- International Monetary Fund
- Published Date:
- March 1986
The openness of the Austrian economy, in which foreign trade amounts to approximately one fourth of GDP, makes it vulnerable to external disturbances; consequently, a major aim of fiscal policy has been to smooth out economic fluctuations to secure full employment. Despite variances in growth rates from year to year, the economy had an impressive growth performance over the period 1972–82, about 3 percent a year on average, although the last two years witnessed unusual slack in economic activity. The great importance assigned to the maintenance of full employment resulted in lower unemployment rates than experienced in most other industrial countries. It was not until 1981 that unemployment rose appreciably above 2 percent, and in the following year it rose to 3½ percent.
Despite strong inflationary pressures caused by the oil price crises, average annual price increases were kept at about 6½ percent during the period, which is well below the average for industrial countries. A strong social consensus among labor market partners and the Government, the so-called social partnership, coupled with a hard currency exchange rate policy, were significant contributors to this achievement.
The external current account did not show large deficits in individual years, but they were persistent. In 1982, for the first time in a decade, the current external account turned into a surplus, equivalent to a little over 1 percent of GDP. Although caused in part by sharply higher oil prices, the current account deficits also reflected the impact of fiscal deficits that were experienced in every year during the period under review. The fiscal and external deficits have become a cause for growing concern as have certain structural problems partly related to the emphasis in fiscal policy on employment.
|Real GDP, percentage changes||6.2||4.9||3.9||–0.4||4.6||4.4||0.5||4.7||3.0||–0.1||1.0|
|Rate of unemployment||1.2||1.1||1.4||1.7||1.8||1.6||2.1||2.1||1.9||2.5||3.5|
|Consumer prices, percentage changes||6.3||7.6||9.5||8.4||7.3||5.5||3.6||3.7||6.4||6.8||5.4|
|External current account balance as percentage of GDP||0.1||–0.3||–1.0||–0.1||–2.3||–3.6||–0.7||–1.0||–2.7||–2.0||1.1|
|(as a percentage of GDP)||29.9||30.3||30.8||31.5||31.5||32.2||34.7||35.0||35.3||36.8||35.5|
|Percentages of total revenue||100.0||100.0||100.0||100.0||100.0||100.0||100.0||100.0||100.0||100.0||100.0|
|Social security contributions||29.9||30.4||30.9||32.7||33.0||33.7||35.1||34.8||35.2||35.0||35.4|
|Payroll (manpower) taxes||7.2||7.6||7.6||7.8||7.9||7.9||6.8||6.6||6.5||5.8||5.8|
|Taxes on goods and services||27.9||29.5||28.1||27.0||27.7||26.9||25.6||25.7||25.0||24.8||25.0|
|Taxes on international trade||5.3||4.7||4.2||3.2||2.7||2.3||1.5||1.5||1.5||1.4||1.3|
|Nontax revenue and grants||6.6||5.7||5.6||6.5||6.7||6.4||7.1||8.2||8.7||9.8||9.8|
|(as a percentage of GDP)||30.1||31.9||32.3||35.5||36.1||35.9||38.8||38.7||38.6||39.7||39.9|
|Percentages of total expenditure||100.0||100.0||100.0||100.0||100.0||100.0||100.0||100.0||100.0||100.0||100.0|
|Expenditure on goods and services||30.4||25.8||26.2||27.1||27.1||27.0||26.0||25.8||25.6||25.7||25.9|
|Wages and salaries||14.6||10.8||10.6||11.0||11.2||11.0||10.6||10.4||10.3||10.3||10.2|
|Subsidies and other current transfers||55.7||56.2||58.0||58.6||58.6||59.6||60.0||59.7||59.1||58.7||58.9|
|Social security funds||…||25.1||25.6||26.5||27.1||27.4||26.3||26.5||26.8||26.7||26.2|
|Lending minus repayments||2.0||2.4||3.2||1.5||2.1||1.5||2.2||2.3||2.1||1.7||1.5|
|(as a percentage of GDP)||–0.2||–1.6||–1.5||–4.0||–4.6||–3.7||–4.0||–3.7||–3.2||–2.9||–4.4|
|Deposit money banks||0.1||—||—||0.3||0.7||0.4||0.4||0.8||0.1||0.5||0.9|
|General government expenditure and net lending/GDP||41.3||43.1||44.6||48.2||49.1||48.3||51.7||51.0||51.0||52.8||52.2|
|Central government debt outstanding/GDP||10.5||10.4||10.0||15.3||18.5||20.8||23.6||25.2||26.3||28.0||30.0|
From 1972 to 1982 the ratio of government expenditure to GDP rose from 30 percent to 40 percent. Expansionary fiscal policies designed to sustain activity and employment in the wake of the first oil price shock, as well as a fall in real GDP, largely explain the 3 percentage point rise in the share of government expenditure in 1975. Following two years at this level, the share rose by a further 3 percentage points in 1978, again the result of near-stagnant growth and measures to stimulate investment and secure employment. The ratio of government expenditure to GDP remained between 38½ percent and 40 percent until 1982. Expenditure on goods and services, including wages and salaries, shared in this relative increase, with its share in total expenditure remaining fairly constant at about 26 percent throughout most of the period. Subsidies and other current transfers increased faster than total expenditure, from 55½ percent to almost 59 percent of the total, reflecting increasing transfers to public and private enterprises and, in a lesser degree, social security funds. Interest payments on government debt took up a steadily growing share of total expenditure, from 2 percent in 1972 to 5½ percent in 1982, while the share of direct capital expenditure in the total declined from 10 percent to 8 percent. Net lending averaged about 2 percent of total expenditure with small deviations during the period.
Although the ratio of total revenue to GDP rose in most years from 1972 to 1982, it remained below that of expenditure throughout the period and rose less, from 30 percent to 35½ percent. Income taxes shared in this increase and remained around 20 percent of total revenue. The elasticity of this tax with respect to GDP was reduced by successive discretionary actions aimed at lessening the tax burden of low- and middle-income earners, stimulating business investment and employment, and reducing fiscal drag. Social security contributions paid by employers and employees grew faster than total revenue, with their share increasing from 30 percent to 35½ percent of total revenue during the period, reflecting, inter alia, higher rates.
Taxes on goods and services, of which the value-added tax (VAT) accounts for almost two thirds, declined as a percentage of total revenue, or from 28 percent in 1972 to 25 percent in 1982. Despite increased rates, the VAT grew at about the same rate as GDP, while excises, the other main tax in this category, declined in relation to GDP, as many of these taxes are specific rather than ad valorem. The share of payroll taxes not earmarked for social security expenditure declined slightly from 7 percent to 8 percent in 1972–77 to 6 percent in 1982, while the share of property taxes remained roughly constant at slightly under 2 percent. Taxes on international trade have become less important as a result of the phased abolition of duties on imports from the European Communities (EC) during the period 1973–77. Nontax revenue, because of higher property income, increased in relative significance, and by the end of the period accounted for almost 10 percent of total revenue, compared with 6½ percent in 1972.
The Fiscal Balance and ITS Financing
In each year of the period the central government finances recorded deficits, which amounted to 4 percent of GDP in the recessionary year of 1975 and reached a peak of over 4½ percent of GDP in the following year. These deficits are indicative of a deliberate expansionary fiscal policy stance that was aimed at neutralizing the effect of the first oil price crisis on activity and employment. Since then, high fiscal deficits have caused growing concern, but efforts to reduce them have been hampered by the policy objective of maintaining a high level of employment through tax concessions and employment-supporting expenditures. From 1977 to 1982, the fiscal deficits ranged between 3 percent and 4½ percent of GDP.
The Austrian Postal Savings Bank makes recommendations for deficit financing. Recourse to the central bank is confined to short-term discounting of treasury bills up to 5 percent of the past published tax receipts of the central government. The financing requirement is met largely by long-term borrowing in the private domestic market or abroad, the share of external borrowing being determined with a view to the domestic liquidity situation. Except in 1975, when external financing covered 70 percent of the deficit, and in 1981 and 1982, when similar ratios were 55 percent and 68 percent, respectively, most of the financing requirement has been met by domestic sources. The persistent fiscal deficits entailed growing government debt which, expressed as a ratio to GDP, rose from 10½ percent to 30 percent between 1972 and 1982. Over the same period the share of foreign debt in total debt rose from 20 percent to 32 percent.
The framework. The Central Government accounts for about three fourths of total general government expenditure, which in 1982 was almost equivalent to 52 percent of GDP. This expenditure includes transfers to other levels of government that amount to approximately one third of their total revenue and grants. Local government budget deficits have been fairly constant over time (at less than 1 percent of GDP) and thus do not play an active role in countercyclical policy. In the early years of the period, however, when inflation was a major preoccupation of economic policy, local governments pursued a restrictive expenditure policy; they refrained from increasing various fees and charges, and their share in federal taxes was temporarily frozen as special deposits in the central bank. Outside the budget proper, the Central Government has relied on the national industries and, in recent years, on special government organizations to realize the fiscal objectives of sustaining a high level of employment and supporting the business sector, especially the export industry.
The budget of the Central Government is prepared on an annual basis; long-term budgeting is not practiced. Since 1972, the ordinary budget has been supplemented by a contingency budget that can be activated in case of unexpected weakening of demand. In an effort to make fiscal policy more flexible, special provisions were introduced in the 1976 budget law that allow for the contingency budget to be implemented without further parliamentary approval if certain conditions are met. Also, revenue shortfalls, up to 5 percent of the year’s estimate, could be offset by borrowing without further authorization by Parliament. The contingency budget is made up of two tranches: a stabilization tranche that can be activated to alleviate problems in certain industries or regions, and a reflationary tranche that can be used to stimulate economic activity in general. The contingency budget was activated in the 1974–76 period and again in 1983.
Aims and measures. As indicated earlier, full employment was a major aim of fiscal policy throughout the period, although the emphasis naturally varied according to overall conditions in individual years. The Government’s contribution to the social partnership consisted largely in commitments to secure a high level of employment. Against a background of unstable external conditions, the authorities have relied on the federal budget as their chief anticylical instrument through the exercise of a flexible fiscal policy.
Having pursued a strict fiscal policy in the first years of the period in response to growing inflationary pressures, the Government shifted its policy priorities toward sustaining employment in mid-1974 to counteract the impact of sharply higher oil prices. In the following two years, the vigorous pursuit of this new objective, through both sides of the budget, led to a sharp widening of the fiscal deficit. Among measures on the expenditure side were the activation of contingency budgets during the period 1974–76 for road construction and other public investments, as well as for subsidies to agriculture, mining, and exports, release of frozen funds of local governments, and subsidization of investment credit to the business sector. Revenue measures that aimed directly at the stimulation of employment and private sector activity included special depreciation allowances for certain types of investment and a suspension of the investment tax that had been imposed in 1973 to make up for revenue loss (repayment of taxes on inventories) caused by the adoption of a value-added tax in that year.
The expansionary fiscal policies caused considerable concern, not only because of the rising public debt, but also because of the structural character of the fiscal deficit that was gradually becoming evident, with adverse implications for the future flexibility of fiscal policy. The elasticity of the revenue system had declined owing to tax changes, especially in direct taxes, embodied in an income tax reform initiated in 1973 that was intended to reduce the tax burden of low- and middle-income earners. Company taxation was also reduced to stimulate investment. At the same time, certain expenditure categories expanded rapidly, especially subsidies to public enterprises. Transfers to the social security system also escalated, in particular for pension insurance, which, unlike the health and accident insurance, is not financed by private contributions, but by substantial transfers from the budget. The increase in pension expenditure also reflected a steady rise in the ratio of pension receivers to the work force that contributes. The sharply deteriorating current account position of the balance of payments in 1976 and 1977 was another cause for concern, as was the rising unemployment in the years following, which, at around 2 percent, represented historically high rates for Austria.
The policy response to these developments was a so-called “dual strategy,” which tried to deal simultaneously with the fiscal and external deficits and the depressed state of economic activity. In the budget for 1978, the authorities announced their aim of reducing the fiscal deficit in the medium term; a target was set at about 2½ percent of GDP in that year and in the following year at about 2 percent. To restrain domestic demand and reduce the fiscal deficit, various tax measures were introduced, such as an increase in the VAT rate from 16 percent to 18 percent in 1976 and a third VAT rate of 30 percent on luxury goods in 1978.1 Subsequent revenue-raising measures have mainly included indirect taxes, such as energy taxes, but further income tax reductions have been continued, largely to compensate for fiscal drag.
Despite the increased emphasis on reducing fiscal and external deficits since 1977, preserving a high level of employment has continued to be a major aim of fiscal policy. To fulfill this part of the dual strategy, investment promotion programs were initiated in 1978 and employment programs were introduced in 1982. Apart from direct budgetary investment outlays, these programs have included interest rate subsidies and tax credits for certain types of investment. The nationalized sector has also played a significant role in the high employment policy by traditionally maintaining employment during recessions. However, this practice has added to the financial difficulties of the sector, which, in turn, have placed a further burden on future budgets, as the Government has in recent years assumed debt repayment obligations for the nationalized industries, in addition to paying direct subsidies. Private sector activity has also received similar support from the Treasury, which has assumed obligations relating to export guarantees as a means of promoting exports.
Overview and implications for future policy. A striking feature of fiscal policy over the past decade has been its success in maintaining full employment. The wider implications of this success, however, are less satisfactory. The declining growth performance of the economy toward the end of the period is in part attributable to insufficient structural adjustment, which was presumably delayed by the high employment policy that tended to slow down labor mobility. Policymakers now face a difficult choice between the social and economic aspects of policy. Also, the growing practice of supporting selected industries by granting credit guarantees and assuming debt-servicing payments has not only entailed a future budgetary burden but might also reduce incentives for efficiency and retard the adjustment process.
An additional implication of past fiscal policy stems from the persistence of fiscal deficits. It is arguable that the impact of increased fiscal deficits on interest rates may be limited, as interest rates in Austria are determined by external rather than domestic factors. While such factors may in part explain why the deficits did not appear to be crowding out private investment, the depressed state of activity and the slack in private sector demand for credit in the last years of the period may be a better explanation for the absence of crowding out. However, there is a probability that protracted deficits could affect expectations and exert an upward pressure on interest rates, and economic recovery might soon create crowding-out problems. Also, failure to reduce the deficit would increasingly restrict the flexibility of fiscal policy, which has in the past contributed significantly to successful management of the economy.
The authorities reacted to the deteriorating fiscal position by announcing in 1978 their intention to reduce the fiscal deficit in the medium term and setting specific targets in that regard. After some initial success, these aims were negated by the working of automatic stabilizers and discretionary measures to support employment. Although economic recovery abroad would ease the task of improving the fiscal balance, a change in policy priorities with greater emphasis on expenditure restraint is nevertheless necessary. An important step in that direction could be the reform of the social security system, particularly the pension system, that the authorities are contemplating.
These rates were raised further by 2 percentage points in 1983.