Explanatory Memorandum to COM(2024)617 - - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2024)617 - . |
|---|---|
| source | COM(2024)617 |
| date | 19-06-2024 |
COUNCIL RECOMMENDATION
on the economic, social, employment, structural and budgetary policies of Hungary
THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121 i and 148 i thereof,
Having regard to Regulation (EU) 2024/1263 of the European Parliament and of the Council of 29 April 2024 on the effective coordination of economic policies and on multilateral budgetary surveillance and repealing Council Regulation (EC) No 1466/971, and in particular Article 3 i thereof,the
Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances2, and in particular Article 6(1) thereof,
Having regard to the recommendation of the European Commission,
Having regard to the resolutions of the European Parliament,
Having regard to the conclusions of the European Council,
Having regard to the opinion of the Employment Committee,
Having regard to the opinion of the Economic and Financial Committee,
Having regard to the opinion of the Social Protection Committee,
Having regard to the opinion of the Economic Policy Committee,
Regulation (EU) 2021/241 of the European Parliament and of the Council3, which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support to the Member States for the implementation of reforms and investment, entailing a fiscal impulse financed by the EU. In line with the European Semester priorities, it helps achieve the economic and social recovery and implement sustainable reforms and investment, in particular to promote the green and digital transitions and make the Member States’ economies more resilient. It also helps strengthen public finances and boost growth and job creation in the medium and long term, improve territorial cohesion within the EU and support the continued implementation of the European Pillar of Social Rights.
The REPowerEU Regulation4, adopted on 27 February 2023, aims to phase out the EU’s dependency on Russian fossil fuel imports. This would help achieve energy security and diversify the EU’s energy supply, while increasing the uptake of renewables, energy storage capacities and energy efficiency. Hungary added a new REPowerEU chapter to its national recovery and resilience plan in order to finance key reforms and investments that will help achieve the REPowerEU objectives.
On 16 March 2023, the Commission issued a Communication on the ‘Long-term competitiveness of the EU: looking beyond 2030’5, in order to inform policy decisions and create the framework conditions for increasing growth. The Communication frames competitiveness along nine mutually reinforcing drivers. Among these drivers, access to private capital, research and innovation, education and skills, and the single market emerge as paramount policy priorities for reform and investment to address current productivity challenges as well as to build up the long-term competitiveness of the EU and its Member States. On 14 February 2024, the Commission followed this Communication with the Annual Single Market and Competitiveness Report6. The report details the competitive strengths and challenges of Europe's Single Market, tracking yearly developments according to the nine competitiveness drivers identified.
On 21 November 2023, the Commission adopted the 2024 Annual Sustainable Growth Survey7, marking the start of the 2024 cycle of the European Semester for economic policy coordination. The European Council endorsed the priorities of the survey around the four dimensions of competitive sustainability on 22 March 2024. On 21 November 2023, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the 2024 Alert Mechanism Report, in which it identified Hungary as one of the Member States that may be affected or may be at risk of being affected by imbalances, and for which an in-depth review would be needed. The Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which the Council adopted on 12 April 2024, as well as the proposal for the 2024 Joint Employment Report analysing the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights, which the Council adopted on 11 March 2024.
On 30 April 2024, the EU’s new economic governance framework came into force. The framework includes the new Regulation of the European Parliament and of the Council (EU) 2024/1263 on the effective coordination of economic policies and multilateral budgetary surveillance and repealing Council Regulation (EC) No 1466/97. It also includes the amended Regulation (EC) No 1467/97 on the implementation of the excessive deficit procedure and the amended Directive 2011/85/EU on the budgetary frameworks of Member States8. The objectives of the new framework are public debt sustainability and sustainable and inclusive growth through gradual fiscal consolidation as well as reforms and investments. It promotes national ownership and has a greater medium-term focus, combined with more effective and coherent enforcement. Each Member State should submit to the Council and to the Commission a national medium-term fiscal-structural plan. National medium-term fiscal-structural plans contain the fiscal, reform and investment commitments of a Member State, covering a planning horizon of 4 years or 5 years depending on the regular length of the national legislature. The net expenditure9 path in the national medium-term fiscal-structural plans should comply with the requirements of Regulation (EU) 2024/1263, including the requirements to put or keep general government debt on a plausibly downward path by the end of the adjustment period at the latest, or for it to remain at prudent levels below 60% of GDP, and to bring and/or maintain the government deficit below the 3% of GDP reference value over the medium term. Where a Member State commits to a relevant set of reforms and investments in accordance with the criteria set out in Regulation (EU) 2024/1263, the adjustment period may be extended by 3 years at most. For the purpose of supporting the preparation of those plans, on [21 June] 2024, the Commission is set to provide Member States with guidance on the content of the plans and the subsequent annual progress reports that they will need to submit and, in accordance with Article 5 of Regulation (EU) 2024/1263, will transmit to them technical guidance on the fiscal adjustments (reference trajectories and technical information, where applicable). Member States should submit their medium-term fiscal-structural plans by 20 September 2024, unless the Member State and the Commission agree to extend the deadline by a reasonable period of time. Member States should ensure the involvement of their national parliaments, and the consultation of independent fiscal institutions, of social partners and other national stakeholders, as appropriate.
In 2024, the European Semester for economic policy coordination continues to evolve in line with the implementation of the Recovery and Resilience Facility. The full implementation of the recovery and resilience plans remains essential for delivering the policy priorities under the European Semester, as the plans help effectively address all or a significant subset of challenges identified in the relevant country-specific recommendations issued in recent years. The 2019, 2020, 2022 and 2023 country-specific recommendations remain equally relevant also for recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241.
On 11 May 2021, Hungary submitted its national recovery and resilience plan to the Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant to Article 19 of Regulation (EU) 2021/241, the Commission assessed the relevance, effectiveness, efficiency and coherence of the recovery and resilience plan, in accordance with the assessment guidelines of Annex V to that Regulation. On 15 December 2022, the Council adopted its Decision on the approval of the assessment of the recovery and resilience plan for Hungary10, which was amended on 8 December 2023 to include the REPowerEU chapter11. The release of instalments is conditional on a decision by the Commission, taken in accordance with Article 24(5) of Regulation (EU) 2021/241, that Hungary has satisfactorily fulfilled the relevant milestones and targets set out in the Council Implementing Decision.
On 30 April 2024, Hungary submitted its 2024 National Reform Programme and its 2024 Convergence Programme, in line with Article 8(1) of Regulation (EC) No 1466/97. In accordance with Article 27 of Regulation (EU) 2021/241, the 2024 National Reform Programme also reflects Hungary’s biannual reporting on the progress made in achieving its recovery and resilience plan.
The Commission published the 2024 country report for Hungary12 on 19 June 2024. It assessed Hungary’s progress in addressing the relevant country-specific recommendations adopted by the Council between 2019 and 2023 and took stock of Hungary’s implementation of the recovery and resilience plan. Based on this analysis, the country report identified gaps with respect to those challenges that are not addressed or only partially addressed by the recovery and resilience plan, as well as new and emerging challenges. It also assessed Hungary’s progress on implementing the European Pillar of Social Rights and on achieving the EU headline targets on employment, skills and poverty reduction, as well as progress in achieving the UN’s Sustainable Development Goals.
The Commission carried out an in-depth review under Article 5 of Regulation (EU) No 1176/2011 for Hungary. The main findings of the Commission’s staff assessment of macroeconomic vulnerabilities for Hungary for the purposes of that Regulation were published in April 202413. On 19 June 2024, the Commission concluded that Hungary is experiencing macroeconomic imbalances. In particular, Hungary faces vulnerabilities related to price pressures and external and government financing needs, which remain relevant, although an improving external environment has mitigated some short-term risks. The large current account deficit closed in 2023 as domestic demand shrunk amid a recession in Hungary, and due to lower energy prices. Together with tighter monetary policy, these factors helped reduce the very high inflation rate. Nevertheless, core inflation has remained among the highest in the EU, and unit labour costs have continued to grow strongly, exerting pressure on competitiveness. The current account is expected to revert to a small deficit next year as domestic demand recovers, while the economy, and its external financing, remain exposed to developments in energy prices and risk premia. House prices slowed down and overvaluation eased in 2023 against the backdrop of higher interest rates. The large budget deficit persists on account of expansionary policies and weakening growth since the recession in 2023. The deficit is forecast to narrow somewhat, but to remain significant and contributing to inflation and adding to external borrowing needs. The government debt-to-GDP and the interest burden are set to remain elevated. Policy progress has been limited across all areas, particularly fiscal and structural ones, contributing to the persistence of the identified vulnerabilities. Fiscal adjustment would contribute to reducing core inflation and strengthening the external position as well as containing rises in government debt; the launch of an Excessive Deficit Procedure should underpin such an adjustment. Timely and effective implementation of the RRP is expected to help reduce vulnerabilities, which would be reinforced by the phasing out of distortive interventions in markets and by reforms that support fiscal consolidation.
(11) Based on data validated by Eurostat14, Hungary’s general government deficit increased from 6.2% of GDP in 2022 to 6.7% in 2023, while the general government debt fell from 74.1% of GDP at the end of 2022 to 73.5% at the end of 2023. As announced in the fiscal policy guidance for 202415, the Commission is taking the first step for the opening of deficit-based excessive deficit procedures on the basis of the outturn data for 2023, in line with existing legal provisions. On 19 June 2024, the Commission adopted a report under Article 126 i of the TFEU16. That report assessed the budgetary situation of Hungary, as its general government deficit in 2023 exceeded the reference value of 3% of GDP. The report concluded that in the light of this assessment, and after considering the opinion of the Economic and Financial Committee as established under article 126 i TFEU, the Commission intends to propose in July to an open excessive deficit procedure, by recommending to the Council to adopt a Decision under Article 126(6) establishing the existence of an excessive deficit, for Hungary.
On 12 July 2022, the Council recommended17 that Hungary take action to ensure in 2023 that the growth of nationally financed primary current expenditure is in line with an overall neutral policy stance18, taking into account continued temporary and targeted support to households and firms most vulnerable to energy price hikes and to people fleeing Ukraine. Hungary was recommended to stand ready to adjust current spending to the evolving situation. Hungary was also recommended to expand public investment for the green and digital transitions, and for energy security taking into account the REPowerEU initiative, including by making use of the Recovery and Resilience Facility and other Union funds. In 2023, according to the Commission estimates, the fiscal stance19 was contractionary, at 4.7% of GDP, in a context of high inflation. The growth in nationally financed primary current expenditure (net of discretionary revenue measures) in 2023 provided a contractionary contribution to the fiscal stance of 1.7% of GDP. The growth of nationally financed primary current expenditure in 2023 was in line with the Council recommendation. However, it is important to note that this was largely driven by the very high level of net expenditure in 2022 compared to 2023, including untargeted expenditure in several areas, which contributed to macroeconomic imbalances, financed by windfall profit and sectoral taxes levied on companies mainly in the energy, financial and retail sectors.] Nationally financed investment amounted to 4.6% of GDP in 2023, representing an increase of 0.2 percentage points as compared to 2022. Hungary financed public investment for the green and digital transitions, and for energy security, such as energy efficiency enhancements and digitalisation in healthcare and education. Hungary has not yet submitted a payment request under the Recovery and Resilience Facility.
The key projections in the 2024 Convergence Programme can be summarised as follows. The macroeconomic scenario underpinning the budgetary projections foresees real GDP growth at 2.5% in 2024 and 4.1% in 2025, while it projects HICP inflation at 4.2% in 2024 and 3.6% in 2025. The general government deficit is expected to decrease to 4.5% of GDP in 2024 and stand at 3.7% of GDP in 2025, while the general government debt-to-GDP ratio is set to decrease to 73.2% by the end of 2024 and 72.1% by the end of 2025. After 2025, the general government deficit is projected to decrease gradually to 2.9% of GDP in 2026, 2.4% in 2027 and 1.9% in 2028. Therefore, the general government balance is planned to go below the 3% of GDP deficit reference value in 2026. In turn, after 2025, the general government debt-to-GDP ratio is projected to decrease gradually to 68.8% in 2026, 66.0% in 2027 and 62.8% in 2028.
The Commission Spring 2024 Forecast projects real GDP to grow by 2.4% in 2024 and 3.5% in 2025, and HICP inflation to stand at 4.1% in 2024 and 3.7% in 2025.
The Commission Spring 2024 Forecast projects a government deficit of 5.4% of GDP in 2024, while the general government debt-to-GDP ratio is set to increase to 74.3% by the end of 2024. The decrease of the deficit in 2024 mainly reflects a gradual recovery of tax revenues, lower spending on subsidies to utility companies for the losses incurred due to caps on residential energy prices, and a decrease in public investments. The increase in the debt-to-GDP ratio is driven by a high headline deficit, lower nominal GDP growth, and additional debt-increasing transactions, such as the expected acquisition of the Budapest airport by entities classified in the general government sector and the implementation of financial instruments supported under REPowerEU loans. Based on the Commission’s estimates, the fiscal stance is projected to be contractionary by 1.0% of GDP in 2024.
Expenditure amounting to 0.8% of GDP is expected to be financed by non-repayable support (“grants”) from the Recovery and Resilience Facility in 2024, compared to 0.3% of GDP in 2023, according to the Commission Spring 2024 Forecast. Expenditure financed by Recovery and Resilience Facility grants will enable high-quality investment and productivity-enhancing reforms without a direct impact on the general government balance and debt of Hungary. Expenditure amounting to 0.4% of GDP is expected to be backed by loans from the Recovery and Resilience Facility in 2024 (no loan-financed expenditure in 2023).
On 14 July 2023, the Council recommended20 that Hungary ensure a prudent fiscal policy, in particular by limiting the nominal increase in net nationally financed primary expenditure21 in 2024 to not more than 4.4%. When executing their 2023 budgets and preparing their budgets for 2024, Member States were invited to take into account that the Commission would propose to the Council the opening of deficit-based excessive deficit procedures based on the outturn data for 2023. According to the Commission Spring 2024 Forecast, Hungary’s net nationally financed primary expenditure is projected to increase by 3.6% in 2024, which is below the recommended maximum growth rate. However, net expenditure in 2023 was higher than expected at the time of the recommendation (by 1.8% of GDP). Therefore, as the recommendation for 2024 was formulated as a growth rate, the assessment of compliance also needs to take into account the base effect from 2023. Had net expenditure in 2023 been the same as expected at the time of the recommendation, the resulting growth rate of net expenditure in 2024 would have been above the recommended growth rate by 1.5% of GDP. Therefore, net nationally financed primary expenditure is assessed as at risk of being not fully in line with the recommendation.
(18) Moreover, the Council recommended that Hungary take action to wind down the emergency energy support measures in force, using the related savings to reduce the government deficit, as soon as possible in 2023 and 2024. The Council further specified that, should renewed energy price increases necessitate new or continued support measures, Hungary should ensure that these were targeted at protecting vulnerable households and firms, fiscally affordable, and preserve incentives for energy savings. According to the Commission Spring 2024 Forecast, the net budgetary cost22 of energy support measures is estimated at 1.6% of GDP in 2023 and projected at 0.9% in 2024 and 0.4% in 2025. In particular, subsidies to utility companies for the losses incurred due to caps on residential energy prices are assumed to remain in force in 2024 and 202523. If the related savings were used to reduce the government deficit, as recommended by the Council, these projections would imply a fiscal adjustment of 0.6% of GDP in 2024, whereas net nationally financed primary expenditure24 provides a contractionary contribution to the fiscal stance of 1.9% of GDP in that year. The emergency energy support measures are not projected to be wound down as soon as possible in 2023 and 2024. This risks being not in line with what was recommended by the Council. However, the related savings are projected to be fully used to reduce the government deficit. This is in line with the Council recommendation. The budgetary cost of emergency energy support measures targeted at protecting vulnerable households and firms is estimated at 0.0% of GDP in 2024 (0.1% in 2023), of which 0.0% of GDP preserve the price signal to reduce energy demand and increase energy efficiency (0.1% in 2023).
(19) In addition, the Council also recommended that Hungary preserve nationally financed public investment and ensure the effective absorption of Recovery and Resilience Facility grants and other EU funds, in particular to foster the green and digital transitions. According to the Commission Spring 2024 Forecast, nationally financed public investment is projected to decrease to 4.0% of GDP in 2024 (from 4.6% of GDP in 2023). This is largely due to the cuts and postponements in nationally financed investment projects announced by the authorities in light of the high projected deficits. This risks being not in line with what was recommended by the Council. In turn, public expenditure financed from revenues from EU funds, including Recovery and Resilience Facility grants, is expected to increase to 1.7% of GDP in 2024 from 0.8% of GDP in 2023. This increase is due to a projected pickup in the absorption of the EU cohesion policy funding from the 2020-2027 programming period and higher expenditure on investments supported by the Recovery and Resilience Facility.
Based on policy measures known at the cut-off date of the forecast and on a no-policy-change assumption, the Commission Spring 2024 Forecast projects a government deficit of 4.5% of GDP in 2025. The decrease of the deficit in 2025 mainly reflects higher VAT and PIT revenue on the back of stronger growth, a further decrease in subsidies to utility companies for the losses incurred due to caps on residential energy prices, and lower interest expenditure due to decreasing coupon payments on the inflation-linked retail bonds. At the same time, the planned phaseout of temporary windfall profit and sectoral taxes in line with their sunset clauses levied since 2022 is set to have a debt-increasing impact. The general government debt-to-GDP ratio is set to decrease slightly to 73.8% by the end of 2025. Prudent fiscal policy should contribute to reducing core inflation, which is well above the EU average and could lead to competitiveness losses if persistent and strengthening the external position too.
Weaknesses in budget planning and execution have increased the expansionary bias of fiscal policy and added to current macroeconomic challenges. The very early adoption of annual budgets between 2016 and 2023 reduced the reliability of macroeconomic and budgetary forecasts. Various budget flexibility rules and large budget reserves allowed for higher discretionary spending. Ad hoc spending decisions were often made at the end of the budget year or were enacted by government decrees throughout the year without adequate parliamentary oversight and public consultation, in turn reducing budget transparency. The national fiscal framework has not led to a more prudent fiscal stance due to shortcomings in the design of domestic fiscal rules, in particular due to a debt rule with procyclical features and the weak enforcement of medium-term budget planning, further eroded by the special provisions of the ‘state of danger’ regime. Frequent and significant revisions of fiscal targets have undermined the role of the budget as an anchor for market participants and have called into question the credibility of the medium-term fiscal plans. Basing medium-term fiscal planning on multiannual spending ceilings, as set out in the revised EU fiscal rules, may help address the expansionary bias of fiscal policy. The effectiveness of the national fiscal council in steering public discussions on fiscal issues remains constrained by limited mandate and resources.
In accordance with Article 19 i, point (b), and Annex V, criterion 2.2 of Regulation (EU) 2021/241, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investments to be implemented by 2026. These are expected to help effectively address all or a significant subset of challenges identified in the relevant country-specific recommendations. Within this tight timeframe, proceeding swiftly with the effective implementation of the plan, including the REPowerEU chapter, is essential to boost Hungary’s long-term competitiveness through the green and digital transition, while ensuring social fairness. To deliver on the commitments of the plan by August 2026, it is essential for Hungary to significantly accelerate the implementation of reforms and investments, first by swiftly implementing the necessary measures to ensure the protection of the EU’s financial interests. The systematic involvement of local and regional authorities, social partners, civil society and other relevant stakeholders remains essential to ensure broad ownership for the successful implementation of the recovery and resilience plan.
As part of the mid-term review of the cohesion policy funds, in accordance with Article 18 of Regulation (EU) 2021/1060, Hungary is required to review each programme by March 2025, taking into account, among other things, the challenges identified in the 2024 country-specific recommendations, as well as its national energy and climate plan. This review forms the basis for the definitive allocation of the EU funding included in each programme. While Hungary has made progress in implementing cohesion policy and the European Pillar of Social Rights, challenges remain and significant social and regional disparities persist between the least and most developed districts of the country, as well as between urban and non-urban areas. Accelerating implementation of cohesion policy, combined with strengthening administrative capacity at sub-national level is crucial. The priorities agreed in programmes remain relevant. It is of particular importance to see fast implementation of the investments in the digital and green transition, including basic digital skills development, the digital transformation of businesses, the take-up of smart city solutions, nature-based and net-zero technologies and water management, as well as of the territorial just transition plans. Hungary should also continue to work on integrated territorial development in functional areas and the least developed districts. Equally, the implementation of investments in social inclusion and poverty reduction, focusing on children and the most deprived districts, as well as the comprehensive strengthening of basic skills and improving access to quality mainstream education and lifelong learning, remain a priority. In this regard, structural reforms of the education system, including by improving access to quality early childhood education and care, as well as targeted actions to address labour market challenges for vulnerable groups and build the capacity of social partners remain key. Resolving pending issues on enabling conditions and the general regime of conditionality is necessary for Hungary to make full use of cohesion policy funds.
In the context of the mid-term review of cohesion policy programmes, addressing energy poverty and intergenerational poverty through integrated interventions, with a focus on the least developed districts and municipalities, as well as the need for a strengthened governance and differentiation of the smart specialisation strategy are areas that merit further attention. Hungary could leverage the Strategic Technologies for Europe Platform (STEP) initiative to boost investments in deep and digital technologies (e.g. Internet of Things, big data, artificial intelligence), clean technologies (e.g. renewable energy, geothermal energy) and biotechnologies (pharmaceuticals, medical products), whilst also investing in skills and qualifications required to meet the labour demand in these sectors.
Beyond the economic and social challenges addressed by the recovery and resilience plan and other EU funds, Hungary faces several additional challenges related to the business environment, the skills levels and integration of disadvantaged groups into the labour market, social assistance and social dialogue, and reliance on Russian fossil fuels.
The business environment continued to deteriorate, primarily due to increasing state interventions in the economy and frequent ad hoc changes to the regulatory framework. Hungary performs poorly in indicators that measure competitiveness and regulatory quality. The high number of taxes increased further in 2024. In recent years, the number of sector-specific taxes levied on certain sectors and firms has increased. These tend to be in sectors where foreign ownership is high (for example, retail, cement, construction and ceramic materials), creating a disproportionate burden on the firms concerned and affecting the single market. Firms complain about unequal treatment and arbitrariness when authorities conduct administrative inspections or decide on permits. Various state interventions are used to force foreign owners to sell their firms, facilitating the creation of public or government-connected national champions. The government increasingly declares certain investment projects to be of ‘strategic importance for the national economy’ to speed up and lighten the administrative process. The criteria used by the government are not transparent and cannot be challenged in court. The government continues to use its power to exempt certain transactions from merger control. The criteria for these exemptions are not transparent, and no formal procedure exists to contest them. The government also continues to make extensive use of its mandate to issue emergency decrees under the ‘state of danger’ regime. Many of these decrees do not seem to relate to the invoked emergency situation, which weakens legal certainty and interferes with normal business activity.
Despite a high overall employment rate, some disadvantaged groups, such as the low-educated, Roma and persons with a disability, still face barriers in accessing upskilling opportunities and entering the labour market. The same disadvantaged groups also tend to be low achievers in basic skills at school, leave school early, become unemployed or inactive and rarely enter higher education. Inequalities are rooted in the way the education system is organised, characterised by the concentration of socio-economically disadvantaged pupils at certain schools. Between 2014 and 2022, significant amounts of EU cohesion policy funds were allocated to preventing early school leaving and implementing active labour market measures. While the employment rate of the low-skilled and Roma increased significantly over that period, it remains much lower than the overall employment rate. The disability employment gap remains well above the EU average. Several sectors face skills shortages, which makes it difficult for Hungary to shift its economy to a high value-added growth model. The share of tertiary graduates is one of the lowest in the EU, which poses challenges in meeting the growing demand for a highly skilled workforce. The short duration of unemployment benefits makes it difficult for people to participate in reskilling and upskilling and find better matching jobs that could improve productivity and competitiveness. While there has been a significant increase in the number of foreign workers in recent years, this may not fully match the needs of sectors facing skills shortages and labour shortages.
In the past decade, poverty indicators have improved markedly in line with the increase in the employment rate. However, the severe material and social deprivation rate is still among the highest in the EU and has worsened among children, Roma and in remote areas. The poverty-reducing impact of social transfers, while still comparable to other EU Member States, has decreased in recent years. Despite the high inflationary economic environment, some social benefits, such as minimum income, family benefit and family tax benefits, have remained nominally unchanged. The adequacy of the minimum income and unemployment benefit is one of the lowest in the EU. The total tax burden on low earners and reliance on value added tax are high, which disproportionately burdens low-income groups in the context of non-progressive, flat-rate personal income taxation. The share of people who spend more than 40% of their household income on housing costs has also increased due to inflation, energy and housing price hikes, and the lack of targeted support measures. Addressing these challenges would also contribute to supporting upward social convergence, in line with the Commission services’ second-stage analysis based on the features of the Social Convergence Framework25.
Despite some improvement, social dialogue remains weak and fragmented. The tripartite forum in the private sector, which comprises the government, trade unions and employers’ associations, has limited possibilities to influence or change the government’s plans. Limited social dialogue puts employees in a disadvantaged position, including in wage bargaining, especially in the public sector. The establishment of a separate employment status for certain groups of public employees has weakened their ability to defend their collective interests. In some cases, it has led to collective agreements becoming void and having to be renegotiated. Measures such as limiting teachers’ right to strike or the abolishment of collective bargaining in the health sector have gradually eroded workers’ rights. The new legislation on the collection of the trade union membership fees in the public sector could further erode trade union representativeness. The relevant fora in the public sector had only one meeting in 2023.
Hungary continues to rely heavily on fossil fuels, and its efforts to increase energy security by shifting away from dependency on Russian imports are slow. Hungary’s share of renewable energy sources amounted to 25.7% in 2023, 18 percentage points below the EU average. The share of Russian crude oil and gas imports amounted to 64% and 75% in 2021 and 2023, respectively. Oil and gas account for two-thirds of its energy consumption. Hungary has one of the highest figures in the EU for fossil fuel subsidies as a share of GDP on account of subsidised energy prices for households.
In light of the Commission’s in-depth review and its conclusion on the existence of imbalances, recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1), i and i below. Policies referred to in recommendations (1) and i help to address vulnerabilities linked to external and government financing needs and price pressures. Policies referred to in recommendation i help to address vulnerabilities linked to price pressures.
1. Submit the medium-term fiscal-structural plan in a timely manner. In line with the requirements of the reformed Stability and Growth Pact, limit the growth in net expenditure26 in 2025 to a rate consistent with putting the general government debt on a plausibly downward trajectory over the medium term and reducing the general government deficit towards the 3% of GDP Treaty reference value. Wind down the emergency energy support measures before the 2024/2025 heating season. Pursue effective coordination and clear demarcation of macroeconomic policies to ensure fiscal and external sustainability. Phase out remaining price and interest rate caps to reduce distortive effects and facilitate the smooth transmission of monetary policy. Target support measures in the housing sector to low-income households. Strengthen the medium-term budgetary framework, align the preparation of annual budgets with the budgetary year and limit discretion in the implementation of annual budgets.
2. In light of prolonged delays, significantly accelerate the implementation of cohesion policy programmes and the recovery and resilience plan, including the REPowerEU chapter, ensuring completion of reforms and investments by August 2026, by swiftly implementing the necessary measures to ensure the protection of the EU’s financial interests and resolving pending issues on enabling conditions. In the context of the mid-term review of cohesion policy programmes, continue focusing on the agreed priorities, taking action to better address poverty, focusing on energy poverty and the least developed districts and municipalities, and improve the smart specialisation strategy, while considering the opportunities provided by the Strategic Technologies for Europe Platform initiative to improve competitiveness.
3. Improve the regulatory framework and enhance competition in product markets and services by avoiding arbitrary administrative interventions and the selective use of tailor-made legislation providing undue advantage or disadvantage to specific companies, by applying competition scrutiny systematically to business transactions and by reducing the use of emergency measures to what is strictly necessary, in line with the principles of the single market and the rule of law. Improve the adequacy of the social protection system, including unemployment benefits. Improve educational attainment levels as well as access to effective active labour market measures, in particular upskilling and reskilling opportunities for the most disadvantaged groups, and ensure effective social dialogue.
4. Reduce overall reliance on fossil fuels, accelerate the diversification of gas supply towards non-Russian sources, and take steps to phase out fossil fuel subsidies.
Done at Brussels,
For the Council
The President
1OJ L 2024/1263, 30.4.2024 ELI: data.europa.eu/eli/reg/2024/1263/oj.
2OJ L 2024/1263, 30.4.2024 ELI: data.europa.eu/eli/reg/2024/1263/oj.
3Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021 establishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17) ELI: data.europa.eu/eli/reg/2021/241/oj.
4Regulation (EU) 2023/435 of the European Parliament and of the Council of 27 February 2023 amending Regulation (EU) 2021/241 as regards REPowerEU chapters in recovery and resilience plans and amending Regulations (EU) No 1303/2013, (EU) 2021/1060 and (EU) 2021/1755, and Directive 2003/87/EC (OJ L 63, 28.2.2023, p.
1) ELI: data.europa.eu/eli/reg/2023/435/oj.
5COM(2023) 168 final.
6COM(2024) 77 final.
7COM(2024) 77 final.
8Council Regulation (EU) 2024/1264 of 29 April 2024 amending Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure (OJ L, 2024/1264, 30.4.2024, ELI: data.europa.eu/eli/reg/2024/1264/oj) and Council Directive (EU) 2024/1265 of 29 April 2024 amending Directive 2011/85/EU on requirements for budgetary frameworks of the Member States (OJ L, 2024/1265, 30.4.2024, ELI: data.europa.eu/eli/dir/2024/1265/oj).
9Net expenditure as defined in Article 2 of Council Regulation (EU) 2024/1263 of 29 April 2024 (OJ L 2024/1263, 30.4.2024. ELI: data.europa.eu/eli/reg/2024/1263/oj). Net expenditure means government expenditure net of (i) interest expenditure, (ii) discretionary revenue measures, (iii) expenditure on programmes of the Union fully matched by Union funds revenue, (iv) national expenditure on co-financing of programmes funded by the Union, (v) cyclical elements of unemployment benefit expenditure, and (vi) one-offs and other temporary measures.
10Council Implementing Decision of 15 December 2022 on the approval of the assessment of the recovery and resilience plan for Hungary (15447/2022).
11Council Implementing Decision of 8 December 2023 amending the Implementing Decision of 15 December 2022 on the approval of the assessment of the recovery and resilience plan for Hungary (15964/1/23).
12SWD(2024) 617 final.
13SWD(2024) 103 final.
14SWD(2024) 103 final.
15COM(2023) 141 final.
16Report from the Commission, prepared in accordance with Article 126 i of the Treaty on the Functioning of the European Union, 19.6.2024, COM(2024)598 final.
17Council Recommendation of 12 July 2022 on the National Reform Programme of Hungary and delivering a Council opinion on the 2022 Convergence Programme of Hungary OJ C 334, 1.9.2022, p. 136.
18Council Recommendation of 12 July 2022 on the National Reform Programme of Hungary and delivering a Council opinion on the 2022 Convergence Programme of Hungary OJ C 334, 1.9.2022, p. 136.
19The fiscal stance is defined as a measure of the annual change in the underlying budgetary position of the general government. It aims to assess the economic impulse stemming from fiscal policies, both those that are nationally financed and those that are financed by the EU budget. The fiscal stance is measured as the difference between (i) the medium-term potential growth and (ii) the change in primary expenditure net of discretionary revenue measures (and excluding temporary emergency measures related to the COVID-19 crisis) and including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other Union funds.
20Council Recommendation of 14 July 2023 on the 2023 National Reform Programme of Hungary and delivering a Council opinion on the 2023 Convergence Programme of Hungary, OJ C 312, 1.9.2023, p. 155.
21Net primary expenditure is defined as nationally financed expenditure net of (i) discretionary revenue measures, (ii) interest expenditure, (iii) cyclical unemployment expenditure, and (iv) and one-offs and other temporary measures.
22Net primary expenditure is defined as nationally financed expenditure net of (i) discretionary revenue measures, (ii) interest expenditure, (iii) cyclical unemployment expenditure, and (iv) and one-offs and other temporary measures.
23Net primary expenditure is defined as nationally financed expenditure net of (i) discretionary revenue measures, (ii) interest expenditure, (iii) cyclical unemployment expenditure, and (iv) and one-offs and other temporary measures.
24This contribution is measured as the change in general government primary expenditure, net of (i) the incremental budgetary impact of discretionary revenue measures, (ii) one-offs, (iii) cyclical unemployment expenditure and (iv) expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other EU funds, relative to the medium-term (10-year) average potential nominal GDP growth rate, expressed as a ratio to nominal GDP.
25SWD(2024)132.
26According to Article 2 i of Regulation (EU) 2024/1263, ‘net expenditure’ means government expenditure net of interest expenditure, discretionary revenue measures, expenditure on programmes of the Union fully matched by revenue from Union funds, national expenditure on co-financing of programmes funded by the Union, cyclical elements of unemployment benefit expenditure, and one-offs and other temporary measures.
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