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Quick Facts
- Population:
- GDP (PPP):
- $187.6 billion
- 1.2% growth
- -0.2% 5-year compound annual growth
- $18,738 per capita
- Unemployment:
- Inflation (CPI):
- FDI Inflow:
Hungary’s economic freedom score is 67.1, making its economy the 49th freest in the 2012 Index. Its score has increased by 0.5 point, with declines in the management of public finance and investment freedom counterbalanced by improvements in property rights, business freedom, and fiscal freedom. Hungary is ranked 22nd out of 43 countries in the Europe region, and its overall score is well above the world average.
The Hungarian economy has implemented critical reforms in many facets of its system, helping to create and sustain a vibrant private sector that accounts for about 80 percent of economic output. Business start-up procedures have been streamlined, and a flat 16 percent personal income tax has been implemented. Overall regulatory efficiency is further enhanced by open-market policies that support increased trade and investment flows.
The relatively sound judicial framework that sustains the rule of law and provides consistent protection for property rights has contributed to Hungary’s stability and long-term competitiveness. However, respect for the principle of limited government appears to have weakened. Fiscal consolidation and better management of public finance are needed to curb a growing debt burden caused by excessive spending.
Background
Hungary emerged from 40 years of Communist rule more politically and economically open than its formerly Communist neighbors. The ruling coalition of the Hungarian Socialist Party and the liberal Alliance of Free Democrats collapsed in April 2008. The center-right FIDESZ party won a two-thirds majority in parliament in April 2010, and Viktor Orban became prime minister. Hungary has transformed itself into a market economy, but a high level of private and state borrowing left it vulnerable to the 2008 credit crunch. The economy rebounded in 2010 following a rise in exports, and continued growth is expected. Hungary joined the European Union in 2004 and in January 2011 assumed the six-month presidency of the EU for the first time.
The judiciary is constitutionally independent, and the threat of expropriation is low. Property rights are relatively well respected, and the legal framework continues to evolve, although overall progress has been sluggish. Protection of intellectual property rights has improved somewhat. Despite efforts to eradicate corruption more effectively, concerns remain, particularly in the area of government procurement.
The income tax rate has been cut in half to a flat 16 percent, and the top corporate tax rate is 19 percent. Other taxes include a value-added tax (VAT) and a property tax, with the overall tax burden equal to 39.1 percent of total domestic income. Government spending has risen to a level equivalent to 50.2 percent of total domestic output. The budget balance has been negative, and public debt has reached a level equal to 80.2 percent of GDP.
The transparent regulatory framework allows dynamic business formation and flexible and efficient operations. Dealing with licenses has become less burdensome, and the minimum capital requirement for launching a business has been cut to a level less than 10 percent of average annual income. The bankruptcy process is relatively easy. Labor regulations are fairly stringent, with rigid restrictions on work hours. Inflation has been under control.
Hungary maintains a common external tariff with other members of the European Union, and the trade regime is fairly competitive. The investment regime is relatively efficient, but deterrents such as bureaucracy and deficient transparency still impede the dynamic growth of investment. The government has largely withdrawn from banking, and over two-thirds of the sector is foreign-owned. Foreign investors participate freely in capital markets.