Economy - overview: Hungary has transitioned from a centrally planned to a market-driven economy with a per capita income approximately two-thirds of the EU-28 average; however, in recent years the government has become more involved in managing the economy. Budapest has implemented unorthodox economic policies to boost household consumption and has relied on EU-funded development projects to generate growth.
The economy is largely driven by exports, making it vulnerable to external market shocks. Following the fall of communism in 1990, Hungary experienced a drop-off in exports and financial assistance from the former Soviet Union. Hungary embarked on a series of economic reforms, including privatization of state-owned enterprises and reduction of social spending programs, to shift from a centrally planned to a market-driven economy, and to reorient its economy towards trade with the West. These efforts helped to spur growth, attract investment, and reduce Hungary’s debt burden and fiscal deficits. However, living conditions for the average Hungarian initially deteriorated as inflation increased and unemployment reached double digits. Conditions slowly improved over the 1990s as the reforms came to fruition and export growth accelerated. Economic policies instituted during that decade helped position Hungary to join the European Union in 2004; Hungary has yet to join the euro-zone, however. Hungary suffered a historic economic contraction as a result of the global economic slowdown in 2008-09 as export demand and domestic consumption dropped, prompting it to take an IMF-EU financial assistance package.
Since 2010, the government has backpedaled on reforms and taken a more nationalist and populist approach towards economic management. The government has favored national industries, and specifically government-linked businesses, through legislation, regulation, and public procurements. In 2010 and 2012, the government increased taxes on foreign-dominated sectors, such as banking and retail, because the move helped to raise revenues and decrease the budget deficit, thereby allowing Hungary to maintain access to EU development funds. The policy deterred private investment, however. In 2011 and 2014, Hungary nationalized private pension funds. The move squeezed financial service providers out of the system, but it also helped Hungary curb its public debt and lower its budget deficit to below 3% of GDP, as subsequent pension contributions have been channeled into the state-managed pension fund. Hungary’s public debt (at 73.9% of GDP) is still high compared to EU peers in Central Europe. Despite these reversals, real GDP growth has remained robust in the past several years because EU funding increased, EU demand for Hungarian exports rose, and domestic household consumption rebounded. To further boost household consumption ahead of an anticipated 2018 election, the government has announced plans to increase the minimum wage and public sector salaries, decrease taxes on foodstuffs and services, cut the personal income tax from 16% to 15%, and introduce a uniform 9% business tax for small and medium-sized enterprises and large companies. Real GDP growth slowed in 2016 due to a cyclical decrease in EU funding, but increased to 3.8% in 2017, in part as Budapest front-loaded drawdowns of EU funds ahead of the planned 2018 election.
Systemic economic challenges include pervasive corruption, long-term and youth unemployment, skilled labor shortages, widespread poverty in rural areas, vulnerabilities to changes in demand for exports, and a heavy reliance on Russian energy imports.
Definition: This entry briefly describes the type of economy, including the degree of market orientation, the level of economic development, the most important natural resources, and the unique areas of specialization. It also characterizes major economic events and policy changes in the most recent 12 months and may include a statement about one or two key future macroeconomic trends.
Source: CIA World Factbook - This page was last updated on January 20, 2018