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Budapest, Hungary

While the fund said Hungary’s economy is growing at a robust pace thanks to a favourable external environment, significant inflows of European Union funds and supportive macroeconomic and fiscal policies, the latter have increased the state’s role in the economy and loaded risk on to the public sector.

“Decisive fiscal action is needed to put public debt on a firmly downward path and help reduce fiscal risks,” the IMF’s executive board said.

It urged the government to embark on a moderate structural fiscal tightening beginning this year, consistent with gradually reducing the structural deficit to zero by 2021 – an annual consolidation of about 0.3% of GDP and reducing public debt from 70% to 60% of GDP in the medium term.

The fund said this should be accompanied by budget rebalancing to help boost long-term growth. On the revenue side this should include broadening the tax base by reducing exemptions and preferential regimes, reducing distortionary sectoral taxes, and further efforts to improve tax administration.

“As for expenditure, there is a need to eliminate generalised subsidies, increase the efficiency of public spending in health and education and rationalise the relatively high and increasing wage bill,” the board added.

It continued: “Structural reforms, with an increased role for the private sector, remain essential to Hungary’s growth potential.”

The fund said that increase state involvement is not only shifting risks on to public finances, but constraining growth and productivity and potentially crowding out private sector investment.

It recommended improvements to the business environment, including easing regulation and red tape, improving competitiveness by boosting innovation, vocational training and entrepreneurship and measures to upgrade labour force skills and increase participation.