Labor market reforms would increase participation, particularly that of women and the low-skilled, also supporting higher growth,” the IMF staff said in the report, compiled after an Article IV Consultation in Budapest from February 3 to 15.

“Under this strategy, growth could accelerate to more than 3% over the medium term, the investment ratio could reach pre-crisis levels, and the public debt ratio could fall gradually to around 60%.”

The IMF’s Executive Board noted in a summary that high debt levels and financing needs leave the economy vulnerable to shocks and said the country’s medium-term growth prospects “appear subdued”. The directors underscored the need for policy actions to further reduce vulnerabilities and boost mediumterm, private sector-led growth.

They said priority should be given to “improving the composition and efficiency of public spending, broadening the tax base and rationalizing the tax system”, allowing a further reduction in sectoral taxes and higher infrastructure spending.

The directors “stressed the importance of structural reforms to improve the business climate and increase potential growth” and called for “efforts to reduce the regulatory burden, enhance policy predictability, and limit state involvement in the economy”.

The IMF staff said Hungary’s fiscal policy is “turning expansionary” and warned that authorities’ mediumterm budget plans would “leave public debt elevated”.

The staff said specific fiscal reforms “are yet to be elaborated” and noted that the cost of a recently launched home purchase subsidy scheme is “subject to large uncertainty”.

Health and education spending “have a long history of under-budgeting” and the state’s “ambitious” investment and acquisition plans “would have to balance against rising pressures for further tax cuts”, they added.

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