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European Commission

MEMO

Brussels, 28 January 2013

Commission's mission to Hungary encourages continued progress in fiscal consolidation while paying more attention to raising growth potential

European Commission officials, in close cooperation with International Monetary Fund staff and observers from the European Central Bank (ECB), conducted a mission to Hungary from 16 and 28 January. Its purpose was to review recent developments and policy initiatives in the context of post-programme surveillance linked to the EU balance of payments assistance provided over 2008-2010. The mission also used the opportunity to gain insights in view of the Commission's Winter 2013 forecast to be published on 22 February and its In-Depth Review of Hungary to be published in the Spring, in the context of the Macroeconomic Imbalances Procedure.

The mission welcomed the fiscal consolidation achieved so far and the commitment of the government to continue its efforts to keep the deficit well below 3% of GDP. At the same time, it encouraged the government to pay close attention to the quality of the adjustment measures so as to ensure a sustainable correction that supports growth and confidence. In view of the challenging external financing needs that Hungary faces in 2013 and 2014, decisive structural reforms as well as a stable and credible institutional policy framework will also play an important role.

The mission reviewed the economic situation and noted that Hungary entered into recession in the first half of 2012 and that GDP is expected to have declined by 1½% in 2012. Growth is expected to resume only slowly from 2013 since economic prospects are lacklustre, also in view of the historically low investment ratio and a further shrinkage in financial intermediation. The current account continues to be in surplus but it partly reflects the compression in domestic demand.

The Hungarian Government's commitment to further fiscal consolidation with a view to ending the excessive deficit procedure and bringing down government debt is to be welcomed. The first results are visible in the fiscal data for 2012. At the same time, keeping the deficit below the 3% of GDP Treaty reference value in a durable and balanced manner, as recommended by the Council, will require additional steps. These should preferably be on the expenditure side. An improved fiscal governance framework as recommended by the Council will facilitate the envisaged fiscal adjustment.

The Commission staff expressed concerns about Hungary’s low potential growth in a regional context. Against this background, the government was encouraged to review the increased reliance on revenue side measures (mostly sectoral taxes), which are likely to be harmful for business confidence, economic growth and employment, not just in the short run, but even more so in the medium and longer term. Also in this context, the mission stressed the importance of improving the conditions for banks to resume lending and thereby supporting much needed investment.

The mission also had discussions with the Hungarian authorities on progress in implementing the structural reform agenda and on how to stimulate further growth-enhancing structural changes – notably in the financial sector and in the areas of tax policy, labour and product markets, and public transport, as also recommended by the Council’s Country Specific Recommendations to Hungary in the context of the European Semester.


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