After re-election of the centre-left coalition in April 2006, the government announced ambitious plans for fiscal consolidation, following admission that its deficit could be well over 10% of GDP without consolidation measures and indication that entry to the euro area in 2010 was impossible. The 2006 deficit, at 9.2% of GDP, indeed marked another peak in Hungary’s strong electoral spending cycle. The government’s goals imply breaking out of this. The aim is for a deficit below 3%, and on a sustainable basis for the future, by the next election in 2010. The consolidation programme comprises immediate revenue and spending measures, many of which are intended to be temporary, combined with wide ranging structural reform to public spending. The potential payoff is large. A permanently low deficit would put public debt on a downward path and return dividends to the economy via lower interest rates, reduced current account imbalances and fewer problems with exchange-rate volatility.

The government deficit reached another election-year peak in 2006 and fiscal consolidation has become the focus of policy. This first chapter of the OECD’s 2007 Economic Survey of Hungary begins with examination of the impact of the poor budgetary record on the economy, why previous governments have failed to adequately address the problem and the prospects of success in the latest consolidation programme. Raising Hungary’s low employment rate also remains a significant policy challenge. The chapter examines progress in unemployment, disability and early-retirement schemes, as well as reforms to active labour market policy and the new system of minimum wages. The chapter also reviews developments in business policies, in particular the ease of doing business and competition issues, as well as progress in environment policy.

This chapter takes an in-depth look at the Hungarian government’s consolidation programme. The plan is ambitious, the deficit was over 9% of GDP in 2006 and the aim is for a deficit below 3% in 2010. The various new measures to tighten fiscal discipline in budget processes are examined and suggestions for further changes are made. Revenue-raising measures have been necessary for the initial phase of consolidation but in the longer term there is a need to get back on track with reducing tax burdens on businesses and households. The spending freezes are proving difficult to maintain but reasonable progress is being made on the wide range of structural reforms, though further reforms need to be considered.

Hungary’s counties and municipalities face difficult challenges. Participation in costcutting structural reforms initiated by the central government means cutbacks to administrative overheads and tough decisions in public services. At the same time, there are also challenges in modernising local infrastructures and in making full use of the EU funds for development projects. This chapter first looks at how meeting these challenges can be helped by better budgeting, in particular regarding the transparency and oversight of accounts. Financing arrangements are also examined and this reveals a general problem of complexity. Assessment of spending responsibilities suggests room for improving the roles of counties and regions and a need for cutbacks in central-government influence on service provision and publicsector wages at the local level.

Hungarian family policy focuses on providing generous options to take time off work to look after children. This system not only contributes to Hungary’s low employment rate but encourages long separation from the labour market, has largely failed to significantly influence fertility rates and is relatively expensive to run. This chapter looks at how to shift the policy focus towards reconciling work and family life. Reasons for under-provision in childcare by local governments are discussed and recommendations for further central-government intervention to improve supply are made. Recommendations for reform are also made regarding the complex system of family cash benefits and leave allowances.