With a deficit currently running at 5.5% of GDP and with a higher public sector debt than other central European countries, Hungary needs to consolidate its public finances through more efficient government spending and raise its growth potential through structural reforms in other areas, the report says.
“Bringing greater discipline to public finances by reforming taxation and government spending is Hungary’s most immediate challenge,” said Aart de Geus, Deputy Secretary-General of the OECD, when introducing the report. “If the reform programme goes according to plan the whole economy will benefit, raising the standard of living across society and allowing Hungary to resume catching up with other OECD countries.”
The report notes that by persevering with planned reforms, Hungary will be able to address a range of problems that are holding back economic growth and improvements in living standards. They include low employment rates, obstacles to successful entrepreneurship and weaknesses in the higher education and health systems.
The immediate gains from reform will come through increased business confidence and lower interest rates, the report says. They should be reinforced over the medium term by growing prospects for cutting taxes. But the report adds that lowering taxes across the board should be attempted only if matched by spending cuts. A pressing concern is to reduce Hungary’s heavy reliance on labour taxation, particularly by lowering employers’ social security contributions. The report strongly backs the idea of imposing carefully designed fiscal rules to bring greater discipline to public finance.
Improving Hungary’s healthcare system will initially have to be achieved through efficiency gains rather than increased spending, the report says. But it warns that the proposals to introduce competition in health insurance will not automatically improve cost-efficiency and quality. To be successful, a consistent regulatory framework must be established, both to monitor the system and enforce laws.
Under current rules the pension system is unlikely to be able to finance the future needs of Hungary’s ageing population, according to the report. It recommends removing incentives for early retirement and, as life expectancy is increasing, raising the statutory retirement age.
The report welcomes the progress made recently in policies to boost the employment rate. However, such moves need to be backed by the creation of an effective system of employment services. In addition, supporting the employment opportunities of low skilled workers would require a moderate minimum wage.
The report argues for a reform of teacher training to improve the quality of education and raise the status of the profession. Better monitoring and evaluation of the education system is needed while access to higher education should be expanded. Improving the education and integration of underprivileged children should be addressed by avoiding segregation, providing greater access to childcare at an early age and ensuring students on vocational courses have pathways back into general education.
Improving the performance of the small and medium-sized business (SME) sector is also crucial if Hungary is to catch up with higher income OECD countries. The report calls for the promotion of a business environment that encourages entrepreneurship and innovation through pertinent changes in taxation and regulation. Targeted programs for SMEs – for instance, to facilitate their access to bank credit and foreign markets - need to be carefully monitored and evaluated to assure cost-effectiveness.
Implementing reforms successfully implies effective performance by the public administration itself. The report acknowledges that administrative reform has proved politically difficult in the past but recommends greater use of consensus-seeking mechanisms such as “roundtables” where planned reforms can be discussed more objectively.
Hungary, like many OECD countries, has embarked on an ambitious reform agenda. The report aims to address the need – expressed by the Hungarian government - for an evidence based debate on critical reform issues. It builds on OECD analysis and country specific reviews of Hungary, as well as on specific thematic research. It is the result of a joint effort across a large number of OECD departments, and is released on the request of the Hungarian Government, under the responsibility of the OECD Secretary General.
