GOVERNMENT OF HUNGARY CONVERGENCE PROGRAMME OF HUNGARY 2021-2025 April 2021 Convergence Programme of Hungary 2021-2025 April 2021 Contents 1. INTRODUCTION ......................................................................................................................................... 1 2. ECONOMIC POLICY OBJECTIVES .................................................................................................................... 2 3. MACROECONOMIC PROCESSES AND FORECAST ................................................................................................ 4 3.1. EXTERNAL ENVIRONMENT ...................................................................................................................... 4 3.2. COMPONENTS OF GROWTH .................................................................................................................... 8 3.2.1. FOREIGN TRADE .......................................................................................................................................... 12 3.2.2. INVESTMENTS ............................................................................................................................................. 13 3.2.3. CONSUMPTION ........................................................................................................................................... 21 3.3. LABOUR MARKET ................................................................................................................................ 25 3.3.1. EMPLOYMENT ............................................................................................................................................ 25 3.3.2. EARNINGS .................................................................................................................................................. 27 3.4. INFLATION TRENDS.............................................................................................................................. 28 3.5. CYCLICAL DEVELOPMENTS .................................................................................................................... 29 3.6. EXTERNAL BALANCE ............................................................................................................................ 30 3.7. ASSESSMENT OF THE ECONOMIC CONSEQUENCES OF GOVERNMENT MEASURES ............................................... 31 3.8. MONETARY AND EXCHANGE RATE POLICY ................................................................................................ 34 3.9. FINANCIAL SECTOR .............................................................................................................................. 36 4. GENERAL GOVERNMENT DEFICIT AND DEBT ................................................................................................... 39 4.1. BUDGET POLICY OBJECTIVES ................................................................................................................. 39 4.2. THE 2020 BUDGETARY OUTCOME ......................................................................................................... 39 4.3. THE 2021 BUDGET ............................................................................................................................. 46 4.4. 2022-25 BUDGETARY PROCESSES ......................................................................................................... 50 4.5. STRUCTURAL BALANCE ......................................................................................................................... 52 4.6. GENERAL GOVERNMENT DEBT ............................................................................................................... 52 5. SENSITIVITY ANALYSES .............................................................................................................................. 56 6. LONG-TERM SUSTAINABILITY OF PUBLIC FINANCES .......................................................................................... 58 7. QUALITY OF GENERAL GOVERNMENT ........................................................................................................... 59 7.1. STRUCTURE AND EFFICIENCY OF GENERAL GOVERNMENT EXPENDITURE .......................................................... 59 7.2. STRUCTURE AND EFFICIENCY OF REVENUES............................................................................................... 60 8. INSTITUTIONAL CHARACTERISTICS OF GENERAL GOVERNMENT ........................................................................... 67 8.1. BUDGETARY FRAMEWORK .................................................................................................................... 67 8.2. STRUCTURE OF THE GENERAL GOVERNMENT’S STATISTICAL DATA REPORTING .................................................. 67 TABLES ........................................................................................................................................................... 68 Convergence Programme of Hungary 2021-2025 April 2021 Convergence Programme of Hungary 2021-2025 April 2021 1. INTRODUCTION The Member States of the European Union submit policy responses and, as part of medium-term their stability or convergence programmes to the planning, presents the forecasts for the current and the Council of the European Union and the European following four years. Within the sensitivity analysis, it Commission by the end of April in every year. (The euro analyses the macroeconomic effects of two alternative aera Member States are required to prepare a stability scenarios that differ in the extent of post-pandemic programme, while non-euro area Member States a recovery. convergence programme.) The Convergence Programme has been prepared Hungary's Convergence Programme for 2021-2025 together with the National Reform Programme. The provides information on the Government's economic document provides detailed information about the policy objectives, describes the macroeconomic and implemented and planned policy measures. The cut-off budgetary developments, with particular attention to date of the Convergence Programme was 30 April the effects of the coronavirus crisis and the economic 2021. 1 Convergence Programme of Hungary 2021-2025 April 2021 2. ECONOMIC POLICY OBJECTIVES In the year since the 2020 Convergence Programme, Looking at economic developments we can conclude measures to address the health effects of the that, although the pandemic hampered economic pandemic and offset the negative effects on the activity to an unprecedented extent in the second economy have become dominant worldwide. Hungary quarter of 2020, a rapid correction took place from the had strong foundations and sound public finances third quarter and the recovery continued in the fourth thanks to the consistent economic policies of recent quarter, despite the reintroduction of measures to years, so the pandemic hit a resilient, balanced limit the spread of the pandemic. Strong fundamentals economy in March last year. and comprehensive and effective crisis management dampened the decline in GDP, so that the performance The government deficit was below 3% of GDP from of the Hungarian economy as a whole in 2020 proved 2012 to 2019, and accordingly, public debt has been to be more resistant to the pandemic than the average steadily declining year on year, with the debt ratio of the EU countries. decreasing from 80.4% in 2011 to 65.5% by the end of 2019. Thanks to responsible finance, the established Under the Economic Protection Action Plan, significant budgetary reserves and effective fiscal policy measures resources flowed into the economy, helping have provided significant room for manoeuvre to businesses, households and employees alike. From the address the economic difficulties caused by the point of view of income trends, an outstanding coronavirus pandemic. economic policy result is that despite the pandemic, the volume of employees’ incomes in the national As demonstrated by last year's convergence economy did not decrease, which was due to measures programme, the Hungarian Government made the to support job preservation and significantly rising decisions that were essential to successfully control the wages even in the midst of the crisis. pandemic in time, and in the meantime additional or extended measures have become necessary due to It is also favourable that the investment rate, which has new waves of the pandemic. Within this framework, been rising to a record high in recent years, remained the 2020 Budgetary Act was reworked and the at an exceptionally high level of 27.3% in 2020, despite Parliament is currently discussing the amendment of the negative impact of the crisis. The anti-cyclical the 2021 Budgetary Act, which takes into account the nature of economic policy is well illustrated by the fact joint aspects of the sustainability of public finances and that last year the ratio of public investment to GDP the provision of the necessary budgetary background increased to 6.4%, which puts Hungary in first place in for protection against and recovery from the EU comparison. The investment rate which has been pandemic. among the leading figures in the EU, the ongoing large- scale capacity expansions and the attractive corporate Expenditure on epidemiological measures and tax environment provide the basis for further economic protection, tax measures to alleviate the expansion of investment performance. burden of the crisis, and the operation of automatic stabilisers resulted in a budget deficit of 8.1% of GDP in The success