Economic surveys and country surveillance

Economic Survey of Hungary 2010

 

Contents | Executive summary How to obtain this publication | Additional information 

 

   

The next Economic Survey of Hungary will be prepared for 2011.

 

An Economic Survey is published every 1½-2 years for each OECD country. Read more about how Surveys are prepared.

The OECD assessment and recommendations on the main economic challenges faced by Hungary are available by clicking on each chapter heading below.

The Policy Brief  (pdf format) contains the OECD assessment and recommendations.

 

Bookmark this page : www.oecd.org/eco/surveys/Hungary 

Contents

 

Chapter 1. Restoring a sustainable growth path

Hungary is facing one of the most severe recessions among OECD countries. High foreign currency indebtedness gave rise to a loss in market confidence, and unsuccessful market financing of the government deficit coupled with limited foreign exchange reserves led the authorities to request financial assistance from international organisations. Amid high exchange rate volatility, macroeconomic policy had to remain tight despite a deep recession. For the central bank, defending the forint had to take precedence over inflation targeting at times. On the fiscal side, discretionary spending was cut significantly. The crisis was also a catalyst to implement decisive structural reforms, such as a far-reaching tax reform, a pension reform and the introduction of a fiscal council and fiscal rules. These ambitious macro and structural policies served to rebuild confidence. Helped by the world recovery, monetary policy has been eased, and the automatic stabilisers have been partly allowed to play. Avoiding major fiscal slippage, especially during the 2010 election year, should help firmly restore confidence and stabilise the economy.
Looking ahead, the depth of this recession is bound to leave deep marks in productive capacity. Re stimulating potential growth and reducing the gaps in efficiency levels (across regions, firms and labour force groups) call for structural reforms, encompassing the labour market, education, entrepreneurship and innovation. The shift in tax burden from labour to consumption in 2009 was a positive step in this respect since it reduces economic distortions. The pension reform and the shortening of maternity leave, which will positively impact labour supply, should be sustained. As for the labour market, active labour market policies could be better-coordinated. The product market policies should further support innovation. Finally, a sustained policy of fiscal consolidation should help improve the policy mix while eventually opening the way to tax cuts supportive of growth.

 

Chapter 2. Sustaining the momentum of fiscal reform

Hungary has faced a considerable challenge to regain credibility following persistent and high fiscal deficits. Efforts during recent years have produced substantial results. The fiscal deficit has been brought down significantly and, despite the recession, fiscal consolidation has continued to help restore foreign investor confidence. Short-term fiscal adjustment needed to be accompanied by measures that can durably improve Hungary’s fiscal position, however, and it has; the adoption in 2009 of a pension reform and a Fiscal Responsibility Act, creating a Fiscal Council and fiscal rules hold that potential.
These results should not lead to complacency. Some expenditure cuts, such as lower public salaries, may prove difficult to sustain. Fiscal consolidation in the past owed both to expenditure cuts and revenue increases. As a result, and despite an important tax reform starting in the second half of 2009 and extended from the beginning of 2010, marginal tax rates remain high, with adverse effects on the labour market and growth. Going forward, the government needs to contain public expenditure growth and improve public administration efficiency to reduce the public “footprint” on the economy and allow lower taxes. Key areas that warrant intensified efforts are public administration and health. The government should help secure a prominent role for the Fiscal Council and some experience needs to accumulate before considering any substantial changes in the fiscal rules. Finally, improvements to make taxation less distortive should continue by further reducing tax wedges, and increasing the role of wealth taxes, notably for local governments.

 

Chapter 3. Enhancing financial stability through better regulation

The global crisis exposed weaknesses in the Hungarian financial system that pose risks to financial stability. Excessive risk-taking by banks and households had been masked by relatively stable exchange rates, the expected early adoption of the euro and unusually lax credit conditions in international markets. With credit becoming scarcer and dearer, the domestic economy was hit through multiple channels. The steep depreciation of the forint boosted households’ debt burden, while banks were hit by the drying up of liquidity, including in swap markets for Swiss francs. A major lesson learnt from the crisis is that the approach to household lending needs to change: a stronger protection for borrowers should be combined with a tighter regulation of lenders. Enhancing competition in the banking market would also impose discipline on lending behaviour. Financial supervision should be strengthened by enhancing the powers of the financial supervisor to avoid abusive practices and excessive risk taking. A better early-warning system needs to be created for the monitoring and assessment of systemic risks, in which a more formal Financial Stability Council should play a prominent role.


Chapter 4. Raising education's contribution to growth

Major structural reforms following the end of the communist period have resulted in an education system that has many features that should result in good educational outcomes and efficient use of resources. Indeed, costs relative to GDP are at about the OECD average, while younger school pupils perform above average in internationally comparable assessments. But this relatively good performance fades with age. Fifteen-year-olds register only average performance in the PISA assessments, and the proportion of adults with tertiary qualifications, though rising, is still low. More worryingly, the school system does not adequately prepare school leavers, especially those from disadvantaged backgrounds, for the labour market. Encouraging more children from such backgrounds to spend more time in pre-school, raising the age at which school students must choose what type of secondary schooling they will follow, and raising the standards of vocational training would help improve matters, as would continuing steps to improve the average quality of teachers. The co-existence of very high gross wage premia for adults with tertiary qualifications, and the comparatively low numbers graduating, suggest that tertiary education should expand further, and that students in higher education should contribute more to the cost of their studies.
 

How to obtain this publication

 

The complete edition of the Economic Survey of Hungary is available from:

 

Additional information

For further information please contact the Hungary Desk at the OECD Economics Department at eco.survey@oecd.org.

The OECD Secretariat's report was prepared by Margit Molnar and Colin Forthun under the supervision of  Pierre Beynet. Research assistance was provided by Desney Erb.

 

 

 

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