Economic Survey of Hungary 2012

 

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Hungary’s economy faces severe headwinds. The global economic slowdown and heightened financial market stress have pushed an already fragile and highly indebted economy towards recession. But, controversial domestic policies have also contributed to uncertainty thereby hurting confidence. Stabilising the economy is the first most pressing priority. Strengthening the credibility and predictability of domestic policies is essential to develop an environment which is conducive to growth. An agreement with multilateral organisations would help restore confidence and support needed fiscal consolidation. In doing so, it would lower the debt burden in foreign currency by stabilising the exchange rate. The second challenge is to put growth on a sound footing. This requires reductions in households’ debt without damaging banks. Finally, raising potential growth is of utmost importance: boosting labour force participation and health outcomes are two promising avenues.


Credible fiscal consolidation and support for labour demand will help stabilise the economy. Despite a relatively favourable fiscal position, a recent deterioration in the underlying balance calls for renewed efforts. A sustained fiscal consolidation should rely more on durably curbing spending by implementing structural reforms to boost growth and, if needed, by raising the least distortive taxes. As recent changes in the tax and benefit system have been highly regressive, minimising negative distributional impacts of consolidation is essential to ensure public and political acceptance. The fiscal council should have adequate resources to perform fiscal surveillance; by contrast, its excessive power to veto the budget should be removed as it could potentially lead to a fall of government. Avoiding cyclical unemployment becoming structural requires a stronger focus on high-quality training, but also better targeting of employment subsidies and correction over time of the very large increases in the minimum wage.

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Making the economy more robust to shocks and promoting a business-friendly environment will put growth on a sounder footing. Hungary is excessively exposed to shifts in investors’ confidence through its high foreign currency indebtedness. Programmes to support household debt reduction should focus on distressed households, and ensure burden sharing between lenders, borrowers and the government. The mid-December 2011 agreement with banks is a welcome step in the right direction, but is not sufficiently targeted to distressed borrowers. To forestall deeper credit rationing, banks should be recapitalised if needed by raising the level of capital, and the bank levy should be reduced and redesigned. More checks and balances would also lead to a more predictable business environment. In particular, the full powers of the Constitutional Court in economic matters should be restored, and effective independence of the central bank should be guaranteed.


Raising labour force participation and improving health can boost growth. Participation of women would benefit from making it easier to combine work and families. Better attuning the education system to labour market needs would ease the integration of youth and the Roma. Finally, reforming early retirement and lifelong learning would raise incentives to work at older ages. The limited effectiveness of the health system creates opportunities to improve health outcomes without straining public finances, notably by reallocating resources from inpatient services to outpatient services and enhancing health workforce management.

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 Rafal Kierzenkowski and Mehmet Eris, under the supervision of  Pierre Beynet. Research assistance was provided by Desney Erb. The survey also benefited from external consultancy work.

www.oecd.org/eco/surveys/hungary

 

 

 

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