Abstract
This 2007 Article IV Consultation highlights that the favorable economic outcome for Austria is owed to a combination of stability-oriented macropolicies, a range of structural reforms, strong international competitiveness resulting from a social partnership that facilitates wage moderation, and an orientation toward fast-growing economies in Central, Eastern, and Southeastern Europe (CESE). The banking sector continues to do well overall. The authorities are taking action to further improve monitoring of the Austrian banks’ activities in CESE, including foreign currency lending, and are also stepping up collaboration with host supervisors.
The Austrian authorities broadly agree with the staff’s assessment of Austria’s economic situation and its general recommendations on economic and financial policies. They appreciate the high quality of the Staff Report and the Selected Issues studies. The Staff Report again highlights Austria’s good economic performance relative to its European peers in terms of GDP growth, unemployment, competitiveness and public finances.
Short–term outlook
As anticipated in the last Staff Report, Austria’s economy has continued its strong growth performance, unemployment has been declining since March 2006 and is expected to drop to 4.2 percent by the end of 2007, while inflation is at 1 ¾ percent, supported by moderate wage rounds despite signs of a tightening labour supply in 2007. In 2006, the Austrian economy recorded its highest growth since 2000. Real GDP grew by 3.2 percent, making Austrian growth performance better than that of the Eurozone. At an increase of 8.5 percent in real terms, exports of goods contributed strongly to growth. With imports growing significantly slower, net exports contributed one percentage point to GDP. Austria’s superior growth performance can be explained by the improvement of its external competitiveness. Since 1995, Austria’s real effective exchange rate has depreciated by more than 10 percent vis–à–vis the other member states. Reflecting the significant improvement in competitiveness, the current account has swung from an average deficit of about 1 percent of GDP before 1995, the year of EU entry, into surplus in 2004 and has shown a solid surplus ever since.
The economy has started particularly well in 2007. Thanks also to the mild winter, employment expanded at more than 2 ½ percent in the first quarter, the highest rate since 1974. Growth is broad–based, and is again expected to reach 3 percent. Investment is expected to continue to grow at a brisk pace in the face of very high capacity utilization and very favorable business survey results. Also consumption is increasingly gaining strength given record employment growth and favorable disposable income developments.
Fiscal policy
The new government came into office on 11 January 2007. The broad contours of fiscal policy have been maintained, aiming at a balanced budget over the cycle. As a result of buoyant revenues and a restrictive stance on expenditures, the general government deficit in 2006 turned out to be better than expected. The latest figure puts the deficit at 1.1 percent of GDP. In 2007, the deficit is forecast to decline further to 0.9 percent. The debt to GDP ratio had declined in 2006 and in 2008, it is expected to drop below 60 percent for the first time since 1993. The promotion of investment in the field of RD, infrastructure and education continues to be very high on the agenda, but more weight is given to social protection and poverty reduction. Thus, the focus is on achieving many of the EU–Lisbon targets.
Compared to the policy of the previous government, less emphasis is put on reducing the tax burden. By implementing structural reforms in public administration, competition policy and the labor market, savings will be achieved, which can be returned to the tax payer in the form of a tax reform, planned for 2010. The government has made it clear that tax reductions are contingent on savings on the expenditure side.
The government plans to lower administrative costs for business by 25 percent by 2010, as well as to further streamline administrative processes (e.g. one–stop–shops). Reform of public administration on both the national and regional levels will continue. Within the central government, considerable savings have been generated by implementing administrative reforms, reducing duplication of work and reduction of personnel and by implementing performance–oriented remuneration schemes. In the coming years, emphasis will be put on the lower levels of government. By mid–year, a commission is expected to make proposals for a reform of the constitution. The central government pays attention to the joint budgetary responsibility of all regional authorities within the framework of the Austrian internal stability pact. For the fiscal revenue–sharing agreement in the period after 2008 it is planned to put special emphasis on the expenditure side.
Selected Issues
Medium–Term Budgetary Framework–What can Austria Learn from other countries?
Currently, Austria has a non–binding multi–year budget program which highlights the major political aims of the government. According to current plans, the government also intends to present to Parliament this year, a proposal for a medium–term expenditure framework (MTEF).
The MTEF would cover a period of four years and is to be revised on a rolling basis each year. It will be binding both for budget decision and for budget implementation in each fiscal year. The MTEF will be an instrument for setting strategic priorities on the expenditure side of the budget. For this purpose it will be divided into five broad categories. The expenditure limits for these categories would be binding for the entire 4–year period.
The MTEF law will be accompanied by a Strategy Report to set out the political priorities and targets of the budget as well as more detailed information on economic assumptions and expected revenues during the MTEF period (estimates for tax revenue, gross national product, gross debt etc.). The authorities concur with the staff that an MTEF by itself will not deliver fiscal discipline–commitment and longer–term planning is also necessary.
Long–Run Fiscal Challenges
The staff’s long–term projections are basically those made at the EU level. The sensitivity tests, however, are based on the IMF’s own assumptions and calculations and can, therefore, be reviewed by the Austrian authorities only to a limited degree. It is to be noted that the current discussions in the government on adjustments of the pensions system would affect orders of magnitude significantly below those indicated in the Selected Issues Paper.
The staff undertakes a comprehensive analysis of risk testing of fiscal sustainability in Austria, with the focus apparently more on the downside than on the upside risks. This approach also explains why there is such a large difference in debt developments between the worst–case scenario, which is, indeed, a “worst–worst–worst”–case, and the best–case scenario. Overall, however, this staff approach centred on long–term risk analysis appears to be a good one and should also be applied to other countries in future.
Cross–border Banking Issues for Austrian Banks and their Supervisors
The activities of banks and financial institutions in the CESE have been a clear success story. This applies not only to the financial institutions concerned but also to the Austrian economy at large, as financial institutions paved the way for legal services, real estate companies, the construction sector, retail trade and green field investment in the CESE.
Notwithstanding these positive elements, the staff rightly points out the challenges ahead and the financial supervision issues, which are also being discussed as a general topic in the EU framework.