The OECD attributed the "substantial" gap between Hungary's GDP and the OECD average to big shortfalls in labor productivity and, to a lesser extent, labor utilization, in a report on economic policy reforms published on Thursday.
"Progress has been made to raise labor supply through reductions in the tax wedge on labor income and incentives to retire early, but more needs to be done...in order to raise productivity growth," the OECD said in the report called Economic Policy Reforms 2011: Going for Growth.
The OECD said priorities for Hungary should be reducing disincentives to continued work at older ages, easing business regulations and reducing the tax wedge on labor income. Other key priorities named in the report were improving the efficiency of the education system and increasing public sector efficiency.
The OECD acknowledged actions already taken by Hungary to tighten conditions to "overly-easy" access to disability benefits for older workers, but recommended a further reduction of implicit tax rates on continued work and the phasing out of access to early retirement programs. The report showed that more than 11% of Hungarians aged 20-65 were receiving disability benefits in 2008.
In the area of business regulation, the OCED noted Hungary had introduced price deregulation in the energy sector and privatized the rail freight unit of state-owned railway company MÁV, but it recommended simplifying entry and exit procedures for businesses and relaxing regulations in retail trade and professional services. Price controls should be further reduced in network industries and the remaining constraints preventing free choice between telecommunications service suppliers lifted, it added.
The report showed the average tax wedge on single earners and single-earner households, both well over 40%, to be among the highest in the OECD, encouraging tax evasion and informality and depressing labor utilization. Although Hungary has cut payroll taxes and introduced a flat personal income tax rate, the OECD recommended further reductions to social contributions, but in a way that maintains a sound fiscal position, as well as financing tax cuts through "expenditure restraint" broadening the tax base and raising property taxes. These steps ought to be taken instead of levying temporary taxes on sectors or dismantling the mandatory funded pension pillar -- as Hungary recently did -- the report added.