Abstract
This 2002 Article IV Consultation highlights that after decelerating sharply in 2001, economic growth in Austria is projected to strengthen gradually during 2002, parallel to the expected improvement in the global economic climate. Real GDP growth is projected to average 1 percent in 2002, supported by a recovery in investor confidence and strong competitiveness. Despite the recent increase, the unemployment rate remains one of the lowest in Europe at about 4 percent. The government intends to stick to its fiscal adjustment plan in 2002.
The Austrian authorities appreciate their consultations with the Fund and the high quality of the staff report, including the special studies on population aging and the economic effects of enlarging the European Union. They broadly agree with the staffs assessment of Austria’s economic situation and its general recommendations on economic and financial policy.
The staff report and the Selected Issues studies are not only a presentation of Austria’s problems but also a demonstration of its strengths and assets in terms of price stability, productivity growth, moderate wage policy, low unemployment, sound mediumterm fiscal policy orientation, strong institutions, ability to reform and ability to identify and exploit the new opportunities for Austrian business and finance offered by European enlargement.
1. Fiscal Policy
When the present government entered office it undertook a major shift in economic policy, which included a much faster pace of fiscal adjustment, as advised by the IMF, and inter alia resulted in a balanced budget in 2001, a year earlier than planned. This was the first time in over 30 years that Austria’s general government budget was not in deficit.
This policy change came at a difficult moment, since 2001 saw the Austrian economy, along with most others in Europe, slow sharply. This slowdown has continued longer than expected, most probably resulting in a general government deficit of 0.4 percent of GDP in 2002. But most recent forecasts by Austrian research institutes agree that a significant recovery of economic activity will occur in the second half of this year.
The policy shift was also accompanied by changes in the structure of revenues and expenditures, and a new approach aimed at realigning all levels of government with this new direction (the “internal stability pact”).
The early restoration of budget balance resulted partly from a change in the timetable for paying assessed taxes, a step which produced surprisingly high additional revenues. The downside of this change was that taxes as a share of GDP reached a new high. In response the government has set itself the medium-term target of lowering the ratio of taxes to GDP to less than 40 percent by 2010. Lowering taxes as a share of GDP has been a longstanding recommendation of the Fund, the OECD, and the EU.
The possible launching of a tax reform now under discussion should be seen as one of Austria’s medium-term policy goals. But the authorities are clearly determined not to let such a tax reform cause a departure from the successful consolidation path of the last two years. They remain fully committed to balancing the budget throughout the business cycle. In the present growth environment this means that any tax reductions must be balanced by significant savings on the expenditure side.
The authorities are cognizant of the staff’s advice about the desirability of a medium-term fiscal framework. Achieving the 40 percent target just mentioned will require just such a framework to help policymakers through the necessary steps. The authorities are presently working on such a framework to assist in carrying out fundamental structural reforms on the expenditure side in line with the government’s objective of streamlining the state’s role in the economy. The staff points to several measures already taken to reduce distortions due to state interference, a goal to be pursued by privatizations, regulatory reforms, and downsizing the public sector.
2. Structural Reforms
The implementation of policies has continued, producing significant progress in several areas. Some of the most important ones are:
In line with international trends, the financial market will be supervised by a new independent consolidated authority established on April 1 this year, which will be better able to respond to the challenges of global and domestic financial developments. This authority will cooperate closely with existing institutions, especially the Austrian National Bank. Early results show that this new consolidated agency has clear advantages over the former segmented arrangements. Unified, integrated supervision will become increasingly important with the growing complexity of financial services and the rapid emergence of financial conglomerates.
The staff rightly notes that it is essential to establish close relations with foreign supervisors, especially in the Central and East European countries. A Memorandum of Understanding will soon be concluded with Slovakia. Negotiations have been started with Poland. And the authorities are in the process of reaching out to Bulgaria.
The Austrian authorities are prepared to participate in an FSAP.
Agencies concerned with implementing competition policies have been retooled with the best of European practices. The influence of social partners on competition policy has been curtailed in response to the perception that the system had been favoring the interests of market insiders at the expense of outsiders.
Major reforms in the labor market have been achieved, including a reform of the severance pay system, which will supplement the pay-as-you-go system by providing the basis for a second pillar. This is a major achievement, and an additional step toward making the pension system sustainable. This being said, the Austrian authorities largely agree with the staff’s analysis of the problem of population aging and its long-term consequences for the public finances.
Key network industries have been liberalized, some of them well in advance of their EU-mandated deadlines.