Explanatory Memorandum to COM(2023)617 - 2023 Reform Programme and 2023 Convergence Programme of Hungary - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2023)617 - 2023 Reform Programme and 2023 Convergence Programme of Hungary. |
|---|---|
| source | COM(2023)617 |
| date | 24-05-2023 |
COUNCIL RECOMMENDATION
on the 2023 National Reform Programme of Hungary and delivering a Council opinion on the 2023 Convergence Programme of Hungary
THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121 i and 148 i thereof,
Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies1, and in Article 9 i thereof,
Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances2, and in particular Article 6(1) thereof,
Having regard to the recommendation of the European Commission,
Having regard to the resolutions of the European Parliament,
Having regard to the conclusions of the European Council,
Having regard to the opinion of the Employment Committee,
Having regard to the opinion of the Economic and Financial Committee,
Having regard to the opinion of the Social Protection Committee,
Having regard to the opinion of the Economic Policy Committee,
Regulation (EU) 2021/241 of the European Parliament and of the Council3, which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support to the Member States for the implementation of reforms and investments, entailing a fiscal impulse financed by the EU. In line with the European Semester priorities, it contributes to economic and social recovery and to the implementation of sustainable reforms and investments, in particular to promote the green and digital transition and make the Member States’ economies more resilient. It also helps strengthen public finances and boost growth and job creation in the medium and long term, improve territorial cohesion within the EU and support the continued implementation of the European Pillar of Social Rights. The maximum financial contribution per Member State under the Recovery and Resilience Facility was updated on 30 June 2022, in accordance with Article 11 i of Regulation (EU) 2021/241.
On 22 November 2022, the Commission adopted the 2023 Annual Sustainable Growth Survey4, marking the start of the 2023 European Semester for economic policy coordination. The European Council endorsed the priorities of the survey around the four dimensions of competitive sustainability on 23 March 2023. On 22 November 2022, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the 2023 Alert Mechanism Report, in which it identified Hungary as one of the Member States that may be affected or may be at risk of being affected by imbalances, and for which an in-depth review would be needed. The Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which the Council adopted on 16 May 2023, as well as the proposal for the 2023 Joint Employment Report analysing the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights, which the Council adopted on 13 March 2023.
While the EU economies are showing remarkable resilience, the geopolitical context continues to have a negative impact. As the EU stands firmly with Ukraine, the EU economic and social policy agenda is focused on reducing the negative impact of energy shocks on both vulnerable households and companies in the short term, and on keeping up efforts to deliver on the green and digital transition, support sustainable and inclusive growth, safeguard macroeconomic stability and increase resilience in the medium term. It also focuses heavily on increasing the EU’s competitiveness and productivity.
On 1 February 2023, the Commission issued the Communication A Green Deal Industrial Plan for the Net-Zero Age5 to boost the competitiveness of the EU's net-zero industry and support the fast transition to climate neutrality. The Plan complements ongoing efforts under the European Green Deal and REPowerEU. It aims to provide a more supportive environment for scaling up the EU’s manufacturing capacity for the net-zero technologies and products required to meet the EU’s ambitious climate targets, as well as ensuring access to relevant critical raw materials, including by diversifying sourcing, properly exploiting geological resources in Member States and maximising the recycling of raw materials. The plan is based on four pillars: a predictable and simplified regulatory environment, speeding up access to finance, enhancing skills, and open trade for resilient supply chains. On 16 March 2023, the Commission also issued the Communication Long-term competitiveness of the EU: looking beyond 20306, structured along nine mutually reinforcing drivers with the objective to work towards a growth enhancing regulatory framework. It sets policy priorities aimed at actively ensuring structural improvements, well focused investments and regulatory measures for the long-term competitiveness of the EU and its Member States. The recommendations below help to address those priorities.
In 2023, the European Semester for economic policy coordination continues to evolve in line with the implementation of the Recovery and Resilience Facility. Fully implementing the recovery and resilience plans remains essential for delivering the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in recent years. The 2019, 2020 and 2022 country-specific recommendations remain equally relevant also for recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241.
The REPowerEU Regulation7, adopted on 27 February 2023, aims to rapidly phase out the EU’s dependency on Russian fossil fuel imports. This will contribute towards energy security and the diversification of the EU’s energy supply, while increasing the uptake of renewables, energy storage capacities and energy efficiency. The Regulation enables Member States to add a new REPowerEU chapter to their national recovery and resilience plans in order to finance key reforms and investments that will help achieve the REPowerEU objectives. They will also help boost the competitiveness of EU’s net-zero industry as outlined in the Green Deal Industrial Plan for the Net-Zero Age and address the energy-related country-specific recommendations issued to the Member States in 2022 and, where applicable, in 2023. The REPowerEU Regulation introduces a new category of non-repayable financial support, made available to Member States to finance new energy-related reforms and investments under their recovery and resilience plans.
On 8 March 2023, the Commission adopted a communication providing fiscal policy guidance for 2024. It aims to support the preparation of Member States’ stability and convergence programmes and thereby strengthen policy coordination8. The Commission recalled that the general escape clause of the Stability and Growth Pact will be deactivated at the end of 2023. It called for fiscal policies in 2023-2024 that ensure medium-term debt sustainability as well as raise potential growth in a sustainable manner. Member States were invited to set out in their 2023 stability and convergence programmes how their fiscal plans will ensure that the 3% of GDP deficit reference value is adhered to as well as plausible and continuous debt reduction, or for debt to be kept at prudent levels in the medium term. The Commission invited Member States to phase out national fiscal measures introduced to protect households and firms from the energy price shock, starting with the least targeted ones. It indicated that, if support measures needed to be extended because of renewed energy price pressures, Member States should target such measures much better than in the past towards vulnerable households and firms. The Commission proposed that the fiscal recommendations would be quantified and differentiated and be formulated on the basis of net primary expenditure, as proposed in its Communication on orientations for a reform of the EU economic governance framework9. It recommended that all Member States should continue to protect nationally financed investment and ensure the effective use of the Recovery and Resilience Facility and other EU funds, in particular in light of the green and digital transition and resilience objectives. The Commission indicated that it will propose to the Council to open deficit-based excessive deficit procedures in spring 2024 on the basis of the outturn data for 2023, in line with existing legal provisions.
On 26 April 2023, the Commission presented legislative proposals to implement a comprehensive reform of the EU’s economic governance rules. The central objective of the proposals is to strengthen public debt sustainability and promote sustainable and inclusive growth in all Member States through reforms and investments. The proposals aim at providing Member States with more control over the design of their medium-term plans, while putting in place a more stringent enforcement regime to ensure that Member States deliver on the commitments undertaken in their medium-term fiscal-structural plans. The objective is to conclude the legislative work in 2023.
On 11 May 2021, Hungary submitted its national recovery and resilience plan to the Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant to Article 19 of Regulation (EU) 2021/241, the Commission assessed the relevance, effectiveness, efficiency and coherence of the recovery and resilience plan, in accordance with the assessment guidelines of Annex V to that Regulation. On 15 December 2022, the Council adopted its Decision on the approval of the assessment of the recovery and resilience plan for Hungary10. The release of instalments is conditional on a decision by the Commission, taken in accordance with Article 24(5) of Regulation (EU) 2021/241, that Hungary has satisfactorily fulfilled the relevant milestones and targets set out in the Council Implementing Decision. Satisfactory fulfilment presupposes that the achievement of preceding milestones and targets has not been reversed.
On 2 May 2023, Hungary submitted its 2023 National Reform Programme and its 2023 Convergence Programme, in line with Article 8(1) of Regulation (EC) No 1466/97. To take account of their interlinkages, the two programmes have been assessed together. In accordance with Article 27 of Regulation (EU) 2021/241, the 2023 National Reform Programme also reflects Hungary’s biannual reporting on the progress made in achieving its recovery and resilience plan.
The Commission published the 2023 country report for Hungary11 on 24 May 2023. It assessed Hungary’s progress in addressing the relevant country-specific recommendations adopted by the Council between 2019 and 2022, and took stock of Hungary’s implementation of the recovery and resilience plan. Based on this analysis, the country report identified gaps with respect to those challenges that are not addressed or only partially addressed by the recovery and resilience plan, as well as new and emerging challenges. It also assessed Hungary’s progress on implementing the European Pillar of Social Rights and on achieving the EU headline targets on employment, skills and poverty reduction, as well as progress in achieving the UN’s Sustainable Development Goals.
The Commission carried out an in-depth review under Article 5 of Regulation (EU) No 1176/2011 for Hungary and published its results on 24 May 202312. It concluded that Hungary is experiencing macroeconomic imbalances. In particular, 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.
Based on data validated by Eurostat,13 Hungary’s general government deficit decreased from 7.1% of GDP in 2021 to 6.2% in 2022, while general government debt fell from 76.6% of GDP at the end of 2021 to 73.3% at the end of 2022. On 24 May 2023, the Commission published a report under Article 126(3) TFEU;14 the report discussed the budgetary situation of Hungary, as its general government deficit in 2022 exceeded the 3% of GDP Treaty reference value. The report concluded that the deficit criterion was not fulfilled. In line with the Communication of 8 March 2023,15 the Commission did not propose to open new excessive deficit procedures in spring 2023; in turn, the Commission stated that it would propose to the Council to open deficit-based excessive deficit procedures in spring 2024, on the basis of the outturn data for 2023. Hungary should take account of this in the execution of its 2023 budget and in preparing its budget for 2024.
(14) The general government balance has been impacted by the fiscal policy measures adopted to mitigate the economic and social impact of the increase in energy prices. In 2022, such revenue-decreasing measures included a cut in excise duties on fuels; while such expenditure-increasing measures included subsidies to utility companies for the losses incurred due to caps on residential energy prices, and support schemes for energy-intensive companies. The cost of these measures was partly offset by new taxes on windfall profits of energy producers and suppliers, namely a temporary tax on the spread between Brent and Urals oil, a temporary tax on the income of energy suppliers and a temporary increase in mining royalty. The Commission estimates the net budgetary cost of these measures at 1.0% of GDP in 2022. The general government balance has also been impacted by the budgetary cost of temporary protection to displaced persons from Ukraine, which is estimated at 0.1% of GDP in 2022. At the same time, the estimated cost of COVID-19 temporary emergency measures dropped to 0.1% of GDP in 2022, from 1.9% in 2021.
On 18 June 2021, the Council recommended that in 2022 Hungary16 maintain a supportive fiscal stance, including from the impulse provided by the Recovery and Resilience Facility, and preserve nationally financed investment.
According to the Commission estimates, the fiscal stance17 in 2022 was supportive, at -0.4% of GDP, as recommended by the Council. As recommended by the Council, Hungary continued to support the recovery with investments to be financed by the Recovery and Resilience Facility. Expenditure financed by Recovery and Resilience Facility grants and other EU funds amounted to 1.5% of GDP in 2022 (2.1% of GDP in 2021). The decrease in expenditures financed by Recovery and Resilience Facility grants and other EU funds in 2022 was due to lower absorption of the European structural and investment funds. Nationally financed investment provided a contractionary contribution of 0.2 percentage points to the fiscal stance.18 Hungary therefore did not preserve nationally financed investment, which is not in line with the Council recommendation. At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) provided a contractionary contribution of 0.6 percentage points to the fiscal stance. Hungary therefore sufficiently kept under control the growth in nationally financed current expenditure.
The macroeconomic scenario underpinning the budgetary projections in the Convergence Programme is favourable. The government projects real GDP to grow by 1.5% in 2023 and 4.0% in 2024. By comparison, the Commission 2023 spring forecast projects a lower real GDP growth of 0.5% in 2023 and 2.8% in 2024, mainly due to expected lower growth in private consumption driven by lower expected growth in nominal wages and slightly higher unemployment rate. The Commission also projects lower growth in government consumption and net exports. The nominal GDP growth projected in the Commission forecast is lower over the forecast horizon due to the lower expected GDP growth and GDP deflator.
In its 2023 Convergence Programme, the government expects that the general government deficit ratio will decrease to 3.9% of GDP in 2023. The decrease in 2023 mainly reflects higher tax revenue driven by the high inflation and temporary windfall profit and sectoral taxes estimated at 1.5% of GDP in 2023. According to the Programme, the general government debt-to-GDP ratio is expected to decrease from 73.3% at the end of 2022 to 69.7% at the end of 2023. The Commission 2023 spring forecast projects a government deficit of 4.0% of GDP for 2023. This is in line with the deficit projected in the Convergence Programme. The Commission 2023 spring forecast projects a higher general government debt-to-GDP ratio, of 70.7% at the end of 2023. The difference is due to lower GDP growth and GDP deflator in the Commission forecast.
The government balance in 2023 is expected to continue to be impacted by the measures adopted to mitigate the economic and social impact of the increase in energy prices. They consist of measures extended from 2022 in particular: subsidies to utility companies for the losses incurred due to caps on residential energy prices and support schemes for energy-intensive companies. The cost of these measures continues to be partly offset by the taxes on windfall profits of energy suppliers. Taking these revenues into account, the net budgetary cost of the support measures is projected in the Commission 2023 spring forecast at 1.2% of GDP in 202319. The measures in 2023 do not appear targeted to the most vulnerable households or firms, and most of them do not fully preserve the price signal to reduce energy demand and increase energy efficiency. As a result, no targeted support measures are to be taken into account in the assessment of compliance with the recommendation for 2023.
On 12 July 2022, the Council recommended20 that Hungary take action to ensure in 2023 that the growth of nationally financed primary current expenditure is in line with an overall neutral policy stance21, taking into account continued temporary and targeted support to households and firms most vulnerable to energy price hikes and to people fleeing Ukraine. Hungary should stand ready to adjust current spending to the evolving situation. Hungary was also recommended to expand public investment for the green and digital transitions, and for energy security taking into account the REPowerEU initiative, including by making use of the Recovery and Resilience Facility and other Union funds.
(21) In 2023, the fiscal stance is projected in the Commission 2023 spring forecast to be contractionary (+4.2% of GDP), in a context of high inflation. This follows an expansionary fiscal stance in 2022 (-0.4% of GDP). The growth in nationally financed primary current expenditure (net of discretionary revenue measures) in 2023 is projected to provide a contractionary contribution of 2.2% of GDP to the fiscal stance. Therefore, the projected growth of nationally financed primary current expenditure is in line with the Council recommendation. Expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to amount to 2.3% of GDP in 2023, while nationally financed investment is projected to provide a contractionary contribution to the fiscal stance of 0.6 percentage points. 22 Therefore, Hungary plans to finance additional investment through the Recovery and Resilience Facility and other EU funds, although it is not projected to preserve nationally financed investment. It plans to finance public investment for the green and digital transitions, and for energy security, such as development of electricity grid, modernisation of suburban railways, support for the use of residential solar panels, provision of laptops to pupils in lower secondary schools and digitalisation measures in healthcare, which are funded by the Recovery and Resilience Facility and other EU funds.
According to the Convergence Programme the general government deficit is expected to decrease to 2.9% of GDP in 2024. The decrease in 2024 mainly reflects a significant reduction in general government spending as a share of GDP, in particular on gross fixed capital formation, intermediate consumption and compensation of employees. The programme expects the general government debt-to-GDP ratio to decrease to 66.7% at the end of 2024. Based on policy measures known at the cut-off date of the forecast, the Commission 2023 spring forecast projects a government deficit of 4.4% of GDP in 2024. This is higher than the deficit projected in the programme, mainly due to higher projected expenditure on gross fixed capital formation in line with recent trends and higher intermediate consumption driven by lingering inflationary pressures. The Commission 2023 spring forecast projects a higher general government debt-to-GDP ratio, of 71.1% at the end of 2024.
The Convergence Programme envisages the phasing out of some of the energy support measures in 2024. The Commission currently assumes the net cost of energy support measures at 0.4% of GDP in 2024, compared to 1.2% of GDP in 2023. These estimates hinge upon the assumption of no renewed energy price increases. The energy support measures that are currently planned to remain in place in 2024 do not appear targeted to vulnerable households or firms. They do not fully preserve the price signal to reduce energy demand and increase energy efficiency.
(24) Council Regulation (EC) No 1466/97 calls for an annual improvement in the structural budget balance toward the medium-term objective by 0.5% of GDP as a benchmark.23 Taking into account fiscal sustainability considerations24 and the need to reduce the deficit to below the 3% of GDP reference value, an improvement in the structural balance of at least 0.5% of GDP for 2024 would be appropriate. To ensure such an improvement, the growth in net nationally financed primary expenditure25 in 2024 should not exceed 4.4%, as reflected in this recommendation. This will also contribute to reducing core inflation, which is well above the EU average, and which could lead to competitiveness losses if persistent, and to safeguarding the external position.
At the same time, the remaining energy support measures (currently estimated by the Commission at 1.2% of GDP in 2023) should be phased out, contingent on energy market developments and starting from the least targeted ones, and the related savings should be used to reduce the government deficit. Based on Commission estimates, this would lead to a growth in net primary expenditure lower than recommended for 2024.
Assuming unchanged policies, the Commission 2023 spring forecast projects net nationally financed primary expenditure to grow at 7.0% in 2024, which is above the recommended growth rate. The adjustment projected in the Commission forecast is less than the savings from the full phasing out of energy support measures which is due to elevated expenditure on intermediate consumption and gross fixed capital formation and the expected phaseout of the temporary windfall profit and sectoral taxes.
According to the programme, government investment is expected to decrease from 5.1% of GDP in 2023 to 3.7% of GDP in 2024. The lower investment reflects lower nationally financed investment and lower investment financed by the EU.
The Convergence Programme outlines a medium-term fiscal path until 2027. According to the programme, the general government deficit is expected to gradually decline to 1.9% of GDP in 2025, 1.4% in 2026 and 0.9% in 2027. The general government deficit is therefore planned to remain below 3% of GDP over the programme horizon. According to the programme, the general government debt-to-GDP ratio is expected to decrease from 66.7% at the end of 2024 to 56.3% by the end of 2027.
Monetary, fiscal and economic development policies responded to recent economic challenges in an uncoordinated way, weakening the effectiveness of the overall policy response. Monetary policy started to tighten in 2021 but fiscal expansion continued until early 2022. Several temporary policy measures introduced since 2021 aimed to preserve households’ purchasing power in an untargeted manner, through price and interest rate caps and fiscally costly energy subsidies. Price caps were introduced on motor fuels and certain basic food items. Interest rate caps were introduced on variable rate mortgages, loans to small and medium sized enterprises, certain student loans, and large bank deposits. Most of these are due to expire in 2023. The cost of these measures has mostly been borne by companies and the financial sector, through reduced revenues and higher indirect taxes, and their distortive effects have contributed to lower domestic production and higher prices among products not directly affected by the caps. They have also hindered the adjustment of demand to a new economic environment. Economic development policies have relied on subsidised loan schemes to help companies adjust to economic shocks. A large, subsidised loan scheme with fixed interest rates was launched in February 2023, to support companies that face rising energy costs. The price and interest rate caps and subsidised lending have counteracted monetary policy efforts to reduce inflation, inter alia by reducing the effectiveness of the central bank’s instruments. The European Central Bank has found that certain regulatory measures, including the cap on bank deposit rates impede the conduct of an efficient monetary policy26.
(29) Weaknesses in budget planning and execution have increased the expansionary bias of fiscal policy and have therefore contributed to many of Hungary’s current macroeconomic challenges. Since 2016, the very early adoption of annual budgets has reduced the quality of the macroeconomic and budgetary forecasts. Various budget flexibility rules and large budget reserves allowed for higher discretionary spending, which exacerbated the procyclicality of fiscal policy. Ad hoc spending decisions were often made at the end of the budget year or were enacted by government decrees throughout the year without adequate parliamentary oversight and public consultation, in turn reducing budget transparency. The national fiscal framework has not prevented high public deficits due to shortcomings in the design of domestic fiscal rules, including a debt rule with procyclical features, the weak enforcement of medium-term budget planning, further eroded by the special provisions of the “state of danger” regime, and the limited role and resources of the Fiscal Council. The national fiscal council’s limited mandate and resources limit its effectiveness in steering public discussions on fiscal issues.
House prices have grown strongly in Hungary in the last decade, while housing supply remained limited. Weakly targeted subsidy schemes for home purchase, also available for higher income households already in possession of a dwelling, contributed to recent price increases. Subsidies on housing construction, including grants, subsidised loans and preferential VAT rates, are similarly untargeted.
In accordance with Article 19(3), point (b) and Annex V, criterion 2.2 of Regulation (EU) 2021/241, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investments to be implemented by 2026. In accordance with Article 14(6) of Regulation (EU) 2021/241, Hungary expressed its intention to request up to EUR 6 600 000 000 of additional loan support under the Recovery and Resilience Facility. Proceeding swiftly with the implementation of the plan is essential due to the temporary nature of the Recovery and Resilience Facility in place until 2026. It is equally important for Hungary to ensure an adequate administrative capacity to deliver on the commitments of the plan. The swift inclusion of the new REPowerEU chapter in the recovery and resilience plan will allow additional reforms and investments to be financed in support of Hungary’s strategic objectives in the field of energy and the green transition. The systematic and effective involvement of local and regional authorities, social partners and other relevant stakeholders remains important for the successful implementation of the recovery and resilience plan, as well as other economic and employment policies going beyond the plan, to ensure broad ownership of the overall policy agenda. Due to its late adoption in December 2022, the implementation of Hungary’s recovery and resilience plan has been significantly delayed. A swift and steady implementation of the plan would require the fulfilment of 27 milestones related to strengthening judicial independence and safeguarding the protection of the financial interests of the Union. No payment under the plan is possible until these milestones are fully and correctly implemented. Hungary’s REPowerEU grant allocation amounts to EUR 701.6 million. Hungary plans to use the REPowerEU grant and additional loan on energy related investments.
The Commission approved all of Hungary’s cohesion policy programming documents in 2022. Proceeding with the swift implementation of the cohesion policy programmes in complementarity and synergy with the recovery and resilience plan, including the REPowerEU chapter, is key to achieving the green and digital transition, increasing economic and social resilience, as well as achieving balanced territorial development in Hungary.
Beyond the economic and social challenges addressed by the recovery and resilience plan, Hungary faces a number of additional challenges related to poverty, labour market competition in services and energy.
(34) While the overall poverty indicators have improved over the last decade, the relative situation of certain disadvantaged groups such as low-income households, children, people with disabilities, Roma and people living in remote rural settlements has worsened. The severe material and social deprivation rate is one of the highest in the EU, with significant disparities between regions. It is especially high among children and Roma. Disadvantaged groups face difficulties in accessing adequate social assistance, education, healthcare and job-seeking services. Households without a stable income face a weakening social safety net. The tax system disproportionately burdens lower-paid workers. The major sources of income for low-income households have not kept up with the cost of living in the last decade. The adequacy of minimum income is one of the lowest in the EU. Recent increases in energy and food prices disproportionately burden low-income earners, while support measures are mainly untargeted. The recent amendment of the social protection legislation reduced the state’s responsibility to provide social care.
The headline employment rate is relatively high, but certain disadvantaged groups such as Roma, low-skilled people, women with caring responsibilities and people with disabilities have difficulties in entering the open labour market due to the weaknesses in education, training, social assistance systems and support structures for jobseekers. The employment rate gaps for the low-skilled, Roma and people with disabilities remain persistently high. One in five women seeking paid employment is left out of the labour market due to caring responsibilities for children or dependents with disabilities. Benefits and access to effective active labour market measures for disadvantaged groups are inadequate. The duration of the unemployment benefit is 3 months, while the average time taken to find a job was 16 months in 2022. Four out of ten registered unemployed people are without benefits. The long average registration period signals capacity challenges in the public employment service. The share of jobseekers with low basic skills is more than double compared to the national average. The share of adults participating in learning remains low, in particular among the low-skilled and the unemployed.
Social dialogue remains among the weakest in the EU and further deteriorated recently. The main tripartite body serves mainly as an information-sharing forum for the government and it has no formal legal framework, with no meaningful dialogue except for minimum wage setting. While the shortage of teachers is an increasing challenge, new legal provisions have curbed the rights of teachers to collective action and widened employers’ possibility to retroactively dismiss teachers participating in civil disobedience to protest labour conditions. Recent reforms, introduced without meaningful dialogue with the relevant unions, negatively affected working conditions and weakened self-representation for healthcare workers.
(37) Recently, there have been cases of public interference in a number of markets, which has weakened legal certainty. These interventions tended to discourage or limit EU and foreign investment in certain markets, in effect enabling purchases of companies by state-owned enterprises or private firms with close ties to the government. They seriously affect the principles of the single market and of the rule of law27, curbing opportunities for sustainable economic growth. For example, specific firms and industries face discriminatory treatment through tailor-made taxes, price caps and regulations imposed at short notice and without prior consultation. Since 2020, the government has also used its extraordinary power under the ‘state of danger’ to introduce such measures. Budget revenues from sector-specific taxes are significant. For example, the government recently imposed administrative price caps and a 90% profit tax on the production of cement and ceramic materials. These are industries with a high degree of foreign ownership. In December 2022, the government suddenly increased the tax on insurance and pharmaceutical companies. Banks were burdened by a cap on flexible mortgage rates, impacting their ability to lend and their profitability. Selective and arbitrary administrative inspections, fines and withholding of permits have been used to exert undue pressure on certain companies, in particular in retail and transport. Effective remedy seems to be lacking against arbitrary measures taken by the authorities. The retail sector continues to face unpredictable regulations. The conditions for authorising the establishment of or changes to shops above 400 square metres do not seem to be transparent, and the availability of judicial review is questionable. The tax on the retail sector disproportionately burdens larger companies that do not have their headquarters in Hungary. The government frequently uses its power to exempt transactions from merger control. The impact of such transactions on the economy, competition and the single market is not being assessed. The criteria for these exemptions are not set out transparently, and there is no formal procedure to contest these criteria or the decision itself. As a result of these interventions, state or state-friendly domestic ownership has increased in banking, telecommunications, utilities, media, TV and radio broadcasting, to the detriment of foreign ownership. Based on announcements by members of the government, similar transactions can be expected in insurance, retail and the transport sector, in particular regarding Budapest Airport. The decreased presence of foreign capital and know-how, in particular in high value-added industries like banking and telecommunications, risks curbing Hungary’s opportunities for productivity growth and innovation.
(38) Hungary’s energy mix is determined by oil and gas, each accounting for about one third of overall energy use. Nuclear and renewable energy sources have a share of 15% and about 14%, respectively. Hungary continues to rely heavily on Russia for fossil fuels as well as nuclear and its efforts to shift away from Russian dependence are slow. Three quarters of domestic gas consumption is covered by imports from Russia. In 2021, Hungary signed a long-term gas supply agreement with Gazprom and in April 2023 renegotiated it, with an option for additional quantities. Decreasing dependency on Russian fossil fuels will require significant additional action, in particular to strengthen cooperation with neighbouring countries, including where necessary on infrastructure, to ensure access to alternative fossil fuel sources. Electrification and the envisaged investment in energy-intensive industries will increase the need for electricity production. Despite the significant increase in solar energy capacity in recent years, the share of renewable energy capacity is still one of the lowest in the EU. The installation of wind power plants has been on halt and is expected to resume after the removal of legal restrictions. Geothermal energy has been underutilised. The frequently changing regulatory environment poses several challenges to the development of renewable energy. In addition, the limitations of the electricity grid’s capacity create a significant bottleneck for connecting renewables to the grid, while the lack of flexibility solutions on the demand and supply sides, and limited consumer empowerment, create a major constraint on the development of clean, renewable electricity production. Suboptimal integration into the EU balancing market is also a missed opportunity to optimise the grid for additional renewables capacity.
(39) Hungary has significant potential in energy efficiency, in particular in residential buildings. Hungary’s consumption of natural gas has dropped by 20% in the period between August 2022 and March 2023, compared with the average gas consumption over the same period in the preceding 5 years, beyond the 15% reduction target, also due to measures in the public sector and the amendment of the energy price cap system applied for households. Hungary is encouraged to keep pursuing efforts to temporarily reduce gas demand until 31 March 202428. Nevertheless, despite these recent changes, the administrative prices system on energy still does not allow price signals to work properly and to create sufficient incentive for energy savings. Price caps are uniformly applied to all households. High-income households also benefit from the subsidised administrative price, while low-income families often live in less energy-efficient homes. Targeted schemes for low-income households would be more efficient, both in supporting vulnerable households and generating energy savings.
Labour and skills shortages in sectors and occupations key for the green transition, including manufacturing, deployment and maintenance of net-zero technologies, are creating bottlenecks in the transition to a net-zero economy. High-quality education and training systems that respond to changing labour market needs and targeted upskilling and reskilling measures are key to reducing skills shortages and promoting labour inclusion and reallocation. To unlock untapped labour supply, these measures need to be accessible, in particular for individuals and in sectors and regions most affected by the green transition. In 2022, labour shortages were reported in Hungary for 31 occupations that required specific skills or knowledge for the green transition. At the same time, worker participation in training in energy-intensive industries has significantly declined and is now below the EU average.
In light of the Commission’s assessment, the Council has examined the 2023 Convergence Programme and its opinion29 is reflected in recommendation (1) below.
In light of the Commission’s in-depth review and this assessment, the Council has examined the 2023 National Reform Programme and the 2023 Convergence Programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendation (1) below. Policies referred to in recommendation (1) help address vulnerabilities linked to very strong price pressures and external and government financing needs. Recommendations i and i contribute to addressing recommendation (1).
1. Wind down the energy support measures in force by the end of 2023 using the related savings to reduce the government deficit. Should renewed energy price increases necessitate support measures, ensure that these are targeted at protecting vulnerable households and firms, fiscally affordable and preserve incentives for energy savings.
Ensure prudent fiscal policy, in particular by limiting the nominal increase in nationally financed net primary expenditure in 2024 to not more than 4.4%.
Preserve nationally financed public investment and ensure the effective absorption of RRF grants and other EU funds, in particular to foster the green and digital transitions. For the period beyond 2024, continue to pursue a medium-term fiscal strategy of gradual and sustainable consolidation, combined with investments and reforms conducive to higher sustainable growth, to achieve a prudent medium-term fiscal position.
Pursue effective coordination and clear demarcation of macroeconomic policies to ensure fiscal and external sustainability. Phase out price and interest rate caps to reduce distortive effects and facilitate the smooth transmission of monetary policy. Target support measures in the housing sector to low-income households. Strengthen the medium-term budgetary framework, align the preparation of annual budgets with the budgetary year, and limit discretion in the implementation of annual budgets.
2. Urgently fulfil the required milestones and targets related to strengthening judicial independence and safeguarding the protection of the financial interests of the Union in order to allow for a swift and steady implementation of its recovery and resilience plan. Swiftly finalise the REPowerEU chapter with a view to rapidly starting its implementation. Proceed with the speedy implementation of cohesion policy programmes, in close complementarity and synergy with the recovery and resilience plan.
3. Improve the adequacy of the social assistance system, including unemployment benefits. Improve access to effective active labour market measures, in particular upskilling opportunities for the most disadvantaged groups, and ensure effective social dialogue. Improve the regulatory framework and competition in services by avoiding selective and arbitrary administrative interventions and the use of tailor-made legislation providing undue advantage or disadvantage to specific companies, by applying competition scrutiny systematically to business transactions and by reducing the use of emergency measures to what is strictly necessary, in line with the principles of the single market and of the rule of law.
4. Reduce overall reliance on fossil fuels by accelerating the deployment of renewables, including wind energy, geothermal and sustainable biomethane, in particular by streamlining the permitting procedures, while conducting regular environmental impact assessments and by creating a supportive and predictable regulatory environment. Phase out subsidies for fossil fuels. Reform balancing energy market rules and tariff setting to allow for cost recovery and an optimum use of the grid and, where necessary, upgrade the electricity infrastructure, including grid and storage capacities. Diversify imports of fossil fuels to significantly decrease dependence on Russia, including by strengthening cooperation with other Member States, including where necessary on infrastructure. Improve energy efficiency, in particular in buildings, and continue efforts to reduce overall gas consumption. Adjust the current system of regulated energy prices to encourage energy saving while providing targeted support for low-income households. Step up policy efforts aimed at the provision and acquisition of the skills needed for the green transition.
Done at Brussels,
For the Council
The President
1OJ L 209, 2.8.1997, p. 1.
2OJ L 306, 23.11.2011, p. 25.
3Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021 establishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17).
4COM(2022) 780 final.
5COM(2023) 62 final.
6COM(2023) 168 final.
7Regulation (EU) 2023/435 of the European Parliament and of the Council of 27 February 2023 amending Regulation (EU) 2021/241 as regards REPowerEU chapters in recovery and resilience plans and amending Regulations (EU) No 1303/2013, (EU) 2021/1060 and (EU) 2021/1755, and Directive 2003/87/EC (OJ L 63, 28.2.2023, p.
1).
8Communication from the Commission to the Council: Fiscal policy guidance for 2024, 8.3.2023, COM(2023) 141 final.
9COM(2022) 583 final.
10Council Implementing Decision of 15 December 2022 on the approval of the assessment of the recovery and resilience plan for Hungary (ST 15447/22; ST 15447/22 ADD 1).
11SWD(2023) 617 final.
12SWD(2023) 639 final.
13Eurostat-Euro Indicators, 47/2023, 21.4.2023.
14COM(2023) 631 final, 24.5.2023.
15COM(2023) 141 final, 8.3.2023.
16Council Recommendation of 18 June 2021 delivering a Council opinion on the 2021 Convergence Programme of Hungary, OJ C 304, 29.07.2021, p. 78.
17The fiscal stance is measured as the change in primary expenditure (net of discretionary revenue measures), excluding Covid-19 crisis-related temporary emergency measures but including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other EU funds, relative to medium-term potential growth. For more details see Box 1 in the Fiscal Statistical Tables.
18Other nationally financed capital expenditure provided an expansionary contribution of 1.7 percentage points of GDP, which is driven by the impact of the purchase of gas stockpiles by a special entity classified in the general government.
19The figure represents the level of annual budgetary cost of those measures, including current revenue and expenditure as well as – where relevant – capital expenditure measures.
20Council Recommendation of 12 July 2022 on the National Reform Programme of Hungary and delivering a Council opinion on the 2022 Convergence Programme of Hungary, OJ C 334.17, 12.07.2022, p. 136.
21Based on the Commission spring 2023 forecast, the medium-term (10-year average) potential output growth of Hungary, which is used to measure the fiscal stance, is estimated at 16.6% in nominal terms.
22Other nationally financed capital expenditure is projected to provide a contractionary contribution of 2.2 percentage points of GDP. The large fall in other capital expenditure in 2023 is related the large impact of the purchase of gas stockpiles by a special governmental entity classified in the general government in 2022.
23Cf. Article 5 of Council Regulation (EC) No 1466/97, which also requires an adjustment of more than 0.5% of GDP for Member States with a government debt exceeding 60% of GDP, or with more pronounced debt sustainability risks.
24The Commission estimated that Hungary would need an average annual increase in the structural primary balance as a share of GDP of 0.9 percentage points to achieve a plausible debt reduction or ensure that government debt is kept at prudent levels in the medium term. This estimate was based on the Commission autumn 2022 forecast. The starting point for this estimate was the projected government deficit and debt for 2024 which assumed the withdrawal of energy support measures in 2024.
25Net primary expenditure is defined as nationally financed expenditure net of discretionary revenues measures and excluding interest expenditure as well as cyclical unemployment expenditure.
26Opinion 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).
27See COM(2020) 580 final, page 1.
28Council Regulation (EU) 2022/1369.
29Under Articles 5 i and 9 i of Council Regulation (EC) No 1466/97.
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