Hungary

   

Economic Policies

#37
Key Findings
Showing significant gains over time, but from a low level, Hungary falls into the bottom ranks (rank 37) internationally with regard to economic policies. Its score on this measure has improved by 1.0 point since 2014.

Real GDP growth has rebounded strongly after a slowdown in 2016, benefiting from the resumption of EU-funded investment, a fiscal stimulus, negative real interest rates and strong wage increases. Growth has primarily been driven by fixed capital formation such as large construction projects, as well as household consumption. Deficits are rising, and debt levels remain relatively high.

Unemployment rates have dropped significantly in recent years, in large part due to a broad public-works program that rarely produces long-term labor-market integration. Significant emigration has also played a role, creating a brain drain that has led to skilled-labor shortages in many fields.

Tax reforms have shifted the burden from direct to indirect taxes. Significant tax reductions have been implemented in recent years, with larger companies seeing particular benefit. However, frequent tax changes still complicate economic activity. The research sector remains fairly advanced, but is underfunded.

Economy

#35

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
4
The Hungarian economy returned to growth in 2013. Growth of real GDP slowed from 3.1% in 2015 to 1.9% in 2016 but reached almost 4% in 2017. Benefiting from the resumption of EU-funded investment, a fiscal stimulus, negative real interest rates and a strong increases in wages, economic growth was primarily driven by gross fixed capital formation and household consumption. Concerns about the sustainability of economic growth have been raised by the low potential growth rate, which is estimated at below 3% and has suffered from weak productivity growth. A general problem of economic policy is the high influence of so-called Fidesz oligarchs. Mega-projects such as the construction of the site for the 2017 World Championship in Watersports on the Pest side of the Danube, or the Paks-2 nuclear station, which have contributed to the rise in investment, have largely meant to provide business opportunities for this network. In order to improve the competitiveness of the Hungarian economy, the government established a National Competitiveness Council under the leadership of Minister of national economy Mihály Varga in March 2017. However, its initial measures have been largely confined to changes to registering firms and simplifications in construction permits and have thus failed to tackle the more fundamental problems of the Hungarian economy such as the lack of R&I, weak education outcomes, a growing shortage of skilled labor and a low transparency and reliability of policymaking. Echoing the government’s new emphasis on improving competitiveness, the Hungarian National Bank has begun to publish annual Competitiveness Reports.

Citations:
European Commission (2018): Country Report Hungary 2018. SWD(2018) 215 final, Brussels (https://ec.europa.eu/info/sites/info/files/2018-european-semester-country-repor t-hungary-en.pdf).
Hungarian National Bank (2017): Versenyképességi Jelentés 2017 (Competitiveness Report 2017). Budapest (http://www.mnb.hu/letoltes/versenyke-pesse-gi-jelente-s-hun-digita-lis.pdf).

Labor Markets

#34

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
4
Recorded unemployment has declined significantly since the resumption of economic growth in 2013. However, low unemployment has largely been achieved by controversial public-works programs and an increase in the number of Hungarians working abroad. The public-works programs, which still covered 4% of the workforce in 2017, have seldom resulted in the integration into the first labor market. Participants perform unskilled work under precarious conditions and for very modest remuneration. The main beneficiaries of the program have been local mayors who are provided with access to cheap labor to perform communal work. The number of Hungarians working abroad is estimated at 600,000, many of them highly educated and skilled. The resulting brain drain has become a major obstacle to the acquisition of FDi and to economic development in general. The salary boom in 2017 has been driven by the lack of qualified labor, arguably the main current challenge to labor market policy, and the resulting increase in competition among companies to find a qualified workforce.

Citations:
European Commission (2018): Country Report Hungary 2018. SWD(2018) 215 final, Brussels. 2-3 (https://ec.europa.eu/info/sites/info/files/2018-european-semester-country-repor t-hungary-en.pdf).

Taxes

#35

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
4
Hungary’s tax system has become less equitable under the Orbán governments, as the tax burden has shifted from direct to indirect taxes. While the government adopted substantial tax reductions in 2016 and 2017, the tax-to-GDP ratio is still above the level of regional peers, and the tax wedge remains one of the highest in the EU. With the introduction of the lowest corporate income tax rate in the EU (9%), the tax burden especially on larger companies has substantially decreased. However, companies still struggle with frequent changes in taxation and complex tax regime, including the high sectoral taxes. The NAV’s new scheme of classifying businesses as “reliable,” “average” or “risky,” combined with the promise of preferences for “reliable” taxpayers, has been criticized for its tendency toward favoritism. So has the government’s attempt to induce companies to contribute to sport organizations by granting them tax deductions (“tao”), but also secrecy and a special taxpayer status.

Citations:
European Commission (2018): Country Report Hungary 2018. SWD(2018) 215 final, Brussels, 11-13 (https://ec.europa.eu/info/sites/info/files/2018-european-semester-country-report-hungary-en.pdf).

Budgets

#35

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
5
After exiting the European Commission’s excessive deficit procedure in June 2013, Hungary has managed to keep the fiscal deficit below 3%. In the run-up to the 2018 parliamentary elections, however, the Orbán government has loosened fiscal policy. Despite the strong GDP growth, the headline deficit is set to increase from a long-term low of 1.9% of GDP to 2.1% of GDP in 2017 and 2.6% of GDP in 2018. As a result, the structural deficit will rise to 3.5% of GDP in 2018 and 2019, thus strongly exceeding the country’s medium-term objective of 1.5% of GDP. The Orbán government’s fiscal policy has also been criticized for its lack of transparency. Budgets have been rudimentary and have been passed already in May or June, when important information about the coming year is not yet available. Eurostat has continued to criticize the official Hungarian data on the public debt for not including some expenditures, for example, those of state-owned Eximbank. The Fiscal Council, with its uniquely strong constitutional power, has neglected its watchdog role.

Citations:
European Commission (2018): Country Report Hungary 2018. SWD(2018) 215 final, Brussels, 3-4, 15-15 (https://ec.europa.eu/info/sites/info/files/2018-european-semester-country-report-hungary-en.pdf).

Research and Innovation

#31

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
4
Hungary’s research and innovation (R&I) sector is still fairly advanced but has suffered from chronic underfinancing and the emigration of many researchers and qualified workers. Public R&D spending has declined since 2008 and is among the lowest in the EU. From a comparative perspective, the country’s capacity to attract and to retain talent is rather low. Under the second Orbán government, the public competencies for R&I were centralized, as the National Innovation Office (Nemzeti Innovációs Hivatal, NIH) was transformed into a more comprehensive National Research, Development and Innovation Office (Nemzeti Kutatási, Fejlesztési és Innovációs Hivatal, NKFIH) under the direct control of former Fidesz minister József Pálinkás and accountable only to the prime minister. The third Orbán government has sought to update the countries R&D strategy for 2013-2020 with the help of the European Commission but did not come up with a new strategy during the period of review.

Citations:
World Economic Forum (2017): The Global Competitiveness Report 2017-2018. Geneva (https://www.weforum.org/reports/the-global-competitiveness-report-2017-2018).

Global Financial System

#35

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial Markets
4
Being neither a member of the euro group nor a big lender, Hungary’s role in international financial markets is limited. However, the stabilization of the Hungarian banking system continued in 2016 and 2017 and, in a way, contributed to the stability of the global financial markets. At the same time, the international reputation of the National Bank of Hungary has suffered from the involvement of its governor György Matolcsy in various scandals. Due to the coming parliamentary elections in April 2019, the issue of euro membership has come to the fore. While the democratic opposition, unlike Jobbik, has argued for a quick entry, the Orbán government has taken a more cautious approach.

Citations:
Józwiak, V. (2017): Prospect of Euro Adoption in Hungary. The Polish Institute of International Affairs, Bulletin No. 97, Warsaw (http://www.pism.pl/publications/bulletin/no-97-1037).
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