August 2, 2004
The Austrian authorities appreciate the consultations with the Fund and the high quality of the staff report. They broadly agree with the staff’s assessment of Austria’s economic situation and its general recommendations on economic and financial policies. They welcome the Selected Issues study on growth and public finances as useful input for the policy of further lowering the tax burden. The Austrian authorities also wish to express their appreciation for the very constructive dialogue with the Fund in the context of the FSAP-mission.
The staff report highlights Austria’s good economic performance relative to its European peers in terms of GDP-growth, unemployment (the lowest in the EU), competitiveness and public sector deficit.
In the first quarter of 2004, at a rate of 0.7 percent of GDP, growth remained surprisingly low, mainly due to weak growth of private consumption. However, more recent hard data on exports, construction activity, tourism and employment clearly point to an acceleration of growth, thus confirming the growth projections of the IMF staff. Exports will be the main driving force and private consumption will lag behind, as is typical for an upswing in Austria.
The government undertook a sharp fiscal adjustment of some 2 percent of GDP in 2001, resulting in a small budget surplus (0.3 percent in Maastricht definition). The average fiscal deficit for the period 2000—03 amounted to 0.6 percent which is low by international comparison and relative to its cyclical position. The government let automatic stabilizers play fully and implemented three stimulus packages, which were quite successful in terms of private investment and expenditures for R&D. Investment contributed 1.3 percentage points to GDP growth in 2003, and the new tax premium for R&D financed expenditures to the tune of 0.15 percentage points, which helped to increase the ratio of spending on R&D as a proportion of GDP to 2.3 percent in 2004. Also, due to lower tax revenues, the deficit widened to 1.3 percent in 2003. As parts of the 2005 tax reform have been advanced to this year, my authorities expect a budget deficit of about 1.1 percent of GDP in 2004.
Last year, the staff welcomed the plan for a tax reform in 2005 aimed at lowering the high tax burden in Austria as a first step towards the 40 percent (of GDP) target ratio to be achieved in 2010. The staff recommended that the system be simplified and that the burden on factors of production be lowered. In May 2004, parliament adopted the tax reform amounting to 1.3 percent of GDP. The personal income tax schedule was simplified and the tax-free income threshold was increased, in particular for families and single parents. Some minor taxes were abolished or reduced. Most importantly, the corporate tax rate was reduced by 9 percentage points from 34 percent to 25 percent (while, the tax base was broadened) and a group taxation was introduced in order to foster Austria as a headquarter location. Incidentally, this tax reform is consistent with the econometric evidence from the very interesting Selected Issues study of the staff on growth-enhancing fiscal reform. Notably, the reduction of the corporate tax rate has led to a significant interest of foreign companies in investing in Austria.
We see no danger of pro-cyclicality of the tax reform, as the output gap will remain negative until 2006, previous investment incentives will phase out and reductions of public expenditure will phase in. Thus, the tax reform will support the Austrian economy on its way back to potential output, but will not lead to any overheating. As to the widening of the deficit to close to 2 percent in 2005, it is to be noted that this figure is still within the cyclical safety margin of the SGP and the government is strongly committed to ensuring that this is only a temporary departure from the government goal of a balanced budget over the cycle.
Austria will continue its reform process, cut public expenditure and achieve a balanced budget again in 2008. The next major steps will be the renewal of the internal stability pact and a revision of the law regulating fiscal relations between national and regional authorities. The Austria Convention aims at revising the role of the state, including a reduction of administrative layers. The Ministry of Finance has recently sent a proposal for a medium-term expenditure framework to the Convention.
Since the release of the staff report, important progress has been achieved in the harmonization of the various public pay-as-you-go pension systems. After 22 rounds of extensive negotiations with the social partners, the Government agreed on the reform on July 12. The draft law will be submitted to the parliament in autumn and will become effective on January 1, 2005.
Let me briefly point out the main pillars of the reform:
Individual, transparent pension accounts will be set up for all pension entitlements, regardless of the various pension systems. Thus, the distortions from the old system and mobility barriers between civil servants, workers, farmers and self-employed will be removed.
The base for the contributions will be harmonized, with the same floor and ceiling for all insured. The contribution rate will be 22.8 percent of gross wages, but farmers and self-employed will pay 15 percent and 17.5 percent, respectively.
Several provisions will address social hardship, allow for a more flexible entry age, and reward parenting, unemployment, military service etc.
The system will also include a factor correcting for increasing life expectancy.
Persons currently above 55 years of age will stay in the old system.
This harmonization of the pension systems is broadly in line with the recommendations in the staff report and will secure the long- term sustainability of public finances.
Other structural policies
Privatizations continued with the sale of the federal housing company to private investors. An amendment to the competition and cartel law is in preparation in order to bring the Austrian competition law fully in line with European standards.
1. General Assessment
Coming so soon after the establishment of the new Financial Market Authority (FMA), the FSAP process provided a valuable and timely “supervision” of Austrian financial market supervision. The Austrian authorities are pleased with the results, which they see both as a confirmation of the solidity of their supervisory institutions, and as valuable encouragement for further improvement.
2. Two results of the FSSA are particularly noteworthy:
1) The confirmation of the overall stability of the financial system, and of the successful strategy of the Austrian banks in Central and Eastern Europe, and of their strategies in financial consolidation and improvement of domestic earnings.
2) The confirmation of the reform of financial supervision in the form of the new supervisory structure, in particular the launching of the new Financial Market Authority, and of the successful inter-institutional cooperation with the other supervisory agencies, i.e. the ministry of finance and the central bank. The FSSA will bolster their intentions to strengthen the legal provisions for the supervisor by enhancing the FMA’s powers to regulate, as part of the process of implementation of Basel II. This will address the concern, relating to the FMA’s regulatory powers expressed by the mission.
3. Future work
i) Deposit Insurance
While the current system functions well and no medium-term problem appears likely to arise. Nevertheless, in the longer run certain adjustments should be considered, to take into account new developments in the banking system both in Austria and in the rest of Europe. The authorities are therefore exploring solutions along the lines suggested by the IMF.
ii) New pension instruments (“Zukunftsvorsorge”)
The FMA, as regulator has taken care to design adequate risk management instruments in the financial sector for the guarantees extended. Further, the FMA has introduced additional reporting requirements and conducts ad hoc surveys to actively monitor the risks involved. The FMA plans the publication of the results to ensure high market transparency. The FMA will also develop further prudential guidelines for this sector. From the point of view of bank and insurance supervision, the risks are well managed and early monitoring of any emerging unwelcome trends is ensured, enabling the authorities to take appropriate steps at any time.
iii) Public Liability
Efforts to address this issue are already well advanced, on the basis of discussions that were conducted independently of the FSAP. The intention is to address the following issues:
Clarify that the auditor is acting for the company audited and not for the FMA, thus excluding liability in all cases where the auditor is not commissioned by the FMA.
Identify the Federal Republic as the principal addressee of claims.
Discuss public liability in connection with the reform of the deposit insurance system
iv) Foreign Currency Lending
A number of important measures have already been taken, prior and during the FSAP, which are aimed at:
- Informing consumers very clearly about features and risks of some instruments used for foreign currency lending. Also, through extensive public debate on the subject, both the FMA and the OeNB have created public awareness of the issue.
- Obliging banks to ascertain fully the information level of their customers
- Publishing guidelines on this issue
- Finally, the FMA is also considering some legal steps to enhance client information and ensure risk awareness of consumers.
4. Anti Money Laundering
The FSSA shows that Austria has achieved a high level of compliance with the FATF 40+8 Recommendations for AML/CFT. There has been substantial progress in the last years, as a result of important legal amendments and an active policy by the FMA, as well as acute awareness and support from the private sector. Moreover, the FSAP-process has also provided an important incentive for Austria to further review and enhance its AML/CFT regime consistent with international best practices, and implement additional active monitoring measures.
Many of the recommendations in the report are already being actively implemented in Austria. Further guidance notes are currently being drafted by the FMA. The FIU shares practical knowledge in a very pro-active policy of seminars and awareness-raising meetings with financial institutions, and the onsite inspections program has been both intensified and increased. Also, Austria, as part of the EU, is actively working on a common implementation of the new 40 Recommendations (2003) to improve its system further.
Finally, we would like to underline that, as a member of the European Union, Austria is actively engaged in the further development of a number of projects related to all the assessed sectors, and expects that many of the suggestions of the IMF will be implemented in Austria either through the implementation of already existing EU Directives such as the Market Abuse Directive, or the Prospectus Directive, and the Investment Services Directive II (Financial Instruments Market Directive) or through the implementation of documents that are still under discussion such as the Basel II Directive or the 3rd Anti Money Laundering Directive.