Hungary's central bank, the Magyar Nemzeti Bank (MNB), released its Competitiveness Report on October 27, providing a comprehensive and objective picture of Hungary’s competitiveness based on 100 indicators. The report shows Hungary lagging behind not just the European Union, but also the Visegrad countries in nearly all areas observed.

Even as Hungary advanced nine spots in the latest Global Competitiveness Index (GCI) from the World Economic Forum, the issue of competitiveness has become a priority for the government as long-term growth outlooks are dampened by the possible drop in EU subsidies after 2020. Hungary’s economy heavily depends on EU funding.

The government established the National Competitiveness Council last year, a body of business leaders and experts to come up with proposals to improve Hungary’s competitiveness. One of most vital areas for Hungary is the dire labour shortage. The number of unfilled job positions in the business sector has grown by 65% since 2007, according to the report.

There are still reserves of people to bring into the primary job market, mainly from the public sector, said MNB director Daniel Palotai after the release of the report. Hungary should move from a low-wage production model towards a more productivity oriented one, he added. The proportion of atypical work employment should be increased and digitalisation in the state administration would improve not only the pace but the quality of service. 

The central bank recommends further cuts to payroll and healthcare contribution taxes for companies. Data shows Hungarian businesses pay around 11 different types of taxes and spend 277 hours a year compiling tax reports. Hungary in the past decade eased the tax burden, which is now at the average of Visegrad countries, but still above the EU average.

Hungary’s long-term competitiveness depends greatly on the fertility rate, which should be above 2.1, Palotai said. Currently it is around 1.44, which is one of the lowest in Europe. 

The cabinet introduced a set of measures in the spring to challenge falling demographics, including forgiving student loans of women with two children and reducing mortgage loans by HUF1mn (€3,225) for third and subsequent children. 

Hungary’s education system needs to improve significantly, the MNB report shows. The scholastic performance of students has been steadily declining since 2000, according to the OECD, which publishes the benchmark PISA tests every three years. Opposition parties have been calling for the government to spend more on education, which is below the OECD average, to stop the decline of the sector.

Hungary performed poorly in the overall innovation index and research and development spending compared to the EU and Visegrad countries, according to the MNB report. Investment spending of companies fell in all countries of the EU after the crisis, but in Hungary, the rate of decline was steeper than the EU average or for the Visegrad countries.

There is still room for improvment in Hungary’s banking sector, the MNB director said. The central bank has pushed banks to speed up lending and to lower interest rates, advocating the use of long-maturity fixed-rate mortgage loans. After the latest meeting of the Monetary Council, policymakers stressed the importance of bringing down long-term yields further.