The Council had recommended in June that Hungary take steps to ensure that the nominal growth rate of net primary government expenditure does not exceed 3.3% in 2019 and 4.7% in 2020, corresponding to an annual structural adjustment of 1% of GDP in 2019 and 0.75% of GDP in 2020. It also recommended that the government use any windfall gains for deficit reduction.
A report by the Hungarian authorities on measures corresponding to those recommendations submitted in October showed no effective action had been taken, according to the EC.
The latest EC economic forecast projects Hungaryʼs net primary government expenditures will rise by 6.8% this year, well over the recommended threshold, while the structural balance is set to improve by 0.5% of GDP, half of the recommended 1.% of GDP.
The EC proposed the Council should now revise its recommendation to Hungary, while keeping the same parameters, namely ensuring that the nominal growth rate of net primary government expenditure does not exceed 4.7%, corresponding to an annual structural adjustment of 0.75% of GDP.
The ECʼs latest economic forecast puts Hungaryʼs net primary government expenditures up 7.5%. However, the structural balance is set to improve by 1.2% of GDP, well over the recommended 0.75%, the EC notes in its recommendation for a decision by the Council establishing Hungary has taken no effective action with regard to the June recommendation.
The EC said the Council should also recommend that Hungary should “use any windfall gains for deficit reduction” and “compensate unexpected revenue shortfalls with high-quality permanent fiscal measures”.
Hungary is to report to the Council on actions it has taken by April 15, 2020, according to the proposed recommendation.
The EC conducted an enhanced surveillance mission connected to Hungaryʼs deviation from its MTO on September 26, a report on the mission findings released on Thursday show. The mission acknowledged good economic times and an improvement in the overall fiscal situation, but warned of the future impact of a slowdown in Hungaryʼs export markets in Europe.
“The Hungarian authorities agreed that, in a context of decelerating EU growth, it will be challenging for Hungary to maintain growth rates observed in past years, and recognized that the main concern of the Hungarian government was future growth rather than fiscal policy,” according to the report.
The mission said Hungarian authorities confirmed they had no plan to revise the 2019 general government deficit target of 1.8% of GDP, in spite of better-than-expected macroeconomic and fiscal data in the year to date. Budget revenue has exceeded targets, but the mission said the extra revenue is expected to be entirely absorbed by higher expenditures, “in particular, by the financial correction on EU funds recently agreed with the Commission related to the fraudulent use of EU funds”.
According to the mission report, that correction, related to projects implemented in 2017-2019, is expected to cause the budget balance to deteriorate by 0.3% of GDP in 2019, while a further impact of about 0.3% of GDP falls on future years.
The mission said Finance Ministry calculations show Hungary will overachieve its MTO, set as a structural deficit of 1% of GDP, already in 2021.
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