Recent Economic Developments and Selected Issues

This paper reviews economic developments in Austria during 1995–96. A review of developments and short-term prospects for the domestic economy, the public finances, monetary and exchange rate policy, and the balance of payments is presented. Several estimates of potential output and the output gap in Austria are discussed, together with two macroeconomic scenarios that the IMF staff has developed. The paper provides an analysis of the Austrian federal structure. The distribution of government responsibilities, the revenue-sharing mechanism, and transfers among different levels of government are also discussed.


This paper reviews economic developments in Austria during 1995–96. A review of developments and short-term prospects for the domestic economy, the public finances, monetary and exchange rate policy, and the balance of payments is presented. Several estimates of potential output and the output gap in Austria are discussed, together with two macroeconomic scenarios that the IMF staff has developed. The paper provides an analysis of the Austrian federal structure. The distribution of government responsibilities, the revenue-sharing mechanism, and transfers among different levels of government are also discussed.

Basic Data

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Sources: Ministry of Finance; Austrian National Bank; Austrian Institute for Economic Research (WIFO); and Austrian Central Statistical Office.



Change as percent of previous year’s GDP.

The first series shows registered unemployment in percent of the dependent labor force. The second series, which includes the self-employed in the labor force and is based on survey data, corresponds to EU definitions.

Implicit price deflator for trade in goods.

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Projections. Fiscal data reflect authorities’ intentions.

End of period.


I. Introduction and Overview

The economic recovery faltered in the second half of 1995, in line with developments in other European countries, and real GDP is now estimated to have grown by less than 2 percent for the year as a whole. Concomitantly, labor market conditions have begun to worsen, but remain still favorable from an international perspective. Inflation has eased below 2 percent, reflecting the maintenance of the hard-currency policy and continued wage moderation, but also price-dampening effects of EU membership and weakening demand. The public finances deteriorated markedly last year, with the general government deficit rising to over 6 percent of GDP and the public debt ratio approaching 70 percent of GDP. Concurrently, the external current account deficit doubled to 2 percent of GDP.

Snap elections were held last December and a new coalition government agreement was concluded in early March of 1996. Subsequently, a fiscal consolidation package and twin budgets for 1996 and 1997 were approved by Parliament. The program seeks to reduce the general government deficit to 3 percent of GDP by 1997, and is estimated to cumulatively withdraw about 4 percentage points of GDP in fiscal stimulus at the federal level; additional consolidation efforts of almost 1 percentage point of GDP are anticipated at the lower levels of government. Consequently, the short term outlook is for continued sluggish growth, higher unemployment, a lower current account deficit, and low inflation.

A review of recent developments and short term prospects for the domestic economy, the public finances, monetary and exchange rate policy, and the balance of payments, is presented in section II of this paper. Several estimates of potential output and the output gap in Austria are discussed in section III, together with two macroeconomic scenarios that the staff has developed, particularly with a view to assess the structural fiscal balance over the new government’s term in office (1996-99). An important conclusion is the need for additional fiscal adjustment measures beyond the 1996-97 consolidation program, in order to prevent a renewed rise in the structural (and actual) deficit of the general government in 1998 and to achieve a clear downward trend in the public sector debt ratio.

A number of more specific topics are covered in subsequent chapters. Section IV provides an analysis of the Austrian federal structure. The distribution of government responsibilities, the revenue-sharing mechanism, and transfers among different levels of government, as well as efficiency implications and reform proposals are discussed. In section V, an analysis is undertaken of the pension system in Austria, which probably spends a higher share of GDP on pensions than any other country in the world. The projections confirm an anticipated widening deficit over the medium and long term due to demographic factors, early retirements, and generous pension replacement rates. These results strengthen the case for speedy fiscal adjustment in order to preserve the ability to cope with higher future pension outlays. Finally, in section VI, the focus is on external competitiveness which, as far as manufacturing is concerned, is shown to have consistently improved over many years. The analysis also suggests that some concern is appropriate with regard to overall competitiveness in Austria, due to high unit labor costs increases in sectors outside manufacturing.

Two appendices review current economic data publication practices, and the record and outlook for official development assistance and support for economies in transition, respectively.

II. Economic Developments and Prospects

1. Domestic economy

a. Aggregate demand and supply

Recent cyclical movements of economic activity in Austria have been relatively shallow and short-lived. The mild recession that started in the middle of 1992 bottomed out a year later and growth accelerated steadily in the second half of 1993. The recovery was sustained in 1994, with real GDP growing by 3 percent. Growth continued in the first half of 1995 at a more moderate pace of 2 1/2 percent, but weakened considerably in the second half. On balance, real GDP is now estimated to have grown last year by slightly less than 2 percent (Table A1).

Developments in domestic demand components were mixed in 1995. Business fixed investment remained robust, supported by falling interest rates and high profit levels, and in part due to a restructuring need in the face of heightened EU competition (Chart II-1). Also, stock building made again a significant contribution to GDP growth. Investment in construction stagnated, however, after seven years of steady expansion, as the boom in commercial and office building had resulted in a glut and pent-up demand for residential housing had largely been met. 1/ Steady growth in private consumption was initially maintained, in part due to purchases of durable goods that had been postponed earlier in the expectation of price cuts after EU entry. Also, while growth in real disposable incomes was weakening, consumption benefited from a modest fall in the overall household saving rate (Table A3). As the year progressed, however, private consumption growth tended to decelerate as the faltering recovery led to growing fears about job losses and the government crisis increased uncertainty about the public policy framework. For the year as a whole, volume growth in private (and public) consumption was still close to 2 percent, but the bulk of additional spending went to imports--via travel and cross-border shopping--so that sales by Austrian retailers remained almost flat. Also, strong investment demand for machinery and equipment had a high import content. At the same time, rapid growth of exports was being maintained, but fell still short of import growth and, as a result, the foreign sector’s net contribution to GDP growth was again substantially negative (Table A2). However, it should be kept in mind that reliable foreign trade data have not been available since Austria joined the EU and, consequently, that current national accounts estimates of 1995 exports and imports may well be subject to substantial revisions in the future. 1/


Austria: Growth in Aggregate Demand

(Volume percentage changes)

Citation: IMF Staff Country Reports 1996, 060; 10.5089/9781451802238.002.A001

Source: Austrian Economic Research Institute.

The distribution of value added across output sectors confirms the main trends outlined above. Strong export expansion stimulated production in the manufacturing and energy sectors, with the former still growing at a rate in excess of 3 1/2 percent in 1995. By contrast, construction output fell for the first time in many years, reflecting the above-mentioned factors as well as bad weather conditions and cuts in public sector infrastructure investments. The relatively high import propensity of households and businesses, and the concomitant weakness of spending on domestic output, are clearly reflected in the rapid growth of import duties as well as in the low progression of value added in the trade services sector and of VAT revenues (Table A4). 2/

Short-term economic prospects are not favorable and highly conditional on cyclical developments in neighboring countries, especially Germany. Economic growth will be supported essentially by exports, which should benefit from strong growth in non-OECD markets and from a general tax cut that may boost German imports. Domestic demand components will on the whole remain subdued, however. Private and public consumption will be constrained by the sharp fiscal contraction that is planned over the next two years (see Section II.2, below); however, the negative impact on aggregate demand may be partially neutralized by a lower household savings ratio, as households try to maintain consumption in a now more settled public policy framework. Spending on construction is anticipated to continue to decline, but the outlook for business investment is brighter as a number of projects in manufacturing were postponed in the unsettled political environment last year and credit costs are likely to decrease further. Also, import growth will continue to decelerate and the external sector’s contribution to growth will turn from sharply negative to near neutral. All in all, real GDP growth is likely to be below 1 percent in 1996 and, in view of the size of the fiscal retrenchment required in 1997, sluggish output growth can be expected to continue in that year as well.

b. Labor market

As the economic slowdown became more pronounced in the second half of 1995, labor market conditions have worsened. Since last summer, employment has been steadily declining and the number of registered unemployed has risen continuously. 1/ For the year as a whole, however, dependent employment was on average only marginally lower and registered unemployment increased modestly by about 1/2 percent compared with 1994. Consequently, the dependent labor force changed little and the official unemployment rate, which is defined in Austria as the ratio of the registered unemployed to the dependent labor force, rose slightly from 6.5 percent in 1994 to 6.6 percent in 1995 (Table A5). 2/ In recent years the authorities have also presented a second unemployment rate series (survey-based), which is more useful for international comparisons as it corresponds closely to standardized OECD unemployment data; by that measure the average 1994 unemployment rate was 4.4 percent (of the total labor force), compared with 4.6 percent for 1995. However, this data series has been discontinued and, since early 1996, another survey-based series is being published which corresponds to EU definitions. 3/ The latter shows a rise in the average unemployment rate from 3.6 to 3.8 percent (of the total labor force) over 1994-95.

By international comparison the labor market situation continues to be quite satisfactory, both in terms of the overall level of unemployment and its distribution across various groups and regions of the country. However, the near-term outlook is not favorable. In the past, both public sector employment and the migration of foreign labor have acted as buffers in economic downturns. In addition, easy access to generous early retirement schemes and disability pensions have provided relief on the supply side of the market. All these factors are changing. Immigration policy has been tightened for some time now, and the share of foreign workers is constrained to 9 percent of the labor force. 4/ As re-entry into the Austrian labor market is no longer assured, foreign workers often prefer to stay once they lose their job. The fiscal retrenchment program envisages cuts in public sector employment and access to early retirement has been made more difficult under the fiscal consolidation package adopted in April 1996. Meanwhile, stronger competitive pressures are encouraging employers to maintain labor productivity, rather than the level of employment, over the business cycle. Thus, the responsiveness of employment to cyclical movements is rising in Austria. With output growth decelerating, employment is forecast to decline by about 1 percent a year over 1996-97. 1/ Consequently, the unemployment rate (national definition) is projected to increase from 6.6 percent in 1995 to about 8 percent of the dependent labor force in 1997. This increase corresponds to a more moderate rise of the EU-standardized unemployment rate from 3.8 to 4.2 percent of the total labor force.

The growing cyclical sensitivity of employment underscores the need for more flexible labor market conditions. The continuing decline in the number of self-employed persons is indicative of excessive administrative obstacles and regulations that constrain employment growth in the services sector. Also, the social and political context continues to militate against part-time work, which helps to explain relatively low participation rates for women and older workers. Finally, the bulk of spending on labor market policy takes the form of passive income support measures (over 1.5 percent of GDP), rather than active measures (about 0.2 percent) such as information provision, counseling, training, and subsidization of employment of certain groups (the disabled, youth, and the long-term unemployed).

c. Prices and wages

Inflationary pressures eased further last year, with the consumer price index on average rising by 2.2 percent compared with 3 percent in the preceding year (Table A7). In the early months of 1995 the consumer price inflation rate remained fairly steady at around 2 1/2 percent, but a significant easing occurred in the second half of the year; by October the year-to-year rate fell below 2 percent, for the first time in almost seven years, and it eased further to 1.8 percent at the end of the year. Meanwhile, the wholesale price index remained virtually stable in 1995, which bodes well for future inflation at the retail level. A number of factors have contributed to this development, including the weakening of final demand, continued wage moderation, and the (delayed) impact of exchange rate appreciation earlier in the year on foreign trade prices. Also, the price-dampening effects of EU membership are increasingly being felt. 2/ Apart from the impact of the lower external customs tariff, these effects showed up first in food prices following adoption of the Common Agricultural Policy at the beginning of 1995, but are now also reflected in the prices of apparel, shoes, and other manufactures, as competitive pressures have intensified at many levels of production and distribution. However, rents -and other housing costs rose again at a fast pace of close to 6 percent in 1995, while inflation has continued unabated at annual rates of over 4 percent in a number of services sectors.

For a number of years Austria has had the reputation of being a high-price country where market-segmentation strategies could be successfully applied. Expectations of sharp price reductions in the wake of EU membership and numerous price comparisons with other countries, fueled by an awareness campaign of the Chamber of Labor, appear to have fostered the emergence of a competitive spirit. 1/ As Austrian consumers have become more price-conscious, retailers have come under increasing pressure to lower prices, which should help to moderate inflation in the future. While the one-off EU effect on food prices has probably largely run its course, similar effects should increasingly show up in other areas, including services. Public charges and fees can be expected to rise faster than last year, in view of the fiscal consolidation program for 1996-97. Generally, however, the prospective real decline in household disposable income and decelerating consumer demand should limit the margin for price rises. On balance, the outlook is for annual inflation to continue at about the 2 percent level over the next two years.

Following the conclusion of a “stability pact” among the social partners in the fall of 1993, 2/ wage cost increases have moderated compared with developments in earlier years. While there is no national wage round in Austria, wage bargaining is still highly concentrated--if account is taken of the large degree of imitational bargaining--with the three largest collective agreements covering about half of the dependent labor force and with less than 5 percent of wage and salary earners not being covered by any such agreement. However, the resultant contractual or basic wage rates (Tariflöhne) are typically supplemented by additional pay increases, which vary considerably from one sector and plant to another, so that “effective” wages tend to be higher and more differentiated than the contractual ones. In 1995, gross wage income per employed person rose by about 3.8 percent (Table A7) and unit labor costs by about 1.9 percent. The increase in gross wages per capita is expected to level off over 1996-97, as the less favorable outlook for output and employment will act as a brake on wage increases in cyclically sensitive sectors such as manufacturing and construction, and public sector wages will be virtually frozen. Meanwhile, rationalization efforts in many sectors should ensure continued productivity growth, so that unit labor costs should increase only modestly.

2. Public finances

a. Background

The public finances continued to worsen in 1995 for the third consecutive year. The general government deficit, which had widened from 1.9 percent of GDP in 1992 to 4.5 percent in 1994, increased sharply further to 6.2 percent in 1995 (Table II-1). 1/ The gross public debt/GDP ratio increased from 58.3 percent of GDP in 1992 to 69.4 percent in 1995. This development stood in sharp contrast to the gradual improvement in the preceding five years. During the period 1987-92, the general government deficit fell by over 2¼ percentage points of GDP to 1.9 percent of GDP, one of the lowest in the OECD area, while the debt ratio began to decline.

Table II-1.

Developments in the Public Finances

(In percent of GDP)

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Sources: Federal Ministry of Finance.

National accounts basis.

Definition conforming to the Maastricht Treaty.

Differences between general government and the sum of federal sector plus lower levels are due to temporary imbalances of the social security funds.

The improving performance of the Austrian public finances during 1987-92 was due to a combination of economic growth and fiscal consolidation. The main thrust of the consolidation efforts had been (i) expenditure restraint, (ii) improvements of public sector efficiency through a stronger medium-term orientation and a closer link between spending decisions and financing responsibilities in the design of intergovernmental financial relations, (iii) a pension reform, including an increase in the pension age, and (iv) structural reforms, including the transfer of ownership and management of several large public enterprises to the private sector. The improvement occurred almost totally at the level of the federal government. The lower levels of government, the states (Länder) and municipalities, maintained a small consolidated surplus. The social security funds retained a broadly balanced position, after federal transfers.

In 1993, fiscal developments were affected by the cyclical downturn and measures that increased social expenditure. Lower receipts from taxes on profits and incomes other than wages and much higher expenditure for unemployment benefits were the result of the slowdown in activity. Additional pressure came from newly introduced outlays for family allowances, particularly for maternity leave, and transfers to the social security funds to finance new welfare programs for the elderly and the disabled. As a result of these factors, the general government deficit more than doubled to 4.1 percent of GDP, mainly reflecting the deterioration at the federal level.

Despite a significant recovery of the economy, the general government deficit widened further in 1994. This outturn reflected both unexpected revenue shortfalls--traceable to the 1994 tax reform 1/ and to the cyclical reaction of revenues to low profits in the preceding recession--and, as in 1993, higher than anticipated transfers to social security funds and pension payments. This time, most of the deterioration occurred at the lower levels, while the federal deficit was 4.5 percent. Therefore, the government failed to achieve its medium-term target for the federal deficit of 2 ½ percent of GDP (originally set for 1992 and then postponed to be reached in 1994).

b. Developments in 1995

As noted, the general government deficit deteriorated further to 6.2 percent of GDP in 1995. This outcome was strongly affected by Austria’s EU accession (Table II-2). The net first year contribution of the general government to the EU amounted to S 48.6 billion (or 2.1 percent of GDP), of which two thirds was provided by the federal government and one third by the lower levels of government. This total amount comprised regular EU contributions (S 23.6 billion), the first installment of Austria’s capital subscription to the European Investment Bank (S 2 billion), and tax revenue losses (S 16.5 billion). Of the latter, S 12 billion was a one-time loss resulting from the harmonization of VAT collection lags with those in the EU and S 4.5 billion was a permanent loss owing to tax adjustments (including lower import tariffs) to EU law. Also included in this total amount were domestic transitory payments to the agricultural sector and the food industry to facilitate their adjustment to the EU’s common agricultural policy (S 7.7 billion). As a return flow, the EU paid S 1.1 billion to the federal budget. In addition, there were EU payments to recipients outside the general government, mostly to farmers (S 9 billion). Transfers from the EU to farmers are likely to offset national transfer programs to farmers, thereby providing additional relief to the federal budget.

Table II-2.

Financial Impact of EU Membership

(In billions of schillings)

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Source: Federal Ministry of Finance.

Total includes EU payments for recipients outside the general government of S 9 billion in 1995 and growing amounts in the following years.

Overall, tax revenues and social security contributions rose only by 0.8 percent in 1995; the levy ratio consequently declined by 1½ percentage points to 41.1 percent of GDP. Collections of direct taxes rose by 7.4 percent, whereas those of indirect taxes declined by 9.2 percent (mainly due to the prior deduction of EU contributions from VAT revenue, the harmonization of VAT collection with EU practice, and cross-border shopping by Austrians). Social security contributions increased by 5.3 percent, largely attributable to higher pension insurance contribution rates for civil servants (from 10.25 percent to 11.75 percent). At the same time, public expenditure grew faster than nominal GDP and the expenditure/GDP ratio increased further by slightly more than ½ percentage point to 52.7 percent of GDP.

The deviation of the outcome from the official projection of a deficit of 4.5 percent was mainly due to underestimated contributions to the EU, part of which--the share of the lower levels of government--had not been budgeted for, and higher transfers to the pension system. The latter were attributable to: (i) the unexpectedly high demand for full credit toward pension rights of up to four years of child upbringing (Kinderanrechnungszeiten), which was underestimated by S 6 billion; (ii) a shortfall of payroll contributions because of the weaker than expected economic growth (underestimated by S 2.2 billion); (iii) additional federal grants to the pension system mandated by a constitutional court decision (S 2.5 billion); (iv) additional pension payments due to the continued rapid increase in the number of early retirees (S 1.5 billion). 1/ Another important factor relates to unanticipated changes in the procedure of housing financing. By law, 9.2 percent of revenue from wage and income taxes collected by the federal government are earmarked for housing financing by the states. In 1995, several states switched their support unexpectedly from loans (counted “below” the line in determining the deficit) to grants (counted “above” the line), which increased the imbalances in the states’ budgets by S 2 billion.

c. Comparative fiscal performance

The fiscal deterioration over 1992-95 was at variance with aggregate developments in other EU countries (Table II-3). On average, other EU countries kept their total expenditure/GDP ratio unchanged and brought their current receipts/GDP ratio down by 0.6 percent of GDP. By contrast, Austria let the former rise by 1.6 percentage points and the latter drop by 2 percentage points. As a result, both ratios were about 2 percentage points higher than the average of the other EU countries.

Table II-3.

Austria’s Public Finances and Developments in Other EU Countries

(Ratios in percent of GDP)

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Source: OECD, Economic Outlook, No. 58, December 1995; and staff calculations.

Excludes Austria and Luxembourg.

Current outlays plus net capital outlays.

Excludes capital receipts.

OECD estimates of the structural component of general government financial balances.

The fiscal deterioration in Austria resulted mainly from discretionary measures that widened the structural fiscal balance. 1/ According to OECD data, the latter has worsened sharply, from a deficit of 2.1 percent of GDP in 1992 to a deficit of 5.1 percent in 1995. This can be traced to improvements in the social safety net introduced in 1992-93, the 1994 tax reform measures, which lowered tax revenues in 1994 by an estimated S 13.2 billion and by even higher amounts in the years thereafter, and the 1995 EU accession. By contrast, the average structural fiscal balance of EU member countries has moved in the opposite direction, namely from minus 5.2 percent of GDP to minus 3.7 percent of GDP.

The deterioration of the primary balance has been even worse. The Austrian primary balance shifted from a surplus of 1.3 percent of GDP in 1992 to a deficit of 2.2 percent of GDP by 1995, whereas the average primary deficit of other EU members virtually disappeared. Since interest rates in Europe are--and will presumably be for the years ahead--above economic growth rates, the built-in momentum requires a primary surplus merely to stabilize the debt/GDP ratio. For a policy focusing on long-term fiscal sustainability, it might not be sufficient to stabilize the current level of the debt/GDP ratio but rather to aim for a gradual reduction in the debt/GDP ratio.

d. Prospects for 1996 and 1997

The failure to reach agreement on the 1996 budget precipitated new elections in December 1995 and caused a further delay in the implementation of corrective measures. According to an official current services projection for the period 1996-99 (Kassasturz) made in late 1995, the fiscal position was rapidly becoming unsustainable, attributable to the continuing effect of past structural measures, continued EU contributions, and population aging. In the absence of corrective measures, the general government deficit would have grown to 7½ percent of GDP in 1999 and the public debt would have risen to almost 90 percent of GDP.

In March 1996, the federal government took the unprecedented step to present two budgets for 1996 and 1997 in order to confront the exceptional fiscal situation and put the public finances on a course that would permit Austria to participate in the final stage of EMU. The core element of the two budgets is a comprehensive consolidation package which, after full implementation and based on the official growth assumptions in early 1996, would reduce the general government deficit to slightly below 3 percent of GDP in 1997. On the basis of the official current services projection, the consolidation need to meet the deficit target in 1997 was estimated at S 100 billion. At the time of the budget presentation, the authorities’ intention was to cut back the general government deficit from its 1995 level of 6.1 percent of GDP (or S 145 billion) to 4.2 percent of GDP (or S 103.3 billion) in 1996 and 2.9 percent of GDP in 1997 (or S 72.3 billion) in 1997 (Table A14). To reach this target, current revenues were projected to grow by 5.1 percent annually, on average, whereas expenditures were budgeted to increase by 1.7 percent a year. Due to the subsequent downward revision of both the 1995 GDP and the 1996 and 1997 GDP growth rates, these budget projections were translated into a 1995 general government deficit of 6.2 percent of GDP and projected 1996 and 1997 general government deficits of 4.5 percent and 3 percent of GDP, respectively.

The expected sharp reduction of the deficit in 1996 is attributable to three factors: the initial effects of measures included in the consolidation package, the one-off character of the VAT collection loss (S 12 billion) in 1995, and the expected reduction of EU payments by S 6 billion.

The consolidation package is designed to rely by two thirds on expenditure restraint and by one third on revenue increases. On the expenditure side, the plan is to hold all large expenditure categories at their nominal 1995 levels, and to introduce a number of structural reforms which will dampen public expenditure in the medium-term. The rationale behind the plan is to improve the productivity of public sector employees, to lower expenditure related inefficiencies, and to improve targeting of social expenditure programs. The most important measures are (i) virtual zero wage rounds for the civil service until 1997, (ii) reduction of the number of public employees (including postal workers) by 10,500 by the end of 1997, (iii) reduction of subsidies to students, (iv) restrictions applied to nursing care, (v) freezing of Austrian funds for active labor market policies, (vi) suspension of the regular pension adjustment in 1997, (vii) reduction of subsidies by 10 percent in all cases where no economic or labor market effect is discernible, and (viii) reform of administrative processes and procedures (Table II-4). Additional short-run relief for the federal government can be expected from higher license payments by the Austrian telecommunications company, from higher prepayments of corporate income tax by the Austrian post and telecommunications service company (ÖPT), and from the prevention of increases in contributions to the Austrian railway company (ÖBB).

Table II-4.

The 1996-97 Fiscal Consolidation Program

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Source: Federal Ministry of Finance; and staff calculations.

Tobacco, inheritance, gift, insurance, and car registration taxes.

On the revenue side, measures to pursue the strategy of streamlining and broadening the income tax base include (i) reduction of the rate at which special expenses are deductible from the personal income tax base, (ii) reduction of the general tax credit for incomes above a certain ceiling and its abolition for high incomes, (iii) reform of taxation for social security contributions on Christmas and vacation bonuses (so-called 13th and 14th salaries). Further revenue enhancing measures are (iv) temporary restrictions on the deduction for losses from the corporate income tax, (v) abolition of special tax subsidies, (vi) increase in the rates of the tobacco excise and the insurance tax, and (vii) extension of energy taxation to natural gas and electricity.

The fiscal strategy combines the fiscal consolidation package with incentives to stimulate economic activity and enhance Austria’s attractiveness as a location for investment. These incentives are targeted to mobilize financial reserves. Budget measures include the improvement of the preferential housing saving scheme, the abolition of restrictions on the use of housing rent reserves, a higher investment allowance, lower tax deduction on several forms of savings and investment, and increased reliance on road pricing. Higher revenues from road pricing are earmarked to finance major road construction projects. Further incentives to promote employment and support the construction industry include a five-year S 60 billion railway infrastructure program financed by the off-budget Austrian railways, and the sale of real estate to finance new housing construction by the off-budget federal real-estate agency (Bundesimmobiliengesellschaft).

Notwithstanding the full implementation of the consolidation package, the general government debt will continue to grow faster than nominal GDP and increase from its 1995 level of 69.4 percent of GDP to 72.8 percent of GDP in 1997 in the absence of debt reduction with the proceeds from asset sales. This conventionally defined debt/GDP ratio does not include contingent liabilities and unfunded liabilities to future pensioners under the pay-as-you-go pension system (for further details on the Austrian pension system, see section V of this report). In aid 1995, the total of contingent federal liabilities stood at S 682.4 billion (or 29 percent of GDP), mainly reflecting export credit guarantees extended by the Austrian Control Bank (ÖKB). The annual net budget impact related to contingent federal liabilities, calculated as the difference between outlays for liability claims and return flows from recoveries has remained very small (Table II-5).

Table II-5.

Contingent Federal Liabilities

(In billions of schillings)

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Sources: Federal Ministry of Finance; and staff calculations.

June 30, 1995.

Of which: energy sector, S 21.1 billion; export promotion, S 480.5 billion; public enterprises. S 50 billion; private-public enterprises, S 99.4 billion; and federal funds, S 18.7 billion.

On April 26, Parliament approved the 1996 and 1997 budgets with only minor changes in the 1996 budget, mainly to take account of the recent downward revision of economic growth rate and a re-calculation of EU contributions. On a national accounts basis, the 1996 federal government deficit will increase by S 4 billion to S 97.4 billion (4.0 percent of GDP). This deterioration is mainly attributable to the work of the automatic stabilizers. The most important changes are as follows: lower revenues are expected from the wage tax and the personal income tax (S 1.4 billion), the value-added tax (S 1.25 billion), and from social security contributions (S 0.7 billion). The expected outlays for unemployment benefits have been increased by S 1.5 billion. Some offsetting effect will be provided by lower contributions to the EU budget (S3 billion). On an administrative basis, the federal government deficit will remain at 3.7 percent of GDP because of higher privatization receipts.

The 1997 federal budget was approved in its draft version. Due to the high rate of uncertainty and differences in the 1997 growth forecasts between the two main economic research institutes, Institute for Advanced Studies (IHS) and Austrian Institute of Economic Research (WIFO), Parliament decided not to change the budget figures and not to adopt new structural measures until the mid-term budget review this fall.

3. Monetary and exchange rate developments

Since 1981 monetary policy in Austria has aimed at maintaining a fixed exchange rate of the schilling vis-à-vis the deutsche mark. This target was fully achieved in 1995 despite unfavorable developments in the underlying fundamentals. There were only two, temporary drops in official international reserves, and interest rate differentials with Germany widened only to a modest extent. Following Austria’s EU membership and the entry of the schilling in the ERM, a number of changes were made to bring Austria’s monetary policy framework and banking regulations in line with EU standards.

a. The hard-currency policy

Austria’s hard-currency monetary policy aims at facilitating trade and economic integration with Germany and other hard-currency countries and stabilizing exchange-rate relevant expectations for inflation and the conduct of incomes policy. The schilling-deutsche mark rate has been pegged since 1981 at around S 7.03 per deutsche mark (Table A19). But even before the official deutsche mark peg, the bilateral exchange rate with Germany had changed only slightly. In fact, the rate stood at around S 7 per deutsche mark in the final years of the Bretton Woods system, and it remained close to this level during the remainder of the 1970s.

In comparison with other European countries which have pegged their exchange rate to the mark, a number of issues stand out in the Austrian case. First, Austria never let the schilling float. Even immediately after the breakdown of the Bretton-Woods system it kept the schilling pegged to a basket of trading partner currencies and successively eliminated those that began to float (the British pound, the French franc, and the Italian lira). Second, Austria made clear from the very beginning that the exchange rate peg was the sole intermediate target of monetary policy. Other countries have at least for some time tried to combine the peg with other intermediate targets. 1/ Third, the peg has been maintained much more closely than in the case of the other European currencies. From January 1982 to December 1995, the schilling did not in any month deviate by more than 0.3 percent from its peg to the mark. In more than half of these months the deviation was even less than 0.05 percent (see section VI on competitiveness for a discussion of the effective exchange rates).

On January 9, 1995 the schilling entered the exchange rate mechanism (ERM) of the European Monetary System at ECU 1 = S 13.717. 1/ As a full ERM member, Austria transferred 20 percent of its gold and U.S. dollar reserves to the EMI and obtained official ECUs in the same amount. Although by joining the ERM the schilling became formally part of a multilateral exchange rate system, the bilateral deutsche mark peg was continued in actual practice. The unchanged policy was made possible by the large weight of the deutsche mark in the ECU and the wider bands of the ERM.

b. Implications of the hard-currency policy for interest rates and reserves in 1995

The political and economic developments in Austria in 1995 put the hard-currency policy to a test. As outlined in section II.2, the coalition government that assumed office in November 1994 could not agree on a budget for 1996 and resigned in October 1995. Parliament was dissolved, and new elections were called. The general government deficit rose to 6.2 percent of GDP, compared with 4.5 percent in 1994 and 3.6 percent in Germany. At the same time, the external current account deficit doubled to 2 percent of GDP, and the gross public debt ratio (about a quarter of the federal debt is held abroad) rose by more than 4 percentage points to almost 70 percent of GDP. The size of the fiscal deficit and the wide discrepancy in the fiscal stance between Austria and its anchor country led to uncertainties as to whether Austria would be able to meet the Maastricht criteria and participate in stage 3 of EMU.

Despite these rather unfavorable conditions, the hard-currency policy was maintained with relative ease: apart from two episodes, there was hardly any effect on reserves, and the Austrian National Bank was able to lower its interest rates fully in line with those in Germany. Over the year, official reserves increased from S 233 billion to S 238 billion, amounting to roughly 10 percent of GDP or 4 months of imports. There were, however, two episodes when the central bank had to intervene more heavily in the foreign exchange market and lost a substantial part of its reserves. In February-March, when the government’s attempts to shape a consolidation package met severe political opposition, the schilling came under pressure and the central bank lost S 5.0 billion of reserves. The second episode was in September-October, when the coalition government collapsed and Parliament was dissolved. In defending the schilling peg, the National Bank lost S 24.1 billion, or almost 10 percent of its reserves. The loss of S 18 billion, or 7.5 percent of reserves, in October was the sharpest monthly reserve loss--in both absolute and relative terms--since end-1981, i.e., in the history of the present exchange rate peg. However, the central bank was able quickly to re-accumulate reserves, which reached their September level in January 1996.

Official interest rates followed German rates one-to-one: the discount rate was cut in 3 steps during the year, from 4.5 percent to 3.0 percent (Table A16) and further to 2.5 percent in January. Also, market rates kept very much in line with those in Germany: overnight rates, which fell from 4.8 to 4.0 percent during 1995, were generally 10 basis points below those in Germany. This was caused by the high liquidity in the Austrian market, which can mainly be attributed to the capital inflows following the EU entry. 1/ Three-month rates were on average identical with those in Germany, with minimal fluctuations of up to ±10 basis points. Government bond yields, which fell from 7.3 to 5.6 percent, were practically identical with those in Germany. The only signal of increasing risk premia demanded by markets was visible at the long end, for 10-year government bonds. Their average yield differential increased from 23 basis points in the first quarter of 1995 to 43 basis points in the fourth quarter. However, in the early part of 1996, when the fiscal consolidation package was debated and agreed upon by Parliament, the differential declined progressively, falling below 10 basis points in April.

The yield curve in Austria steepened substantially in 1995. In fact, the difference between long-term yields and overnight rates--278 basis points in 1995 on average--was the largest in the past decade. The yield curve became even steeper in early 1996, when short-term rates declined further and long-term rates rose in both Austria and Germany.

The fact that Austrian interest rates remained so close to those in Germany during most of 1995 is all the more remarkable since one would--even in a situation characterized by identical fundamentals--expect somewhat higher rates in Austria because of the smaller size of its financial market, which would make it more difficult for an investor to find a buyer for a large-scale sale of securities. Such a “liquidity risk” would be expected to imply a small premium in the Austrian market relative to the German market.

c. Trends in monetary aggregates and counterparts

Given the exchange rate peg, money supply is fully endogenous and its development is merely monitored by the authorities (Table A17). The growth of monetary aggregates has been similar to that in Germany over the long term, although there have been divergences from year to year. In 1995, Ml in Austria grew by 15.1 percent, compared with 6.3 percent in 1994. This acceleration may have been the result of the falling opportunity costs of holding money. M3 grew by 5.7 percent, much more in line with 1994 when it grew by 5.3 percent. Bank lending to the private sector remained strong initially, but weakened later in 1995 along with aggregate demand; lending to the public sector soared, reflecting the expansionary fiscal stance (Table A18). Net external claims contributed only little to money supply growth, and they were mainly accrued by private banks; the year-on-year increase in official reserves was relatively small.

d. Changes in the monetary policy framework

Two important changes were made to harmonize monetary operations with those in the EU. In October 1995, the central bank complemented the demand-oriented standing facilities by supply-side tender facilities. The aim of the new facilities--which are offered to the banks in American-style auctions--is to bring liquidity management in line with current practices in the EU and the expected liquidity management of the future European central bank system. Due to the abundant liquidity in the Austrian money market, the central bank used this new instrument only once in 1995, but it is planning to use it regularly in 1996. 1/ The second change refers to minimum reserve requirements, which were lowered in July and September 1995 in order to comply with EU regulations and to improve the competitiveness of Austrian banks. 2/ 3/

The share of subsidized bank credit in total commercial bank credit has gradually been decreasing, from 24 percent in 1991 to 21 percent in 1995. It is estimated that almost half of all credits to industrial firms and about 10 percent of all credits to the commercial sector are subsidized. 4/ The macroeconomic importance of credit subsidies is underlined by the fact that in Austria bank financing is still high: direct commercial bank credit amounts to more than 100 percent of GDP (Table A18). Since the subsidized rate (with terms and conditions verying for different schemes), which is some fraction below the market rate, is adjusted only infrequently or only when there are larger changes in the market rate, the subsidization slows down the effect of interest changes on credit demand. Apart from distorting resource allocation in favor of subsidized activities, it has significant implications for the transmission of monetary policy by slowing down monetary policy impulses on the subsidized sectors while subjecting unsubsidized sectors of the economy to much larger interest rate fluctuations.

e. Financial markets and bank earnings

There were only minor structural changes in the Austrian banking system in 1995. The trend toward mergers continued, albeit at a slower pace than in 1994, and affected mostly rural credit cooperatives. The number of banking outlets remained high at a practically unchanged 5,730. The most important and long-pending change--the privatization of the federal government’s share in Austria’s second-largest bank, Creditanstalt--was postponed. The authorities are still reviewing bids from national and international investors, and a decision is expected in the course of 1996.

The banks’ results were satisfactory; the total operating surplus increased by 1.4 percent to S 45.4 billion. The decline in interest rates led to a compression of their average interest rate margin, which fell by 7 basis points to 3.27 percent. It is noteworthy that, triggered by capital inflows attracted in part by an increasing yield differential on long-term bonds, the international exposure of Austrian banks increased strongly: assets abroad grew by 9.5 percent to S 1.04 billion and liabilities abroad grew by 6.9 percent to S 1.11 billion. The capital ratio of Austrian banks remained high at 12 percent of risk-weighted assets, compared with the required rate of 8 percent.

f. Changes in regulations on money laundering

Austrian banking laws were modified several times in recent years to comply with EU regulations, in particular in the area of money laundering. Several changes were made to comply with the 1991 EU directive on money laundering: money laundering is now a criminal offense, subject to the penal code; bank staff is obliged to report suspected money laundering; identification for deposits of more than S 200,000 (about US$20,000) is required; and a reporting office for suspicious transactions has been installed. 1/ No new anonymous securities accounts will be allowed from July 1, 1996 and the anonymity of existing ones will be lifted as soon as new securities are added.

However, the key issue of dispute with the EU still persists: the anonymous savings books. In Austria, any resident (before issuing the book, the bank must check the resident status) can acquire an anonymous savings book. Deposits and withdrawals can be made upon presentation of the book and use of an agreed password. 2/ There exist some 26 million of these books with estimated deposits of S 1,400 billion. The dispute between the authorities and the EU is about whether these anonymous savings books comply with the EU directive. According to the Austrian authorities, there is no contradiction between these accounts and the EU directive; this view, however, is disputed by the EU, and the case is now likely to be submitted to the European Court of Justice.

g. A monetary conditions Index for Austria

A monetary conditions index (MCI) has recently been calculated in several countries as a tool to assess the stance of monetary policy. 1/ Such an index usually combines short-term interest rates and the exchange rate, the latter weighted by a measure of the degree of openness of the economy. 2/ The idea is that monetary policy affects aggregate demand and inflation through both interest rate and exchange rate channels. In Austria the changes in die nominal effective exchange rate are, however, relatively minor, due to the large weight of the deutsche mark and other hard currencies in the trade pattern. 3/ Different interpretations of the change in monetary conditions arise, however, depending on the exchange rate deflators used: consumer prices yield a very different picture from unit labor costs in manufacturing in the case of Austria.

The MCI constructed for Austria (Chart II-2) is a weighted average of short-term real interest rates (the 3-month money market rate) and the real effective exchange rate. The weights for the interest rate and the exchange rate are 1 and 0.4, respectively. The weight for the exchange rate is supposed to reflect the degree of openness of the economy as measured by the importance of foreign trade (i.e., one half of imports and exports over GDP). These weights, which are similar to those used in other studies, 4/ imply that a 1 percent increase in the real interest rate is assumed to have an impact on demand conditions which is equivalent to a 2.5 percent real appreciation.


Austria: Monetary Conditions Index (MCI)1/

Citation: IMF Staff Country Reports 1996, 060; 10.5089/9781451802238.002.A001

Source: IMF staff calculations.1/ Index of the absolute change in the real short-term Interest rate and percentage change in the real effective exchange rate compared to their average levels over the period 1983Q1 to 1995Q4.2/ Real eff. exchange rate based on relative ULC.3/ Real eff. exchange rate based on relative consumer prices.

The MCI for Austria shows quite a different pattern, depending on the deflators used in the real effective exchange rate. Based on unit labor costs in manufacturing, monetary conditions have eased considerably since 1991, especially since 1993. This reflects not only a decline in interest rates, but, more importantly, a substantive real effective depreciation of the schilling that resulted from a decline of unit labor costs in manufacturing vis-à-vis the trading partners (see section VI for a discussion of the unit labor cost index). Monetary conditions have eased much less since 1991 if the consumer price index is used as a deflator. The reason for this divergent alternative interpretation is that much of the interest rate decline has been offset by an appreciation of the schilling, which, in turn, was caused by a nominal appreciation and a relative inflation performance that could not fully offset this appreciation. Thus, the exchange rate effect in early 1995 actually caused monetary conditions to tighten, before easing during the remainder of the year. The problems surrounding the choice of deflators for the effective exchange rate, however, show that the interpretation of an MCI for Austria should not be pushed too far.

4. Balance of payments

a. Current account

The external current account position traditionally tended to fluctuate narrowly around balance, with moderate trade deficits being about offset by tourism surpluses (Chart II-3). Indeed, between 1983-93, Austria experienced the smallest fluctuation in the current account balance (relative to GDP) among all European OECD countries. Since then, there have been steadily worsening deficits; from slightly less than 1 percent of GDP in 1994, the deficit widened to over S 47 billion, or 2 percent of GDP, in 1995 (Table A18). In absolute terms, last year’s current account deficit was a record, while in relative terms it was the highest since 1981.


Austria: Current Account Balance

(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 060; 10.5089/9781451802238.002.A001

Source: Austrian National Bank.

Six major factors explain the widening gap in 1995, four on the negative side and two on the positive side. The former are, in descending order of importance: (1) net EU payments of over S 13 billion; (2) increased tourist spending by Austrians abroad of about S 10 billion; (3) lower net returns on direct investment of S 5 billion; and (4) lower tourist spending by foreigners in Austria of close to S 3 billion. Taken together, these factors account for a worsening in the current account of S 36 billion, far outweighing a S 12 billion improvement deriving, in about equal parts, from lower net merchandise trade payments and higher net interest receipts.

An explanation of the moderate improvement in the trade deficit is hampered by the absence of (customs) trade statistics, with a breakdown by commodities and regions, since the beginning of last year. Payments data, which include transit trade and nonseparable trade-related services, indicate nominal export and import growth of over 9 and 7 percent, respectively. With an only small increase in (estimated) foreign trade prices (Table A7), these data imply remarkable real growth rates compared with developments in other European countries, perhaps reflecting some catch-up effect with respect to the “openness” of the Austrian economy deriving from EU membership and the economic turnaround in neighboring transition countries. Membership in the EU has offered new opportunities, including bilateral trade agreements that existing EU members had previously negotiated with third countries, particularly in the Far East. Austria may also have benefited from the structure of its exports, with its high share of machinery and semi-manufactures which tend to benefit from the early stages of recovery.

The deficit on investment income, which has been shrinking for a number of years, declined further in 1995. As mentioned, there were two significant developments in this area. On the positive side, interest receipts from abroad rose by S 6 billion more than interest payments to the rest of the world. On the negative side, the deficit with respect to net earnings on direct investments widened by about S 5 billion, reflecting both lower profit receipts and increased profit remittances abroad.

The tourism surplus continued to contract sharply in 1995, by over S 13 billion. The main reason was a 10 percent increase in expenditures by Austrians abroad, of which perhaps half could be attributed to increased cross-border shopping after EU membership, especially in Italy after the weakening of the lira. 1/ In addition, foreign currency earnings from tourists visiting Austria fell by about 2 percent, reflecting essentially a further decrease of 6 percent in overnight stays by foreigners. German tourists still account for about two thirds of all tourists in Austria and their overnight stays fell by 5.7 percent. The fall in the number of tourist arrivals from weaker-currency countries (e.g., Italy, U.K., and Sweden) was much sharper. On the positive side, tourism from Eastern Europe, once a mainstay of the Austrian tourist industry, is growing strongly--albeit from a still very small base. The decline in tourism earnings was more significant in the summer months than in the winter (ski) season, and more pronounced in the western part of the country (especially Tirol and Salzburg) than elsewhere. By contrast, city tourism in Vienna and overnight stays in high-quality hotels continued to show modest growth. 2/

The deficit on the transfers balance more than doubled to exceed S 21 billion last year, which can be attributed entirely to first-time EU membership contributions. Gross payments to the EU amounted to about S 23.5 billion, compared with return flows of S 10 billion.

The prospects are for a gradual improvement in the current account balance over the next few years, assuming stability in the exchange rate and full implementation of the fiscal consolidation program. The latter will have a dampening effect on household disposable incomes and more broadly on domestic demand. With income growth in Austria anticipated to remain somewhat behind the EU average in the near future, the trade balance is likely to strengthen. 3/

b. Capital account and international investment position

The capital account closed 1995 with a net capital import of S 58 billion (or 2 1/2 percent of GDP), consisting of S 79 billion of long-term capital inflows and S 22 billion of short-term capital outflows.

The high long-term capital inflow was mainly caused by the placement of Austrian securities abroad (Table A21), in particular bond issues by the government and Austrian banks. Both the positive long-term yield differential vis-à-vis Germany and the increasing financing requirement of the government played a role in the strong increase in portfolio investment liabilities, from S 50 billion to S 130 billion. Net purchases of securities by Austrians abroad, by contrast, fell from S 49 billion to S 29 billion.

Foreign direct investment flows declined significantly in 1995. Inward investment fell from S 15 billion to S 5 billion, whereas outward investment declined from S 14 billion to S 11 billion. Reflecting the migration of labor-intensive production to low-wage locations, the share of direct investment in eastern Europe almost doubled within the declining total.

As net capital inflows exceeded the current account deficit, official reserves increased by S 20 billion (see also section II.3b).

Reflecting the widening current account deficit, Austria’s international investment position deteriorated in 1994. Its overall net liability position increased from S 140 billion, or 6.6 percent of GDP, at end-1993 to S 184 billion, or 8.1 percent of GDP, at end-1994 (Table II-6). The worsening of the international investment position reflected mainly an increase in external debt; the external equity position remained almost unchanged, although also negative. The further deterioration of the external current account in 1995 would indicate, ceteris paribus, an increase in the negative international investment position to some 10 percent of GDP by end-1995.

Table II-6.

International Investment Position

(In billions of schillings)

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Source: Austrian National Bank.

Net external debt--the balance of non-equity assets and liabilities, i.e., excluding direct investment and equity securities--amounted to S 150 billion, or 7 percent, of GDP at end-1994. The public sector is the main external debtor, with S 344 billion, followed by the credit institutions with S 87 billion of net external debt. The National Bank, with net external assets of S 256 billion, as well as businesses and households, together with net external assets of S 25 billion, were net creditors vis-à-vis the rest of the world. The bulk of non-equity external assets (78 percent) is held in foreign currency, mainly deutsche marks, U.S. dollars, Swiss francs, and Japanese yen. This reflects the fact that the federal government, when issuing debt in foreign currencies, chooses hard currencies only.

III. Potential Output. Output Gap, and Cyclically Adjusted Fiscal Balance

1. Estimates of potential output and the output gap

Over the past year, several new attempts have been made to estimate potential output and corresponding output gaps for Austria, which can be used to identify and isolate the impact of the business cycle on the fiscal position. The approaches adopted typically define potential output as the maximum output level that is sustainable over the medium term at a stable rate of inflation. Two broad methods can be distinguished: a time-series approach and a structural approach. The time-series approach is rather mechanistic and involves various techniques to decompose a time series (of real output or real GDP) into various (.trend, cyclical, seasonal, and irregular) components. The structural approach is rooted in economic theory and concerns the identification of the relevant variables that determine long-term economic growth. Recent estimates of potential output growth in Austria by three different institutions will be reviewed here.

The Austrian National Bank (OeNB) has used the so-called Hodrick-Prescott (HP) filter method to measure potential output and the output gap. 1/ This method is shown to be more appropriate in the case of Austria than various other (time-series) smoothing methods. It uses a two-sided filter, which means that each observation is a weighted combination of past and future observations (and which poses the difficult problem of choosing an appropriate weighting factor). As can be expected, the HP method spreads the effects of structural breaks over a number of years and suggests cycles of slightly lesser amplitude and smaller output gaps (compared with other time-series methods, e.g., linear and split time trends). The OeNB results show moderate output gaps in recent years; even in the recession year of 1993, actual output was estimated to be only 1¼ percent below potential, and for 1994 the estimated gap was about ½ percent. 2/

The OECD, which used to apply various time-series methods, has switched to a structural approach, using a two-factor Cobb Douglas production function to determine potential output for the business sector. 3/ The assumption is made that the government sector is always producing at its potential level. This method involves significant data requirements with regard to employment, labor force, and capital stock, as well as a number of supplementary assumptions to estimate trend total factor productivity. In particular, the measurement of the NAWRU (nonaccelerating wage rate of unemployment) is a complex and imprecise (partly judgmental) task. The results indicate an estimated output gap of 1¾ percent for 1994, and projected potential growth of about 2¼ percent a year for 1995-96.

Recently, the Austrian Institute of Economic Research (WIFO) has published the results of a new study which combines structural and astructural elements (e.g., mechanistic trend extrapolation). 1/ It does not directly involve a production function, in part because of concerns about the quality of the available capital stock data. The distinctive feature of this approach is the introduction of structural information on the Austrian economy in an indirect way, through the use of price and wage equations, in order to extract cyclical components of GDP and of the unemployment rate. The results show somewhat wider fluctuations in potential output growth rates over time, compared with the other two methods discussed above. They also support the notion that a sharp slowdown has occurred in the potential output growth rate in recent years, from over 4 percent in 1990 to slightly less than 1½ percent in 1994 (with a corresponding output gap of only ¼ percent). 2/

The above examples provide only a limited illustration of the range of available indicators of potential output and, given significant differences in the results of various estimations, it is clear that sizable margins of error are involved. The staff has not attempted to make independent potential output calculations, and has chosen to take a middle position. Accordingly, in preparing medium-term scenarios, it was assumed that potential output growth in 1994 was still close to 2 percent with a corresponding modest output gap of slightly less than ½ percent. With actual output growth estimated at 1.8 percent in 1995, the output gap is believed to have remained virtually unchanged last year.

2. Baseline scenario

The external economic environmental assumptions are broadly in line with the Spring 1996 WEO exercise; average growth in Austria’s export markets is assumed to be slightly above 5 percent a year during 1996-99, and long-term interest rates are assumed to remain close to German levels. After declining by more than 2 percentage points to 11 percent of disposable income during 1996-97 (largely in response to near stagnation in disposable incomes), the household savings rate is expected to recover to above 13 percent in 1998-99 as economic recovery becomes more firmly established. It is also assumed that the government will take the necessary measures to achieve the general government deficit target of 3 percent of GDP by 1997; this requires full implementation of the two-year fiscal consolidation package, and some additional adjustment measures (estimated at 0.4 percent of GDP) that have become necessary to offset the effects of the automatic stabilizers that would result from the recent lowering of growth forecasts for 1996-97. Because of the sharp fiscal contraction, sluggish growth is likely to continue somewhat longer in Austria than in other European countries, but cyclical recovery is projected for 1998-99. Also, potential output growth is anticipated to accelerate modestly in the coming years, reflecting renewed growth in the labor force and efficiency gains due to competitive pressures from EU membership and East European economies. Consequently, the output gap is projected to widen initially to exceed 2½ percent in 1997, and then to narrow gradually and virtually disappear by the turn of the century (Table III-1).

Table III-1.

Austria: Medium-Term Scenarios

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Sources: Fund staff estimates.

Assuming full implementation of the fiscal adjustment package and any additional measures required to achieve the government’s deficit target for 1997.

In percent of potential output.

Based on survey data and corresponding to EU definitions.

Excludes debt reduction from the use of future privatization receipts.

The fiscal implications of the baseline scenario are that the general government deficit will widen anew in 1998 to about 3¾ percent of GDP, despite a moderate reduction in the cyclical component of the deficit in that year. The structural fiscal balance will deteriorate by about 1 percentage point, in large measure because several measures of the 1996-97 fiscal consolidation package will lapse. This applies, for example, to wage restraint and employment cuts in the civil service, the 1997 zero-round for pensions, the freeze of nursing care benefits and of certain government consumption items (goods and services), and the non-deductability of loss carryovers from the corporate income tax. In addition, the continuing effects of social spending initiatives and tax reduction measures adopted during 1992-94 more than offset the planned gradual reduction and eventual elimination of temporary support to agriculture and food processing in the aftermath of EU accession.

Without substantial privatization receipts, the public debt ratio can be expected to rise further through 1998 and to remain close to 74 percent of GDP in subsequent years. While the initial fiscal contraction will help to reduce the external current account deficit over the next two years, the renewed fiscal deterioration under this scenario will prevent any clear further improvement in the external balance for the remainder of the decade.

3. Additional fiscal adjustment scenario

The distinguishing feature of this scenario is the assumption of additional fiscal consolidation measures in 1998, equivalent to about 1½ percent of GDP, followed by a much smaller effort in 1999. This would be sufficient to offset the long-term effects of the expansionary discretionary measures referred to above and additional pension outlays due to aging, and to achieve a reduction in the structural fiscal deficit to 1 percent of GDP. It would also raise the projected fiscal primary surplus sufficiently to bring about a clear downward trend in the public debt ratio.

It is projected that the additional fiscal contraction, assumed to occur in 1998-99, will have a moderately negative impact on aggregate demand. Consequently, under this scenario, the period of sluggish output growth would last longer and the output gap would narrow less rapidly compared with the baseline scenario. 1/ Also, the unemployment rate would be marginally higher, while inflation is likely to remain close to 2 percent. However, the external current account position would show steady improvement, in part due to the significant further reduction in the general government deficit.

IV. Fiscal Federalism

1. The federal structure 1/

Within the Austrian federal structure, government responsibilities are shared between three levels of territorial authority, the federation (Bund), the nine federal states (Länder) and some 2,350 municipalities (Gemeinden). In addition, the general government sector comprises a number of other legal entities which carry out specifically delegated governmental functions--i.e., the social security funds, the chambers, 2/ and a number of federal and state funds, such as the Family Benefit Fund, the Catastrophe Fund, the Hospital Cooperation Fund (KRAZAF), the Water Supply and Distribution Fund, and the Motorway Financing Fund (ASFINAG).

The distribution of major government responsibilities between the Bund and the states is set out in the constitution. This distribution, however, is not straightforward, and a distinction is made between legislative and administrative responsibilities. While the most important items of the national agenda--like defense, foreign policy, macroeconomic management--are assigned wholly to the Bund, and others of mainly regional and local importance--like building codes and regulations--entirely to the states, responsibilities are shared between the two levels in other matters--like trade and industry, water supply, and regulations concerning motor vehicles--in the sense that the Bund is responsible for legislation and the states for administration. A general clause, based on the subsidiarity principle, gives the states responsibility for all matters not explicitly reserved for the Bund. The constitution gives to municipalities the right of self-government within a certain area of competence specified by state law.

Although the constitution provides for the sharing of government responsibilities between the three levels of territorial authority, the right to levy taxes is heavily concentrated with the Bund. According to the 1995 estimated outturn and the proposed budgets for 1996 and 1997, 3/ roughly 90 percent of all tax and other current revenues are collected by the Bund. The share of taxes directly collected by the states is only ¼ of 1 percent and the share of direct collections by the municipalities (including Vienna) some 4 percent (Table IV-1). Revenues collected by the Bund comprise joint federal taxes (50 percent), social security contributions earmarked to fund the social security system (30 percent), and fully retained federal taxes and other current revenues (20 percent). The joint federal taxes are shared between the Bund and the lower levels of government (states and municipalities) in a ratio of 2 to 1.

Table IV-1.

Tax and Other Current Revenues

(In billions of schillings)

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Source: Ministry of Finance; and staff calculations and projections.

Including Vienna.

Tax and other current revenues (i.e., social security contributions and contributions to the Family Benefit Fund) as a share of GDP.

The states’ and municipalities’ shares in joint federal revenues are important sources for the funding of their outlays. According to staff estimates for 1995, 45 percent of states’ and 37 percent of municipalities’ current revenues stemmed from joint federal taxes. In 1995, total tax revenues (including revenues from joint federal taxes) equaled 46 percent of states’ current revenues and some 70 percent of municipalities’ current revenues. Consequently, for the states, collections of own tax revenues are almost negligible (Table IV-2).

Table IV-2.

Revenue Structure of States and Municipalities

(In percent of total 1995 revenues)

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Source: Ministry of Finance; and staff calculations.

Excluding Vienna.

Including Vienna.

Including federal revenue shares.

Transfers from other government levels are another important pillar in the revenue structure of states and municipalities. Especially for the states, these transfers are very substantial; in 1995 some 40 percent of their total revenues stemmed from that source. Among these transfers are earmarked federal payments, such as transfers for housing subsidies and cost defrayal for teachers’ salaries and pensions. As an exception to the rule that transfers usually are made by higher levels of government, the municipalities also make contributions to their respective state (Landesumlage). For municipalities, transfers from higher government levels in 1995 contributed 15 percent to their total revenues. Finally, states and municipalities have other “revenues,” such as user charges, privatization receipts, drawing on reserves or other one-off revenues.

2. The revenue-sharing mechanism

Given the assignment of all major taxes to the Bund and the primary reliance of states and municipalities on their respective shares in joint federal taxes and transfers from other government levels, the result of the revenue-sharing mechanism is extremely important for the financial position of the lower levels. To balance the competing interests, the revenue-sharing mechanism has been transformed into a highly complex scheme with different and often annually changing ratios for dividing and redistributing revenues of federal joint taxes among the different recipients, each ratio being the result of extensive bargaining. Eighteen different taxes are involved in this revenue-sharing mechanism, which leads to the so-called Primary financial settlement.

The 1996 federal budget proposal puts the total amount of joint federal taxes available for revenue sharing at S 465.7 billion. 1/ Out of this total, S 304.4 billion would remain with the Bund, S 85.2 billion would be distributed to the states, and S 68.5 billion would be distributed to the municipalities (Table IV-3). Therefore, 65 percent of the joint federal taxes would remain with the Bund, compared with 54 percent in the early 1980s.

Table IV-3.

The Sharing of Joint Federal Revenues, 1996

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Source: Ministry of Finance; and staff estimates.

Family Benefit Fund, Catastrophe Fund, Water Supply and Distribution Fund, Hospital Cooperation Fund, and ASFIMAG.

Motor car tax and motor car insurance tax. The federal shares are 76.8 percent and 50 percent, respectively.

The allocation of joint federal revenues to each state and within each state to each municipality is the function of the horizontal equalization mechanism. This allocation procedure mainly follows two principles: one referring to the financial strength of the state or municipality (Aufkoamensprinzip) and the other referring to its financial need (Bedarfsprinzip). A proxy for the former are tax yields; a proxy for the latter are the number of inhabitants. 80 percent of revenues allocated to states and 70 percent of revenues allocated to municipalities, respectively, are determined by the second principle. Due to the predominance of the number of inhabitants in determining horizontal equalization, the per capita disparities that remain between the states are relatively small. Nevertheless, a special federal equalization grant is supposed to smooth the allocation further (Kopfquotenausgleich). The remaining disparities are almost eliminated by this grant, which is paid to states receiving from joint federal taxes less, on a per capita basis, than the average of all states.

Municipalities get their receipts from joint federal taxes broadly on the basis of a scaled population assessment, 2/ while poor municipalities additionally receive a special share based on the imbalance between their financial need and their financial strength. Also, special factors are used to generate further assistance for municipalities that encounter specific problems. A somewhat different equalization arrangement applies for Vienna.

3. Transfers between governments

The primary settlement as provided by the tax assignment and the sharing of joint federal taxes (including the federal equalization grant) is further modified by a number of transfers between the different levels of government (secondary financial settlement). The most important of these transfers are from the federal budget to the states and include cost defrayals (e.g., teachers’ salaries and pensions) and earmarked transfers (e.g., housing subsidies, water supply and conservation subsidies, disaster damage subsidies). Other major transfers are (i) federal grants-in-aid to finance major investment projects at the lower levels of government or to restore budget equilibrium, (ii) general purpose equalization grants paid by states to municipalities, and (iii) municipalities’ contribution to state budgets.

In addition to these transfers, there are numerous cost-sharing arrangements both between the Bund, states, and municipalities and between them and the various funds in order to finance special projects (such as roads, hospitals, schools or universities) or to subsidize private sector activities. The main reason for this tertiary financial settlement is that states and municipalities seek certain types of federal projects and programs of specific regional interest and in return agree to share the costs with the federal government. The funds are used as a tool to finance large infrastructure projects on a permanent basis. Usually, these funds do have some financial reserves.

4. Implications for efficiency

The complex Austrian federal system, which is based on revenue sharing and transfer payments, gives rise to a number of problems and distortions:

• The earmarking of funds from particular revenue sources to certain spending categories (e.g., housing financing) creates upward pressure on spending beyond the socially desirable optimum on the expenditure categories linked to specific revenue sources;

• The fact that the share of overall tax revenues eventually transferred to the states and municipalities is determined by criteria which largely emphasize the number of inhabitants, and even “need”, contributes towards an equal supply of public services nationwide and promotes the convergence of living conditions throughout the country. In this context, combined with the balancing effect of the revenue-sharing mechanism, this tends to reduce the incentives for states and municipalities to develop their own local tax bases and to exploit them efficiently;

• The rise of federal transfers for the automatic defrayal of costs, combined with the assignment of responsibilities for spending decisions to lower levels of government, encourages oversupply;

• The reliance of specific grants-in-aid rather than block grants leaves little room for local choice;

• Since the overwhelming part of the responsibilities assigned to the states is financed from outside sources, there is no direct link between the political responsibilities of spending and taxing. This separation also contributes to inefficiencies and oversupply.

5. Possible Improvements of the revenue-sharing mechanism

The revenue-sharing mechanism could be improved along the following lines:

• The earmarking of funds from particular revenue sources to certain spending categories could be reduced, along the lines of the changes already made in the consolidation package for the financing of the Catastrophe Fund and the Water Supply and Distribution Fund;

• The equalization effect and, hence, the need orientation of the revenue-sharing mechanism for joint federal taxes could be reduced;

• The practice of automatic defrayal of costs through the federal government incurred by spending decisions of the lower levels of government should be abandoned;

• General purpose grants could be increased at the expense of specific grants-in-aid;

• Certain taxes could be left to the states in order to link the political responsibilities of spending and taxing. The property tax might serve as an example. So far, the property tax is a federal tax. However, the federal property tax is zero-rated, thereby precluding the lower levels of government from introducing a property tax of their own. In order to give the states the opportunity to levy a property tax, the abolition of the federal property tax would be required.

V. The Pension System: Medium-Term Outlook 1/ 2/

Austria has probably the world’s highest pension expenditures in relation to its economic size. With 15 percent of GDP being spent on pensions, it tops the list of a sample of 92 countries, comprising OECD members as well as less developed countries (Chart V-1). The OECD average is around 10 percent. 3/ The main reason for Austria’s high spending on pensions is not demographics: although the population structure is rather unfavorable for a pension system with 20 percent of the population over 60 years and an old-age dependency ratio 4/ of 23 percent, it is not exceptional in Europe. Germany, for example, which has practically the same population structure, is spending considerably less on pensions (11 percent of GDP). Even Sweden, which has the most unfavorable population structure in the 92-country sample, is spending less on pensions than Austria (just under 12 percent of GDP).

Chart V-1
Chart V-1

Austria: Pension Expenditure and Population Structure

Citation: IMF Staff Country Reports 1996, 060; 10.5089/9781451802238.002.A001

Source: World Bank, Averting the Old-Age Crisis. Sample: 92 countries, 70 shown in chart.

What makes Austria the likely world-leader in pension expenditure is the generosity of the system, reflected in two key indicators: the eligibility ratio and the replacement ratio. The eligibility ratio, measuring the share of actual pensioners in their population age group, is particularly high by international standards for persons below the normal pension age. The extent to which Austrian have made use of early retirement possibilities is remarkable: 85 percent of men and 70 percent of women retire before the statutory retirement age of 65/60 years. The average retirement age has fallen to as low as 58.5 years for men and 57.1 years for women. In the age group of 60-64 years, less than 20 percent of men and less than 10 percent of women are still working. In brief, one of Austria’s problems in the area of pensions is that a large fraction, one quarter, of all pensioners have not yet reached the statutory pension age. Naturally, there are also positive aspects of this development: early retirement has served as an escape valve for the labor market. As a result, Austria’s unemployment rate--at just below 4 percent in early 1996--is the lowest in the European Union (apart from Luxembourg), and there is hardly any youth unemployment.

The second difficulty for the pension system, besides high eligibility ratios caused by early retirement, is the high replacement rate. People taking pensions receive a high fraction of their last income as pension (up to 80 percent). In addition, the level of pensions has risen faster than nominal incomes of those still working. Finally, the penalty for taking early retirement in terms of a lower pension has thus far been small.

The fiscal situation of the Austrian pension system is not as bad as one might suspect, given the problems outlined above. The level of budget transfers necessary to balance the system is high but not exceptional in a European comparison. What “saves” the Austrian system is a very high contribution rate of 22.8 percent of gross wages (paid jointly by employee and employer), compared with 19.2 percent in Germany. This, however, is also part of the long-term problem: since the contribution rates in Austria are already high and international competition will put pressure on reducing labor costs, raising contribution rates will not be an option for Austria to face up to the challenge of an aging population. The pending deterioration in old-age dependency ratios will thus have to be borne by budget transfers. Should the system not be brought into better balance via cuts in its generosity, these transfers will soon have to increase sharply.

1. The pension system

The Austrian pension system is of the pay-as-you-go type and thus entirely unfunded. It is mandatory not only for all dependent employees but also for a large number of the self-employed, including farmers. 1/ Each group is organized in a separate pension system, and most parameters--contribution rates, pension levels, replacement rates, and deficits--very across these systems. The pension system for dependent employees is by far the largest one with over one million pensioners in 1994 (Table V-1). The funds for various groups of self-employed, including farmers, are much smaller with together 238,000 pensioners. 1/

Table V-1.

Size and Financial Operations of the Main Pension Systems, 1994

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Source: Hauptverband der Sozialversicherungsträger, Statistisches Handbuch 1994. Table 5.21.

Old-age and disability pensioners only (i.e., without survivor pension recipients).

Includes property income.

Pension expenditures for these groups (excluding civil servants) in 1994 amounted to S 236 billion or 10.2 percent of GDP. By contrast, contributions, which are calculated as a fraction of gross wage income, amounted to S 182 billion or 8 percent of GDP. In addition, some S 8 billion were raised from other sources, such as property income. The remaining financial gap of the pension system of S 46 billion was covered by transfers from the federal budget. The financial situation of the much smaller system for the self-employed is much worse in relative terms than that of the dependent employees so that its overall deficit is roughly equal to that of the fund for the dependent employees.

The fiscal situation of the pension funds as a whole has not improved significantly over the past 25 years. The budget transfer in relation to the expenditures of all funds has fluctuated between 25 and 30 percent since 1970, a relatively high level in an international comparison. It must be regarded as particularly high in recent years because the main reason for the introduction of budget transfers--to make up for war-related periods of non-contribution by older generations--has lost its significance.

Each system covers three basic types of pension: old-age, disability and survivor pensions. For practical purposes, there is little distinction between the first two because disability pensions have been used more and more in recent years for early retirement and have become “old-age” pensions in essence. The reference to “pensions” in this section therefore covers both old-age and disability pensions.

The basic formula for calculating old-age pension levels is the same across all systems and based on three parameters: the retirement age, a; the years of contribution, t (which together determine the replacement rate, r); and the best 15 years of income, y. 1/ Contribution years are all periods of employment, unemployment, military service, and child raising. For each child, one parent is given credit for 4 years of contribution. Contribution years can be purchased retroactively for higher education or vocational training at favorable rates. The pension entitlement is then given by the following formula:


The maximum replacement rate r is 80 percent. It is reached for men at the statutory retirement age of 65 if the would-be pensioner has accumulated 40 contribution years; or earlier in case of a longer contribution period (e.g., at age 62 in the case of 44 contribution years). For women, the maximum replacement rate is reached at the statutory retirement age of 60 and 40 years of contributions. For each year of retirement earlier or each year less of contributions, the replacement rate is lowered by 1.9 percentage points for the first 30 years of contributions and by 1.5 percentage points thereafter. 2/ If early retirement takes place on the basis of a disability pension, however, the replacement rate is lowered by much less.

Pensions in Austria are subject to taxation. Existing pensions are adjusted each year according to the growth in net wages. In contrast to other countries “net” means that social security contributions, but not taxes, are subtracted from the gross wage bill. This net adjustment of existing pensions was introduced in 1993, when it replaced the adjustment according to gross wages.

The actual average pension age for both men and women is much lower than the statutory pension age of 65/60. This is less so for women because due to a shorter employment history they often only reach full eligibility close to their legal retirement age. Early retirement is facilitated because once they have contributed for 35 years, men can retire at the age of 60 and women at the age of 55. In 1994, men took old-age pensions at 60.8 years on average, and at 50.3 years in the case of disability pensions. Altogether, men retired at 58.5 years on average (Table V-2). Male blue-collar workers, for example, retired on average at the age of 57.8 years. The self-employed retire on average at a slightly higher age.

Table V-2.

Average Retirement Pension Age

(In years: as of 1994)

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Source: Bundesministerium für Arbeit und Soziales, Bericht über die soziale Lage 1994, p.92f.

2. The projection model

The model used to project the likely development in the Austrian pension system is a partial equilibrium model that starts with a projection of the main economic aggregates and variables (GDP growth, employment growth, technical progress, etc.), consistent with the underlying population projection, taken from the World Bank. 1/ The core of the model is the pension system, which comprises all dependent employees and the self-employed, but excludes civil servants. It thus covers 86 percent of all current pensioners. Because they belong to different funds with their own distinct parameters, dependent employees and the self-employed are treated in two separate models. The time horizon is 1994-2050; the population is treated in age cohorts of 5 years and separated for men and women. Technically, the model consists of interlinked spreadsheets which cover, in that order, the projections for the macroeconomic framework, population, employment, wages, contributions, pensioners, and pensions. There is also a spreadsheet consisting of the accounts of the pension system, by income, expenditure and budget transfers. Finally, there exists a set of options to evaluate the impact of policy changes, for example with respect to changes in the indexation of pensions, the replacement ratio or the contribution rates. The system also calculates the present value of unfunded pension liabilities at unchanged policies. 1/

The model extrapolates the current employment structure by sex and age cohorts. Consequently, participation rates of all male/female age cohorts are assumed to remain constant at their current level. In particular, this means that female participation remains at its current low level, and the sectoral pattern between dependent employees and the self-employed remains constant. Wage projections are based on the current age/sex/sector earnings pattern and are consistent with the overall growth of the wage bill. The labor share in the economy is assumed to remain constant. The same assumptions also hold for pensioners: replacement and eligibility ratios for the various age/sex/sectors are assumed to remain constant at their present levels. These projections build up the accounts of the pension system; budget transfers are given as a fixed fraction of government outlays, which are in turn linked to GDP growth.

The model was developed in the Fiscal Affairs Department (author: A. Jaeger) and used to project the pension fund developments in the G-7 countries and Sweden. These projections provide the basis for comparing Austria’s projection in an international context in subsection 4 below.

3. The projection results for Austria

The projections for the Austrian pension funds are rather gloomy. To balance the system under unchanged policies, the budget transfer (in terms of GDP) to the dependent employees’ system would have to be more than doubled by 2010. To balance the self-employed fund, the budget transfer would have to increase slightly from its present high level, at which it already covers more than two thirds of the fund’s expenditures.

The dependent employees’ pension system is currently still on a relatively sound footing. The ratio of contributors to pensioners was 2.76 in 1995, and contributions covered 87 percent of total expenditures. This reflects the high contribution rate of 22.8 percent of gross wages. The necessary budget transfer is thus currently relatively small, with 13 percent of the fund’s expenditures. The demographic change affects the system, however, rather swiftly. Already by 2010, the number of contributors per pensioner falls to 2.14 and, at present contribution rates, contributions would then cover only 72 percent of expenditures. Thus, budget transfers would have to more than double in relation to GDP.

Under unchanged policies—i.e., constant contribution rates and budget transfers in terms of GDP (the latter, 1.0 percent)--the fund’s deficit would amount to S 19 billion, or 0.6 percent of GDP, in 2000 (Table V-3), and to rise to S 91 billion, or 2.1 percent of GDP, in 2010. The present value of liabilities until 2000 which would remain unfunded under unchanged policies amounts to S 71 billion or 3 percent of 1995 GDP. This is the amount the government would have to put aside today to balance the fund through the year 2000. Until 2010, unfunded liabilities would add up to S 800 billion or 34 percent of 1995 GDP.

Table V-3.

Projections of the Austrian Pension System

(In percent of GDP)

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Source: Staff projections.

Contributions in percent of total expenditures.

The self-employed fund is already on a very unsound footing and remains so in the future (Table V-3). The reason is that its ratio of contributors to pensioners is already very unfavorable, with 1.68:1, and is projected to worsen to 1.42:1 by 2010. The coverage ratio of contributions over total expenditures falls from 32 percent to 30 percent until 2010, increasing the necessary budget transfers from 68 to 70 percent of the fund’s expenditure. Hence, under unchanged policies, the fund would remain severely unbalanced in the coming years. If the budget transfer in terms of GDP remained constant, the self-employed fund would have accumulated net deficits of S 27 billion by 2010.

For the self-employed fund, the projections may even underestimate the worsening of the financial situation. The projections assume an unchanged employment pattern, in particular a constant share of self-employed at all age groups. If the recent trend, which shows a considerable decline in the number of self-employed in particular among the young, continues, the fund’s balance would worsen further. On an aggregate level, this would be mitigated since it is most likely that an increase in dependent employment would be the consequence so that the fund of the dependent employees would improve its situation. Even without a further worsening of the financial situation, however, the high budget transfer might become an increasing problem from a public choice point of view. For a large pension fund, the existence of a budget transfer may be a relatively small distortion since the overlap between contributors and tax payers is very large. In the case of a small fund--like the self-employed fund, to which less than 8 percent of the working-age population contribute--the existence and increase of a large budget transfer covering some 70 percent of expenditures is, however, effectively a transfer from all employees/taxpayers to the relatively small number of self-employed. A transfer of that size cannot be justified by positive externalities and could only be justified for a short period, e.g., when a fund is newly established. The fund of the self-employed has, however, been severely unbalanced since the 1970s and will continue to be unbalanced to the same degree far beyond 2010 if no policy changes are made.

4. The Austrian projections in an international comparison

In order to put the Austrian projections into perspective, this section provides some comparisons with the results for other industrial economies, which obtained by using the same projection model. 1/ The countries are the 6-7 countries plus Sweden. The latter was included because of its large public sector and mature demographic situation.

Table V-4 compares the main characteristics of the pension systems in these countries with that of Austria. It shows that the Austrian system is generous in an international comparison: at 80 percent, the maximum replacement rate is the highest and on a par with that in Italy; earnings are assessed on the basis of the best 15 years rather than the entire career, as in most other countries; and pension benefits are indexed to net wages, i.e., pensioners participate in productivity growth, which implies increases that are at times significantly higher than inflation.

Table V-4.

Characteristics of Public Pension Schemes in Selected Industrial Countries

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Sources: Van den Noord and Herd, 1993, Table 1.1; and staff estimates; projections for countries other than Austria are taken from SM/96/7.

PAYG - Pay-As-You-Go. PF - Partially Funded.

Statutory retirement ages as of 1995.

Benefit accrual factor per year of contributions, in percent of assessed earnings.

Benefit accrual factor increases as assessed earnings decline.

The basic scheme is indexed to prices, while the earnings-related schemes are indexed to gross wages.

For earnings-related scheme only.

Benefit accrual factor declines as number of contribution years increases.

Benefit accrual factor declines from 2.11 to 1.6 as numbers of contribution years increases.

a. Differences in demographic trends

Projections of demographic developments reflect assumptions on future trends in fertility, life expectancy, and immigration flows. 1/ The projection results for the time period from 1995-2050 differ considerably across the selected industrial countries, with a fast growing population in the United States and Canada (with population increases of 27 percent and 23 percent by 2050, respectively), mostly attributable to net immigration flows. A somewhat less rapid population growth is projected for Sweden, France, and the United Kingdom. By contrast, the population in Japan, Italy, and Germany is projected to shrink significantly (in Germany by almost 20 percent until 2050). The population in Austria will remain unchanged until 2010 and shrink marginally, by 1.6 percent, until 2050 (Table V-5). These population trends are due to very low fertility rates in most countries, whereas life expectancy at birth of both sexes is for all countries projected to improve by some five years until 2050. Net immigration flows’ for the European countries are projected to fall to zero after 2005.

Table V-5.

Demographic Trends in Selected Industrial Countries, 1995-2050

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Source: Bos and others. World Population Projections 1994-95. World Bank, 1994.Notes: The elderly dependency ratio is defined as population aged 65 and over as a percent of the population aged 15-64. The very elderly ratio is defined as the population aged 75 and over as a percent of the population aged 65 and over. The total dependency ratio is defined as the population aged 0-14 and 65 and over as a percent of the population aged 15-64.

In addition to changes in total population, changes in its composition are likely to affect the performance of the national pension systems. One common ratio to assess the fragility of a pension system is the development of the elderly dependency ratio, i.e., the ratio of the population aged 65+ to the population aged 15-64. For Austria, the 1995 value of 22.5 percent is similar to values for Germany, France, Italy, and the United Kingdom. This ratio is significantly lower in the United States and Canada, but considerably higher in Sweden, reflecting the mature demographic situation in the latter country. For Austria, the elderly dependency ratio is projected to increase to 28 percent in 2010 and to 49 percent in 2050, or broadly in line with developments in Germany, France, Italy, and the United Kingdom. Thus, the projection implies an increase in the Austrian dependency ratio by slightly more than one fifth over the next 15 years.

While the elderly dependency ratio is an indicator of the size of the share of retirees in the population, the development of the very elderly ratio is a proxy for the duration of pension payments. The latter ratio is defined as population aged 75+ over the population aged 65+. Again, the Austrian development is broadly in line with the other industrial countries in the sample. For 1995, the Austrian ratio of 40.8 is practically the average of ratios for other countries, ranging from 37.8 percent in Japan to 46.6 percent in Sweden. Until 2010, this ratio will rise to 45.2 percent in Austria, still average in the sample. In 2050 some 60 percent of pensioners will be at age 75 or over. If the average retirement age were to remain at its current level of 58, six out of ten pensioners would receive their pension for a period exceeding 17 years; the average duration of pension receipt--given the projected life expectancy at pension age--would be 26 years.

A further important indicator is the total dependency ratio, i.e., the population aged 0-14 and 65+ over the population aged 15-64. Again, the Austrian development is in line with developments in Germany and France. The Austrian ratio increases from 48.5 percent in 1995 and 51.3 percent in 2010 to 79 percent in 2050. Consequently, the burden of transferring resources to one member of the young or old generation will have to be borne by 1.25 persons of working age. In this context, a decreasing participation rate would further aggravate the burden on the working population.

b. Macroeconomic assumptions

The main macroeconomic assumptions for the selected industrial countries are broadly similar. For Austria they are as follows: (i) due to aging, the employment growth is projected to be negative (on average, 0.5 percent, per year); (ii) real GDP growth is 1.1 percent per year on average, attributable to capital deepening and exogenous labor-augmenting technical progress, the latter growing at 1.5 percent per year; (iii) the real interest rate is 3.5 percent, i.e., significantly higher than the real GDP growth rate (implying the projected long-run growth path to be dynamically efficient). Also, this relationship between growth and interest rates would require sizable primary surpluses in the public finances in order to stabilize the public debt/GDP ratio; and (iv) the inflation rate is 2.5 percent.

c. Results for the pension systems

Based on the demographic and macroeconomic assumptions, the pension expenditure in percent of GDP will grow by 25 percent in Austria, from 10.2 percent now to 12.7 percent in 2010 (Table V-6). 1/ This medium-term increase is the second-highest in the sample: in Germany expenditures will only increase from 10 to 11 percent, in France they will stay constant at 12.5 percent, and in Italy they will even fall slightly from 16 to 15.2 percent. Only Japan has an increase in pension expenditures similar to that in Austria, but from a much lower level. The long-term increase in Austria is, however, more in line with the other countries.

Table V-6.

Baseline Projections of Pension Expenditure, Balances, and Net Asset Positions of Public Pension Funds in Selected Industrial Countries, 1995-2050

(In percent of GDP)

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Source: Staff estimates; projections for countries other than Austria are taken from SM/96/7.