Pierre-Alain Pionnier
Michaël Sicsic
OECD Economic Surveys: Hungary 2026
Abstract
After a strong post-pandemic recovery, GDP growth abruptly turned down in 2022 and has remained low since then. Inflation has receded but wage growth remains strong. Together with a weakening of the fiscal stance, this will support private consumption and an upturn in GDP growth over 2026-27.
Nevertheless, Hungary needs to strengthen its public finances to accommodate rising costs related to ageing and climate. Beyond securing access to EU funds, it could start by streamlining inefficient tax expenditures and subsidies. Recurrent property taxes, inheritance taxes and health-related taxes could also be mobilised to raise fiscal revenues, while supporting mobility and health outcomes. On the expenditure side, strengthening the pension system, including by linking the retirement age to life-expectancy, improving spending efficiency through regular spending reviews and ensuring stronger public investment governance would also contribute to more fiscal space.
In addition, structural tax reforms would support stronger growth and equity. Introducing progressivity in personal income taxation would lower the high labour tax wedge for low-income earners and enhance the tax system’s responsiveness to growth. Phasing out distortive turnover and sector-specific profit taxes, as well as price and margin caps, would support investment.
1.1.1. Private consumption has rebounded but investment is depressed
After a strong post-pandemic recovery driven by domestic demand, GDP growth abruptly turned down in the second half of 2022, and has remained low since then. While private consumption turned down amid rapidly rising inflation, housing investment also declined sharply as interest rates increased, followed by public investment as EU funds got blocked, and private investment as business confidence and capacity utilisation declined. Declining external demand drove down gross exports but imports declined even more strongly due to falling domestic demand. This contrasts with the pre-pandemic decade where strong demand driven by private consumption and investment lifted actual growth above potential growth to around 4%.
Overall, GDP only grew by 1.4% between 2022 Q1 and 2026 Q1. Private consumption declined in 2023 due to high inflation eroding real incomes but has started to rebound in 2024. Investment declined by 18% between 2022 Q1 and 2026 Q1 and has not yet started to rebound. In early 2026, business confidence remained significantly below the levels seen before the pandemic and immediately after, but consumer confidence rebounded sharply following the 2026 elections. In line with capacity utilisation in industry, the output gap reached 4.3% of GDP in early 2026, close to its level during the Great Financial Crisis of 2008-09 and the following years (Figure 1.1).
Note: Panel D: Capacity utilisation is shown as a percentage-point deviation from its long-term (2005Q1-2026Q2) average, and the output gap is expressed in percentage points of potential output.
Source: Panels A and C: Hungarian Central Statistical Office (KSH), OECD Database on National Accounts, OECD calculations. Panels B and D (capacity utilisation): European Commission. Panel D (output gap): OECD estimate.
1.1.2. The labour market remains strong but has started to weaken
Despite subdued economic activity, unemployment has only moderately risen from 3.5% in June 2022 (low point) to 4.4% in May 2026. Nevertheless, the labour market has become slightly less tight recently as registered job vacancies have decreased by 5% since early 2025. As a ratio to unemployment, overall vacancies are now below pre-pandemic levels but there is significant sectoral heterogeneity. The vacancy rate is highest in real estate, business services and health, and lowest in agriculture and construction (Figure 1.2). This heterogeneity does not lead to significant differences in wage growth across sectors.
Note: Panel A features the ratio of registered job vacancies to registered unemployment at the National Employment Service. Registered job vacancies provided by the National Employment Service may differ from job vacancies reported by the Hungarian Central Statistical Office (HCSO) but they are available on a longer period. In Panel B, sectoral vacancy rates are calculated as ratios of sectoral vacancies to employment, both reported by the HCSO.
Source: Panel A: National Employment Service (green line), HCSO (blue line); Panel B: HCSO. OECD calculations.
While unemployment has slightly increased for cyclical reasons, population ageing is also contributing to a structural decline in the workforce, which is hampering long-term growth (Figure 1.3). Past reductions in employer social contributions have bolstered the employment rate in the last decade but this effect has now faded. As population ages, providing the right fiscal incentives to mobilise all available labour resources and boost productivity will be key (see below and Chapter 3).
Note: The employment rate in Panel A, covering the population aged 15-64, differs from the one in the Basic Statistics Table of the Executive Summary, covering the population aged 15 and above.
Source: Panel A: OECD Infra-annual labour statistics database; Panel B: OECD Economic Outlook 118 Database.
1.1.3. Inflation has receded
Inflation has significantly receded from the historically high levels reached in early 2023. In June 2026, core inflation excluding food and energy (OECD definition) stood at 3.2% while headline inflation was 1.7% (Figure 1.4). Hungarian consumers remained largely shielded from rising global energy prices due to regulated electricity and natural gas prices and the price cap on motor fuels that was put in place in March 2026. The close to 10% appreciation of the Hungarian forint against the US dollar and the euro between March and June 2026 also helped reduce domestic inflation.
Source: OECD Database on Consumer Price Indices.
As food price inflation had increased to nearly 7% in February 2025, the government imposed margin restrictions for basic food products to retailers. This measure led to a one-off decline in the level of food prices but did not have a lasting effect on food price inflation (Figure 1.5). Moreover, a temporary increase in inflation is to be expected when the margin cap will be lifted.
Due to data limitations, it is difficult to assess if the pricing power of food retailers in Hungary is higher than in other countries and if rising margins drove the increase in retail food prices in early 2025. Nevertheless, the best way to ensure low margins in the retail sector is to foster competition. While they can reduce prices in the short term, price caps are also likely to discourage investment and business entry in this sector, which ultimately ensure competition and lower prices in the longer term. Product market regulations in the Hungarian retail sector could also be relaxed to encourage business entry (Chapter 4).
Labour costs, not profits, are the main factor explaining why inflation remained sticky until early 2026. While unit profits significantly contributed to domestic inflation until early 2023, unit labour costs have been the main driver of domestic price pressures since then (Figure 1.6, Panel A). The wage share in GDP initially declined as profits increased but now exceeds the level it had just before the COVID-19 pandemic and the high-inflation period that followed (Figure 1.6, Panel B).
Note: In Panel A, the GDP deflator is a value-added deflator. It captures domestic factors contributing to the inflation of producer prices, above and beyond higher prices of imported intermediate consumption such as energy. Domestic factors include unit profits (profits per unit of value added in volume terms), unit labour costs, and unit taxes.
Source: OECD Databases on National Accounts and Productivity; OECD calculations.
Despite higher inflation than in most EU countries during the high-inflation period of 2022-24, cumulated real wage growth since the pandemic has also been higher in Hungary (Figure 1.7, Panel A). The real wage growth of full-time employees had started to slow down and had decreased from 10.4% year-on-year in May 2024 to 5.1% in December 2025. Since then, the government has raised the salaries of government office staff by 15% in January 2026, and granted a six-month pay bonus to policemen and soldiers in February 2026, as in 2022 ahead of the previous general elections. While part of this uptick will be transitory, overall real wage growth increased to 6.8% year-on-year in May 2026 as a result.
While minimum wage growth lagged average wage growth between 2018 and 2021, this trend has now reversed. In 2025, the ratio of the minimum to the average wage exceeded its pre-pandemic level (Figure 1.7, Panel B). Following the November 2024 agreement between the government, employers’ organisations and trade unions, the nominal minimum wage has been increased by 9% in 2025 and 11% in 2026, and a further 14% increase is planned for 2027. At 39% of the average wage in 2025, Hungary remains well below the indicative reference level of 50% mentioned in the 2022 EU Directive on minimum wages and the 2024 agreement would only lift it to 42% in 2027 given projected average wage growth (Table 1.1). Nevertheless, it will be important to rediscuss minimum wage adjustments every year to account for inflation and productivity developments and avoid endangering the on-going disinflation process and Hungary’s cost competitiveness which has already weakened recently compared to Czechia, Slovakia and Germany (Figure 1.8).
Note: In Panel A, wages refer to gross wages and salaries (D11) divided by the number of employees in quarterly national accounts. In Panel B, the ratio of the minimum wage to the average wage is calculated by dividing the minimum wage for 40 hours of work by the average wage of full-time employees working in the business sector and enterprises with 10+ employees.
Source: OECD Databases on National Accounts and Labour Statistics.
Relative unit labour cost (Manufacturing, Germany = 100)
Note: The above ULC is relative to Germany, which is normalised to 100 each year. The labour cost in the numerator is expressed in current euros. It includes an imputed labour cost for self-employed workers, assuming that they have the same hourly labour cost as employees of the same industry. VA in the denominator is expressed at constant 2017 prices. The conversion to comparable 2017 prices across countries is based on the 2017 average exchange rate. Using the manufacturing PPPs compiled by (Inklaar, Marapin and Gräler, 2023[2]) would lead to a slightly higher ULC but the same evolution.
Source: OECD Database on Quarterly National Accounts, OECD calculations.
A 2024 Government decree transposing the EU Minimum wage directive has designated the Permanent Consultative Forum of the Competitive Sector and the Government (VKF) as the forum for minimum wage negotiations. Its members are the government, the three main trade unions, and the three main employers’ organisations. Trade unions and employers’ organisations rely on in-house economic experts to assess the economic and social impact of past and intended minimum wage increases. According to the Labour Code, the government also needs to consult the National Economic and Social Council (NGTT), composed of representatives of employers and employees, representatives of the scientific community, NGOs and churches, before updating the minimum wage. Setting up an independent expert commission giving a public scientific assessment of the economic impact of recent and planned minimum wage developments would be helpful to frame VKF discussions between the government, trade unions and employers’ organisations.
1.1.4. Economic activity is projected to pick up in 2026
GDP growth is expected to increase from 0.5% in 2025 to 1.9% in 2026 and 2.2% in 2027, and inflation to pick up from 1.9% in 2026 to 2.7% in 2027, as wage growth remains strong and motor fuel price caps have been lifted in June 2026. Monetary policy is expected to implement only gradual policy rate cuts and to remain mildly restrictive until 2027 (Table 1.1). Private consumption will be supported by strong real wage growth and a more accommodative fiscal policy with PIT cuts in 2026. Investment has declined by 20% since early 2023, but is expected to increase progressively over 2026-27, supported by the release of EU funds. Exports are projected to track external demand from Hungary’s main trading partners, especially Germany, with no significant gains in export market shares, in line with recent developments (Box 1.1).
Note: 1. Contributions to changes in real GDP. 2. OECD definition: consumer price index excluding food and energy.
Source: Hungarian Central Statistical Office (KSH), OECD projections
1.1.5. The growth outlook is subject to several risks
International trade is a key risk for the outlook. While only 5% of Hungarian exports are directly shipped to the US, Hungarian firms are integrated into the global value chains of European countries which are also exposed to US tariffs, especially in the automotive sector. Higher-than-expected US tariffs on EU goods would impact Hungary both directly and indirectly, through reduced activity in the EU which represents 65% of Hungarian exports. On the other hand, the availability of new manufacturing capacity may provide a further boost to Hungarian exports over 2026-27. Nevertheless, industrial capacity utilisation is currently low (Figure 1.1, Panel D) and the potential of the manufacturing sector will be fully exploited only if external demand picks up significantly. Admittedly, the new factories in the electric mobility sector may benefit from strong specific demand but the aggregate performance of the manufacturing sector also depends on the demand for combustion engine vehicles.
Another risk concerns energy supply. While alternative supply routes are being developed, the fact that Hungary is a landlocked country makes this task difficult. The EU decision to ban gas imports from Russia by end-2027 is important from a geopolitical point of view but may also create supply difficulties for Hungary if alternatives are not rapidly found. Moreover, renewed geopolitical tensions in the Middle-East leading to another energy price shock would damage the growth outlook and increase inflation. Reinstating motor fuel price caps would support consumption and limit inflation, but at a high cost for public finances. As a Russian firm is the main contractor for the two new units of Hungary’s single nuclear plant, this project (Paks 2) is also subject to geopolitical risks (Table 1.2).
Hungary’s nominal export growth depends on the import growth of its trading partners, and on export market share developments. The new OECD balanced international merchandise trade dataset (OECD, 2025[3]) allows breaking down export market share developments into product, market, competitiveness and residual effects. The analysis in this box focuses on Hungary’s exports of goods, representing 80% of its total exports at current prices, and its market share in its 25 main export destinations, accounting for 90% of its exports of goods.
Product and market effects account for the fact that the structure of Hungary’s exports may differ from the average structure of external demand. For example, if Hungary predominantly exports products for which external demand grows faster than average, Hungary’s exports will grow faster than overall external demand, thus resulting in export market share gains. The result will be the same if Hungary predominantly exports to destinations (markets) where external demand grows faster than average. Competitiveness effects account for the fact that Hungary’s export growth for specific products and destinations may differ from the total import growth for these products and destinations, here again implying changes in export market shares. Positive competitiveness effects may be related to various factors including lower prices or higher quality triggering increased demand for Hungarian products, or composition effects at a more detailed level of the product classification than considered here.
Except in 2021 and 2023, Hungary’s nominal export growth since 2017 has closely tracked external demand. While Hungary’s export market share declined in 2021, it rebounded significantly in 2023 (Figure 1.9, Panel A). The 2021 decline was largely related to a negative competitiveness effect, but positive product, market and competitiveness effects jointly contributed to the rebound in 2023 (Figure 1.9, Panel B). In 2021, the competitiveness of Hungarian exports mainly declined in Europe, for machinery and mechanical appliances and, to a lower extent, pharmaceutical products. In 2023, Hungarian competitiveness rebounded in the European and US markets (Figure 1.9, Panel C), for the same products as before, as well as electrical machinery and equipment (including batteries) and transport equipment (Figure 1.9, Panel D). The positive market effect in 2023 was mainly related to higher-than-average import demand from Europe excluding Germany, where Hungary ships a significant part of its exports. The positive product effect in the same year was mainly related to higher-than-average import demand for transport equipment, representing a disproportionate part of Hungary’s exports. Overall, Hungary’s export market share has increased over 2017-24, but this is largely related to developments in a single year (2023), which calls for caution when interpreting this finding. Looking ahead, rising trade tariffs may also significantly reshuffle market shares.
Note: Panel B breaks down the change in Hungary’s export market share shown in Panel A. While Panel B aggregates the competitiveness effect over products and destinations, Panel C aggregates it only over destinations, and Panel D aggregates it over products.
Source: OECD Balanced International Merchandise Trade Dataset (BIMTS), OECD calculations.
1.2.1. Monetary policy is mildly restrictive
Considering the decline in inflation and the easing of previous tensions on the exchange rate, the Central Bank has significantly reduced its nominal effective policy rate between May 2023 and September 2024 but has been cautious since then. The forward-looking real interest rate remains slightly above the neutral real interest rate of 2% estimated by the IMF (Jackson, 2024[4]), indicating a mildly restrictive monetary policy stance which seems appropriate owing to strong wage growth (Figure 1.10). At the same time, the historically large negative output gap (Figure 1.1, Panel D) and the appreciating exchange rate in recent months show that there is no need for monetary policy to get tighter.
After declining in 2022 when monetary policy was tightening, credit distribution to households rebounded from 2023 but credit to corporations continued to decline until early 2025 (Figure 1.11). The rebound in household lending since 2023 has been supported by declining inflation, rising real wages and subsidised mortgage programmes (Table 1.3). By contrast, corporate demand for investment loans remains low, in line with business confidence and capacity utilisation, which limits corporate credit distribution despite the high profitability and lending capacity of the banking sector (see below). The recent increase in corporate credit seems largely related to the introduction of the Demján Sándor Programme to support SME investment (Chapter 4) and this upturn remains fragile (Central Bank of Hungary (MNB), 2026[5]).
Note: Panel B: The forward-looking real interest rate is calculated by subtracting 12-month-ahead inflation expectations from the 12-month interbank lending rate (BUBOR). 12-month-ahead inflation expectations are calculated as a weighted average of CPI inflation in the last 24 months.
Source: Central Bank of Hungary (MNB).
Note: The volumes of new loans to households and corporations have been calculated by deflating the corresponding values by the Hungarian quarterly CPI (2024 Q4 = 100). In Panel A, the volume of new loans to corporations is shown as a moving average over the last four quarters.
Source: Central Bank of Hungary, OECD calculations.
Looking ahead, the Central Bank should ease monetary policy at a gradual pace to ensure that inflation durably stays around 3% and that expectations are firmly anchored. While professional forecasters expect on average that inflation will be in line with the Central Bank’s target in the medium-term (Figure 1.12, Panel A), uncertainty has increased compared to the pre-pandemic period. This uncertainty is reflected in the dispersion around the average inflation projection of professional forecasters and denotes a weaker anchoring of inflation expectations than before the pandemic. No similar increase in uncertainty can be noticed for the euro area (Panel B).
Source: Consensus Economics.
1.2.2. Financial stability risks are contained but business failures and the housing market require vigilance
Hungarian banks are well capitalised, above the international (Pillar I) and domestic capital requirements and close to the OECD average (Figure 1.13, Panel A). Despite multiple recent government measures affecting bank profitability, including the temporary tax on windfall profits, the interest rate cap on variable-rate mortgages, the increase in the transaction tax, and limitations to bank fee increases for households, bank profitability remains high. This is mainly related to the large difference between the interest rate that banks earn at the Central Bank and the one they pay to their clients (Central Bank of Hungary (MNB), 2025, pp. 64-65[6]). The share of non-performing loans (NPLs) is higher than the OECD average but has been on a declining trend since 2013, after a sharp increase during the Great Financial Crisis (GFC) of 2008-09 (Figure 1.13, Panel B).
Business failures have risen since the end of the pandemic. This is expected to increase the share of NPLs but in a way that should be manageable by banks. Part of the recent increase in business failures is related to the resumption of court activities, which had been paused during the pandemic, but the cumulated increase since 2021 exceeds what a mere catching up with pre-pandemic levels would imply. The construction sector is especially affected (Figure 1.14). The Central Bank anticipates that the NPL ratio would increase by 2 percentage points (pp) in an optimistic macroeconomic scenario where GDP would grow by 2.4% in 2025 and 4.2% in 2026, and by 7pp in a stress scenario where GDP would decline by 6.1% in 2025 and 1.8% in 2026. Nevertheless, the Central Bank anticipates that all banks should be able to meet their capital requirements by 2026 if they sufficiently reduced dividend outflows (Central Bank of Hungary (MNB), 2025, pp. 66-69[6]).
Note: Data for Hungary refers to 2024 Q4 in Panel A and 2025 Q1 in Panel B. In Panel A, capital requirements are only available for EU countries.
Source: IMF Financial Soundness Indicators, (Central Bank of Hungary (MNB), 2025, p. 11[6]) for capital requirements in EU countries.
After a slowdown from early 2022 to mid-2023, real house price growth rebounded to 15% in end-2025. By then, national house prices were estimated to exceed fundamentals by over 20%, a level not seen since before the GFC (Figure 1.15). Nevertheless, the main factors that contributed to mortgage default in Hungary at the time, i.e. the share of foreign-currency loans, the debt overhang of households and the increase in unemployment, are currently largely muted. Following a government intervention in 2015, foreign-currency denominated mortgages have practically disappeared, unemployment is low, and while the share of new mortgages with a high (above 70%) loan-to-value ratio has nearly doubled since end-2022, it remains well below the levels reached before the GFC.
Considering increasing risks, the Central Bank has raised the countercyclical capital buffer (CCyB) from 0 to 1% in two steps since mid-2024, and the sectoral systemic risk buffer (SyRB) from 0 to 1% in January 2026. Looking ahead, it should continue to closely monitor loan delinquencies and housing market developments and further raise bank capital requirements as needed.
Note: Business failures are defined as the sum of forced deletions and liquidations. Forced deletions correspond to the removal of economically inactive businesses from the business register, without any judiciary procedure. They were temporarily suspended during the pandemic. Since June 2022, they cannot occur when claims against a company exceed HUF 400,000, thus turning cases that were previously handled as forced deletions into liquidations. Therefore, the recent increase in business failures may be partly related to the resorption of the backlog of forced deletions accumulated during the pandemic. These accumulated cases may give rise to forced deletions or liquidations depending on business claims.
Source: Hungarian Central Statistical Office (KSH), OECD calculations.
Note: In Panel B, the deviation of house prices from fundamentals is measured with the MNB composite index, calculated as a weighted average of the deviations of different ratios from their long-term average: house prices / income, house prices / rents, new house prices / construction costs, house prices / affordable loan amount, and housing investments / GDP.
Source: Panel A: OECD Analytical House Price Indicators. Panel B: (Central Bank of Hungary (MNB), 2026, p. 14[1])
1.3.1. The fiscal stance is becoming more expansionary
Focusing on the cyclically-adjusted primary fiscal balance shows that fiscal consolidation has been significant over 2022-25, mainly supported by lower public consumption and investment as a share of GDP. Nevertheless, rising debt servicing costs and subdued economic activity have counterbalanced the impact of this underlying fiscal consolidation.
Without remedial measures that may be included in the revised 2026 budget, the headline fiscal deficit may expand to 6.7% of GDP in 2026, just below the record levels reached in 2020-21 during the pandemic (Figure 1.16). As a result, the fiscal stance measured by the cyclically-adjusted primary deficit is expected to weaken by 1.8% of GDP. This is mainly due to decreasing fiscal revenues related to the introduction of the 14th month of pension (0.2% of GDP), PIT cuts (0.5% of GDP), as mothers below 40 with at least two children will be PIT exempted from 2026 onwards, and the family tax allowance will further increase, following a first increase in mid-2025 which will have its full-year impact in 2026. Public consumption is also expected to increase by 0.9% of GDP, partly driven by the 6-month salary bonus granted to policemen and soldiers as a one-off in early 2026 and other permanent public wage increases. Moreover, the motor fuel price cap that was in place from March to June 2026 had a cost of 0.2% of GDP. On the other hand, public investment is expected to decline as a share of GDP.
In 2027, the fiscal stance is expected to tighten by 0.6% of GDP, as public consumption reverts to a lower level. While EU funds are expected to be released by the end of 2026, assessing their impact on public finances would require detailed information that is not available at this stage (Box 1.2). Therefore, no other major changes in fiscal revenues and outlays are expected at this stage for 2027.
Government fiscal balance, % of GDP
Note: All details of the OECD methodology are available in (Price, Dang and Botev, 2015[7]).
Source: Hungarian Central Statistical Office (KSH), OECD projections.
The accounting treatment of defence expenditure will limit the discrepancy with the ambitious consolidation path included in Hungary’s medium-term fiscal-structural plan. In 2026, the government does not plan to increase defence spending beyond the 2.0% of GDP that were reached in 2024 and 2025, up from 1.0% in 2021. Nevertheless, the European Commission has allowed Hungary to activate the national escape clause of the Stability and Growth Pact based on this past increase and to deviate from the net expenditure path set out in its 2025-28 medium-term fiscal-structural plan (EU Council, 2025[8]) (EU Council, 2025[9]). In practice, Hungary’s compliance with this plan will be assessed after deducting 1.0% of GDP from its overall net expenditure, corresponding to the increase in defence expenditure since 2021.
Accounting for the flexibility allowed by the national escape clause, the cyclically-adjusted primary balance expected by the OECD is far from Hungary’s targets in its medium-term fiscal-structural plan for 2026 (1.7%) and 2027 (2.3%). In November 2025, even before the deficit objective was revised upwards by the government, the European Commission already assessed that Hungary was at risk of non-compliance with the EU fiscal rules in 2026. This calls for further fiscal consolidation in the near term, as also confirmed by the subsequent debt sustainability analysis (Figure 1.20).
1.3.2. Debt servicing costs are high
While inflation has receded, interest rates remain higher than before the high-inflation period, which translates into higher public debt-servicing costs than in most OECD countries (OECD, 2025[10]). In Hungary, these costs have risen sharply, from 2.2% of GDP in 2019 to 4.9% in 2024, much faster than in the rest of the EU, and they have reached the highest level in 20 years (Figure 1.17, Panel A). This significant increase is first related to higher inflation and interest rates in Hungary than in most OECD countries since 2022, to the need to refinance roughly 20% of the stock of debt at market interest rates every year (ÁKK, 2025[11]), but also to the large share of variable interest rate and inflation-linked bonds in the stock of debt, which makes debt servicing costs very sensitive to higher inflation and interest rates in the short term (Figure 1.17, Panel B). While variable-interest and inflation-linked bonds may be attractive for investors and facilitate debt financing in the short term, the debt management agency (ÁKK) should carefully balance these benefits against higher costs when inflation and interest rates are high and consider the risk that such a situation happens again.
While debt-servicing costs have increased everywhere, those paid by Hungary appear high in international comparison when considering the country’s debt-to-GDP ratio (Figure 1.17, Panel C). For example, Austria had a similar debt-to-GDP ratio to Hungary but only paid 1.5% of GDP in debt-servicing costs in 2024, compared to the 4.9% in Hungary. Outside the euro area, Poland had a slightly lower debt-to-GDP ratio than Hungary (67.3% vs. 82.3% of GDP) but paid significantly less interest in 2024 (2.2%). While the gap with other countries has increased in 2024, Hungary has structurally paid higher debt servicing costs over the last 20 years (Figure 1.17, Panel A). The narrowness of the forint-denominated bond market is a factor contributing to high debt-servicing costs. Extending foreign-currency borrowing beyond 30% as currently (Central Bank of Hungary (MNB), 2025, p. 69[12]) would expose public finances to a significant exchange-rate risk and cannot be recommended. Nevertheless, ensuring long-term fiscal sustainability and access to EU funds (see below) would contribute to improve Hungary’s credit rating, currently at the lowest investment grade level (Standard & Poors, 2026[13]), and reduce financing costs.
Note: In Panel B, the overall increase in debt servicing costs between 2019 and 2024 (+2.0pp of GDP) is slightly below the one in the national accounts (+2.7pp of GDP), where they are recorded on an accrual basis. On a cash basis, given the way these bonds are defined, interest payments from inflation-linked bonds track inflation with a delay of two years. On an accrual basis, these interest payments are recorded when inflation occurs, without any delay. For international comparability, as Maastricht debt is only available for EU countries, Panel C uses the gross financial liabilities of the general government as the measure of public debt. General government interest expenditure is used as a proxy for debt servicing costs.
Source: Panels A and C: OECD. Panel B: Hungarian Debt Management Agency (ÁKK), OECD calculations.
1.3.3. Unblocking EU funds will be key for Hungary’s economic development
EUR 16 billion of EU funds (7.3% of Hungary’s 2025 GDP) that have been blocked since 2022 due to concerns related to the rule of law and academic freedom are expected to be released soon (Box 1.2). EU transfers to Hungary have significantly declined over the last years, which constrained public investment in a period where fiscal space was limited and debt servicing costs were high (Figure 1.17, Panel A). This did not only weigh on short-term growth (Figure 1.1, Panel C) but also hampered long-run growth prospects as EU funds were supposed to contribute to key investments in the electricity grid, the transport system, digital skills, and the healthcare sector (European Commission, 2022[14]). Completing the required reforms for unblocking EU funds will be key for Hungary’s economic development. In the short term, this will also contribute to strengthen investors’ confidence and limit the risk premium that Hungary is paying on its public debt.
On 29 May 2026, the European Commission (EC) announced the release, subject to the completion of reforms announced by the new Hungarian government, of EUR 10 billion of Recovery and Resilience Funds (RRF) and EUR 6.4 billion of Cohesion Funds that have been blocked since December 2022 due to concerns related to the rule of law and academic freedom. Additional EUR 0.5 billion of Cohesion Funds is still blocked in relation to a child protection law passed by the previous government. Altogether, these EU funds represent 7.3% of Hungary’s 2025 GDP.
Provided that all conditions are met by 31 August 2026, the RRF will be disbursed in a single transfer in December 2026, while Cohesion Funds will be disbursed progressively, as Hungary submits invoices to the EC. As Hungary had already received EUR 0.9 billion of prefinancing, the RRF transfer will amount to EUR 9.1 billion, of which EUR 6.4 billion of grants and EUR 2.7 billion of loans.
The impact of EU funds on public finances needs to be assessed on a case-by-case basis. EU grants that are used to finance new expenditure will leave the fiscal deficit and public debt unchanged. By contrast, EU grants that are used to repay expenditure that Hungary pre-financed while EU funds were blocked will not impact the fiscal deficit, which is calculated on an accrual basis, but will reduce public debt, which is calculated on a cash basis. Using EU loans to finance new expenditure will increase both the fiscal deficit and public debt.
1.3.4. Spending pressures coming from ageing and the green transition require building more fiscal space, among other reforms
Hungary faces severe demographic pressures driven by rising life expectancy at 65 (by 7 years for men and women by 2070) and a fertility rate (1.4 in 2024) well below replacement level and low immigration. As a consequence, the old-age to working-age ratio (ratio of the number of people aged 65+ to the number of people aged 20-64) is expected to increase from 35% in 2024 to 54.3% by 2070, the number of pensioners is expected to rise by 23%, and the working age population to decrease by 18%. The increase in the dependency ratio would be slightly lower than the EU average (+19.3pp compared to +21.8pp).
According to the 2024 Ageing Report (European Commission, 2024[15]), expenditures related to pensions, healthcare, long-term care, and education will rise by 5.5% of GDP between 2025 and 2070, mostly driven by a strong increase in pension costs (+4.4pp). Hungary will face one of the largest increases in pension-related expenditures in the EU (Figure 1.18). This increase would be almost entirely linked to the rise in the dependency ratio (contribution of +4.3pp), while the benefit ratio would increase slightly. Most of the increase in pension-related expenditures is projected to occur between 2030 and 2045 (+2.5pp of GDP).
Population ageing creates mounting pressure on public finances, not only through rising spending but also by eroding the capacity of the tax system to generate revenues with fewer active taxpayers. The current tax system may amplify this vulnerability. In Hungary, tax revenue per capita follows an inverted U-shape, mainly because pensions are not taxed and some reduced VAT rates disproportionately benefit older people. By 2070, the share of the population in the peak revenue-contributing age bracket (40-50 years old) is projected to shrink, while the share above 70 will rise sharply (Figure 1.19). Without policy changes, this demographic shift could reduce the tax-to-GDP ratio, mostly through lower PIT and SSC revenues (Box 1.3).
Fiscal space is also needed to finance investments for climate mitigation and adaptation. In order to achieve national decarbonisation and energy efficiency objectives, significant additional public investments on top of increased private investment will be required in the upcoming decades, estimated at around 0.8% of GDP per year up to 2050 (Chapter 2). In the context of high exposure to floods, droughts and extreme heat, climate adaptation public investments also need to be stepped up, with 0.2% of GDP representing a lower bound for the additional public investment effort. A larger budget contribution for climate adaptation and rising costs from global warming would require creating further fiscal space. Private climate adaptation investment will need to increase at the same time (Chapter 2).
Change in expenditures between 2025 and 2070
Note: Pension expenditures are net of social security contributions.
Source: European Commission 2024 Ageing report.
These spending and revenue pressures will require actions to maintain Hungary on a sustainable fiscal path (Figure 1.20). Without offsetting measures, higher spending on ageing (+5.5pp of GDP by 2070), lower tax revenues due to ageing (-2pp), and climate change mitigation and adaptation additional expenditures (+1pp by 2050) and higher debt servicing costs, the debt-to-GDP ratio is expected to double by 2045 and exceed 180% of GDP in 2050 (Figure 1.20). These projections do not account for the recent commitment to increase defence spending to the NATO target of 5% of GDP by 2035. The green transition is also expected to weigh on some tax revenues (e.g. from fossil fuels and cars), but these effects are not accounted for in the debt sustainability analysis either, given the uncertainty surrounding the pace and scope of the transition. Expanding carbon pricing would raise additional tax revenues but these will be fully redistributed in the illustrative projections to support low-income households and finance adaptation investments, thereby enhancing the political acceptability of higher carbon prices (Chapter 2).
The impact of demographic change on tax revenues can be simulated by combining age-specific tax profiles with projected changes in population structure (Figure 1.19, Panel B). The method applies today’s per-capita tax revenue by age group to the population age structure of a different year (for example 2070), while holding GDP and total population constant (Sicsic and Hourani, 2026[16]). This isolates the mechanical effect of ageing on the tax-to-GDP ratio. The underlying assumption is that tax revenues per person in each age group grow in line with average GDP per capita. The simulation uses PIT and SSC data provided by the Ministry for National Economy, other tax data from the National Transfers Account (NTA) database (from the United Nations), and OECD population projections.
Results suggest that the tax revenue to GDP ratio would have been lower under the projected population structure, by 1.2pp in 2040 and 2.1pp in 2070, mostly through lower PIT and SSC revenues (-1.4pp). Tax revenue losses due to ageing are expected to be one of the highest among OECD if the tax structure would remain the same (Sicsic and Hourani, 2026[16]). Specific features of the Hungarian tax system determine the impact of ageing on tax revenues, notably the PIT and health SSC exemption of pensions, and reduced VAT rates on health services, recreational and cultural activities (15pp below the standard VAT rate according to Eurostat data) which disproportionately benefit older people.
Note: OECD calculations.
Source: UN National Transfers Account (NTA) database; OECD Population projections dataset; and Ministry of National Economy of Hungary.
Table 1.5 presents a policy package combining expenditure saving and revenue raising measures to achieve the necessary consolidation. Around 40% of the adjustment would be achieved by reforming pensions and increasing public spending efficiency, one third by raising additional revenues from tax measures (direct effect), and the remainder by implementing structural reform which would raise tax revenues indirectly (Figure 1.21, Panel B). The fiscal measures would keep the debt-to-GDP ratio below 80% until 2040, though it would begin to rise again thereafter, reaching 120% in 2070. By fostering potential GDP growth by 8% over 2050 and boosting tax revenues, the comprehensive set of structural reforms proposed in this Survey (Table 1.6) would maintain debt below 80% of GDP over the long term (green line in Figure 1.20). The following sections outline the key consolidation and growth-enhancing measures that are recommended.
Early action and the appropriate sequencing of reforms are essential to place Hungary on a sustainable fiscal path. Several consolidation measures could be implemented in the near term without weighing on growth. They include reducing inefficient tax expenditures (such as the main PIT exemptions and reduced VAT rates on non-essential goods) and streamlining subsidies, especially fossil-fuel subsidies and housing support schemes. Increasing the property tax rate can be done quickly, but improving the tax base will take more time. The effects of structural tax reforms will also take time to materialise, but they are key to delivering significant medium-long term gains (Table 1.6). For instance, recalibrating family policies by aligning the length of family leave entitlements with international practices, for both men and women, and scaling up childcare and long-term care services (partly financed through the reallocation of the 2026–27 family package) would substantially raise female employment, support long-term growth, and strengthen tax revenues over the next decade. Enhancing the anti-corruption and public integrity framework would also support long-term growth.
Government debt, Maastricht definition
Note: In the red line scenario, the primary government balance is projected to converge to the structural primary balance within five years and to gradually deteriorate in line with rising costs and lower tax revenues from population ageing. In this scenario, long-term interest rates are projected to remain above potential growth by 0.6pp on average after 2030, which does not fully account for rising debt servicing costs as public debt increases. The blue line scenario only accounts for the mechanical impact of the consolidation measures presented in Table 1.5. In the green line scenario, GDP growth is boosted by structural reforms (Table 1.6) and tax revenues increase due to behavioural effects (higher employment and working hours) that are not taken into account in the blue line scenario.
Source: Simulations based on the OECD’s Global Long-Term Model; (European Commission, 2024[15]); OECD projections.
Note: Panel A shows how much higher the primary fiscal-deficit-to-GDP ratio would be in 2040 and 2070 compared to 2027 without adjustment measures. This reflects higher ageing and green-transition costs and lower tax revenues due to ageing, despite an improved fiscal balance related to the closing of the output gap in the meantime. The required adjustment to stabilise public debt depends on the increase in the primary fiscal deficit-to-GDP ratio, on future interest rates, growth and inflation, and on the timing of the effort. It is higher than the increase in the primary fiscal deficit in Panel A. Panel B shows how the measures recommended in Table 1.5 and Table 1.6 contribute to this adjustment. The indirect effect on tax revenues mainly comes from the increase in employment due to recommended structural reforms, including the pension reform, the PIT reform and policies to reduce the gender employment gap.
Source: OECD calculations and projections, based on (European Commission, 2024[15]) and (Sicsic and Hourani, 2026[18]).
Source: OECD calculations
1.3.5. Strengthening the Hungarian pension system
Hungary’s pay-as-you-go pension system provides relatively generous benefits compared to OECD countries. The average disposable income of individuals older than 65 is on par with the rest of the population, relative old-age poverty is low (10%), and according to the current rules in the pension system, new entrants to the labour market can expect net replacement rates that are 15pp above the OECD average (Figure 1.22). Past reforms have raised the statutory retirement age and tightened access to early retirement and disability pensions, which has increased the effective retirement age and extended careers, especially for men. Despite these reforms, public pension spending is projected to increase by 4.4% of GDP by 2070 (European Commission, 2024[15]), while revenues from labour taxes are expected to decline as a share of GDP, thus endangering fiscal sustainability in the absence of reforms. Even a substantial increase in the fertility rate would have a limited effect on pension expenditures by 2070 (OECD, 2024[17]). Therefore, adjusting the parameters of the pension system is needed to guarantee its financial sustainability. Moreover, creating a capitalisation pillar would increase the resilience of the pension system to future demographic shocks but would only provide benefits in the longer term, the time for sufficient financial assets to be accumulated.
Note: The OECD aggregate refers to the unweighted average of 38 countries in Panel A and 34 countries with available data in Panel B.
Source: OECD Pensions at a Glance 2025 and OECD (2025), Income distribution database.
Several features of the Hungarian pension system put its financial sustainability at risk. First, the statutory retirement age of 65 is not linked to life expectancy. Second, owing to the Women-40 scheme, nearly half of women retire before the statutory age, at an average retirement age of 60, without actuarial penalties (OECD, 2024[17]). Consequently, the drop between prime age and older age employment rates for females is unusually large in OECD comparison. And third, the reinstatement of the 13th month pension in 2021 increased spending, including for high-income pensioners. These elements weaken sustainability and weigh on older-age employment, particularly among women.
Several policy options can strengthen fiscal sustainability while maintaining adequate pensions, as detailed in a dedicated OECD report (OECD, 2024[17]). One option includes gradually linking the retirement age to gains in life expectancy, with the age rising by two-thirds of future longevity gains, as in Finland, the Netherlands, Portugal and Sweden. A one-to-one link, as in Denmark, Estonia, Greece, Italy and the Slovak Republic, where all additional expected life years are spent working, would be politically more difficult to implement. With a two-third link, the statutory retirement age would rise from 65 years in 2025 to around 67 years by 2045 and 69 years by 2070 while the average time spent in retirement would continue to increase, from 15 years in 2025 to around 18 years by 2070, compared with 22 years if the retirement age remained unchanged. The reform would also raise future replacement rates, by 8pp for a male worker.
Early retirement could still be allowed up to two years before the statutory age with a corresponding reduction in benefits. This would accommodate different personal preferences and increase the public acceptability of the reform. For women, the early retirement option could be adjusted by linking the eligibility period of 40 years to life expectancy gains. These options would reduce pension spending by 1.9% of GDP and increase social contributions and personal income tax by 0.8% of GDP by 2070. An additional way to reduce expenditures would be to adjust the 13th and 14th months of pension benefits. For example, these additional months of pension benefits could be capped at the average pension level, thus not affecting lower-income pensioners’ entitlements. Combining these policy options would reduce net pension spending by 1.4% of GDP by 2040 and 3.0% by 2070 (2.0% from lower expenditures and 1.0% from higher tax revenues), with both current pensioners and future generations contributing to the savings.
Additional measures should be considered to ensure the financial sustainability of the pension system. One of them could change the uprating formula, which converts the value of past wages into a current-day value to serve as a basis to compute pension benefits. Usually, this uprating of past wages is linked to the average global wage growth. However, choice could be made to move from an indexation fully based on wage growth to a mix of inflation and wage growth. This could reduce pension-related spending by 1.6% of GDP by 2070 under an uprating rule giving equal weight to wage and price growth. In Portugal for instance, past earnings are uprated based on a weighted average of average wage growth (25%) and price inflation (75%). However, this measure progressively lowers replacement rates, requiring regular reassessment to ensure adequacy over time.
Other measures could be taken to reinforce voluntary pension savings as voluntary contributions are low compared to other OECD countries. Such measures include strengthening awareness and confidence in private instruments, that were weakened by the 2011 “switchback reform” which eliminated the mandatory defined-contribution scheme, and introducing automatic enrolment in occupational pension plans with an appropriate default contribution rate, while allowing individuals to opt out (OECD, 2024[17]). Developing a pension dashboard showing expected pension benefits from public and private sources and allowing users to modify parameters as in Denmark would strengthen awareness and trust in the pension system.
The labour market participation of older workers should also be enhanced. Increasing older workers' participation in education and training, a domain where Hungary performs poorly compared to other European countries (OECD, 2024[17]), would increase financial incentives to continue working and make older workers more employable. Targeted policies to combat age discrimination from employers, and promote lifelong-learning and flexible working arrangements are also key to maintain adequate labour incomes for older-age workers. Increasing financial incentives for late retirement from 6% to 8% of pension benefits, as in Canada, Japan, Lithuania and the United States would also raise the effective retirement age. Further expanding access to early childcare (section 1.3.7 and Chapter 3) would reduce the pressure on grandmothers to retire to take care of their grandchildren and give them greater flexibility to remain employed for longer.
1.3.6. Increasing the efficiency of public spending
Public spending in Hungary is high compared to neighbouring countries, indicating potential scope for rationalisation and reprioritisation. Between 2021 and 2023, government spending averaged 49% of GDP, compared to 44% in Czechia, and 45% in the Slovak Republic and Poland. Spending on general public services (10.3% of GDP in 2023) and economic affairs (9.2%) are 4.4pp of GDP and 3.4pp above the EU average, and tertiary education spending is 1.3pp above while the share of young people receiving tertiary education is low (Chapter 3). High spending on goods and services can reflect inefficiencies in public administration. At the same time, social transfers are insufficiently targeted (OECD, 2024[19]).
There is room to improve infrastructure and public procurement governance. Infrastructure governance is weak compared to other OECD countries, largely because formal cost-benefit analysis is insufficiently used for public investments in infrastructure projects (Figure 1.23) (Ruiz Rivadeneira, Dekyi and Cruz, 2023[20]). Hungary has implemented several reforms to strengthen public procurement governance, including a yearly revised action plan to intensify competition in public procurement and a public procurement performance measurement framework using e-procurement data. Despite recent improvements, the proportion of single bids was still above the government target of 15% in 2024 (European Commission, 2025[21]). Around one-quarter of public procurement contracts above the EU threshold were unsuccessful in 2024 because single bids, no bids, or invalid bids were submitted. Single bidding lowers public spending efficiency by increasing prices, by 10% on average in the EU, which is especially harmful given that public procurement represents around a third of government expenditure (OECD, 2024[22]). Analysing bidding patterns in public tenders, a recent study (Deryugina et al., 2025[23]) finds that the quality of public procurement systems is relatively low in architectural and engineering services, transport and construction. Improving the situation requires relying on cost-benefit analysis more systematically, increasing competition and acting against corruption and collusion in public procurement. Beyond reducing costs, improving the efficiency of public investment would also increase GDP growth and help create fiscal space (IMF, 2015[24]).
Note: Data for Belgium refers to Flanders only. "Other" aggregates 3 sub-pillars in Panel A and 5 sub-pillars in Panel B. See the source for more details.
Spending on health and social transfers is among the lowest in the EU (10pp of GDP below the EU average in 2023), which can contribute to low life expectancy and high preventable mortality, while it is also inefficient (Dutu and Sicari, 2016[25]). Poland, for example, has a higher life expectancy but spends 0.2% of GDP less on healthcare and long-term care. OECD research has highlighted concrete ways to reduce wasteful spending in health systems, among which the most relevant to Hungary would be to reinforce the role of primary care to avoid that emergency hospital services are overburdened or used as one-stop-shops (OECD, 2019[26]), limit unnecessary prescriptions and exams and fully exploit the potential of generic medicines (OECD, 2025[27]), and fight against fraud (OECD, 2017[28]). Rigorous programme evaluation should be implemented, ex post but also ex ante, to ensure effectiveness.
Energy and housing subsidies could also be reviewed to rationalise spending. Environmentally harmful fossil-fuel subsidies averaged 0.3% of GDP between 2010 and 2021 but increased to 3.5% of GDP in 2022, largely due to the household energy price cap. While these schemes have shielded the population during the energy crisis, these measures distort price signals and are poorly targeted to vulnerable groups. Phasing out fossil-fuel subsidies should be a priority, with part of the savings redistributed as cash transfers to vulnerable households. Strengthening data infrastructure to better identify and support vulnerable groups will be essential to improve the targeting of energy support. Public support for housing (Table 1.3) is also costly and may fuel house price growth if housing supply does not adjust quickly enough, which may limit its impact on housing affordability. Real house price growth was close to 10% in mid-2025, the third highest in the EU (Figure 1.15). The overvaluation of house prices compared to fundamentals (see above) calls for a gradual phasing out of the poorly-targeted housing lending programmes and subsidies.
More generally, comprehensive spending reviews would help identify possible savings. International experience shows that such reviews are most effective when backed by strong political ownership, ambitious targets, and transparent implementation. Since its establishment in 2024, the Public Expenditure Review Department in the Ministry for National Economy has produced three reports, on healthcare, family and housing benefits, and education. However, none of them has been published and their impact on the budget process is unclear. To strengthen spending discipline, such reports should be published, regularly updated, and actually implemented. On average across 222 spending reviews in OECD countries, such reviews reduce public wage bills by around 1% after four years (IMF, 2025[18]), which represents 0.1% of GDP in Hungary.
1.3.7. Broadening the tax base and increasing the responsiveness of tax revenues to economic activity
Beyond lower spending, additional fiscal revenues will be needed to ensure fiscal sustainability in the long term while avoiding cuts in the public expenditures that are needed to sustain growth or reduce inequality. Hungary’s tax-to-GDP ratio has decreased steadily over the past decade and is now below the European average (Figure 1.24, Panel A). This decline reflects a series of tax reforms aimed at lowering the overall tax burden, most notably employer social security contributions (SSC) since 2017, PIT allowances and reduced VAT rates. In 2026, the new family tax package for mothers (see below) will further reduce fiscal revenues, pulling the tax-to-GDP ratio close to the OECD average and 1.5pp below neighbouring countries. While the reduction in employer SSC was successful in raising the employment rate of younger, older, and lower-skilled workers (Svraka, 2019[29]), no assessment of the efficiency of the other tax cuts is available.
Note: Panel A reports data on an accrual basis for Hungary, including for 2024 (from Eurostat). The EU aggregate refers to the unweighted average of 22 EU member countries which belong to the OECD. Projections after 2024 are from the OECD. In Panel B, personal and corporation income taxes refer to taxes on income, profits and capital gains of individuals and corporations. Own calculations on the OECD average of 36 countries excluding Australia and Japan. Data for the United Kingdom are provisional.
Source: (OECD, 2025[30]), Global Revenue Statistics and Revenue Statistics in OECD member countries (database); Eurostat, Main national accounts tax aggregates; OECD projections.
Tax buoyancy, defined as the responsiveness of tax revenues to changes in economic activity, is also low especially for PIT and CIT (WBG, 2025[31]), which is related to the flat PIT rate, tax exemptions, low capital income taxes, suboptimal presumptive tax regimes, and the lack of mechanism to update land values. Even without the recent tax reforms, the tax-to-GDP ratio would have declined. Reforms are needed to reverse the trend decline in the tax-to-GDP ratio, increase the responsiveness of fiscal revenues to future growth, and reduce their negative exposure to population ageing (Box 1.3).
Streamlining tax expenditures and restructuring family tax incentives
Various PIT and CIT exemptions are costly for the budget, tend to be regressive, undermine the responsiveness of fiscal revenues to economic activity in the long term, and their economic efficiency is not always clear. In 2023, income tax and SSC exemptions, allowances and reduced rates amounted to an estimated 1.5% of GDP in foregone revenues according to the Ministry for National Economy. Major items include the PIT allowance for families (0.5% of GDP), SSC exemptions for employed pensioners (0.4% of GDP), tax advantages for young people and contributors to private pension funds (0.3% of GDP), and deductions for sponsorship of sports (0.2% of GDP). Careful evaluation is essential to guide which tax expenditures should be retained or phased out and if the objective can be tackled at source by non-tax measures. The government should systematically assess the costs and benefits of each tax expenditure and publish the results of these evaluations. International experience, such as the recent review undertaken by the Dutch Ministry of Finance, shows that many schemes can prove ineffective, unjustified, or excessively complex (OECD, 2025[32]).
The recently introduced PIT exemptions for mothers, which are expected to further reduce tax revenues by 0.6% of GDP in 2026 (Section 1.3.1), are a case in point. While Hungary already ranked among the countries spending the most on family support prior to this reform (Figure 1.25), international evidence suggests that such policies only have a modest impact on fertility (Box 1.4). Based on elasticities estimated across 18 OECD countries (Luci-Greulich and Thévenon, 2013[33]), the reform may raise Hungary’s fertility rate by only 0.1 to 0.3 percentage point, although the exact impact may depend on local circumstances. International evidence suggests that fertility can be sensitive to marginal changes in incentives for higher-order births, notably beyond the second child (Box 1.4). While the Family Tax Reduction Programme also includes higher family allowances for additional children, granting the same PIT exemption from the second child flattens marginal tax incentives for subsequent births, which may increase deadweight costs and limit the overall effectiveness of the measure. To improve their effectiveness, family tax benefits could be recalibrated to preserve stronger marginal incentives for higher-order births, while shifting towards in-kind benefits such as childcare provision (Chapter 3), which have proven more effective in supporting both fertility and the reconciliation of work and family life (Box 1.4). In particular, the lifelong PIT exemption could be replaced with capped per-child tax credits, and tax allowances could increase with the number of children below a certain age. Moreover, reallocating part of the resources of the 2026 reform towards expanding affordable childcare would improve both cost-effectiveness and equity.
A distinctive feature of Hungary’s tax system is that pensions are fully exempt from PIT, while employee pension contributions are subject to it. This system lowers tax revenue and amplifies the fiscal challenges of population ageing (Box 1.3). Hungary has the second-largest gap in effective taxation between pensioners and workers among OECD countries, at similar levels of income. Pensioners in Hungary face a low poverty rate (Figure 1.22), and the median disposable income of pensioners is on par with the rest of the population. Subjecting pension benefits to PIT, by far the more common approach in the OECD, could be considered. A large basic allowance as in Ireland and Israel could protect small pensions, while larger pensions would be taxed more in line with labour income, thereby broadening the tax base, enhancing equity, and strengthening long-term fiscal sustainability. This would not only mitigate the impact of ageing on tax revenue but also reinforce the perception that everyone contributes fairly to public finances.
Note: Public spending accounted for in Panel A concerns public support that is exclusively for families. Spending in other social policy areas such as health and housing support also assists families, but not exclusively, and is not included here. In Panel B, data on fertility rates refer to 2023, while data on public spending on family benefits refer to 2021 or latest year.
Source: OECD Social Expenditure Database and Family database.
In most countries, fertility-related tax incentives and cash benefits only led to modest and temporary increases in birth rates, with high fiscal costs. In Spain, two tax reforms (tax credit for mothers with children up to age three and higher tax reductions for children) increased fertility by 3 per 1000 women, mainly among young mothers (Azmat and González, 2010[34]). In France, the family income tax rebate ("quotient familial") reforms only had a marginal positive impact on fertility. It was slow to materialise, reached its full impact only after 5 to 10 years, and was more effective for high earners (Landais, 2004[35]). Evidence from the US also suggests that expansions of child-related tax credits of the Earned Income Tax Credit (EITC) had a minor influence on fertility, at best (Baughman and Dickert-Conlin, 2003[36]). In Hungary, it has been estimated that increasing the family tax credit by 10% would raise the probability of birth by 2.5% (Szabó-Morvai et al, 2019[37]).
Family cash benefits also have a limited impact on fertility. Such benefits can nudge up birth rates in certain contexts, but the effect is typically limited (mean impact of 5% on fertility) and temporary (Bergsvik, Fauske and Hart, 2021[38]). Fertility responds especially to changes in the marginal subsidy for the next child after the second one according to evidence from Israel (Cohen, Dehejia and Romanov, 2013[39]) and Hungary (Gábos, Gál and Kézdi, 2009[40]). According to this latter study, a doubling of family benefits would only increase fertility rate by 0.25 percentage point in Hungary.
Evidence suggests that expanding early childcare and balancing parental leave between mothers and fathers is a more effective and fairer strategy to support fertility than tax incentives and cash benefits (Bergsvik, Fauske and Hart, 2021[38]). Cross-country analyses show higher fertility in countries providing sufficient and affordable early childcare and when fathers are encouraged to share parental leave with mothers (OECD, 2025[41]). Unlike one-off bonuses and tax incentives, such policies are more likely to have a permanent effect on fertility. They help parents reconcile work and family life, thus addressing a key deterrent to childbearing (Thévenon, 2014[42]). The provision of childcare services for children under the age of three has a larger influence on fertility than leave entitlements and benefits granted around childbirth in OECD countries (Luci-Greulich and Thévenon, 2013[33]) and in particular Italy (Guetto, Alderotti and Vignoli, 2025[43]). The extension of the in-kind support for childcare provided to Swedish families has durably supported fertility in Sweden (Björklund, 2006[44]). Evidence from Korea shows that financial support boosts childbearing only when paired with accessible childcare services (OECD, 2025[41]). The importance of mixing financial benefits, parental leave schemes, and childcare provisions is also found in Italy (Guetto, Alderotti and Vignoli, 2025[43]). Housing policies contribute also to fertility, but much of the variation in fertility trends is not explained, pointing to a growing role of social norms (OECD, 2024[45]).
Broadening the VAT base
Although Hungary‘s standard VAT rate is the highest in the OECD (27%), VAT revenues are not higher than in Nordic countries or New Zealand where standard VAT rates are lower. This reflects structural features of the Hungarian VAT system rather than low compliance. Following significant improvements over the last decade, the VAT compliance gap declined to 2% in 2022, which is a major achievement in international comparison (Figure 1.26, Panel A). Yet, the VAT policy gap, reflecting exemptions and reduced rates, remains above the EU median, at 48.2% in 2023 (European Commission, 2025[46]).
There is scope to reconsider some of the VAT exemptions and reduced rates, which tend to be distortive, regressive and to raise administrative costs. Foregone VAT revenues from reduced rates and exemptions that are theoretically possible to discontinue amounted to 15.9% in Hungary in 2022 and increased to 23.3% in 2024 (Figure 1.26, Panel B). A reduced VAT rate of 18% is applied to selected food products, and a reduced rate of 5% is applied to a list of goods and services, including books, newspapers, hotel accommodation, district heating services, and some pharmaceutical products, and a new 0% VAT rate has been introduced in 2025 on daily newspapers. Such measures are an inefficient tool for redistribution, as richer households capture larger absolute benefits. In Hungary, exemptions or reduced rates on insurance, medical products, newspapers and books, dining out and accommodation services, benefit higher-income households even in relative terms, as a share of the total consumption (IMF, 2024[47]).
Note: The VAT total tax liability in Panel A is an estimated amount of VAT that is theoretically collectable based on VAT legislation and ancillary regulations, assuming full compliance. Panel B is the theoretical VAT revenue loss due to the application of those VAT exemptions that are theoretically possible to discontinue, or due to VAT rate reductions. The notional ideal VAT revenue refers to a single, standard statutory VAT rate. The EU aggregate refers to 26 countries excluding Luxembourg.
Source: European Commission (2026), Database on taxation.
Broadening the VAT base by phasing out reduced rates that do not correspond to goods and services of first necessity, combined with targeted cash transfers, would deliver substantial net gains for low-income households and help make the tax system more efficient (Warwick et al., 2022[48]). The effectiveness of VAT reductions is limited by their incomplete pass-through to consumer prices. The recent temporary cut of the VAT rate to 5% on newly built residential property, costing 0.3% of GDP, illustrates this inefficiency, as pass-through is typically higher for VAT increases than for cuts (Benzarti et al., 2020[49]). Given Hungary’s high standard VAT rate, extensive use of online cash registers and real-time reporting, another option could be the introduction of a progressive single-rate VAT, under which low-income households would receive real-time rebates at the point of purchase (Swistak and de la Feria, 2024[50]).
Mobilising additional revenues from immovable property taxes
Recurrent taxes on immovable property are underused in Hungary, as they only raise 0.3% of GDP compared to the OECD average of 0.9% (Figure 1.27). Such taxes are an economically efficient tool for raising fiscal revenues. They are among the least harmful taxes to growth and contribute to improving the progressivity of the tax system (Arnold et al., 2011[51]). Hungary has distinct land and building taxes, but in 2025, only 30% of municipalities (representing 73% of the population) actually raised building taxes and 18% of municipalities (representing 46% of the population) raised land taxes. Large areas, including farmland, remain tax exempt. Introducing a minimum local tax, as in other OECD countries such as France, Spain and Italy, could strengthen municipal revenues for adaptation and affordable housing investments (Chapter 2). As land value taxation is considered optimal (Bonnet et al., 2021[52]) and provides the additional benefit of discouraging urban sprawl (OECD, 2022[53]), Hungary could prioritise raising land tax rates, more than building tax rates, to support denser development and contribute to emission reductions (Chapter 2).
Decomposition of property tax revenues, 2024
Source: OECD Revenue Statistics in OECD member countries (database).
Hungary’s property tax reform should not only increase tax rates but also improve how the tax base is calculated. The current mix of area- and value-based assessments, with a predominance of area-based taxation, does not reflect market value and limits equity. Moving to a value-based taxation system is key to improve efficiency, equity and raise higher tax revenues (OECD, 2022[53]). Having reliable valuation techniques based on actual transaction prices is key and the recent digitalisation of the property registry can support this move. In the Netherlands, property values are updated annually by local governments based on cadastre data, with the central government ensuring methodological consistency across municipalities (OECD, 2025[54]). New technologies make it possible to maintain up-to-date registers of property values at low administrative cost. For example, Norway has introduced a machine learning method to assess dwelling values for the purpose of its wealth tax.
To be politically acceptable, the property tax reform should be gradual and accompanied by specific provisions for low-income households. Dealing with the acceptability of reforms and preventing liquidity issues among homeowners is key. Higher recurrent property taxes can be politically sensitive in countries with a large share of owner-occupiers such as Hungary and may create liquidity problems, especially if household incomes do not rise in line with property values. International experience shows that careful design can mitigate these risks. Avoiding any abrupt increase in property tax rates can help. For example, Canada and the Netherlands took up to 20 years to reach higher tax rates following past reforms. A number of OECD countries, including Canada, Denmark, Ireland and some US States, also allow certain taxpayers, such as old-age or poor households, to defer recurrent property tax payments until the sale of the property (OECD, 2022[53]). Political acceptability can also be improved by making it part of broader tax reforms, as for instance was done in Denmark and Ireland (OECD, 2022[53]). Hungary could couple its property tax reform with the reforms to lower the PIT for 90% of the population (section 1.1.6) to mitigate the political cost of the reform.
Increasing capital income taxation to reduce tax arbitrage and improve fairness
Capital income is taxed at a flat rate of 15% and an effective rate of around 31% once corporate taxes are added, well below the corresponding OECD averages of 22% and 40%, respectively (Hourani and Perret, 2025[55]). Accounting for all taxes and contributions in the economy, capital income and gains are taxed at a lower effective tax rate than labour income in Hungary (-11pp in 2025) and this current gap would widen even more with the proposed PIT reform in this Survey (to -18pp, see section 1.3.8). This gap creates tax-arbitrage opportunities for owners of unincorporated businesses and owner-managers of trust funds in Hungary, who are incentivised to shift income across types of income and to incorporate their business to minimise taxes, which reduces collected tax revenues (Zawisza et al., 2024[56]).
Increasing capital income taxes to 22%, in line with the proposed top labour income tax rate, would increase capital income tax revenues by 0.2% of GDP, accounting for behavioural responses. Increasing capital income taxes further to 25% would limit the issue of tax arbitrage opportunities and increase capital income tax revenues by 0.3% of GDP. In this case, capital tax revenues would reach 1% of GDP, similar to the level observed in Spain, Greece and Nordic countries. It would also be in line with other EU countries where revenues from capital taxes are gaining momentum (EC, 2025[57]). Nevertheless, the new effective tax rate on capital income would remain below the OECD average of 40%. It would also remain below the revenue-maximising rate, which is estimated between 43% and 57% for capital income taxes in France (Lefebvre, Lehmann and Sicsic, 2024[58]).
The exemption of capital gains on secondary or rented-out property after five years should also be reconsidered, as it creates inequities and distortions (Hourani and Perret, 2025[55]). In addition to raising revenues, these measures would strengthen fairness and tax buoyancy as capital income is more concentrated at the top of the income distribution and tends to grow faster than wage income.
Strengthening inheritance and wealth taxation to enhance intergenerational income mobility and tax revenues
Intergenerational income mobility is low in Hungary (Figure 1.28, Panel A). This is related to the strong influence of social backgrounds on educational outcomes (Chapter 3) and low inheritance taxation contributing to a growing share of inherited wealth (Figure 1.28, Panel B). While overall wealth and wealth inequality are relatively limited compared to the European average, wealth is more concentrated at the very top and extreme wealth is persistent. The wealth of the 100 richest Hungarians, owning a wealth of more than HUF 20 billion, grew by 22% in 2025, after 15% in 2024 (Portfolio, 2025[59]). Transfers between direct descendants and spouses are fully tax exempt, resulting in near-zero revenues from inheritance taxes, compared to an OECD average of 0.2% of GDP, and up to 0.6-0.7% in Belgium, France and Korea (Figure 1.27).
Fewer opportunities to move up the income ladder tend to reduce the number of potential talents and entrepreneurs (Bell et al., 2018[60]), which hampers long-term labour productivity growth (Einiö, Feng and Jaravel, 2025[61]) and innovation (Aghion et al., 2018[62]). Inheritances and gifts tend to play a strong role in income and wealth persistence across generations between parents and their children (OECD, 2021[63]). It generates negative earnings responses, particularly among those aged 55 to 64, and would lower GDP by up to 1% (Brülhart et al., 2025[64]). As population ageing increases wealth transfers, this issue will become even more relevant over time (Sicsic and Hourani, 2026[16]). A well-designed taxation of intergenerational transfers would enhance equality of opportunities (OECD, 2021[63]), as well as horizontal and vertical equity (Elinder, Erixson and Waldenström, 2018[65]). Such taxes also have more limited effects on the labour supply, investment and saving behaviour of wealthy taxpayers than other taxes, while the effect on the labour supply of their heirs is positive, and tax exile is limited (OECD, 2021[63]). International experience suggests that to ensure fairness and acceptability, the tax should target large bequests, exempt modest inheritances, and be progressive. The current flat tax rate of 9%, with many exemptions, is high in international comparison. It should be made progressive while the tax base of direct relatives should be enlarged. International experience shows that lack of popularity of inheritances taxes goes hand in hand with a poor understanding about the impact and functioning of this tax and that providing such information significantly increases public support (Stantcheva, 2021[66]) (Kuziemko et al., 2015[67]). Allowing instalment payments and deferrals for illiquid assets would ease liquidity constraints, while taxing recipients rather than donors would better promote equality of opportunities (OECD, 2021[63]). Reforming inheritance taxation should be coordinated with the property tax reform to ensure accurate and updated asset valuations. Strengthening the automatic exchange of Financial Account Information in Tax Matters (CRS‑AEOI Standard) would reduce opportunities for tax evasion.
Note: Earnings Persistence is measured for men in Panel A as the difference between the earnings premium and the earnings penalty with having high relative to low-educated parents. A larger number implies a larger degree of immobility over generations and a lower intergenerational mobility. In Panel B, the OECD aggregate refers to the unweighted average of 38 countries where data refers to 2023 for Greece and Japan.
Source: (Causa, Nguyen and Tanaka, 2026[68])]; and OECD (2025), Revenue Statistics in OECD member countries.
The government has announced plans to introduce an annual wealth tax of 1% on net assets above HUF 1 billion (around EUR 2.5 million), with projected annual revenues between 0.3% and 0.6% of GDP. This might help reduce wealth concentration at the top of the distribution, which has risen sharply in Hungary in recent years. However, design and enforcement capacity will largely determine the revenues and economic effects of this tax. The repeal of net wealth taxes in most OECD countries reflected valuation difficulties and weak revenues relative to administrative costs, partly due to tax avoidance (Perret, 2021[69]). International experience shows that exemptions and reliefs narrow the tax base, reduce revenues and create avoidance opportunities, while broad tax bases with high thresholds limit these risks (OECD, 2018[70]). While the threshold of the proposed reform is above the top 1% of the wealth distribution, it could extend liability to illiquid assets, including family-owned businesses, raising valuation and liquidity issues that should be carefully monitored. Robust valuation rules, third-party reporting and anti-avoidance provisions covering trusts will also be needed to raise revenues and contain administrative and compliance costs. As enforcement conditions have improved in recent years, with automatic exchange of information giving tax administrations access to data on financial assets held abroad, this should be used systematically to support tax collection. As the intended tax will interact with the above-discussed reforms to capital income, inheritance and property taxation, the combined effective tax rate on capital will need to be assessed, together with behavioural responses that the tax may induce, e.g. in relation to wealth accumulation and migration.
1.3.8. Structural tax reforms for stronger and more inclusive growth
Together with lower fiscal spending and higher tax revenues, sustained economic growth will be needed to keep public debt on a declining path over the long term. This section outlines tax reforms that would support employment, economic growth and health outcomes.
Lowering the tax wedge on low-income earners by introducing a progressive PIT
Hungary introduced a flat PIT in 2010-2013 as part of a broader overhaul of the tax system, designed to simplify and restore the competitiveness of the Hungarian tax system. With an aim to improve the cost-efficiency of work incentives, the general in-work tax credit was replaced by targeted incentives in payroll taxes, focusing on the most vulnerable groups on the labour market (e.g. employees in elementary occupations and those entering or re-entering the labour market), currently covering one fifth of employees. These incentives cover only part of low-income workers, contrary to a progressive PIT, which would also increase tax revenues, equity and tax buoyancy, i.e. the capacity of the tax system to generate additional revenues as the economy grows. Hungary is the only OECD country with a flat average effective income tax rate on labour income for people aged 25+ without children (OECD, 2025[71]). Estonia is the only other OECD country with a flat PIT rate but a general tax allowance makes the PIT system progressive. Together with social security contributions (SSCs), Hungary’s PIT results in a labour tax wedge of 41% for single workers and couples without children, and 32% for couples with two children, at the average wage. While employer SSCs have been cut by 15pp since 2017, the labour tax wedge for low-income earners remains 5pp above neighbouring countries and 14pp above the OECD average in 2025, reflecting the flat PIT design (15% of gross income) (Figure 1.29). The labour tax wedge is also higher for low-income couples with children (+16pp compared to neighbouring countries). By contrast, the tax wedge for high-income earners is below the OECD and regional averages.
A PIT reform that is revenue-neutral ex ante, i.e. before accounting for any positive impact on employment, could benefit 90% of taxpayers (Figure 1.30). As an illustration, introducing a progressive PIT schedule for labour income with three tax brackets and a first marginal tax rate (MTR) of 9% would reduce the labour tax wedge of the bottom 50% of the population by close to 5pp and have three main advantages. First, it would strengthen incentives to work in the formal sector and boost employment for young and low-skilled workers (Sicsic, 2026[72]), whose employment rate in Hungary was 10pp below the one in top OECD performing countries in 2023. By stimulating the employment of lower-skilled workers and despite slight disincentives for higher-income earners, the reform would increase potential GDP by around 1% and tax revenues (from PIT, SSC and VAT) by 0.1% of GDP after considering behavioural responses (Table 1.7). Second, greater progressivity would enhance tax buoyancy and increase tax revenues by an additional 0.2% of GDP by 2040 and 0.6% by 2070 when leaving the brackets’ thresholds unchanged in real terms. This effect could be even higher if top wages increased more than wages in the rest of the distribution. Third, the reform would reduce inequality and raise take-home pay for the bottom 50% of earners, whose share of total income has fallen from over 30% in the 1990s to 22% in 2024 (World Inequality database). After the reform, the inequality index of PIT would exceed the one of pre-tax income by 7pp, implying greater progressivity and a less unequal post-tax income distribution than currently. In a context where half of Hungarians believe that their fellow citizens do not pay taxes fairly in proportion to their income and wealth, the highest share among European countries (EC, 2025[73]), introducing a more progressive PIT schedule sounds politically appealing. This would also be in line with several OECD countries which have recently reintroduced progressive taxation, including Czechia (2021), Latvia (2018), and Lithuania (2019).
Note: Data refer to a single person without children in 2025. Data for Hungary are the same rates at 50%, 100% and 250% of average wage (AW) earnings. “Neighbouring countries” includes Czechia, Poland, and Slovakia.
Source: OECD (2026), Labour taxation - tax wedge decompositions (database).
Note: An illustrative reform introducing three tax brackets (with marginal tax rates of 9% below the 20th centile, 16% between the 20th and 90th percentiles, and 22% above) is designed to be revenue-neutral ex ante and revenue-enhancing once behavioural responses are accounted for (Table 1.7). The wage distribution is estimated using a generalized Pareto interpolation method (Blanchet, Fournier and Piketty, 2021[74]) based on 2023 income data.
Source: Ministry for National Economy data (income data); OECD calculations.
Even with a higher top marginal tax rate of 22%, Hungary would still have the lowest top PIT rate among OECD countries, with Estonia, well below the OECD average of 40%. The labour tax wedge for top earners would reach 47%, still well below the OECD average and below the Laffer revenue-maximising rate in Hungary (Benczur, Kiss and Mosberger, 2013[75]). A more progressive tax schedule would generate higher employment at the lower end of the income distribution but also higher behavioural effects for top incomes (Sicsic, 2026[72]). As the illustrative reform would only apply to labour income, Hungary would move towards a dual income tax system, with capital income remaining subject to a flat taxation, similar to the system adopted in Nordic and most European countries. Nevertheless, the capital income tax rate would need to be aligned with or exceed the top labour income tax rate to limit tax arbitrage, as proposed in section 1.3.7. Limiting the number of tax brackets to two would mitigate the negative impact on high-income earners and spread it over a larger share of the population, lowering the share of the population gaining from the reform from 90% to 70%, and therefore the political acceptability of the reform.
Note: Behavioural effects in this Table are simulated based on the income distribution provided by the Ministry for National Economy and parameters in line with the economic literature, especially the one focusing on the Hungarian tax system. Such parameters include elasticities of taxable income with respect to the marginal effective net-of-tax rate (1-MTR) at different points of the income distribution (0.5 for low incomes and 0.25 for top incomes), income effects based on elasticities of taxable income with respect to the average effective net-of-tax rate (1-ATR) at different points of the income distribution (non-significant for lower incomes and 0.3 for top incomes, which is the lowest estimate available for Hungary; alternative assumptions have been explored in background simulations to reflect the higher uncertainty surrounding this parameter), and employment responses consistent with an elasticity of employment with respect to the net-of-tax wage rate of 0.4. The mechanical effect is calculated by applying the tax rate change to an unchanged tax base, and the behavioural response by applying the new tax rate to the change in the tax base. Differences in saving rates across income groups are used to estimate VAT revenues. The resulting fiscal impact is reported in Table 1.5 (“additional tax revenues from behavioural effects”). Substitution effects are negligible between the third and ninth deciles of the income distribution, due to low elasticities and limited changes in tax rates in this part of the distribution. The tax buoyancy effect assumes an increase in real wages of 1.5% per year, in line with potential productivity growth. See (Sicsic, 2026[72]) for details on the formulas, assumptions, elasticities and data used.
Source: OECD calculations
Improving corporate taxation
Hungary has started to implement the EU Minimum Tax Directive in 2025 based on the OECD Global Anti-Base Erosion (GloBE) Model Rules, which implement the Global Minimum Tax (GMT) ensuring that large multinational enterprises (MNEs) with consolidated revenues above EUR 750 million pay at least a 15% effective tax rate on their excess profits in each jurisdiction where they operate. As part of the implementation of this directive, Hungary introduced a Qualified Domestic Minimum Top-up Tax. Because the local business tax (LBT) and sector-specific taxes are accounted for in addition to the 9% CIT rate under the OECD GloBE rules, the average effective rate of in-scope MNEs operating in Hungary exceeds 15% according to government estimates. Indeed, the large tax base of the LBT (see below) increases the effective tax rate. This rate varies across firms, with about 20% of the 3,000 MNEs in-scope expected to pay a top-up tax. Most likely, the new refundable R&D incentive introduced in 2024 will not require rising top-up taxes to comply with the GMT, but it should be better targeted towards SMEs to maximise its impact on innovation (Chapter 4).
Hungary should continue reducing the distortive profit taxes that are raised on several economic sectors. While some of these taxes were phased out in 2025 (e.g. on telecommunication and air travel), those levied on the banking, insurance, energy and retail sectors have been extended and are expected to raise 0.4% of GDP of tax revenues in 2026. Due to their sectoral nature, these taxes may distort market mechanisms. Moreover, uncertainty around their removal date, combined with the fact that they were initially levied on profits generated before their introduction are likely to discourage investment. For these reasons, these taxes should be phased out. The only exception might be the Ural-Brent spread tax, which addresses an economic inefficiency, the difference between the Ural and Brent crude oil prices. In June 2026, the government proposed extending the tax into 2027 and widening its base by introducing a 50% rate on spreads of USD 2-5 per barrel from August onward, alongside the existing 95% rate above USD 5. This reform is welcome, as it extends the tax to a wider range of spreads while preserving its rationale.
Compared to other OECD and neighbouring countries, Hungary levies a relatively large share of business taxes in the form of turnover taxes (Figure 1.24, Panel B). As already mentioned in the 2024 Economic Survey of Hungary, such taxes should be phased out over time as they increase the price of intermediate consumption and cumulate along the production chain. In France, turnover taxes have been found to increase production prices in downstream sectors by up to three times the marginal tax rate due to cascading effects (Martin and Trannoy, 2019[76]). This may lead companies to substitute untaxed imported inputs for domestic inputs or use other inputs that are less productive but less taxed, thus reducing productivity and competitiveness. The local business tax (LBT) is the most prominent turnover tax levied in Hungary, generating 1.6% of GDP in tax revenues in 2025. While the LBT tax base (sales minus intermediate consumption and R&D costs) is close to the VAT tax base, downstream firms cannot deduct it from the tax base, contrary to VAT, which is why it cumulates along the production chain. As the LBT rate is fixed by municipalities, this tax may also fuel tax competition across municipalities. The share of municipalities applying the maximum tax rate of 2% has fallen over the past decade, contributing to exacerbating regional inequalities (KSH, 2025[77]). Plans to remove the LBT in 2008 were suspended amid fiscal consolidation needs (OECD, 2007[78]). To improve the situation, the LBT could be made deductible, in the same way as VAT.
There is also scope to streamline the different simplified tax regimes for small businesses in Hungary. The KATA regime allows unincorporated micro-businesses and small entrepreneurs with low turnover to pay a fixed tax amount in lieu of PIT, CIT and SSCs. The KIVA regime allows small firms to replace CIT and SSCs with a single tax on a simplified tax base. Moreover, the individual entrepreneur taxation regime replaces the actual cost deduction by a fixed share of turnover. The multiplicity of regimes creates complexity which can undermine their overall effectiveness. Harmonising and improving these regimes in line with OECD best practices would strengthen business formalisation and the overall business environment (Mas-Montserrat, Colin and Brys, 2024[79]). Options include reducing the sharp eligibility thresholds and aligning contribution rates more closely with income levels to avoid incentives for income splitting or underreporting, and better linking liabilities to turnover or profit. In June 2026, the government announced plans to broaden KATA eligibility from 2027, including restoring the option to provide services to legal entities which had been removed in 2022. This goes in the right direction as a well-designed KATA regime can strengthen business formalisation and reduce informality. However, the reform's impact will depend on its detailed design. The tax amount, revenue ceiling, and limits on revenue concentration from a single client should include adequate safeguards against disguised employment. In addition, aligning the KATA revenue ceiling with the VAT registration threshold would lower incentives for underreporting income.
Raising taxes on health harmful products to improve health outcomes
Improving health outcomes in a cost-effective way should start by reducing avoidable mortality, which is nearly twice higher than the OECD average (Figure 1.31, Panel A). Tobacco and alcohol consumption are especially high, while self-reported obesity also exceeds the OECD average (OECD, 2025[27]). Beyond promoting healthier lifestyles and strengthening preventive care, fiscal measures and regulations play a key role. Health-related excise taxation has been reinforced in recent years. An inflation-linked annual adjustment mechanism was introduced in 2025 for alcohol and another one is planned for tobacco from 2026. Excise rates on alcohol were raised in 2022, while tobacco excises have increased progressively since 2022. Hungary also introduced its Public Health Product Tax (commonly referred to as NETA) in 2011, making it one of the first EU Member States to implement a comprehensive health tax targeting products with high sugar, salt, caffeine or other unhealthy components. NETA is widely recognised as a pioneering preventive policy tool, which contributes to product reformulation, reduced consumption of unhealthy food items, and provides stable, earmarkable revenues for public health programmes.
Despite earlier reforms, there is still scope to raise health-related taxes, especially on alcohol, which remain low compared to the OECD average (Figure 1.31, Panel B, (OECD, 2024[80])). Strengthening NETA would help curb obesity while continuing to increase tobacco taxation could decrease the share of daily smokers, representing 25% of the population, compared to 15% in the OECD. To maximise effectiveness, higher taxation should be coupled with measures against smuggling and illegal production. Raising alcohol prices together with regulating alcohol promotion would also help tackle harmful drinking (Sassi, 2015[81]). Such combined actions could raise tax revenues by 0.2% of GDP in the short term, while longer-term revenues would gradually decrease as consumption falls (Table 1.5). Reducing the consumption of harmful products would lower the associated medical spending and also free up income for other purposes, particularly for low-income households who tend to adjust consumption more strongly in response to price increases (Fuchs, González Icaza and Paz, 2019[82]).
Note: The OECD average is the unweighted average of 36 countries in Panel A and 37 countries in Panel B (green line).
Source: OECD (2024), Revenue Statistics 2024: Health Taxes in OECD Countries; OECD (2025), Health at a Glance 2025: OECD Indicators.
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