The EC said Hungary had made “some progress” in reducing the tax wedge for low-income earners and facilitating the transition of fostered workers to the primary labour market.

But it said “limited progress” had been made in reducing sectoral taxes, improving transparency and competition in public procurement procedures, improving the adequacy of social and unemployment benefits and bettering the educational outcomes of disadvantaged groups, in particular Roma.

The EC noted that Hungary’s external balances, internal financial balances and banking system had all strengthened, but said that low corporate investment was holding back productivity growth.

It said the government’s 2017 payroll tax and corporate tax reductions had reduced the tax burden by about 1.5 percentage point, improving Hungary’s competitiveness, but added that the tax wedge on labour costs remains high for several groups, especially low-income workers without children.

Sectoral taxes have been declining since 2013 but “still tend to complicate the tax system and weaken investor confidence”, the EC said.

The commission remarked that a crackdown on tax evasion and fraud had “produced tangible results”.

The EC called Hungary’s regulatory environment “unstable” and said stakeholder engagement and evidence-based policy making is “insufficient”.

Corruption risks “remain high”, it added. The EC said Hungary’s budget policy had been “prudent” but added that an expected fiscal loosening would pose a risk for the reduction of state debt in the mid-term.

The EC conceded that progress implementing the 2016 recommendations “has to be seen in a longer-term perspective (since the introduction of the European Semester in 2011)” and said the government had “achieved considerable progress” in strengthening public finances and had adopted recommendations on labour taxation, active labour market policies and social assistance every year since 2011.

The EC acknowledged the success of measures designed to remove barriers to business, such as the central bank’s Funding for Growth Scheme and the mandatory connection of tills to the tax office.

It also recognised the government’s agreement to reduce the bank levy and consult with lenders before taking steps that could impact their profits negatively.

The economy ministry pointed out that the EC had delivered positive assessments of a number of recent government measures in a statement released after the country report was published.

It noted an agreement on a reduction in payroll taxes paired with minimum wage increases, the lower corporate tax, the higher employment rate, the crackdown on tax evasion and steps that have contributed to an improvement in retail and corporate lending.

Republished with permission of Hungary Matters, MTI’s daily newsletter.