OECD Economic Surveys: Hungary 2024

1. As macroeconomic challenges recede, policy reforms become key

The last years have been characterised by severe macroeconomic challenges for Hungary, which put an end to a period of strong economic growth and improving public finances in the years preceding the COVID-19 pandemic. As the economy emerged from the pandemic, inflation rose to levels not seen in decades, initially on the grounds of international factors such as rising commodity prices and supply-chain bottlenecks and strong policy stimulus that stretched growth beyond its potential, later exacerbated by the economic fallout from Russia’s war of aggression against Ukraine. Against a backdrop of declining household real incomes, higher interest rates and weak investor confidence, domestic demand softened, leading to declining activity from mid-2022 onwards. At the same time, however, the labour market has proven surprisingly resilient (Figure 1.1).

Policymakers reacted to this challenging situation with a number of policy initiatives meant to attenuate the burden of high inflation and the recession on households. Some of these helped to shield ordinary Hungarians from an even stronger impact, but frequently at substantial fiscal costs. As growth recovers and inflation recedes, the need to unwind some of the legacy left behind by emergency measures adds to the existing medium-term challenges.

Figure 1.1. Economic indicators

Note: ¹ Indicator reversed so that the right side of the scale corresponds to a better outcome.

Source: World Bank; OECD Database on consumer price indices; OECD Database on labour market statistics; OECD calculations

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Looking ahead into the next years, economic policies will have to be guided by the need to rebuild fiscal space to address new and long-standing challenges. Population ageing will imply rising expenditure, especially on pensions. Amendments to the pension system will be needed to mitigate ageing-related costs, but that may not be enough to guarantee that public debt reverts back to 50% of GDP in the long term, as mandated by the Constitution. Reviewing existing policies and raising the efficiency of public spending will be key to ensure that investments for the future can be made without endangering fiscal sustainability.

Stronger productivity growth will be needed to sustain living standards amid a declining share of the working-age population. After a decade of falling labour productivity following the global financial crisis, productivity growth resumed in the late 2010s but remains lower than before the crisis. Future productivity growth will hinge on creating the right environment for new and innovative firms to enter markets and for existing firms to improve their performance. Innovation and new technologies will play a key role for that, and current challenges in digital preparedness and skills will have to be overcome.

Among the structural reforms that are discussed in this Survey, simulations show that increasing competition in network and services sectors, and improving the insolvency framework to the average of the five best-performing OECD countries has the potential to raise GDP per capita by a cumulated 3.2 percentage over 10 years. Moreover, reducing social contributions to the OECD average could raise GDP per capita by an additional 1.3 percentage point (Table 1.1).

Table 1.1. Illustrative impact on GDP per capita of structural reforms

Difference in GDP per capita 10 years after reform

	% of GDP
Competition reforms
Increase competition in network sectors	1.4
Increase competition in services sectors	1.3
Improve the insolvency framework	0.5
Tax reforms
Replace turnover taxes with VAT	0.5
Reduce social contributions to OECD average, by targeting low-income workers	1.3
Total	5.0

Note: For the three competition reforms, the simulation assumes that Hungary reaches the average product market regulation or insolvency framework characteristics of the 5 best-performing OECD countries.

Source: OECD estimates, based on (Xing, Bilicka and Hou, 2022[1]) and the OECD Economics Department’s Long-Term Model.

Reforms can make growth not only stronger but also more inclusive. Sizeable social transfers keep income inequalities and poverty at low levels. Nevertheless, inequalities of opportunities are high for women, especially after childbirth, and for those from less privileged socio-economic backgrounds, which is linked to the education system.

Investment in education will support stronger and more inclusive growth, but it will take additional resources to lift outcomes, such as the proportion of tertiary graduates, to the level of European peers (Figure 1.2). Rethinking how funds and teachers are allocated to schools could improve the support that students with lower socio-economic backgrounds receive.

A more recent structural policy challenge will be to master the transition towards a greener and less carbon-intensive economy. Price signals have been underexploited in the quest to achieve ambitious emission targets, with carbon prices being among the lowest in Europe. As a result, household energy consumption is high in international comparison (Figure 1.3).

Structural reforms will need to unwind energy price caps and the resulting subsidies, while finding more targeted and effective ways to protect vulnerable households against the economic effects of higher carbon prices. Moreover, the green transition will require increasing electricity supply, by raising the contribution of low-carbon energy sources. This would both reduce emissions and improve energy security.

Figure 1.2. Inclusiveness indicators

Note: ¹ Indicator reversed so that the right side of the scale corresponds to a better outcome.

The relative poverty rate is the proportion of people earning less than 60% of the median income, after accounting for taxes and transfers. The social mobility indicator is the expected number of generations for children belonging to a family at the bottom 10% of the income distribution to reach average income. The average PISA score is the average score of mathematics, science and reading.

Source: OECD Income Distribution Database; OECD (2018), A Broken Social Elevator? How to Promote Social Mobility, OECD Publishing, Paris; OECD PISA database; OECD Education at a glance database; Eurostat; OECD calculations.

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Figure 1.3. Sustainability indicators

Note: ¹ Indicator reversed so that the right side of the scale corresponds to a better outcome.

GDP per unit of GHG emissions is the production-based CO2 productivity. Fine particles concentration is the mean population exposure to PM2.5.

Source: OECD Green Growth Indicators Database; Household energy consumption per capita: Odyssee-Mure (https://www.odyssee-mure.eu/); OECD calculations.

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Against this background, the main messages of this Survey are:

• Fiscal and monetary policies will need to work hand-in-hand to fight remaining inflationary pressures, and recreate fiscal space to finance future spending needs.

• Productivity has slowed since the mid-2000s and structural reforms that facilitate new firm entry and exit, in addition to a wider take-up of digital tools are needed. Recent reforms to promote public integrity will sustain investor confidence if they are fully implemented.

• Social transfers keep income inequalities and poverty low but should be better targeted to those most in need, while inequalities of opportunity are substantial. Further expanding access to childcare facilities for young children and improving the education system would help to address these challenges.

• Hungary’s green transition has made progress but needs to accelerate. This will require a significant increase in electricity supply from low-carbon sources, with price signals acting as a catalyst for a more effective and efficient decarbonisation. Targeted transfers can help to protect vulnerable households against the effects of rising energy prices.

References

[1] Xing, J., K. Bilicka and X. Hou (2022), “How Distortive are Turnover Taxes? Evidence from Replacing Turnover Tax with VAT”, NBER Working Paper #29650, https://www.nber.org/system/files/working_papers/w29650/w29650.pdf.