OECD: Hungary must stabilise its economy for a durable recovery

The OECD report, released on Tuesday, March13th, in Budapest, shows that the fragile and highly-indebted Hungarian economy has been hard hit by the global slowdown and heightened financial market stress. It points out that controversial domestic measures have added to the uncertainty that is undermining business, household and market confidence. According to the OECD's latest Economic Survey of Hungary, swift action is needed to stabilise the Hungarian economy and put growth on a sound footing for a durable recovery.

"Strengthening the credibility and predictability of domestic policies is essential to develop an environment that is conducive to growth and rising incomes," the OECD says. Also, an agreement with multilateral organizations for new financial assistance is a necessary step toward restoring confidence. A financial assistance package would support needed fiscal consolidation and lower Hungary's debt burden in foreign currencies by stabilising the exchange rate. In addition, the government should prioritize permanent spending cuts and structural reforms to boost growth, the OECD said. If additional revenues are needed, the least distortive taxes should be raised. Fiscal consolidation efforts should be shared fairly across Hungarian society.

The credibility of any planned fiscal consolidation programme would be bolstered by providing the fiscal council with adequate resources to perform fiscal surveillance; by contrast, its excessive power to veto the budget should be removed, as it could potentially lead to a fall of government.

Hungary should also take steps to reduce household debt. Programmes to support household debt reduction should focus on distressed households, and ensure burden-sharing between lenders, borrowers and the government, to avoid damaging banks or provoking a credit crunch. The mid-December 2011 agreement with banks is a welcome step in the right direction, but is not sufficiently targeted to distressed borrowers.

Raising growth should be a key medium-term objective. Boosting labour force participation, particularly of under-represented groups, could be achieved by making it easier to combine work and families, better attuning the education system to labour market needs and reforming early retirement programmes. Reforming the health system would improve outcomes and raise efficiency. Promising avenues include reallocating resources from inpatient services to outpatient services, promoting prevention and healthy lifestyles and enhancing access to care.

Further information on the Economic Survey of Hungary is available at: www.oecd.org.

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