EC recommends removing Hungary from excessive deficit procedure

By bne IntelliNews May 30, 2013

The European Commission recommended on May 29 lifting of the excessive deficit procedure against Hungary, concluding that the country has taken adequate adjustment measures to keep the fiscal deficit below the 3% threshold in both 2013 and 2014. The decision is based on the assessment of Hungary’s plans for economic reforms and fiscal policy measures in the mid-term period, outlined in the country’s updated Convergence Programme for the 2013-2016 period and the National Reform Programme.

The commission has also issued seven country specific recommendations, which aim to support Hungary's economic performance. While acknowledging Hungary’s success in fiscal consolidation, the EC believes that the sustainability of the consolidation efforts requires more measures on the expenditure side. Lowering the level of public debt would help mitigating the accumulated macroeconomic imbalances. The authorities need to enhance medium-term budgetary framework by making it more binding and by closely linking it to numerical rules. Broadening the functions of the Fiscal Council would also be required.

In the field of tax policy, Hungary needs to ensure a stable, more balanced and predictable corporate tax system, the EC said. It is expected to streamline corporate taxation and minimise distortions of resource allocation created by sector- specific taxes, so as to foster growth and employment.

Regarding the development of the financial sector in Hungary, the commission noted that lowering the extra burden currently would help for improving the capacity for capital accumulation and hence supporting to restore normal lending activity. The improvement of loan portfolio quality by removing bad assets from the banks' balance sheets also remains a challenge. The EC also proposed giving more effective emergency powers to the Hungarian Financial Supervisory Authority and establishing a bank resolution regime in order to enhance financial regulation and supervision.

Reduced administrative burden, less corruption and more competition in the public procurement will improve the business environment, the EC said adding that authorities should make the regulatory framework more stable and foster market competition in order to restore the country's image of an attractive environment for foreign direct investors.

As regards to the energy and transport sectors, the commission proposed gradual abolishment of regulated energy prices while ensuring the effective protection of economically vulnerable consumers. Further steps are needed to ensure the independence of the national energy regulator. State-owned enterprises in the transport sector need to reduce operational costs and increase revenues in order to ensure the financial sustainability. The EC also recommended specific measures regarding reforms in education and labour market.

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