Hungary needs to decrease administrative burdens on businesses and reduce the tax wedge on low salaries, the OECD's Going for Growth report found. A serious pension reform may also be called for if the system is to be sustainable.
What has Hungary done for growth?
The income gap in Hungary has narrowed somewhat in recent years thanks to growing employment. GDP per capita and income produced per working hour have also increased and are now at two-thirds of the OECD average, the report said. Hungary has started reintegrating the long-term unemployed in the labour market, and there have been positive signs in higher education as well. There has been minimal progress in simplifying administration, however.
Positive signs aside, Hungary needs to further simplify its business and regulatory environment, the OECD said. Differentiating in certain industries hobbles competition, while the lobbying power of big corporations scares off many potential entrepreneurs. The quality of education should also be improved, especially for Roma people, according to the report.
The OECD also recommends that Hungary reduces the tax wedge for low income people, thereby decreasing their dependence on social allowances. Also, distortions in the tax system should be addressed.
As for achievements, the OECD highlights that the statutory retirement age is being raised in steps to 65 by 2022, adding that it should be linked to life expectancy.
And now the specific recommendations
In the second half of its analysis, the OECD makes specific recommendations to the Hungarian government for measures that could strengthen sustainable growth.
- Ease administrative and insolvency procedures for businesses. Overly burdensome and frequently changing regulation, coupled with lengthy and opaque insolvency procedures, are hampering business investment and productivity growth. Some measures to simplify administrative procedures have been implemented, for example, electronic submission in civil courts for business matters. The competition authority intervened in several markets in 2017 to propose more competition friendly regulation, the OECD said. It recommends implementing regulatory impact assessment to ensure regulations do not unnecessarily hamper market entry and competition. Insolvency procedures should be streamlined and effective reorganisation proceedings put in place. The time before formal closure should be reduced and market exit facilitated.
- Improve outcomes and equity in education. A steady decline in PISA scores, continued low graduation rates from tertiary education, poor vocational training outcomes and high drop-out rates are leading to skills-mismatches and hampering employment and productivity growth. A Digital Education Strategy for 2017-2020 has been adopted by the government to enhance digital literacy and usage, covering all levels of education from early school to adult learning. the OECD recommends extending the period of compulsory secondary schooling to enhance general skills and promote equity in outcomes; developing key performance indicators for vocational training institutes and embed apprenticeships better into the mainstream education; stimulating the collaboration between higher education institutions in strategic areas; integrating the use of ICT technology across most subject matters; and extending support to disadvantaged students in tertiary education.
- Increase work incentives for the elderly. The labour market participation and employment rates for workers over 55 years of age remain below the EU average. Only 53.6% of the 55-64 age group are working, and incentives to remain in the labour market have been scarce in the past. From 2019, social contribution taxes will no longer be charged for old-age pensioners who remain in the labour market, only the 15% personal income tax. In the OECD's view, the statutory retirement age should be indexed to gains in life expectancy. It also suggests improving lifelong learning on the job through introducing individual training accounts; allowing for part-time work while drawing a partial pension for the over-55s; and better targeted job-search assistance and monitoring to be systematically implemented for older unemployed workers.
- Reduce the tax-wedge on labour income. The average tax-wedge remains relatively high in international comparisons, especially for low-income workers. Social security contributions were reduced for employers in 2017 and 2018, and will fall further in 2019, taking the total reduction to 9.5 percentage points since 2016. Families with two children will receive increased benefits in 2019. As for further measures, the OECD said the tax wedge on low wages could be further reduced by the introduction of an employment tax credit that declines as wages increase and an increase in the tax-free threshold amount. It also recommends shifting the focus of taxation to less distortive taxes such as car-fuel use and property or land taxes.
- Increase female labour market participation. The participation rate for women after childbirth is very low by OECD standards, leaving out an important source of labour market supply and productivity growth. The report calls for expanding the availability of childcare facilities for children below the age of three, and aligning opening hours with working hours. It also recommends improving incentives for working mothers to return to the labour market, such as part-time employment, and promoting paternity leave.