2019 OECD Economic Surveys: Hungary 2019

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The prospering economy has boosted employment and reduced unemployment to historical low levels. The risk of overheating is increasing with double digit growth in wages and higher consumer price inflation, although it remains within the central bank’s tolerance band. The recovery could be prolonged if the supportive macroeconomic policies become more restricitve. Looking ahead, public spending pressures are increasing with population ageing and unless corretive measures are taken public debt may increase again. Reform of the pension system needs to contain rising pension spending and old-age poverty. At the same time, a more flexible health sector is needed to respond to the changing demands arising from population ageing. Economic growth has been geographical uneven as the capital has benefitted from growth enhancing agglomeration effects and some regions, particularly in the west of the country, have benefitting from strong inwards FDIs. On the other hand, poor and rural regions are left behind as they lack integration into local and national supply chains. Development policies tend to pursue centrally determined objectives, while local authorities have few possibilities for identifying and implementing projects that are best suited for bolstering local growth.


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The challenges of sustaining Hungary’s pension and health systems

Population ageing is leading to rising financing pressures in the pension, health care and long-term care systems. Official projections suggest that ageing-related spending could increase by 3.2% of GDP by 2070. Less optimistic assumptions about demographic developments and labour market outcomes could add several percentage points to pension spending. Moreover, the risk of old-age poverty is relatively high in the earnings-related pay-as-you-go pension system, and expected pension benefits are difficult to calculate. Measures to correct these issues could double the projected increase in public pension spending in the long run. In addition, the centralised health care system has relatively little use of price signals, contributing to reduced access and outcomes that are worse than elsewhere. Structural reform could improve efficiency, but securing a projected increase in life expectancy of 10 years, aligning it with the EU average, is likely to require additional public resources. This, together with the cost of new technologies and improving quality and coverage, could increase spending by as much as 50% by 2070. The fragmented long-term care system is putting a relatively large responsibility for such care on family members, implying that public spending in this area will increase, particularly as economic structural changes affects the geographical distribution of the population.



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