EC: Hungary should cut taxes or it will miss deficit target

EU

The European Commission yesterday urged Hungary to make fiscal adjustments worth 0.3% of GDP in 2016 and 0.6% in 2017 so that the country could meet its medium-term deficit goal. The EC said these changes should include reductions in sector-specific taxes and more transparent procurement procedures. 

In country-specific recommendations issued yesterday, the EC said Hungary would overshoot its mid-term 1.5% structural deficit target, unless further measures were introduced, state-owned news agency MTI reported. Hungary’s government has said it aims to achieve the medium-term deficit target by 2019. The EC report noted a “high risk of a significant deviation” from the required adjustment in 2016, as well as in 2017, if policies remain unchanged. 

The EC recommended that Hungary further cut sector-specific taxes, reduce the tax burden for low-income earners, strengthen transparency and competition in public procurement procedures, further improve an anti-corruption framework and address “restrictive regulations” in the service and retail sectors. It also urged officials to facilitate a transition from workfare to the primary labor market, improve the adequacy and coverage of social assistance and unemployment benefits, and take measures to improve educational outcomes and increase the participation of disadvantaged groups, particularly Roma, in mainstream education. 

The EC said the adjustment required to meet the medium-term budgetary objective had been lowered in 2015 to reflect the fiscal impact of a wave of refugees and an assessment of any such costs in 2016 would be made in the spring of 2017. 

The EC acknowledged “considerable recent improvements” in tax policy and tax administration, but said Hungary’s reliance on sector-specific taxes “remains a potential barrier to investment” and “causes distortions across sectors”. 

The EC said Hungary had made “limited progress” promoting competition and transparency in public procurement, adding that the higher number of unannounced negotiated procedures as well as contracts awarded to sole bidders show a “low level of competition” persists. 

The EC said “restrictive regulations” in the service sector and a “volatile regulatory environment” remain concerns for businesses. Establishment and operation restrictions in the retail sector constitute barriers to entry and expansion, it added, noting that mark-ups in the Hungarian retail sector are the third-highest in the EU. 

The EC criticized Hungary’s workfare scheme, saying it failed to sufficiently improve the reintegration of participants into the open labor market. In the first half of 2015, around 13% of participants exited the scheme and found regular employment, but 60% who left returned within 180 days, it added.

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