pension funds practically disappeared following the de facto renationalisation of the second pension 
pillar in 2010. Life insurance funds also remain limited in international comparison. The role of building saving funds also 
diminished in 2018 when state subsidies after savings were abolished.  

(24)  The gross financing needs remain high at 15.5% of GDP in 2023. They are projected to remain well above 10% of GDP 

over the medium term. 

17 

-80%-70%-60%-50%-40%-30%-20%-10%0%10%20%30%40%50%60%70%80%-8%-7%-6%-5%-4%-3%-2%-1%0%1%2%3%4%5%6%7%8%20112012201320142015201620172018201920202021202220232024public debt (right scale)interest expenditureprimary deficitdeficit      
                                                 
Graph 2.8: Structure of the general government debt and average term to maturity, Hungary 

2. 

Assessment of macroeconomic vulnerabilities 

Source: Hungarian debt management agency and European Commission services 

Assessment of MIP relevant policies 

The  weakly  coordinated  policy  response  to  rising  vulnerabilities  is  delaying  the 
adjustment  of  the  economy.  Expansionary  economic  and  fiscal  policies  contributed  to  the 
deterioration  of  the  external  balance,  rising  inflation  and  house  prices  since  the  mid  2010s. 
Monetary  policy  started  to  tighten  in  2021  but  fiscal  expansion  continued  until  early  2022.  The 
government also resorted to price and interest rate controls that hindered real adjustment of the 
economy  to  a  changing  world  economic  structure,  rising  interest  rates  and  higher  energy  prices. 
Interest  rate  caps  weakened  the  transmission  mechanism  of  monetary  policy,  by  limiting  the 
response of aggregate demand to changes in central bank’s interest rates. Chapter 3 discusses in 
more  detail  the  reasons  for  procyclical  policies,  and  the inconsistencies  of  the  policy  response to 
recent challenges. 

Monetary  policy  tightened  unevenly  to  arrest  inflation.  The  central  bank  (MNB)  started  to 
hike interest rates in June 2021, but its asset purchase and subsidised loan programmes continued 
until early 2022. On two instances MNB had to reverse course after announcing a slowdown or a 
halt of interest rate hikes (in September 2021 and September 2022, respectively). In October 2022 
the  currency  depreciated  significantly,  to  which  MNB  responded  by  introducing  a  new  overnight 
deposit  tender  with  an  interest  rate  of  18%,  500  bps  above  the  main  policy  rate.  Conversely, 
subsidised  loans  by  the  MNB  and  national  development  banks  and  credit  guarantees  by  the 
government  rose  substantially  after  the  COVID-19  pandemic;  the  latest  of  those  schemes  was 
launched in February 2023 and was mostly disbursed to finance working capital (see Chapter 3). 

Expansionary and pro-cyclical policies since the mid-2010s left the budget with limited 
room  for  manoeuvre.  While  the  government  debt  ratio  had  been  on  a  steady  declining  trend 
before  the  pandemic  on  the  back  of  buoyant  economic  growth,  the  pace  of  consolidation  in 
structural terms remained slow. The increase in public debt since 2020 was only partly driven by 
the  net  effect  of  temporary  measures  in  response  to  the  COVID-19,  Russia’s  war  of  aggression 

18 

0%20%40%60%80%100%% of GDPa) Structure of general government debtGeneral government debt of entitites classified outside of the central governmentOther HUF-denominated debt (government bonds and loans)HUF-denominated retail securitiesHUF-denominated discount T-BillsForeign currency denominated debt234567891010111213141516171819202122yearsb) Average term to maturity of central government debt Local currency debtForeign denominated debtTotal debt      
 
2. 

Assessment of macroeconomic vulnerabilities 

against Ukraine and the subsequent energy crisis. A large part of the fiscal expansion since 2021 
was  rather  due  to  permanent  measures.  Procyclical  fiscal  policy  was  further  enabled  by 
weaknesses  in  the medium-term  fiscal  framework, and  large government discretion in  budgetary 
execution. That was accompanied by a tendency in budgetary planning to underestimate revenues, 
with the better-than-expected revenues being matched by additional spending up to exactly meet 
the official deficit target (see Chapter 3 for further details). The high public debt level, high gross 
financing  needs  and  a  growing  share  of  foreign  debt  have  made  Hungary  vulnerable  to  shifts in 
market sentiment and, with rising interest rates, have substantially and rapidly increased the debt 
servicing  costs.  The  large  government  deficits  have  also  accounted  for  the  bulk  of  the  external 
borrowing needs of the economy. 

Price  and  interest  rate  caps  provided  temporary  relief  for  consumers  but  created 
distortions in the economy and weakened the monetary policy transmission mechanism 
(see  Chapter  3  and  Table 3.1  for  details).  In  2021-2022  the  government  capped  motor  fuel  and 
basic  food  items,  and  initially  kept  residential  utility  prices  unchanged.  Furthermore,  interest  rate 
caps were introduced, such as a cap on flexible mortgage rates (originally for 6 months in January 
2022  but  extended  repeatedly).  These  measures  aimed  to  shield  households  from  the  impact  of 
rising commodity prices and interest rates and their cost was mostly borne by companies and the 
budget.  Due  to  their  untargeted  nature,  these  costs  have  been  substantial,  and  they  also  hinder 
policy  efforts  to  curb  inflation  and  to  reduce  energy  import  dependence. (25)  The  negative  side 
effects of these measures included the following: 

  Net fuel prices have exceeded the average price of neighbouring countries since the phase-out 
of the motor fuel price cap, suggesting that wholesale and retail traders try to recoup the losses 
they incurred while the price cap was in force.  

  In the case of the food price cap, retail companies appear to have offset their losses by raising 
the  prices  on  non-affected  products. (26)  However,  the  downward  pressure  on  producer  prices 
seems to have burdened the domestic food industry, whose production declined since February 
2022. 

  Low  household  energy  prices  were  partly  cross  subsidised  by  high  prices  for  large  industrial 
consumers,  consequently  the  production  of  energy-intensive  manufacturing  branches  (e.g., 
chemicals, metals) dropped more than the EU average in 2022.  

  Interest  rate  caps  also  weakened  the  transmission  mechanism  of  monetary policy,  by  limiting 
the response of aggregate demand to changes in central bank’s interest rates (see Chapter 3 for 
further analysis). 

Generous  and  untargeted  housing  support  policies  remain  in  place.  The  Family  home 
creation subsidy, which offers grants, subsidised loans, and VAT refunds for housing purposes with 
limited targeting, has remained available in 2023, although the government signalled its intention 

(25)  In 2022, Hungarian household gas consumption decreased by 8% in 2022 compared to the 2019-2021 average, which 
was the lowest reduction in the EU (source: https://www.bruegel.org/dataset/european-natural-gas-demand-tracker). A 
recent study found that energy savings by Hungarian households in 2022 were partly driven by mild weather and not 
higher prices. This study also found insignificant correlation between household income and energy consumption, indicating 
that the two-tier energy pricing system, which provides a low regulated price up to the average consumption level, is not 
targeted towards the poor. See: Tóth G., V. Jáger, Zs. Kovalszky. P. Bóday, D. Ádám and Á. Kincses (2023): A magyarországi 
háztartások energiafogyasztásának jellemzői az orosz–ukrán háború árnyékában, Statisztikai Szemle 101: 118-144 (in 
Hungarian).  

(26)  Evidence for dairy products was collected by the Hungarian competition authority. See: GVH (2023): Jelentés (tervezet) a tej 

és tejtermékek magyarországi piacán lefolytatott gyorsított ágazati vizsgálatról. Gazdasági Versenyhivatal. 
https://bit.ly/44Gt4lC (in Hungarian, accessed on 8 May 2023). 

19 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

to revise the scheme later this year. The temporary prenatal loan scheme, which was partly used 
for housing purposes and was due to expire on 31 December 2022, has been extended until  the 
end of 2024 (see Table 3.1 in Chapter 3 for further details on these schemes).  

Recent  policy  interventions  may  affect  negatively  banks’  profitability  and  capacity  to 
lend.  The  ESRB  in  February  2022  assessed  that  the  prevailing  macroprudential  policy  was  only 
partially appropriate and sufficient and issued a warning. The authorities responded by activating a 
0.5%  countercyclical  risk  buffer  as  of  1  July  2023,  which  can  help  to  address  the  risks  of  the 
economic downturn on banks’ capital position. However, banks’ profitability remains under pressure 
by policy measures. Although the debt repayment moratorium introduced during the pandemic was 
terminated  for  the  last  remaining  participants  as  of  1  January  2023,  regulatory  caps  on  lending 
rates on flexible mortgage rates since January 2022 have compressed their interest margin, and 
the bank levy rose substantially in 2022. The return on equity in the banking sector fell below the 
risk-free interest rate in 2022, which could hinder banks’ ability to attract capital and to lend. As of 
1 April 2023, the central bank introduced a non-interest-bearing tier to commercial bank reserves, 
which reduces commercial banks’ interest income further.  

The  timely  and  effective  implementation  of  Hungary’s  Recovery  and  Resilience  Plan  is 
expected to help reduce macroeconomic vulnerabilities. Reforms to improve the quality and 
long-term  sustainability  of  fiscal  policy  include  the  introduction  of  regular  spending  reviews,  a 
pension reform, and the phase-out of distortive sectoral taxes. Implementing these reforms could 
help in achieving the necessary policy stance and coordination to restore price stability and support 
the adjustment of the economy to a new macroeconomic environment. Reforms and investments in 
education and skills can improve productivity and export competitiveness, while  the promotion of 
energy  efficiency  and  renewable  energy  can  reduce  Hungary’s  energy  import  dependence  and 
improve the current account balance in the longer term. 

Conclusion 

Hungary  is  facing  vulnerabilities  relating  to  its  external  and  government  financing 
needs, compounded by the impact of high inflation. A key issue is whether price stability can 
be  achieved,  or  inflation  will  prove  sticky  for  an  extended  period.  The  baseline  forecast  assumes 
tight and well-coordinated anti-inflationary policies and well-anchored inflation expectations, but a 
looser  and  inconsistent  policy  stance  could  risk  de-anchoring  expectations  and  raise  inflation 
persistence  which  would  eventually  result  in  a  higher  nominal  interest  rate  path,  keeping 
government  financing  costs  elevated.  The  deteriorating  trend  of  the  already  significant  current 
account deficit was exacerbated by the rising energy bill in 2022, and short-term external debt has 
risen.  Expected  improvements  in  the  current  account  over  2023  and  2024  are  contingent  on  the 
assumed moderation of energy import prices, and on the expected reduction of the budget deficit. 
Beyond 2024 addressing the high energy intensity of the economy would be important for current 
account dynamics. The public debt ratio decreased in recent years thanks to marked nominal GDP 
growth,  but  the  budget  deficit  remains  elevated,  and  accounts  for  a  large  share  of  the  external 
borrowing needs of the economy. The government is facing an increasing interest burden while the 
debt maturity is still relatively low. House prices have grown briskly in Hungary in the last decade. 
However, the outlook is for an easing of housing market overvaluation, and the risk of a substantial 
nominal  price  drop  seems  limited  in  the  current  high  inflation  environment.  Unaddressed 
vulnerabilities diminish Hungary’s resilience to possible further shocks.  

Policy  inconsistencies  have  exacerbated  those  vulnerabilities  whereas  a  consistent 
policy  mix,  underpinned  by  a  strong  institutional  policy  framework,  is  instrumental  to 
safeguard  external  sustainability  and  anchor  expectations.  Monetary  and  fiscal  policy 

20 

2. 

Assessment of macroeconomic vulnerabilities 

tightened, but the composition of the fiscal response remained conducive to inflation and hindered 
efforts to reduce energy import dependence. It included, inter alia, untargeted measures to protect 
households’  purchasing  power,  financed  by  indirect  taxes  burdening  companies  and  the  financial 
sector, price and interest rate caps, and untargeted and fiscally costly housing subsidy schemes. All 
these  policies  have  also  had  a  material  impact  on  external  and  fiscal  sustainability.  Export 
promotion  policies  remain  focused  on  attracting  cost-sensitive  and  resource-intensive  assembly 
activities, in which Hungary is losing its comparative advantage due to skills shortages and higher 
energy  prices.  Overcoming  the  identified  vulnerabilities  requires  considerable  efforts.  Timely  and 
full  implementation  of  structural  reforms  included  in  Hungary’s  Recovery  and  Resilience  Plan  is 
expected to help reducing macroeconomic vulnerabilities and support growth and adjustment in the 
medium  term.  These  include  spending  reviews  and  a  pension  reform  to  improve  fiscal 
sustainability, and reforms and investments to reduce fossil fuel dependence. In addition to these, 
an appropriate policy mix through the effective coordination and clear demarcation of policies and 
the smooth transmission of monetary policy would help to ensure a consistent and effective policy 
response to high inflation and strengthen external sustainability. Fiscal sustainability risks need to 
be reduced by permanent measures that curb expenditure and do not weigh on long-term growth. A 
stronger  medium-term  budgetary  framework  and  less  discretion  during  the  execution  of  annual 
budgets  could  help  to  reduce  the  procyclical  bias  of  fiscal  policy.  An  enhanced  role  by  the  fiscal 
council could improve transparency and fiscal discipline. The phasing out of price and interest rate 
caps  would  disencumber  monetary  policy,  while  stronger  price  signals  in  regulated  energy  prices 
could reduce energy import dependence. 

Based on the findings in this in-depth review, the Communication “European Semester – 
2023  Spring  Package”  sets  out  the  Commission’s  assessment  as  to  the  existence  of 
imbalances or excessive imbalances in Hungary, in line with Regulation 1176/2011. (27) 

(27)  European Commission (2023), European Semester Spring Package 2023, COM(2023) 600 final. 

21 

 
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

Box 2: Inflation exposures and cross-border pass-through 

This  box  sheds  light  on  the  sources  of  inflation  in  Hungary  and  its  spill-overs  with  EU 
partners.  The  period  since  2021  has  been  characterized  by  pandemic  aftershocks  and  global 
supply  chain  disruptions  compounding  global  inflationary  pressures  and  a  surge  in  commodity 
prices  triggered  by  Russia’s  war  of  aggression  against  Ukraine.  As  a  result,  inflation  in  Hungary 
surged to unprecedented levels. In response, wages and profits also picked up across the EU, which 
further  added  to  price  pressures  in  Hungary.  With  input-output  data,  domestic  inflation  can  be 
decomposed  into  the  contributions  from  key  cost  factors.  Taking  into  account  some  data 
limitations, the framework can be  used to attribute consumer and investment price changes to i) 
extra-EU import price changes, which include both directly imported inflation and inflation passed 
through from EU partners import costs ii) domestic unit labour cost changes iii) domestic unit profit 
changes, including indirect taxation changes and iv) rest-of-EU value added price changes. (28) 

Data suggests that the imported inflation shock from 2022 adds to the domestic factors 
that  continue  to  drive  inflation.  In  2022,  as  shown  in  Graph  2.9,  energy  prices  contributed 
markedly  to  consumer  and  investment  inflation.  Moreover,  import  prices  on  other  goods  and 
services  from  outside  the  EU  were  a  significant  factor  in  the  acceleration  of  consumer  inflation. 
However,  domestic  value  added  is  the  most  persistent  component    underpinning  inflation  until 
consumer  and  investment  inflation.  Among  domestic  value-added  components,  unit  labour  cost 
increases  contribute  persistently,  but  is  outweighed  by  price  increases  attributed  to  unit  profits. 
Value-added inflation from other EU countries also affected the investment deflator, though to a 
lesser  degree.  Unlike  investment  inflation,  consumer  inflation  is  expected  to  increase  further  this 
year  on  the  back  of  base  effects.  The  delayed  impact  of  energy  prices  is  set  to  keep  consumer 
inflation  elevated  and  to  lower  investment  inflation.  Inflation  spill-overs  from  other  EU  countries 
are projected to remain limited. 

Graph 2.9: Components of gross fixed capital formation deflator growth and consumer price 
inflation 

Source: European Commission services 

(28) The graphs below are based on national accounts data and the Commission’s Spring 2023 forecast, combined with 

Eurostat input-output data. HICP is taken as the measure of the price of private consumption, including non-residents. 
Changes in import prices and value-added deflators are assumed to affect demand prices with a delay of 7 months. For 
further methodological details, see explanations in the 2023 in-depth review for Czechia, p. 16. 

22 

-50510152025161718192021222324% change (year-on-year)HU: contribution to domestic GFCF deflator growth-10-505101520161718192021222324% change (year-on-year)HU: contribution to domestic CPI deflator growthDomestic ULCUnit profits (&taxes)RoEU value added deflatorEnergy imports from Extra-EUOther imports from Extra-EURoEU import cost passthr.ResidualDeflator growth YoY 
  
 
                                                 
Table 2.1: Selected economic and financial indicators (Part 1), Hungary 

2. 

Assessment of macroeconomic vulnerabilities 

(e) estimate based on ECB quarterly data 
(1) Potential output is the highest level of production that an economy can reach without generating inflationary 
pressures. The methodology to compute the potential output is based on K. Havik, K. Mc Morrow, F. Orlandi, C. Planas, R. 
Raciborski, W. Roeger, A. Rossi, A. Thum-Thysen, V. Vandermeulen, The Production Function Methodology for Calculating 
Potential Growth Rates & Output Gaps, COM, European Economy, Economic Papers 535, November 2014. 
(2) Deviation of actual output from potential output as % of potential GDP. 
(3) Current accounts in line with fundamentals ("current account norms") are derived from reduced-form regressions 
capturing the main determinants of the saving-investment balance, including fundamental determinants, policy factors 
and global financial conditions. See L. Coutinho et al. (2018), "Methodologies for the assessment of current account 
benchmarks", European Economy, Discussion Paper 86/2018, for details.  
(4) This benchmark is defined as the average current account required to halve the gap between the NIIP and the 
indicative MIP benchmark of -35% of GDP over the next ten years, or to stabilise the NIIP at the current level if it is 
already above the indicative MIP benchmark. Calculations make use of Commission’s T+10 projections. 
(5) NENDI is a subset of the NIIP that abstracts from its pure equity-related components, i.e. foreign direct investment 
(FDI) equity and equity shares, and from intracompany cross-border FDI debt, and represents the NIIP excluding 
instruments that cannot be subject to default. 
(6) Fundamentals-based benchmarks are derived from regressions capturing the main determinants of credit growth and 
taking into account a given initial stock of debt. Prudential thresholds represent the debt threshold beyond which the 
probability of a banking crisis is relatively high, minimising the probability of missed crisis and that of false alerts. 
Methodology to compute the fundamentals-based and the prudential benchmarks based on Bricongne, J. C., Coutinho, L., 
Turrini, A., Zeugner, S. (2019), “Is Private Debt Excessive?”, Open Economies Review, 1- 42. 
Source: Eurostat and ECB as of 2023-04-28, where available; European Commission for forecast figures (Spring forecast 
2023) 

23 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Real GDP 3.5-0.83.64.9-4.57.24.60.52.8Potential growth  (1)3.40.42.34.53.53.73.42.52.5Contribution to GDP growth:Domestic demand 2.8-2.04.06.8-2.64.43.6-1.22.0Inventories 0.0-0.4-0.40.10.01.80.30.40.0Net exports 0.61.6-0.1-2.0-2.01.00.71.30.8Contribution to potential GDP growth (1):Total Labour (hours) -0.6-0.21.00.80.50.50.50.00.0Capital accumulation 1.40.60.91.91.41.51.41.11.1Total factor productivity 2.60.10.41.71.61.71.51.41.4Output gap (2)2.6-3.00.63.9-4.1-0.80.3-1.6-1.2Unemployment rate6.69.96.13.34.14.13.64.24.0Harmonised index of consumer prices (HICP)5.44.91.23.43.45.215.316.44.0GDP deflator 4.43.34.24.86.46.415.313.03.5External positionCurrent account balance (% of GDP), balance of payments-7.8-1.12.3-0.8-1.1-3.9-8.2-3.5-2.7Trade balance (% of GDP), balance of payments-1.74.56.82.31.90.3-4.1..Primary income balance (% of GDP)-5.9-4.9-3.6-2.5-2.5-3.1-3.2..Secondary income balance (% of GDP)-0.2-0.7-0.9-0.6-0.5-1.1-0.9..Current account explained by fundamentals (CA norm, % of GDP) (3)-0.8-0.5-0.3-0.2-0.1-0.10.00.20.3Required current account to stabilise NIIP above -35% of GDP over 20Y (% of GDP) (4)-1.3-3.7-5.7-5.4-5.6-5.2-4.6-4.3-4.2Capital account balance (% of GDP)0.41.92.51.82.02.52.0..Net international investment position (% of GDP)-88.8-102.9-65.6-49.7-52.1-52.4-49.3..NENDI - NIIP excluding non-defaultable instruments (% of GDP) (5)-28.8-48.3-17.9-2.6-2.4-1.3-5.3..Net FDI flows (% of GDP)-1.9-1.7-1.9-0.2-1.9-2.0-2.2..CompetitivenessUnit labour costs (ULC, whole economy)4.82.63.03.16.72.611.914.05.8Nominal compensation per employee 8.42.53.17.03.08.815.014.68.3Labour productivity (real, hours worked)4.60.41.04.20.34.12.11.82.7Real effective exchange rate (ULC)2.7-2.3-1.6-1.4-5.30.2-1.311.12.9Real effective exchange rate (HICP)3.0-0.4-1.4-0.6-4.20.4-3.9..Export performance vs. advanced countries (% change over 5 years)46.110.3-4.33.28.03.2...Private sector debtPrivate sector debt, consolidated (% of GDP)79.2110.581.067.376.880.477.6..Household debt, consolidated (% of GDP)23.336.521.918.520.821.018.5..Household  debt, fundamental benchmark (% of GDP) (6)8.511.819.023.727.229.130.6..Household  debt, prudential threshold (% of GDP) (6)40.243.738.737.438.537.937.8..Non-financial corporate debt, consolidated (% of GDP)55.974.059.148.856.059.459.1..Corporate debt, fundamental benchmark (% of GDP) (6)33.429.033.837.141.143.144.2..Corporate debt, prudential threshold (% of GDP) (6)60.965.255.652.455.154.554.3..Private credit flow, consolidated (% of GDP) 13.30.8-0.34.28.112.68.9e..Corporations, net lending (+) or net borrowing (-) (% of GDP)-2.71.51.8-2.03.0-0.7-3.00.0-0.8Households, net lending (+) or net borrowing (-) (% of GDP)1.22.94.95.05.46.53.03.24.9Net savings rate of households (% of net disposable income)5.45.37.910.410.913.1...forecast 
      
 
 
Table 2.2: Selected economic and financial indicators (Part 2), Hungary 

2. 

Assessment of macroeconomic vulnerabilities 

(7) Unweighted average of price-to-income, price-to-rent and model valuation gaps. The model valuation gap is 
estimated in a cointegration framework using a system of five fundamental variables; total population, real housing 
stock, real disposable income per capita, real long-term interest rate and price deflator of final consumption expenditure, 
based on Philiponnet, N., Turrini, A. (2017), "Assessing House Price Developments in the EU," European Economy - 
Discussion Papers 2015 - 048, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission. 
Price-to-income and price-to-rent gaps are measured as the deviation to the long term average (from 1995 to the latest 
available year). 
(8) Price-to-income overvaluation gap measured as the deviation to the long term average (from 1995 to the latest 
available year). 
(9) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
Source: Eurostat and ECB as of 2023-04-28, where available; European Commission for forecast figures (Spring forecast 
2023) 

24 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Housing marketHouse price index, nominal.-2.58.917.04.916.521.9..House price index, deflated.-6.76.911.81.510.04.1..Overvaluation gap (%) (7)11.5-3.0-9.28.17.815.423.1..Price-to-income overvaluation gap  (%) (8)16.31.1-9.85.47.49.215.0..Residential investment (% of GDP)4.53.12.33.24.13.94.6..Government debtGeneral government balance (% of GDP)-7.2-4.1-2.3-2.0-7.5-7.1-6.2-4.0-4.4General government gross debt (% of GDP)61.577.774.365.379.376.673.370.771.1Banking sectorReturn on equity (%).10.95.315.98.313.4...Common Equity Tier 1 ratio.14.114.914.915.217.7...Gross non-performing debt (% of total debt instruments and total loans and advances) (9).9.810.6..2.4...Gross non-performing loans (% of gross loans) (9)..12.14.23.63.23.3..Cost of borrowing for corporations (%)..1.5.2.15.115.6..Cost of borrowing for households for house purchase (%)..4.54.14.04.410.9..forecast 
      
 
3.  THEMATIC CHAPTER: PRO-CYCLICAL POLICY MIX 

Pro-cyclical  and  weakly  coordinated  economic  policies  have  contributed  to  many  of 
Hungary’s current macroeconomic challenges. After years of deleveraging in the wake of the 
2008  financial  crisis,  the  second  half  of  the  2010s  was  characterised  by  a  favourable  external 
environment  and  a  natural  recovery  of  the  housing  market  and  bank  lending.  Inspired  by  both 
economic  and  political  considerations,  fiscal  and  monetary  policies  remained  deliberately 
expansionary in this period,  although the favourable economic environment masked  the potential 
risks of these policies. In 2020, economic policies could respond countercyclically to the recession 
caused  by  the  COVID-19  pandemic  and  supported  the  swift  recovery  of  the  Hungarian  economy. 
However,  policy  stimulus  continued  well  into  2022.  This  contributed  to  a  deteriorating  external 
balance  and  high  inflation  since  2021.  Against  the  backdrop  of  higher  commodity  prices,  tighter 
financing conditions and a global and domestic economic slowdown, the fiscal and monetary room 
to  manoeuvre  narrowed  in  2022.  The  policy  response  was  delayed  and  included  several  stopgap 
measures, to the detriment of policy coordination, consistency and predictability. Newly introduced 
measures to protect households and firms from higher prices and interest rates were undermining 
efforts to contain aggregate demand and impacted on the effectiveness of monetary policy. This 
chapter assesses why Hungarian fiscal and monetary policy has tended to amplify economic cycles 
(with the important exception of 2020) and assesses how the institutional framework could ensure 
that these policies become a stabilising force against future fluctuations of the business cycle. 

Fiscal policy 

The  expansionary  and  procyclical  fiscal  policy  since  2017  appears  to  have  thwarted  a 
more ambitious debt consolidation. The general government debt-to-GDP ratio had been on a 
declining  trend  in  the  pre-pandemic  period,  and  after  an  increase  in  2020,  it  has  continued  to 
decrease  supported  by  high  nominal  GDP  growth.  However,  the  pace  of  debt  reduction  remained 
slow. The structural primary balance over 2015-2022 was highly expansionary at -1.7% of GDP on 
average,  1.5  percentage  points  lower  than  the  EU  average. High  deficits in  structural  terms  have 
also coincided with positive or neutral output gaps, most notably in 2017-2019 and in 2022 (see 
Graph 3.1).  

25 

 
 
Graph 3.1: Structural primary balance and output gap, Hungary 

3. 

Thematic chapter: Pro-cyclical policy mix 

Source: European Commissions services 

Since  2020  the  increase  in  public  debt  was  only  partly  driven  by  the  response  to  the 
pandemic,  and  Russia’s  war  of  aggression  against  Ukraine  and  the  subsequent  energy 
crisis. Measures to address the consequences of the pandemic exceeded 4% of GDP in 2020 but 
were largely phased out in 2021 (see Graph 3.2). The total budgetary cost of measures to mitigate 
the impact of high energy prices – net of revenue resulting from the new taxes on windfall profits 
of energy companies – is estimated at almost 2% of GDP in 2022 and is expected to drop to below 
1%  in  2023.  Most  of  the  fiscal  expansion  between  2021  and  2023  can  be  explained  by  other 
discretionary  measures  adopted  or  brought  forward  during  the  recovery  period  and  before  the 
2022  parliamentary  elections,  including  a  refund  of  income  tax  to  families,  reintroduction  of  the 
13th  monthly  pension,  a  one-off  bonus  for  law  enforcement  officers  or  further  cuts  to  corporate 
and labour taxes (see Table 3.1 for details). Of those, the non-temporary measures are projected to 
have a deficit-increasing impact of 3% of GDP in the medium term.  

Graph 3.2: Discretionary fiscal measures adopted since 2020 (% of GDP, cumulative) 

Source: European Commission services 

26 

-8-6-4-20246201120122013201420152016201720182019202020212022%HU Structural balance excluding interest, % GDPEU 27 Structural balance excluding interest, % GDPHU Output gap (%)EU 27 Output gap (%)-1%0%1%2%3%4%5%6%20202021202220232024% of GDPSpecial sectoral taxes and other taxes, excluding windfall energy taxesEnergy measures, net of windfall energy taxes, including gas stockpiling (COM definition)Temporary fiscal measures adopted in the aftermath of the COVID-19 crisisPermanent measures adopted in the aftermath of the COVID-19 crisisCOVID-19 measures (COM definition)Net impact of discretionary fiscal measures      
      
 
Table 3.1: Selected policy (Part 1) 

3. 

Thematic chapter: Pro-cyclical policy mix 

Source: European Commission services 

27 

 
 
   
 
Table 3.2: Selected policy (Part 2) 

3. 

Thematic chapter: Pro-cyclical policy mix 

Source: European Commission services 

28 

 
 
   
Graph 3.3: GDP forecast errors and expenditure surprises compared to annual budget plans 

3. 

Thematic chapter: Pro-cyclical policy mix 

(1) 2020 data were excluded from the regression in the right panel, as the outturn for 2020 was exceptional due to the 
activation of the general escape clause and a genuinely countercyclical fiscal stance. 
Source: European Commission services based on annual budget laws 

The  tendency  for  procyclical  policies  is  also  linked  to  the  design  of  the  debt  rule, 
weaknesses  in  budget  planning  and  execution,  and  low  policy  transparency  and 
accountability.  Specifically,  the  shift  to  a  very  early  adoption  of  annual  budgets  in  early 
summer (29),  when  available  economic  data  series  are  limited,  has  reduced  the  quality  of  the 
macroeconomic  and  budgetary  forecasts.  The  average  forecast  error  for  nominal  GDP  in  the 
budgetary  year  has  increased  from  2.8%  to  5.9%  since  the  change  to  early  budget  preparation 
(Graph 3.3 a). Nominal GDP forecasts were also consistently lower than the actual outturns since 
2016, leading to revenue and commensurate expenditure surprises almost every year. (30) The level 
of this extra spending was calibrated to exactly meet the official deficit target and comply with the 
very loose debt rule which only requires the government to ensure a fall in the debt-to-GDP ratio. 
The  rules  embedded  in  the  budget  laws  have  allowed  the  government  to  deviate  from  the 
predetermined spending ceilings set therein and reallocate unspent appropriations, as long as the 
additional  spending  did  not  jeopardise  the  official  deficit  targets.  Additional  measures  with 
significant  fiscal  implications  are  frequently  enacted  by  government  decree,  without  publicly 
available 
impact  assessment,  meaningful  social  dialogue  and  adequate  parliamentary 
oversight. (31)  Finally,  the  annual  budgets  have  frequently  included  large  general  and  special-
purpose budgetary reserves, which could only be spent if this did not endanger the fulfilment of the 
deficit  target.  In  practice, this  also  meant  that  higher  spending  was  authorised  precisely  in  those 

(29)  Since 2016, the draft annual budgets have been submitted by the government to the Parliament in spring and adopted in 
early summer, making Hungary the only OECD country to publish the budgetary projections some 6 months ahead of the 
fiscal year concerned. See OECD (2019), Budgeting and Public Expenditures in OECD Countries 2019, OECD Publishing, 
Paris, https://doi.org/10.1787/9789264307957-en.  

(30)  In the good economic times of 2017-2019 and 2021-2022, positive GDP surprises were accompanied by commensurate 
spending surprises, with a 1 percentage point nominal GDP growth surprise typically coinciding with additional spending of 
0.4% of GDP (see Graph 3.3 b). A significant part of those spending surprises could be observed in spikes of central 
government spending each December since 2016.  

(31)  During the outbreak of COVID-19 pandemic, the authorities have announced a “state of danger” and have extended it in 

2022 due to the Russia's war of aggression against Ukraine. Under the state of danger, the government may issue decrees 
by which it can suspend the application of certain laws, deviate from legal provisions, and take other extraordinary 
measures, which can be adopted by the parliament as laws ex post. The state of danger does not allow the government to 
deviate from the constitutional provisions contained in the Fundamental Law. 

29 

-5%0%5%10%15%20%2010201120122013201420152016201720182019202020212022a) Forecast errors (actual/plan) of nominal GDP in budget laws since 2010Budget adoption in autumn: mean absolute error =2.8%Budgetadoption in summer: mean absolute error = 6.0%average forecasterrorR² = 0.390%5%10%15%-5%0%5%10%15%20%Deviation of actual cash expenditure from planned expenditure (%)Forecast error of nominal GDP (%)b) Forecast errors of nominal GDP and expenditure surprises since 20102022202120202010 
      
                                                 
3. 

Thematic chapter: Pro-cyclical policy mix 

years when favourable revenue developments would have resulted in lower-than-expected deficit. 
The  design  of  the  pension  premium,  that  is  payable  only  when  GDP  growth  is  strong,  and  the 
practice to adjust the salaries of most public sector employees in an ad hoc way in good economic 
times, have further contributed to the procyclicality of fiscal policy. (32) 

The  national  fiscal  rules  in  place  have  not  provided  a  strong  enough  foundation  for  a 
prudent fiscal policy. At present, there are three fiscal rules in force in Hungary, two based on EU 
treaties  and  one  national.  Those  rules  induce  procyclical  policies  and  have  differing  levels  of 
enforcement: 

1.  The general government deficit ceiling of 3% of GDP, consistent with the deficit reference value 
set  out  in  the  EU  Treaties,  has  been  an  important  policy  anchor  in  Hungary.  However,  in  the 
second  half  of  the  2010s,  Hungary  pursued  procyclical  fiscal  policies  while  its  government 
deficit remained below 3% of GDP. 

2.  A  rule  requiring  that  the  fiscal  balance  determined  during  budgetary  planning  be  in  line  with 
achieving the medium-term budgetary objective expressed in structural terms (MTO) plays only 
an auxiliary role in the budgetary process, as it suffers from lack of an effective enforcement 
mechanism in case of non-compliance. The MTO-based rule has been weakened by the biases 
in  the  budgetary  forecasts.  These  forecasts  have  underestimated  the  output  gaps  and  thus 
overestimated  ex  ante  structural  balance  relative  to  the  European  Commission’s  estimates 
based on the commonly agreed methodology with Member States.  

3.  The  national  debt  reduction  rule  enshrined  in  the  Fundamental  Law (33)  sets  the  effective 
constraint  on  fiscal  policy  at  national  level,  as  compliance  with  this  rule  is  necessary  for  the 
adoption and discharge of the annual budget. The debt rule, however, has procyclical features 
as  it  induces  a  moderately  restrictive  fiscal  stance when growth  and  inflation are  low,  and 
allows for an expansionary stance in an environment of higher growth and inflation. 

The  national  fiscal  framework 
lacks  a  genuine  medium-term  orientation  and 
accountability,  with  the  role  of  the  Fiscal  Council  remaining  limited.  According  to 
Commission’s  fiscal  governance  database,  Hungary  medium-term  budgetary  framework  ranks 
among  the  lowest  in  the  EU  (Graph  3.4  b).  The  Act  on  public  finances  requires  the  annual 
publication of 3-year budget plans by 31 December, and possible deviations from these plans by 
the annual budgets must be publicly explained. However, this requirement has been lifted in 2020-
2022  by  special  rules  during  the  “state  of  danger  emergency”  regime.  Furthermore,  there  are  no 
constraints on possible deviations from medium-term plans, and well-defined corrective actions are 
also lacking in case of such deviations. (34) The Hungarian Fiscal Council has a right to veto budget 
laws  in  case  of  non-compliance  with  the  national  debt  rule.  However,  its  role  in  the  fiscal  policy 
discussions is constrained by the low operational capacities and limited mandate. According to the 

(32)  The pension premium is conditional payment that depends on GDP growth and inflation. It has been introduced from 2010, 
in exchange for the cancellation of the 13th monthly pension. Since 2021 the 13th monthly pension has been reinstated, but 
the pension premium remains in force as well. 

(33)  According to the debt rule, if the general government debt exceeds 50% of GDP, the Parliament may only adopt an act on 
the central budget that leads to a reduction in the debt of at least 0.1% of GDP in normal economic times. An escape 
clause is provided during a special legal order and when the real GDP is projected to fall. The definition of the general 
government debt for the purposes of the rule differs from the Maastricht debt calculated in line with EU requirements. 
Specifically, the Stability Act stipulates that: (i) debt in foreign currency must be calculated at a constant exchange rate 
determined in the adopted annual budget law to abstract from the exchange rate fluctuations, (ii) the excess of 
government debt may be disregarded if it arises due time-inconsistencies in recording of the EU funds expenditure and 
revenues and due to liquidity shortfall related to delayed EU fund cash inflows. 

(34)  See the Fiscal governance database of the European Commission: https://economy-finance.ec.europa.eu/economic-

research-and-databases/economic-databases/fiscal-governance-database_en 

30 

                                                 
3. 

Thematic chapter: Pro-cyclical policy mix 

Commission’s  scope  index  of  independent  fiscal  institutions,  Hungary’s  Fiscal  Council  has  a 
narrower  scope  of  activity  than  the  EU  average  (Graph  3.4  a).  The  Council  does  not  prepare 
independent macroeconomic forecasts and can merely endorse the government’s forecast or issue 
a  non-binding  negative  opinion.  The  Council  does  not  prepare  regular  quantitative  policy  costings 
nor long-term sustainability analyses and is not involved in promoting fiscal transparency.   

Graph 3.4: Fiscal governance indicators 

Source: Fiscal Governance Databases of the European Commission 

Monetary policy 

The  Hungarian  central  bank  (MNB)  operates  an  inflation  targeting  regime.  Its  primary 
objective  is price  stability  (target  of  3%  for  inflation  ±1pp  tolerance  band),  but  its mandate  also 
foresees a role in ensuring a sustainable contribution of the financial system to economic growth 
and supporting the economic policy of the government as long as these activities do not endanger 
its  primary  objective.  Since  2021  the  statutory  mandate  of  MNB  also  includes  promoting 
environmental sustainability. 

Monetary and financial policies have been accommodative since the mid 2010s and the 
central bank balance sheet expanded significantly due to quasi-fiscal activities. (35) In the 
low inflation environment of the mid-2010s MNB aimed to support economic growth through low 
interest rates and targeted lending schemes. In 2013 it launched and then repeatedly extended a 
lending scheme for small and medium-sized enterprises and engaged in mortgage-backed security 
purchases  (from  2018)  and  corporate  bond  purchases  (from  2019).  These  programmes 
complemented  similar  schemes  by  the  national  development  banks,  and  subsidised  products 
amounted to 54% of new corporate loans in 2017-2019. MNB also operated facilities to improve 
commercial  banks’  access  to  long  term  funding,  to  promote  lending.  The  policy  response  to  the 
COVID-19 pandemic included further expansion of such activities by MNB and development banks, 

(35)  Central banks may carry out operations that have similar roles as fiscal policy tools (e.g., subsidised lending). These have 

direct or indirect fiscal implications (e.g., through contingent liabilities for the budget through potential central bank losses) 
even if they are not recorded in the government accounts. See e.g., Mackenzie, G. A. and P. Stella (1996): Quasi-Fiscal 
Operations of Public Financial Institutions. International Monetary Fund, Washington D.C. 

31 

0102030405060708090ATITMTPTNLESIELUCYROELSIBEEU-27FILTBGLVDEEEHUCZSKFRDKSEHRPLa) COM Scope index of independent fiscal institutions, 2021ATITMTPTNLESIELUCYROELSIBEEU-27FILTBGLVDEEEHUCZSKFRDKSEHRPL304050607080901000.40.91.41.92.42.93.4b) Commission fiscal governance indicators, 2021Commission Fiscal Rule index scores, 2021Commission Design index of medium-term budgetary frameworks, 2021      
                                                 
3. 

Thematic chapter: Pro-cyclical policy mix 

as well as government bond purchases by MNB amounting to some 5% of GDP. Between the end of 
2019 and 2021 the size of the central bank balance sheet nearly doubled from 26% to 47.8% of 
GDP. The share of subsidised loans among the outstanding loans of non-financial corporations rose 
from 13% in 2019 to 32% by the end of 2022. After the 2008 financial crisis several central banks 
launched  similar  programmes  to  fend  off  deflationary  pressures,  but  MNB  continued  and  even 
extended some of its programmes in a period when inflation was already in the 3% ±1pp tolerance 
band, and accelerating, surpassing MNB forecasts (Graph 3.5). Many of these policies were framed 
within the theory of a “high-pressure economy”, whereby policy stimulus can encourage the build-
up  of  productive  capacities,  which  boost  productivity  growth  and  thus  limit  the  build-up  of 
inflationary  pressure. (36)  In  practice  however,  the  easy  financing  conditions  mainly  supported 
investment  in  construction.  The  share  of  buildings  and  structures  in  total  investment  rose  from 
45.2%  in  2017  to  56.5%  in  2022.  As  a  result  of  this  shift  towards  less  productivity-enhancing 
asset types, capital productivity decreased, the external balance deteriorated and prices increased.  

Monetary tightening since mid-2021 was accompanied by a further complication of the 
policy toolkit and occasionally confusing guidance. In June 2021 the central  bank began to 
tighten monetary conditions to address inflationary pressure. The base rate increased from 0.6% to 
13%  by  September  2022,  and  other  tools  (such  as  higher  reserve  requirements  for  banks)  were 
employed  to  reduce  excess  liquidity  and  ensure  the  transmission  of  higher  interest  rates  to 
financial  markets.  The  pace  of  tightening  was  uneven  and  the  central  bank  twice  had  to  reverse 
course after trying to slow down rate hikes. In September 2022 MNB signalled the end of its rate 
hike  cycle.  As  the  currency  depreciated  significantly  in  the  subsequent  weeks,  MNB  introduced  a 
new  overnight  deposit  with  an  18%  interest  rate  to  stabilise  the  currency.  While  this  instrument 
was  aimed  to  be  temporary,  it  still  remains  in  place,  and  serves  as  a  key  tool  to  absorb  excess 
liquidity in the financial sector. Meanwhile, MNB has kept referring to the base rate as the interest 
rate  that  is  consistent  with  the  medium-term  inflation  outlook  (and  left  it  unchanged  at  13%). 
However,  the  base  rate  has  no  influence  on  monetary  conditions  beyond  its  signalling  role,  as  it 
only  serves  to  determine  the  remuneration  of  commercial  banks’  required  reserves. (37)  The 
complex  toolkit  makes  it  more  difficult  for  market  participants  to  assess  the  monetary  policy 
stance. (38) Eventually Hungary ended up with the highest monetary policy rate and also the highest 
inflation rate in the EU by early 2023. 

A  number  of  policy  measures  further  hindered  the  transmission  of  higher  monetary 
policy rates to the economy. Higher interest rates reduce demand and increase savings, both of 
which  work  towards  containing  inflation.  This  transmission  channel  of  monetary  policy  has  been 
hindered  by  caps  on  variable  mortgage  rates  from  January  2022  (affecting  one  quarter  of  all 
outstanding  mortgages),  on  SME  loans  from  November  2022  (affecting  some  17%  of  corporate 
loans) and on bank deposit rates from November 2022. A large, subsidised loan scheme was also 
launched  in  February  2023  to  help  companies  finance  their  higher  energy  bill,  offering  fixed 
interest  rates  that  are  significantly  below  the  current  monetary  policy  rate. (39)  In  March  2023,  a 

(36)  The origins of this concept can be traced back to the 1960s, with an early account of the effects of high employment on 
potential output by Okun, A. (1962): Potential GNP: Its Measurement and Significance, Cowles Foundation Paper 190 
(https://bit.ly/3TZErQB). It has returned to recent policy discussions through a 2016 speech of Fed Chair Janet Yellen. See: 
Yellen, J. (2016): Macroeconomic Research After the Crisis, Speech at "The Elusive 'Great' Recovery: Causes and Implications 
for Future Business Cycle Dynamics" 60th annual economic conference sponsored by the Federal Reserve Bank of Boston, 
Boston, MA (https://bit.ly/3M5QSIN) The Hungarian central bank discussed this theory at length in MNB (2016): Growth 
report, Magyar Nemzeti Bank. 

(37)  Excess reserves of commercial banks are remunerated with an interest rate of 18%, according to MNB Decree 11/2023. 

See: https://njt.hu/jogszabaly/2023-11-20-2C 

(38)  The complexity of the monetary toolkit is discussed in detail by Lybek, T. (2023): Hungarian Monetary Policy Operations 

Before, During, and After the Pandemic, IMF Selected Issues Paper SIP/2023/005. 

(39)  The Gábor Baross Reindustrialisation Credit Programme was launched on 1 February 2023 with an initial envelope of HUF 
700 bn (equivalent to some 10% of new corporate lending in 2022). Three-quarters of the requested amount up to 6 

32 

                                                 
 
3. 

Thematic chapter: Pro-cyclical policy mix 

government  decree  also  banned  domestic  non-bank  financial  institutions  from  purchasing  the 
central bank’s discount bill, which it issues to absorb excess liquidity and ensure that money market 
rates evolve in line with monetary policy decisions. The European Central Bank found that this ban 
and  the  cap  on  bank  deposit  rates  impede  the  MNB  from  independently  choosing  the  necessary 
means  and instruments  to  conduct  an  efficient monetary policy,  and  therefore  it views  that  they 
infringe on central bank independence. (40) 

Central bank losses will burden the budget in the coming years. The central bank’s assets 
have  long  maturities  and  low  yields,  as  they  are  mostly  made  up  of  foreign  currency  reserves, 
subsidised loans and Hungarian government bonds that were issued in a period of very low yields. 
On the contrary, anti-inflationary policy requires it to offer high yields on its liabilities. MNB incurred 
losses in 2022 and further losses are expected in the coming years. (41) The Hungarian central bank 
law specifies how MNB must be recapitalised by the budget for past losses, and the medium-term 
outlook of the 2023 budget law estimated these expenditures at an average 0.5% of GDP annually 
between 2024-2026. (42) Since the adoption of the 2023 budget, interest rates rose sharply, further 
increasing  the  expected  losses  of  MNB.  However,  the  recapitalisation  rules  were  also  relaxed  in 
December  2022,  dispersing  the  recapitalisation  needs  over  time. (43)  Thus,  the  quasi-fiscal 
operations by the central bank such as subsidised loan schemes, have eventually turned into a real 
fiscal burden. The central bank has introduced a non-interest bearing tier to the required reserves 
of  commercial  banks  in  March  2023,  which  limits  the  losses  of  MNB  to  some  extent.  However, 
shifting the burden to commercial banks impacts on their profitability and lending. 

March were working capital loans, with an interest rate of maximum 6% for forint loans and 3.5% for euro loans. The 
envelope was increased to HUF 1000 bn in March 2023. 

(40)  Opinion of the European Central Bank of 26 April 2023 on the restriction of the negotiability of discount bills issued by the 

Magyar Nemzeti Bank and the extension of an interest rate cap. CON/2023/10. https://eur-lex.europa.eu/legal-
content/EN/TXT/PDF/?uri=CELEX:52023AB0010&qid=1682527131068  

(41)  Net interest losses can be partly offset by revenues on foreign currency operations and the revaluation gains on foreign 
reserves. However, in recent years the debt management agency repurchased significant amounts of short-term foreign 
currency government debt, which limits the scope for the former. Meanwhile, anti-inflationary policies might preclude 
significant currency depreciation that is necessary for revaluation gains. 

(42)  Source: https://bit.ly/3G5WEq7. The same table for the amended 2023 budget (https://bit.ly/3U0wSJN, page 162-164) does 

not specify separately this item.  

(43)  According to the amended rules, the budget must reimburse one-fifth of the negative equity of MNB each year. In March 

2023, the equity of MNB (including reserves) stood at HUF -1244 bn (-1.9% of 2022 GDP). 

33 

 
 
                                                                                                                                                        
Graph 3.5: Inflation and monetary policy developments between 2017-2023 

3. 

Thematic chapter: Pro-cyclical policy mix 

(1) MIRS = monetary policy interest rate swap 
Source: European Commission services based on Hungarian Central Statistical Office and MNB 

34 

 
 
Table 3.3: Selected housing market indicators, Hungary 

3. 

Thematic chapter: Pro-cyclical policy mix 

(') Forecast. The forecast of house prices is computed on the basis a housing valuation model shared with Member States 
in the context of the EPC LIME working group. The forecasts represent real house price percentage changes expected 
based on economic fundamentals (population, disposable income forecast, housing stock, long-term interest rate, and the 
price deflator of private final consumption expenditure), as well as the error correction term summarising the adjustment 
of prices towards their long-run relation with fundamentals. The source for the forecast of other variables is Ameco. 
(1) Price to income in level is the number of years of income necessary to buy an assumed 100m2 dwelling. See 
Bricongne, J-C, A Turrini, and P Pontuch, 2019, “Assessing House Prices: Insights from HouseLev, a Dataset of Price Level 
Estimates”, Discussion Paper 101, European Commission, available in "https://ec.europa.eu/info/publications/assessing-
house-prices-insights-houselev-dataset-price-level-estimates_en".  
(2) Price to income and price to rent gaps are measured in deviation to the long term average (from 1995 to the latest 
available year).  
(3) The model valuation gap is estimated in a cointegration framework with nominal house prices as the dependent 
variable and five fundamental explanatory variables:  total population, real housing stock, real disposable income per 
capita, real long-term interest rate and price deflator of final consumption expenditure. See Philiponnet and Turrini, 
Assessing House Price Developments in the EU (2017) available in "https://ec.europa.eu/info/publications/economy-
finance/assessing-house-price-developments-eu_en" and revision notes presented to LIME in October 2019 and June 
2020.  
(4) The average house price gap is the simple average of the price-to-inome, price-to-rent and model valuation gaps. 
Sources: Sources: Eurostat, OECD, ECB, BIS, Ameco, national sources, European Commission calculations. 

35 

2003-072008-122013-18201920202021202222Q122Q222Q322Q4House price developmentsUnitSourceReal house price, yoy growth%(a)-6.77.111.81.510.04.111.09.24.7-6.6Nominal house price, yoy growth%(a)-2.59.117.04.916.521.923.224.923.416.5Price to income in level (1)years(b)8.87.66.87.98.18.28.78.88.29.68.1Rent price developmentsSourceNominal rent price index2015=100(a)67.089.6103.9124.6129.9132.4146.3155.3155.9157.5158.3Nominal rent price, yoy growth%(a)6.75.02.99.44.31.910.534.435.437.238.8Valuation gapsPrice to income gap (2)%(c)16.31.1-9.85.47.49.215.016.617.416.49.0Price to rent gap (2)%(c)11.2-11.1-11.215.516.333.046.645.547.848.444.5Model valuation gap (3)%(c)7.10.9-6.43.5-0.24.07.610.410.48.70.2Average house price gap (4)%(c)11.5-3.0-9.28.17.815.423.124.125.224.517.9Housing creditBank mortgages (% GDP)%(d)10.114.08.87.58.08.17.2Bank mortgages, yoy growth%(d)21.50.2-2.35.8-0.313.3-0.9Housing supply0.00.00.00.0Residential construction - dwellings  (% GDP)%(e)4.53.12.33.24.13.94.6Residential construction - dwellings, yoy growth%(e)9.3-11.89.87.021.5-4.312.3Non-residential construction (% GDP)%(e)7.57.27.610.59.710.011.4Value added in the construction sector, yoy growth%(e)21.1-5.47.113.0-8.611.93.1Building permits index2015=100(a)401.9180.2184.7291.1180.3245.2294.2267.0326.9277.6305.5Building permits, yoy growth%(a)-0.6-24.234.7-3.7-38.136.020.014.717.823.524.3Number of transactions, yoy change%(f)-13.212.1Other housing market indicatorsShare of owner-occupiers, with mortgage or loan%(a)11.520.917.415.315.515.1 
      
 
 
Table 3.4: Selected household debt indicators, Hungary 

3. 

Thematic chapter: Pro-cyclical policy mix 

(f) European Commission forecast, . (1) Gross non-performing bank loans and advances to Households and non profit 
institutions serving households (% of total gross bank loans and advances to Households and non profit institutions 
serving households). (2)  Quarterly data is annualized. 
Source: (a) Eurostat, (b) Ameco, (c) European Commission calculations, (d) ECB. 

36 

2003-072008-122013-20202120222023f|22Q122Q222Q322Q4SourceStocksDebt, consolidated (% of GDP)(a,d)233621211917|20201919Debt, consolidated (% of potential GDP)(a,b,d)|Prudential threshold (% of GDP)(c)414339383842|Fundamental benchmark (% of GDP)(c)81221293132|Debt (% of gross disposable income)(a,b,d)396337363229|35343332Interest paid (% of gross disposable income) (2)(a,b)2.23.10.80.5|0.71.42.03.1Debt (% of gross financial assets)(a,d)24.732.716.814.6|14.314.514.514.3Share of variable rate loans for house purchase (%)(d)39.567.930.60.80.6|Domestic  loans in forex (% of adjusted dom. loans)(d)63.513.80.30.4|Adjusted domestic  loans (% of gross disposable income)(d)48.329.428.225.5|Loans for house purchase (% of gross disposable income)(d)17.124.114.913.912.7|FlowsCredit flows (% of gross disposable income) (2)(a)8.8-0.90.14.71.10.8|1.23.71.91.5Loans for house purchase (% gross disposable income)(a,b)3.0-1.30.01.91.0|Benchmark for flows (% of GDP)(c)1.62.72.72.92.62.3|Savings rate (% gross disposable income)(b)10.310.613.317.513.012.9|Investment rate (% gross disposable income)(b)9.57.16.78.510.19.2|p.m. Bank HH NPLs (% of HH loans)(1)(d)14.26.0|