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IP/00/338
Brussels, 6 April 2000
Commission and Hungary sign joint assessment of
medium-term economic policy priorities
Mr Zsigmond Jarai, Minister of Finance of Hungary, and Mr Pedro Solbes, EU
Commissioner for Economic and Monetary Affairs, today signed the second
“Joint Assessment of medium-term economic policy priorities of the
Republic of Hungary” for the period up to 2004 as part of the pre-accession
process.
The Hungarian authorities have prepared a Joint Assessment of Hungary’s mediumterm economic policy priorities, together with the Directorate General for Economic
and Financial Affairs of the European Commission. This is a follow-up to the first
Joint Assessment signed by the Hungarian authorities and the European
Commission in June 1997 which is now updated following the adoption of the
Hungarian government’s “Strategy of Catching up with Europe”, envisaging the
convergence of Hungary with the European Union in terms of economic performance
and the welfare of its citizens. The new Joint Assessment was one of the short-term
priorities identified in the Accession Partnership. It reflects the agreed view of the
Hungarian Government and the European Commission on medium-term economic
policies and the priorities of structural reform in Hungary. These policies should help
to consolidate economic transformation whilst establishing the conditions for strong
and sustainable growth of economic activity, reduction of unemployment and
improvement in the living standards of the population. The macroeconomic scenario
covers the period 2000 to 2004.
Mr Pedro Solbes recognised that “the Joint Assessment sets out an ambitious but
achievable economic programme.” He stressed that "Healthcare reform is
cornerstone of the structural reform agenda". He pointed to "the importance of
healthcare reform as part of future budget consolidation".
The framework of the exercise
The Joint Assessment is a common document of the Hungarian Government and the
European Commission, and it reflects the agreed view of the Hungarian Government
and the European Commission on medium-term macroeconomic policies and the
priorities of structural reform in Hungary. It is a follow up to the Joint Assessment
signed by the Hungarian Ministry of Finance and the Directorate-General of
Economic and Financial Affairs of the European Commission in June 1997, which
outlined a policy framework that would allow rapid economic development while
maintaining macroeconomic stability. It meets one of the short-term priorities of the
Accession Partnership and complements other documents, in particular Hungary’s
National Programme for the Adoption of the Acquis, which focuses more on legal
and institutional approximation. In June 1999 the government of Hungary adopted
“The Strategy of Catching up with Europe”, envisaging the convergence of Hungary
with the European Union in terms of economic performance and the welfare of its
citizens.
The Commission has already signed similar Joint Assessments with the
governments of Slovenia (November 1998), Latvia (February 1999), Bulgaria (June
1999), the Czech Republic (November 1999 – IP/99/824), Poland (February 2000 –
IP/00/140), Slovakia (February 2000 – IP/00/198) and Estonia (March 2000 –
IP/00/300). The Commission aims to sign a similar Joint Assessment with the
government of Lithuania soon.
Economic policy priorities
Given Hungary’s rather advanced stage of development, the new reform agenda
will not be as dramatic as this of the past decade. However, there are a number of
reforms which are urgently needed to ensure that the strong economic growth
enjoyed in recent years continues over the medium term. This Joint Assessment
focuses into three areas of reform in particular: healthcare, local government, and
railways. They are addressed as part of Hungary’s more general approach on
public sector reform, labour market policy and regional development.
The Joint Assessments targets healthcare as a key structural reform area. The
increase in medicine costs of the government budget will be contained by fixing the
subsidies on the basis of the pharmaceutical content of the product rather than its
name. In 2000, parliament decided that family doctor services will be privatised.
Outpatient treatment will follow in stages. The government also has plans to
counter the evasion of obligatory health insurance contributions and to extend the
coverage of private co-payments, which in many cases are needed to obtain
treatment, under voluntary and supplementary insurance schemes.
At the local level, greater self-governance is established at the city and district
levels, while associations of smaller communities are formed to benefit from
economies of scale and reduce the overlap of local administrations. A simpler and
less differentiated system of funding has been devised, which will rely more on
local sources of revenue. It is clear that all this should be based on considerations
of subsidiarity rather than expediency.
Another area in which public service obligations play a role is railway passenger
transport. The government has comprehensive plans to close down, suspend or
transfer to third parties some 1,000 km of railway lines and further staff reductions
will be made. An independent infrastructure company will be put in charge of state
assets; Freight and passenger transportation will be split, increasing the
possibilities for privatisation of freight transport. Passenger transport will continue
to be subsidised by central and regional governments.
Throughout the chapter on the priorities for structural change, the Joint Assessment
discusses measures to make the Hungarian economy more flexible. The
government is making efforts to increase the share of household income from work
and to reduce the share from social benefits. It also aims to stimulate the
development of small and medium-sized enterprises.
Macroeconomic developments have been broadly in line with the framework set
out in the 1997 Joint Assessment. Economic growth has been between 4 and 5
percent per year, and it has remained export-led. Hungary’s investment cycle has
become increasingly synchronous with that of the EU economy. Inflation decreased
by 8 percentage points in three years, to reach around 10 percent at the end of
1999. Although in the past two years the current account deficits have been at the
higher end of the 1997 projections, the external debt indicators continued to
improve and the financial system coped well with the turmoil on the international
markets. General government deficit and debt ratios has decreased in accordance
with the projections.
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The macroeconomic framework for 2000-2004 which is included in this Joint
Assessment assumes that the trend growth in labour participation, employment
and productivity will continue to enable economic growth in the range of 5 to 6
percent per year. Real wages will not grow as fast as labour productivity. The
reduction of the public borrowing requirement will help to make room for private
investment, which will need to be financed primarily out of the savings of
enterprises. It is assumed in the growth scenario that the investment to GDP ratio
could increase from 24 percent in 2000 to 30 percent in 2004. Net foreign direct
investment inflows are expected to be around 3 percent of GDP, including intracompany loans. Given the projected growth in exports, which is assumed to be
high but not as spectacular as in the recent past, real domestic demand growth is
expected to be at par with real GDP growth and reach approximately 6 percent in
2003-2004, assuming that EU transfers are forthcoming.
The government aims to have a general government deficit of less than 3 percent
by 2002. This will require a primary surplus in the range of 1.5 to 2 percent of GDP,
which is smaller to the one achieved in 1999, and further structural reforms in the
public sector. The government intends to maintain the priorities of the 2000 budget
in the years to come: to assist families with children; to develop small and mediumsized enterprises; to strengthen the residential construction programme; and to
support agricultural and regional development. Hungary’s commitments linked to
NATO membership and EU accession will further limit the room for manoeuvre on
the expenditure side. At present, pre-accession funds are expected to be in the
order of 200-250 million euro on an annual average basis.
Total government revenue is set to decline as a percentage of GDP in the medium
term. The government intends to reduce the discrepancies between the tax burden
on income from work and income from capital, for instance by granting tax
allowances based on the number of children. Corporate tax allowances, indirect
taxes and local taxes on business will be brought in line with EU regulations. The
revenue of local taxes will remain at the level at which they are levied, allowing for
some reallocation between municipalities.
The main objective of monetary policy is price stability. It is expected that inflation
will decline from 10 percent in 1999 to 3-5 percent by 2002; the government’s
target for 2000 is 6-7 percent. The speed of the reduction of inflation will determine
when Hungary will replace its crawling peg system by a system with a central rate
fixed to the euro and a wider fluctuation band (probably +/-15 percent). It is the
government's intention to do so when inflation falls below 5 percent and the
differential with Hungary’s main trade partners is smaller than 3 percentage points.
This is meant to prepare Hungary for participation in the ERM2 exchange rate
mechanism at the time of accession.
The full text of the Joint Assessment can be obtained from the office of Gerassimos
Thomas, Press and Communication Service, BREY 6/92.
It will also be made available in the Internet shortly at:
http://europe.eu.int/comm/economy_finance/document/eesuppc/joint_assessments/i
ndex_en.htm
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