Going for Growth 2021 – Hungary

Hungary

To ensure a speedy recovery that benefits all, the improvement of the business environment and skills should be on top of the policy agenda. State-intervention and regulatory barriers hamper market entry and dampen productivity. Low graduation rates from tertiary education, weak vocational training outcomes and high drop-out rates lower employment prospects of young adults, who are at risk of long-term scarring given the impact of the pandemic on the labour market.

Performance prior to the COVID-19 crisis

Economy: Percentage gap with respect to the population-weighted average of the highest 18 OECD countries in terms of GDP per capita (in constant 2015 PPPs).

Inequality: The Gini coefficient for disposable income measures the extent to which the distribution of disposable income among households deviates from perfect equal distribution. A value of zero represents perfect equality and a value of 100 extreme inequality.

Environment: Greenhouse gas (GHG) emissions include emissions or removals from land-use, land-use change and forestry (LULUCF). A high exposure to air pollution refers to above 10 μg/m3 of PM2.5.

Source: Economy: OECD, National Accounts, Productivity and Labour Force Statistics Databases; Inequality: OECD, Income Distribution Database and World Bank, World Development Indicators Database; Environment: OECD, Environment Database and United Nations Framework Convention on Climate Change (UNFCCC) Database.

Boosting business dynamics and skills

Reforms to strengthen product market competition should be a priority. State-intervention and regulatory barriers hamper market entry and efficient reallocation of resources in service and network sectors. The competition authority needs more powers to reduce barriers to competition, and room remains to cut red tape further to improve the business environment. Streamlined insolvency procedures would facilitate market exit and support efficient reallocation of resources to the most productive companies during the recovery. Currently, all these barriers risk dampening productivity growth.

Reforms of the education system should continue to improve vocational training outcomes, reduce high drop-out rates and raise low tertiary graduation rates in order to improve employment prospects of the young (Panel A). An increase in the compulsory school-leaving age could enhance general skills and promote equity in outcomes. A continued roll-out of crèches and kindergarten in Roma communities is key to their better integration in early childhood education and care. To modernise the education system, digital skills and ICT use in school curricula should be enhanced. Moreover, training of the unemployed and low skilled workers needs to improve.

Unemployed and low-skilled workers have few incentives to enter employment or increase work efforts, as high income taxes erode their income gains (Panel B). Low-skilled persons from poor regions are particularly hard hit by long-term unemployment. Reforms of tax and social benefits can raise labour market participation, in particular of low-skilled workers, and lower inequalities. These measures should entail the adjustment of unemployment benefits to improve labour mobility, especially from poor regions into growing labour markets and a further lowering of the labour tax wedge. In addition, to improve labour market participation of mothers, the expansion of childcare facilities for children below the age of three should continue.

Vulnerabilities and areas for reform

1. Average tax wedge for a single person without child, at 67% of average earnings. Labour taxes include personal income tax and employee plus employer social security contributions and any payroll tax less cash transfers.

Source: Panel A: OECD, Education at a Glance Database; Panel B: OECD, Taxing Wages Database.

Further pension reform is needed in light of the ageing of the Hungarian population and old-age poverty, where as much as a fifth of pensioners receive pension benefits below the poverty line. An adequate basic state pension could guarantee a minimum income for all pensioners. Linking the statutory retirement age to gains in life expectancy could improve fiscal sustainability.

Hungary: Summary of Going for Growth priorities and recommendations

Recent progress on structural reforms

The pace of structural reforms has slowed in 2020 as the COVID-19 crisis has demanded the government’s attention, making reforms all the more urgent. Progress in reducing overly burdensome product market regulations has been limited. Progress has been achieved with reforms of employers’ social security contributions, which saw a cut from 17.5 to 15.5% in 2020. Reforms to vocational training led to a stronger involvement of the private sector in developing curricula of vocational institutions with the aim to better matching skills with labour market needs. To improve labour market participation of mothers, the government expanded further the availability of childcare facilities for children below the age of three. Moreover, a pension reform is gradually increasing the statutory retirement age from 62 to 65 by 2022. Despite this progress, room remains to link the retirement age with gains in life expectancy and tackle old- age poverty.

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