OECD Economic Surveys Hungary

1 OECD Economic Surveys Hungary May 2016 OVERVIEW This Overview is extracted from the 2016 Economic survey of Hungary . The survey is published on the responsibility of the Economic and Development Review Committee (EDRC) of the OECD, which is charged with the examination of the Economic situation of member countries. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area OECD Economic Surveys .

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3 Hungary 2016 OECD 20169 Executive summary Strong Economic growth has returned Investment has started to pick up Low-skilled have weak labour market outcomesEXECUTIVE SUMMARYOECD Economic Surveys : Hungary 2016 OECD 201610 Strong Economic growth has returnedGDP growthSource:OECD (2016),OECD Analytical 2 imbalances are beingcorrected with the public debt-to-GDP ratiofalling and the current account moving to asurplus. Financial vulnerabilities have beenreduced, but non-performing loans stillhamper bank lending. Growth has beenstrong since 2012.

4 However, income levels arestill well below those in more advancedeconomies and as Economic slack disappears,sustaining growth will require structuralreforms to strengthen the business sector andupgrade has started to pick upTotal investment as a share of GDPS ource:OECD (2016),OECD Analytical 2 key driver behind faster growth is morerapid business capital accumulation. InwardFDI and EU structural funds are stronginvestment drivers. On the other hand,domestic business investment, particularly bySMEs, is held back by a frequently changingregulatory environment and entry barriers innetwork industries.

5 Reforms on these frontscould increase the integration of domesticfirms, which are overwhelmingly SMEs, intoglobal value have weak labour market outcomesEmployment rates of people with belowupper-secondary educationSource:OECD (2015),Education at a Glance 2 requirements in the labour marketare changing rapidly as the economy becomesincreasingly knowledge based. The educationsystem has reacted slowly, leaving manygraduates without needed skills andunprepared to apply knowledge in novel andunfamiliar settings. Training in public workschemes has not been effective enough ingenerating relevant labour market s skills are underutilised, as many donot participate in the labour % changes152025302000200120022003200420052 006200720082009201020112012201320142015% 20 30 40 50 60 70 SVKPOLCZEHUNSVNESPITAEU21 FRAUSAOECDCANDEUAUSGBRESTDNKMEXSWEKOR%EX ECUTIVE SUMMARYOECD Economic Surveys .

6 Hungary 2016 OECD 201611 MAIN FINDINGSKEY RECOMMENDATIONSM acroeconomic policiesPublic debt is still high, considering the openness and vulnerabilities of theeconomy. Public spending is high, especially given Hungary s income reduce spending over the medium-term to further lower thestructural and limit contingent public liabilities in the electricity loans are high and credit growth remains subdued,particularly to domestic a strategy for the asset management company to step-upoffloading of non-performing assets.

7 Expand capital surcharges on non-performing loans detained by banks beyond a certain competition in the banking sector by selling stakes in tax system still relies a lot on labour taxation, which is up the fight against VAT fraud. Rely more on non-distortive consumptiontaxes while monitoring the income distribution private investment and the business environmentFrequent changes in the regulatory framework undermine transparency, stability and formulation of regulatory efforts to cut red tape and make better use of regulatory effectiveness of the competition framework is reduced by exemptions tothe application of competition policy and entry barriers in network sector exemptions to apply the modern competition policyframework as widely as review mergers that might reduce competition and only allowcompetition limiting mergers on clear public interest non-discriminatory third party access in network skills to boost growthPublic

8 Work schemes aim at increasing labour market , few participants find jobs on the primary labour the focus on training and identify programmes that get workers intothe primary labour with younger children have low labour market early childhood care. Reduce the effective length of parental leave andprovide incentives for paternity technologies are increasingly making workers skills a tool set, including individual learning accounts, to promote from the vocational training programmes face recent reforms and continue integrating the vocational trainingprogrammes into secondary vocational in tertiary education has increased sharply over the past decades.

9 While graduation rates remain low and labour market outcomes are funding and expand means-tested support for disadvantagedstudents. Provide incentives to tertiary institutions to better respond to labourmarket Economic Surveys : Hungary 2016 OECD 201613 Assessment and recommendations Resuming inclusive growth The recovery is broadening Bolstering business investment Enhancing skills to boost growthASSESSMENT AND RECOMMENDATIONSOECD Economic Surveys : Hungary 2016 OECD 201614 Resuming inclusive growthPrior to the 2008 global crisis, the Hungarian economy was performing well comparedwith other countries in the region, partly due to unsustainable external lending, which ledto macroeconomic imbalances (Figure 1).

10 Subsequently growth was slower than in mostother countries in the region, before accelerating strongly more recently. Moreover,imbalances have been reduced, notably the current account deficit was turned into asurplus and exposure to foreign currency denominated loans was sharply , the level of real GDP only surpassed its pre-crisis level in 2015. In addition,there has been no significant income convergence vis-a-vis the five richest Europeancountries since the crisis, leaving Hungarian per capita incomes among the lowest in theOECD (Figure 2).