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EC highlights corruption, regulatory barriers in Hungary

The European Commission (EC) addressed a warning to Hungary Wednesday regarding “the existence of a significant deviation from the adjustment path toward the medium-term budgetary objective in 2017.” The Commission also made several recommendations.

The European Commission yesterday released a “Recommendation for a Council Recommendation on the 2018 National Reform Programme of Hungary and delivering a Council opinion on the 2018 Convergence Programme of Hungary.”  The Commission has taken the step in the 2018 cycle of the European Semester of economic policy coordination.

In 2019, in view of Hungaryʼs general government debt ratio above 60% of GDP and projected output gap of 2.3%, the nominal growth rate of net primary government expenditure should not exceed 3.9%, in line with the structural adjustment of 0.75% of GDP stemming from the matrix of requirements under the Stability and Growth Pact, the EC recommendation says.

Based on the Commissionʼs 2018 spring forecast, there is a risk of a significant deviation from that requirement in 2019. Overall, the Council is of the opinion that significant further measures will be needed as of 2018 to comply with the provisions of the Stability and Growth Pact, in light of a strongly deteriorating fiscal outlook, the document adds.

The proportion of people at risk of poverty and social exclusion decreased to 26.3% in 2016, but remains above the EU average, the EC notes, adding that children in general are more exposed to poverty than other age groups.

The level of minimum income benefits is below 50% of the poverty threshold for a single household, making it among the lowest in the EU, the document continues. In addition, it points to the adequacy of unemployment benefits as being very low: the maximum duration of three months ranks as the shortest in the EU, and represents only around a quarter of the average time required by job seekers to find employment.

Inadequate social dialogue, regulatory barriers

Hungarian social dialogue structures and processes remain underdeveloped and do not allow for a meaningful involvement of social partners in policy design and implementation, says the EC. Deficiencies in stakeholdersʼ engagement and limited transparency have an impact on the evidence base for, and quality of, policy making, creating uncertainty for investors and slowing down convergence, the document adds.

Regulatory barriers in services, and the retail trade in particular, impact on the sectorʼs performance and hamper the efficient reallocation of resources, productivity and innovation. There is a continuous trend to entrust certain services to state-owned firms specifically created for these purposes, to the detriment of open competition, the recommendation warns.

Unpredictability of the legal framework is a further problem highlighted, especially in the retail sector, which in recent years has been faced with frequent changes to regulations. As the proposed regulations are often tailored to turnover or floor size, they mainly affect foreign retail chains. This increases uncertainty among business operators and can deter investment, notes the EC.

The recommendation calls for a stable regulatory environment favorable to competition. Restrictive regulation of professions also remains high in Hungary, in particular with respect to key professions like accounting and legal services, the EC notes.

Limited measures against corruption

Concerns remain regarding the prevention and prosecution of corruption. According to several indicators, Hungaryʼs exposure to corruption appears to have increased over the past years and the risks of corruption could negatively affect the countryʼs growth potential.

The EC highlights the functioning of the prosecution service as being of crucial importance in fighting corruption and money laundering, adding that while measures to fight low-level corruption appear to have been applied with some success, there is not enough focus on launching investigations into high-level cases.

Limited transparency and restrictions on access to information further hinder measures to prevent corruption. Significant steps have been taken regarding public procurement, but there is scope to further improve transparency and competition in tendering processes, the EC adds.

EC makes recommendations

Taking into account the above and other factors, the EC recommends:

-  In 2018, ensure compliance with the Council recommendation of XX June 2018 with a view to correcting the significant deviation from the adjustment path toward the medium-term budgetary objective.

- In 2019, ensure that the nominal growth rate of net primary government expenditure does not exceed 3.9%, corresponding to an annual structural adjustment of 0.75% of GDP.

- Continue simplifying the tax system, in particular by reducing sector-specific taxes.

- Improve the quality and transparency of the decision-making process through effective social dialogue and engagement with other stakeholders and by regular, adequate impact assessments.

- Reinforce the anti-corruption framework, strengthen prosecutorial efforts, and improve transparency and competition in public procurement, inter alia, through making data gained from the e-procurement system accessible to the public.

- Strengthen competition, regulatory stability and transparency in the services sector, notably in retail.

- Unlock labor reserves through improving the quality of active labor market policies.

- Improve education outcomes and increase the participation of disadvantaged groups, in particular Roma, in quality and inclusive mainstream education.

- Improve the adequacy and coverage of social assistance and unemployment benefits.