The following is the Executive Summary of the OECD assessment and recommendations, taken from the Economic Survey of Hungary 2005 published on 19 July 2005.
The composition of growth of the Hungarian economy has become healthier and real convergence looks set to be on a sustainable path. While most reforms to establish a flourishing market economy have been carried out and the current government is launching a new reform initiative of “100 Steps”, more needs to be done in two broad areas in order to maintain high growth:
Achieving a smooth entry into the euro area: Frequently missed policy targets, tensions between the government and the Central Bank and stubbornly high twin deficits have established an unhealthy climate of financial volatility, which contrasts with and may even risk threatening the rather smooth process of real convergence.
Increasing trend growth by both raising the employment potential and trend productivity growth: A large share of Hungarians with some work capacity is not working in part because of the way social benefits are designed. Low employment is aggravated by impediments to regional mobility of the labour force. Hungary needs to move further up the value added chain. This process for the time being rests very much on investments by foreign companies while innovative activities and commercial applications of own research remain limited.
Entrenching macroeconomic stability implies achieving fiscal targets for euro entry within a medium term framework
Putting government finances on a track that meets the criteria for euro entry is by far the most urgent challenge for Hungary. Meeting the targets of the budget for 2005 is essential to recover credibility. Budget practice could be improved by using conservative estimates for the current year’s deficit outcome in making budgets for the upcoming year and making prudent assumptions on economic activity, revenue and spending items. Revenue windfalls should be used for debt reductions rather than incremental spending. The medium term fiscal framework should be strengthened.
Reforming health care is important for long term fiscal sustainability
Public sector spending on health care will rise in the future because of ageing and technological developments. Reforms should focus on reducing redundant hospital capacity, better gatekeeping and measures to limit excessive prescriptions of pharmaceuticals.
Monetary policy management could be refined
Inflation targets should be set for a fixed number of quarters ahead. Changes in Monetary Council membership should become smoother. More transparency and better communication of the achievement of fiscal targets by the Ministry of Finance would allow the Central Bank to reconsider the amount of detail and comment on fiscal projections in the Inflation Report.
The employment potential can be raised
Cuts to the tax wedge should be better designed so as to avoid high marginal tax rates above the minimum wage. The early retirement scheme which has no actuarial adjustment should be phased out and the remaining scheme should be made actuarially fair around the statutory retirement age. Inactivity traps in benefit programmes should be tackled by making the unemployment benefit programme relatively more attractive for short term unemployed while applying a “mutual obligation” approach to all benefit recipients with some work capacity. Particular attention should be devoted to further curbing inflows into disability pension.
Innovation policy has become a key priority for the government
The government is putting strong emphasis on targeted measures to support innovation. These programmes should be closely monitored and closed if found to be ineffective. Improvements in framework conditions for innovation, including in the general business environment, in public research funding, and in tertiary, vocational and compulsory education should receive more priority.
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