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The following is the Executive summary of the OECD assessment and recommendations, taken from the Economic Survey of Hungary, published on 11 February 2010.
Hungary is facing one of the most severe recessions among OECD countries
Despite financial assistance from international organisations, macro policies had to remain tight. Stabilisation is underway, but the depth of the recession will leave deep marks. Looking forward, restoring sustainable growth requires decisive structural reforms. The shift in the tax burden from labour to consumption in 2009 was a positive step toward reducing economic distortions. The pension reform, which will increase labour supply, should be sustained. To increase productivity, innovation policies should be promoted. A well-balanced policy mix is also critical to restoring growth. Fiscal consolidation should continue, while avoiding excessive pro-cyclicality, if the economy deteriorates beyond anticipation. As the economy recovers, the central bank should continue to carefully communicate to financial markets so as to avoid financial stability concerns in case of sudden changes in market sentiment.
The momentum of fiscal reform should be sustained
Recently, significant progress in improving fiscal sustainability has been made. The creation of fiscal rules and a Fiscal Council is welcome ahead of the 2010 elections given the historical political cycle of fiscal deficits. Hence, it is of utmost importance that the Fiscal Council benefits from broad political acceptance. It is also advisable to allow some experience to accumulate before considering any substantial changes in the Fiscal Responsibility Law. Improving general public administration should bring large welfare gains and reducing the size of government should eventually allow for tax cuts. The government should continue targeted streamlining of public employment and strengthen public procurement. To spur public administration reforms, a monitoring unit should be established. The government should also enhance the efficiency of the health system by seeking consensus for introducing patient co-payment for physician care.
The financial regulatory framework should be reshaped
The crisis exposed several weaknesses in the supervisory framework, such as inadequate monitoring and risk assessment. Excessive risk taking by borrowers needs to be limited by capping the share of income that can be used for debt servicing while the accuracy of income should be documented. To ensure that the ceilings on debt-service ratios are observed, a comprehensive credit registry is needed. On the lender side, banks should be subject to higher costs for risky lending in the form of higher capital requirements. The scope for unilateral changes in contract should be limited, consumer protection enhanced and all conditions of financial products disclosed in a transparent way. Appropriately, the supervisory authority has been made independent from the Ministry of Finance and directly accountable to Parliament. To prevent systemic risks, close cooperation between the central bank and the supervisory authority is also needed.
Education efficiency needs to be improved
The school system possesses features associated with good outcomes, notably a high degree of autonomy. Nevertheless, vocationally trained school leavers are not adequately prepared for the labour market. Policy to favour vocational practical training in regional integrated vocational training centres and in workplaces should continue. In terms of school efficiency, the ratio of actual teaching relative to the total statutory working time should be raised and there remains scope for further mergers/associations among municipalities. The proportion of adults with tertiary qualifications is still low. The authorities should improve incentives to provide tertiary studies that match labour market needs and tighten the conditions under which students continue to receive free tuition, while extending ways of defraying the living expenses of students from poor families.
How to obtain this publication
The complete edition of the Economic Survey of Hungary is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the Hungary Desk at the OECD Economics Department at email@example.com.
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.