Economy 10 November 2011, 2:01pm

Brussels sees problems with Hungary's job creation plans

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While it is a positive development that labour supply in Hungary has been expanding, job creation remains a challenge for the cabinet, especially in the short term, the European Commission said in its Autumn Forecast 2011-13 on Thursday. The EC forecasts the country’s unemployment rate to rise to over 11% in 2013, while the government expects the jobless rate no higher than 10%.

“Increasing the very low activity rate has been one of Hungary's key structural bottlenecks to growth, and a series of policy decisions are now bearing fruit. Translating this into job creation, however, remains a challenge especially in the shorter term," the EU executive said.
(The active population on the labour market means the combined population of employed and job seekers.)

In its view, the main source of new employment is set to remain the public works scheme.

The EC projects Hungary U-rate to come in at 11.2% this year, then to drop to 11.0% in 2012 only to rise back to 11.3% in 2013.

The Commission noted, however, that public works have so far “not contributed to increasing participants' chances of finding subsequent employment in the private market."

The drastic cut in the duration of unemployment benefits “further exacerbates the difficulties of finding another job in the available time frame before public works (which pay below the minimum wage) would become the main income source," it added.

Another blow by minimum wage hike

The plan to increase the minimum wage by 18% will “further hit labour demand exactly in the segment where employment challenges are the most acute," the EC said.

“This may also pose a serious threat to the viability of many small businesses that are already struggling and are facing serious liquidity constraints. The government intends to compensate the affected enterprises but the form this may take is unclear at the time of publication, and may not arrive in time to tide over the hardest-hit SMEs."

Lower growth, higher deficit seen in 2012

The EU executive expects Hungary’s GDP to grow by a mere 0.5% in 2012, while the government sticks to its estimate of 1.5%.

Commission Vice-President for Economic and Monetary Affairs Olli Rehn said that in the EC’s view Hungary’s budget deficit will exceed the government’s target next year, but still remain below the 3.0% EU ceiling.

However, the EC suggests further action to be taken by the cabinet and so it does not propose ending the excessive deficit procedure (EDP) against Hungary. Another said "message" of the autumn forecast is that the EC expects Hungary’s public debt to rise following a temporary drop this year.