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2010 OECD Economic Surveys: Hungary 2010

image of OECD Economic Surveys: Hungary 2010

OECD's periodic survey of Hungary's economy.  This 2010 edition includes chapters covering restoring sustainable growth, sustaining fiscal reform, enhancing financial stability through better regulation, and raising education's contribution to growth.

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Sustaining the momentum of fiscal reform

Hungary has faced a considerable challenge to regain credibility following persistent and high fiscal deficits. Efforts during recent years have produced substantial results. The fiscal deficit has been brought down significantly and, despite the recession, fiscal consolidation has continued to help restore foreign investor confidence. Short-term fiscal adjustment needed to be accompanied by measures that can durably improve Hungary’s fiscal position, however, and it has; the adoption in 2009 of a pension reform and a Fiscal Responsibility Act, creating a Fiscal Council and fiscal rules hold that potential. These results should not lead to complacency. Some expenditure cuts, such as lower public salaries, may prove difficult to sustain. Fiscal consolidation in the past owed both to expenditure cuts and revenue increases. As a result, and despite an important tax reform starting in the second half of 2009 and extended from the beginning of 2010, marginal tax rates remain high, with adverse effects on the labour market and growth. Going forward, the government needs to contain public expenditure growth and improve public administration efficiency to reduce the public “footprint” on the economy and allow lower taxes. Key areas that warrant intensified efforts are public administration and health. The government should help secure a prominent role for the Fiscal Council and some experience needs to accumulate before considering any substantial changes in the fiscal rules. Finally, improvements to make taxation less distortive should continue by further reducing tax wedges, and increasing the role of wealth taxes, notably for local governments.

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