The National Bank of Hungary (MNB) unveiled a package of 330 recommendations to boost the country's competitiveness and keep it on a path of convergence on February 27. The latest announcement is the expansion of an earlier scheme.

Even though Hungary's economy last year grew 5%, one of the fastest rates seen in Europe, economists say that in the long term the country needs to improve productivity to ensure sustainable growth. Hungarian SMEs' productivity remains low, according to a recent country report by the European Commission. 

The government has realised that with the anticipated future decline in EU proceeds convergence cannot be reached without improving the competitiveness of the economy.

Speaking at the year-opening conference of the Hungarian Chamber of Commerce and Industry (MKIK), MNB governor Gyorgy Matolcsy said the measures are needed to keep Hungary out of the "middle-income trap" and keep its GDP growth at least 2pp over the European Union average, a top priority serving the main goal outlined by PM Viktor Orban at the same event that Hungary should reach 80-85% of the GDP of Austria by 2030.

In a pyramid illustrating the importance of the goals, Matolcsy placed the 2pp growth surplus at the top. The goal for SMEs to increase productivity by an annual 7% and net wage growth of at least 5% was placed in the second tier. 

Hungary should reduce its personal income tax rate from 16% to 9% and increase birth rates to 110,000 per year to stop the demographic decline, according to Matolcsy. 

The fourth tier also contains ambitious goals, including the doubling of the lending stock relative to the GDP, creating 10,000 new SMEs with export capabilities. A Hungarian university should be among the top 200 institutions of higher education in the world, he said. 

On the bottom of Matolcsy's pyramid was reducing tax bureaucracy, the increase of R&D expenditures to 2% of GDP from around 1% and cutting the share of imports in Hungary's energy supply to under 50%.

Matolcsy also envisaged placing state debt in the hands of domestic investors completely, a rather ambitious target as 36% of Hungary's debt is held by foreigners.

Matolcsy said in the presentation that the programme targets an overall productivity rate increase of 4-4.5% a year paired with an investment rate of 23-25%. 

Introducing reforms that help achieve these goals can bring potential GDP growth to an annual average of 4.4%, according to the presentation. Implementing the reforms would cut Hungary's state debt-to-GDP ratio to 38% by 2030 from 70.9% at present, as the general government runs annual surpluses equivalent to 0.5% of GDP.

Orban's strategic goals
Hungarian companies must make investments at least as much abroad as foreigners make in Hungary, Prime Minister Viktor Orban said at the MKIK event, adding that a strategy for supporting Hungarian companies' outward investment is needed. Matolcsy has been tasked with preparing this strategy. 

Orban touched on this issue at the state of the nation speech earlier this month but did not go into detail.

The PM outlined a program, the elements of which had already been drawn up. Orban said Hungary should be among the five best and the five most competitive countries in the European Union by 2030. The strategic points of his plan include stopping the demographic decline, rebuilding the economic region in the Carpathian Basin and that of Central Europe and achieving energy independence.

For the latter objective, he noted, there is a need for the expansion of the Paks nuclear power plant and the increase in solar energy. In addition, there must be an eventual change in the sourcing of fossil fuels: gas extracted by Romania must be made available to Hungary; the TurkStream gas pipeline must travel through Hungary; and if an agreement can be reached with Slovenia, the Italian LNG terminal will also become accessible.

Hungary must continue to keep its finances in order and keep the deficit below 3% and reduce state debt, which eventually should be held by domestic investors.

Further pillars of Orban's economic model include the work-based economy backed up by a family support system and an industrial paradigm shift. 

Orban conceded that as Hungary's population will not grow radically in the near future, employers have to count on a labour pool of about 5mn workers. Joint ventures in regions with ethnic Hungarian populations outside of the country's borders still offer a reserve, he added.

He put farming, the food industry, sport and culture among segments of the economy that can still be developed, as "Hungarians are good at these".

The independence of the central bank, guaranteed in the Constitution, does not mean that government and the MNB should not work together, he said, adding that the lack of cooperation would result in divergence between the real economy and the financial sector.

Orban briefly touched on political issues, saying that those who want a “United States of Europe” represent pro-immigration policies, and are championing the cause of a Europe transformed by immigrants.