Competitiveness still a major problem for Hungarian SMEs

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Hungary continues to lag behind the other Visegrád countries (Czech Republic, Poland, and Slovakia) in SME per capita labour productivity, the National Bank of Hungary (MNB) said in the first publication of its Competitiveness Report on Friday.

In Western European countries, small companies have 70-80% of the productivity of their larger peers, while middle-sized companies equal or surpass their larger rivals in productivity.

In Central and Eastern Europe SME productivity is down by 10-20 percentage points in all categories compared to Western European averages. The total business productivity in Visegrad countries is around EUR 25,000 per capita, which is only 35-40% of the West and North European equivalent, national news agency MTI reports.

Increased production in the pharmaceutical sector in the last ten years has improved competitiveness in Hungary, but the fall in output in other high-tech sectors such as electronic devices has been a setback. Export diversity increased in the years following the 2008 economic crisis, but since 2012, above average investments in the automotive sector have reduced diversity. A similar trend can be observed for Hungarian industrial production as a whole.

Because of the economic crisis, the investment spending of companies fell in the entire EU, but in Hungary the rate of decline was larger than the EU average or for the Visegrad countries. According to the MNB, competitiveness could be improved by increased investments including more innovation in the business sector.

The number of unfilled job positions in the business sector has grown by 65% since 2007, creating another challenge. Labor shortages generate wage rises and the MNB notes it would be important to move from a low-wage production model towards a more productivity oriented one.

The central bank recommends further cuts to payroll and healthcare contribution taxes for companies to improve competitiveness. Data shows Hungarian companies pay around 11 different types of taxes and spend 277 hours a year compiling tax reports. Hungary in the past decade has cut taxes and the tax burden is now at the average of Visegrád countries, but still above the EU average.

Since 2011, there has been a constant increase in the willingness to found companies, which is in contrast with EU and regional trends. Hungary has also made significant gains in reducing the time needed to establish a company.

The share of the hidden economy in Hungary was around 22% in 2015, smaller than before but around 5 pp higher than the EU average. Actual yearly VAT revenues are also now closer to the hypothetical maximum.

The MNB found that improvements have been felt over the last few years but, for Hungary to successfully catch up other countries, progress is needed in productivity growth, reducing labor shortages and reducing the share of the hidden economy.

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