Having examined Hungary’s national reform programme and convergence programme and in view of the European Commission’s in-depth review and assessment of these the Council has made seven country specific recommendations for the country, such as ensuring a stable, more balanced and predictable corporate tax system, broadening the powers of the Fiscal Council, lowering the extra burden on the financial sector, strengthening active labour market policy measures, making the business environment more attractive for foreign direct investment by making the regulatory framework more stable and gradually abolishing regulated energy prices.
The Commission has issued seven country specific recommendations (CSRs) to Hungary to help it improve its economic performance. These are in the areas of:
1. Sustainable public finances
Hungary has managed to keep its deficit below 3% in 2012. However, the corrective measures were mainly concentrated on the revenue side, raising questions about the sustainability of the consolidation efforts. Considering these risks and the high level of public debt, further efforts are needed for both 2013 and 2014. Strengthening the medium term budgetary framework and widening the remit of the Fiscal Council would also help to underpin recent reforms to the fiscal framework.
Specific steps recommended:
•Implement a credible and growth friendly fiscal strategy by specifying the necessary measures focusing on expenditure savings and preserve a sound fiscal position in compliance with the medium-term objective over the programme horizon.
•Building on the above steps, put the general government debt ratio on a firm downward path, also with a view to mitigating the accumulated macroeconomic imbalances.
•Enhance the medium-term budgetary framework by making it more binding and by closely linking it to numerical rules.
•Broaden the mandatory remit of the Fiscal Council, including through systematic ex-post monitoring of compliance with numerical fiscal rules as well as the preparation of regular macro-fiscal forecasts and budgetary impact assessments of major policy proposals.
2. The financial sector
Restoring normal lending to the economy, together with improving the business environment, is a key challenge for the Hungarian economy.
Decreased taxation of the financial sector and managing the deteriorating portfolio quality would help banks’ internal capital accumulation and therefore ease the flow of lending. In case it needs to act to safeguard financial stability, Hungary should ensure effective emergency powers are given to the financial supervisor and establish a resolution mechanism.
Specific steps recommended:
•Help restore normal lending to the economy primarily by improving the capacity for capital accumulation in the financial sector, inter alia by lowering the extra burden currently imposed on it.
•Improve portfolio quality by removing bad assets from banks’ balance sheets, closely consult stakeholders on new policy initiatives and make sure that new policy measures do not increase moral hazard among borrowers.
•Enhance financial regulation and supervision, notably by giving more effective emergency powers to the Hungarian Financial Supervisory Authority and by establishing a bank resolution regime.
3. The taxation system
Frequent changes in the design of the tax system and several surtaxes could have further distortive and dampening effects on growth. Furthermore, the existence of several different tax rates across corporate sectors hampers the effective allocation of resources and affects investment and lending. The complexity of the system is also a source of high compliance costs for businesses. The tax wedge on low wage earners is still high and a refining of the Job Protection Act to better target this group is necessary. Hungary should effectively fight against tax non-compliance to increase revenues and fairness.
Specific steps recommended:
•Ensure a stable, more balanced and predictable corporate tax system.
•Streamline corporate taxation and minimise distortions of resource allocation created by sector- specific taxes, so as to foster growth and employment.
•Continue making taxation of labour more employment-friendly by alleviating the tax burden on low-wage earners, inter alia by refining the eligibility criteria for the Job Protection Act, and by shifting taxation away to environmental taxes.
•Fully implement and step up the already announced measures to improve tax compliance and reduce the cost of tax compliance.
4. Labour market and poverty
In Hungary a low employment rate is paired with one of the lowest rate of labour market participation in the EU. Unemployment risks are higher for low-skilled workers, youth, women, especially those with children, and older workers. Hungary should enhance the Public Employment Service and promote active labour market policies and lifelong learning. The social situation continues to worsen with 31 % of the population at risk of poverty or social exclusion and a high percentage of people facing severe material deprivation. Poverty continues to disproportionately affect disadvantaged territories and communities, in particular the Roma and should be urgently addressed through the National Social Inclusion Strategy.
Specific steps recommended:
•Address youth unemployment, for example through a Youth Guarantee.
•Strengthen active labour market policy measures and enhance the client profiling system of the Public Employment Service.
•Reduce the dominance of the public works scheme within employment measures and strengthen its activation elements.
•Reinforce training programmes to boost participation in lifelong learning. Continue to expand child-care facilities to encourage women’s participation.
•Ensure that the objective of the National Social Inclusion Strategy is mainstreamed in all policy fields in order to reduce poverty, particularly among children and Roma.
5. Business environment
The business environment is one of the main concerns in Hungary and has deteriorated due to a series of measures, including restrictions on investors and an unstable regulatory framework, particularly for services. Businesses would benefit from reduced administrative burden, less corruption and more competition in the public procurement.
Specific steps recommended:
•Create a supportive business environment, in particular restore an attractive environment for foreign direct investors, by making the regulatory framework more stable and by fostering market competition.
•Ensure the prompt implementation of measures envisaged to reduce the administrative burden, improve competition in public procurement and take adequate measures to tackle corruption.
•Address concerns about the independence of the judiciary.
•Remove recently introduced barriers in the services sector, including in retail services.•Provide targeted incentives to support innovative enterprises.
6. Education
Although, Hungary had some success in lowering the number of Early School Leavers in the last decade, the trend was reversed in 2011. There is also a concern about whether the on-going higher-education reform can improve access for disadvantaged pupils. Hungary should implement measures to tackle these issues.
Specific steps recommended:
•Implement a national strategy on early school-leaving and ensure that the education system provides all young people with labour-market-relevant skills, competences and qualifications. Improve access to inclusive mainstream education, in particular for Roma.
•Support the transition between different stages of education and towards the labour market.
•Implement a higher-education reform that enables greater tertiary attainment, particularly by disadvantaged students.
7. Energy and transport sectors
Long-delayed reforms in the energy and transport sectors are having a detrimental effect on public finances and growth in Hungary. Energy prices for certain groups of customers are still heavily regulated and should be gradually phased out, whilst protecting the economically vulnerable. Public transport should be made more cost efficient to improve sustainability.
Specific steps recommended:
•Gradually abolish regulated energy prices while ensuring the effective protection of economically vulnerable consumers.
•Take further steps to ensure the independence of the national regulator.
•Ensure the financial sustainability of state owned enterprises in the transport sector by reducing operational costs and increasing revenues.
Source and more info at the website of: Portfolio