Commission uncovers problems with Hungary amidst coronavirus crisis

In the context of the 2020 European Semester, the European Commission has carried out a comprehensive analysis of Hungary’s economic policy and published it in the 2020 country report. After the assessment the EU executive has several concerns and recommends that Hungary take action in 2020 and 2021 to:

1. In line with the general escape clause, take all necessary measures to effectively address the pandemic, sustain the economy and support the ensuing recovery. When economic conditions allow, pursue fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. Address shortages of health workers and ensure an adequate supply of critical medical products and infrastructure to increase the resilience of the health system. Improve access to quality preventive and primary care services.
2. Protect employment through enhanced short-time working arrangements and effective active labour market policies and extend the duration of unemployment benefits. Improve the adequacy of social assistance and ensure access to essential services and quality education for all.
3. Ensure liquidity support to small and medium-sized enterprises. Front-load mature public investment projects and promote private investment to foster the economic recovery. Focus investment on the green and digital transition, in particular clean and efficient production and use of energy, sustainable transport, water and waste management, research and innovation, and digital infrastructure for schools.
4. Ensure that any emergency measures be strictly proportionate, limited in time, in line with European and international standards and should not interfere with business activities and the stability of the regulatory environment. Ensure effective involvement of social partners and stakeholders in the policy-making process. Improve competition in public procurement.
5. Strengthen the tax system against the risk of aggressive tax planning.

Highlights of the report

• Rule by decree

The EC notes that several member states have declared a state of emergency or introduced emergency measures, but it stresses that "any emergency measures should be strictly proportionate, necessary, limited in time, and in line with European and international standards. They should be subject to democratic oversight and independent judicial review."

If you had doubts that this remark was aimed at Hungary, the following will convince you that it was.

The EC reminded that in response to the COVID-19 epidemic, on 11 March 2020, the government declared a ‘state of danger’. Its duration is not pre-defined and the government has discretionary power to maintain it or to terminate it. The concrete measures taken by the government last until the termination of the ‘state of danger’.

On 30 March 2020, the Parliament (Prime Minister Viktor Orbán's supermajority) passed a new law that allows the government to set aside by decree any law.

The emergency powers granted appear more extensive than those adopted in other Member States, in light of the combined effect of broadly defined powers and the absence of a clear time limit.

Certain emergency measures using those powers raise questions as regards their necessity and proportionality and interfere with business activities and the stability of the regulatory environment. Such measures include allowing derogation from labour laws, deploying military liaison officers in strategic companies and placing under State supervision a publicly traded company.

As stated on 15 May 2020 Prime Minister Viktor Orbán expects that at the end of the month the government will be able to return to Parliament the special mandate it was given due to the coronavirus epidemic.

Strengthening judicial independence would also be crucial for an effective oversight over the emergency measures concerned.

• Fiscal measures to have a limited effect

Overall, while the fiscal measures aim at supporting businesses and preserving jobs, their scope and coverage remains limited compared to most Member States. Moreover, they are planned to be financed through reallocations across budget chapters and newly raised taxes, and are thus expected to have a limited effect from a macroeconomic stabilisation perspective.

• Health care spending needs to be stepped up

Additional investment and comprehensive reforms are necessary to rationalise the use of resources within the health system, reduce inequities in access and increase the quality of care.

Preventive and primary care services are underfinanced and their potential to improve the quality, accessibility and cost-effectiveness of the health system remain underexploited.

Although the authorities have started working towards alleviating Hungary's considerable shortage of health workers, regional disparities in the distribution of health personnel continue hindering access to care in some areas and for some vulnerable groups, such as marginalised Roma, but also people with disabilities face particular barriers. In the face of the demand shock for health systems generated by the COVID-19 pandemic, rapid action is required to start addressing these structural challenges and increase the resilience of the Hungarian health system.

• Duration of unemployment benefits too short, 'Kurzarbeit' needs to be simple

The Commission noted that the duration of unemployment benefits is the shortest in the EU, at a maximum of three months, which even in favourable economic conditions was well below the average time needed to find a job. It stressed that social protection schemes and measures need to protect those at risk of losing their employment, as well as the self-employed and unemployed.

Short-time work schemes, where employees receive income support from the state for the hours not worked, are a good way to protect employment.

During the pandemic, short-time work schemes are most efficient if their administration is simple and quick, and eligibility is not restricted to certain sectors or business types.

• Improved poverty situation can reverse quickly

While Hungary's overall poverty situation improved before the crisis, the trend can reverse quickly during the downturn, the EC warned. Income inequalities increased over the past decade, due in part to changes in the tax and benefit system.

The pandemic is expected to hit hardest the vulnerable groups who lack access to care and essential services and who live in overcrowded households.

The unexpected shift to distance learning is likely to further increase inequalities. Recent and ongoing investments in digitalisation of education have been important and need to conitnue. 

• Regulatory flexibility is key

Among services, retail is one of the most affected sectors due to the measures that prevented many businesses from functioning altogether or limited their operations significantly.

Regulatory flexibility would help retail rebound in the aftermath of COVID-19.

Newly-founded start-ups and scale-ups may need specific support, for example incentives for venture capital fund to increase their investments in these firms. These support measures will also help to avoid fire sales of strategically important European firms.

• R&D spending needs to be increased

Research and innovation is a critical driver for long-term growth and competitiveness. Hungary ranks as a moderate innovator. The shortage of highly skilled workers is a key obstacle to innovation.

Investments in public research and innovation, and a supportive research environment is necessary for recovery.

• Lack of competition in public procurement

The lack of competition in public procurement remains an important concern, since wider opening to competition is a key solution to face the crisis, revive the small business sector and help the economy to restart.

Despite the new legislative changes and digitalisation of public procurement, nearly half of all public tenders result in a single-bid procedure. The high number of single bids undermines the effectiveness of the public procurement system.

Commission audits on public procurement related to projects co-funded by the Union and carried out in recent years identified systemic deficiencies and showed weaknesses in the public procurement control system. In 2019, the Commission imposed around EUR 1 billion of financial corrections on Hungary due to these deficiencies.

• Aggressive tax planning

Tackling aggressive tax planning is key to improve the efficiency and fairness of tax systems.

Spill-over effects of taxpayers' aggressive tax planning strategies between Member States call for a coordinated action of national policies to complement EU legislation. Hungary has taken measures against aggressive tax planning by implementing previously agreed international and European agreed initiatives, but the absence of withholding taxes in Hungary on outgoing income to offshore financial centres could provide an escape route for profits to leave the EU without paying their fair share of taxes.

While the outgoing income flows such as royalties, interest and dividends towards offshore financial centres were relatively small in 2013-2017, Hungary records volatile and relatively high capital inflows and outflows through special purpose entities suggesting potential vulnerability to aggressive tax planning practices.

• 2019 recommendations remain pertinent

While the present recommendations focus on tackling the socio-economic impacts of the pandemic and facilitating the economic recovery, the 2019 country-specific recommendations adopted by the Council on 9 July 2019 also covered reforms that are  essential to address medium- to long-term structural  challenges. Those recommendations remain pertinent and will continue to be monitored throughout next year’s European Semester annual cycle. 

• Corruption, access to public information and media freedom still cause concerns  

Corruption, access to public information and media freedom caused concerns even before the crisis. These areas are even more exposed to further deterioration in the state of danger as control mechanisms have become weaker.

1. Investigation and prosecution appears less effective in Hungary than in other Member States.
2. Determined systematic action to prosecute high-level corruption is lacking.
3. Accountability for decisions to close investigations remains a matter of concern as there are no effective remedies against decisions of the prosecution service not to prosecute alleged criminal activity.
4. Restrictions on access to information continue to hinder the fight against corruption.
5. Dissuasive practices for accessing public information can deter citizens and non-governmental organisations from exercising their constitutional rights.

Cover photo: Getty Images