Reforms for Stability and Sustainable Growth

An OECD Perspective on Hungary

image of Reforms for Stability and Sustainable Growth

EU accession in 2004 has confirmed Hungary’s successful transformation from a centrally planned economy into a functioning market economy operating within the framework of a multi-party democracy. However, the country’s output per capita is still well below the EU average, and public expenditures exceed revenues by a large margin. This report looks at ongoing efforts to restore fiscal balance and promote sustainable growth to accelerate the convergence process. Drawing on the experience of OECD member countries it proposes structural reforms to achieve these objectives, covering the following topics:

• Fiscal policy: Deficit reduction and making taxes and expenditures more growth friendly.

• Health care reform: Improving efficiency and quality of care.

• Pension reform: Providing old-age income security in the face of population ageing.

• Employment and social policies: Making formal employment more attractive.

• Education reform: Improving human capital formation.

• SME promotion:  Increasing competitiveness and fostering successful entrepreneurship.

• Innovation: Fostering rapid productivity growth.

• Energy policy and the environment: Responding to the threat of climate change.

• Public administration reform: Improving the performance of the public sector.

• E-government: Using technical progress to improve public service delivery.

An overview chapter synthesises the findings, highlighting the interdependence of policy actions in the various areas.



Fiscal Policy: Deficit Reduction and Making Taxes and Expenditure More Growth Friendly

Fiscal consolidation dominates Hungary’s policy agenda at present: the Hungarian budget deficit is the highest in the OECD. The government’s biggest challenge is to stick to the ambitious plan to bring the deficit down to below 3% of gross domestic product (GDP) by 2010 from more than 9% in 2006 and an officially estimated 5.7% in 2007. This chapter discusses policy options on how to maintain the momentum of fiscal adjustment. Progress is being made over a wide range of structural reforms but monitoring of achievements is necessary in several spending areas. Measures under discussion in Parliament to tighten fiscal discipline using fiscal rules are examined, and suggestions for possible improvements are made, particularly regarding the transparency and oversight of the accounts, as well as the budget preparatory process. Assessment also reveals an issue of simplification in the budget rules under discussion. Revenue-raising measures have been necessary for the initial phase of consolidation, but there is a need to reduce the tax burden on labour. This chapter discusses avenues for achieving this in the context of a broad strategy of tax reforms, particularly via lowering social security contributions for low wage workers. It ends with an examination of possible measures to improve tax collection and to help effective communication of changes in the taxation system.


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