Austria
2008 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Austria
Author: International Monetary Fund
Publication Date:
19 Jun 2008
eISBN:
9781451802405
Language:
English
Keywords:
ISCR; CR; authority; government agreement; supervisory authority; deficit; foreign currency; General government account; government work plan; world market export share; Global; authorities' goal
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A mix of solid economic policies, wage moderation, and an early orientation toward Eastern Europe explain Austria’s strong economic performance. The economy has grown strong in 2007 and through the first quarter of 2008. Employment growth remains strong, but the trend of a declining unemployment rate appears to be tapering off. Tighter labor market conditions have not resulted in sharp wage increases; instead negotiated wages for 2008 are up. Austria’s external position remains strong, despite a recent decline in competitiveness.

Abstract

A mix of solid economic policies, wage moderation, and an early orientation toward Eastern Europe explain Austria’s strong economic performance. The economy has grown strong in 2007 and through the first quarter of 2008. Employment growth remains strong, but the trend of a declining unemployment rate appears to be tapering off. Tighter labor market conditions have not resulted in sharp wage increases; instead negotiated wages for 2008 are up. Austria’s external position remains strong, despite a recent decline in competitiveness.

I. Introduction1

1. A mix of solid economic policies, wage moderation, and an early orientation towards Eastern Europe explain Austria’s strong economic performance. Economic policies have contributed to this performance by a focus on macroeconomic stability and structural reforms. Wage moderation, resulting from a strong social partnership, has preserved competitiveness and supported export led growth, which has significantly exceeded the euro area average in recent years. The private sector has reaped the benefits from an early entry into fast growing CESE, including in the financial industry. The overall direction of Austria’s economic policies has been supported by the Fund (Box 1).

Key Fund Policy Recommendations and Implementation

During Article IV consultations in recent years, the Executive Board commended the authorities on their record of sound macroeconomic policies and structural reforms.1 Overall, policy implementation has been largely consistent with Fund policy advice.

Fiscal policy. Directors endorsed the authorities’ medium-term macroeconomic policy objectives of sustaining a balanced budget over the cycle and reducing the tax burden. They underscored the importance of quickly designing and setting in motion expenditure measures to reach a structural budget balance.

Financial system. Directors appreciated the resilience of Austria’s financial sector, while emphasizing that developments in financial markets require continued close monitoring, particularly regarding the growth of foreign currency loans and the rapidly expanding activities of Austrian financial institutions in CESE. Directors welcomed further strengthening of supervision and interest in an FSAP update.

Structural policies. Directors supported the authorities’ focus on structural reforms, including in the area of pensions and labor market, and encouraged them to keep the momentum in implementing these reforms.

1 The latest Public Information Notice is available at http://www.imf.org/external/np/sec/pn/2007/pn0748.htm.

2. The ruling grand coalition of social democrats (SPOe) and conservatives (OeVP) agreed on a new government work program in March 2008. The plans in this broad work program are consistent with the Government Program agreed upon in early 2007, and include reduced social security contributions for low income earners, bringing forward pension increases, pension harmonization at the lower levels of government, freeze of a number of levies collected at the federal and regional level, tax-cuts in 2010, health reform, and administrative reform. The staff report addresses the macroeconomic and structural measures in the government program, with a special focus on competitiveness and fiscal and financial sector policies.

II. Recent Developments

3. The economy grew strongly in 2007 and through the first quarter of 2008 (Tables 1 and 2, Figure 1). Real GDP in 2007 grew by 3.4 percent, driven by strong exports and investment, while private consumption growth decelerated. Preliminary estimates for the first quarter of 2008 show continued strength of the economy. However, leading indicators of production, services, and consumption, are off their peaks and the growth momentum is expected to soften as economic activity in trading partners dampens (Figure 2).

Table 1.

Austria: Basic Data

article image
Sources: Austrian authorities; Datastream; and IMF staff estimates and projections.

Contribution to GDP growth.

Dependent labor force.

Payroll employment.

In percent of total labor force. The standardized rate is survey-based, according to EU standards.

On ESA95 basis. The Maastricht Excessive Deficit Procedure (EDP) definition differs from this due to the inclusion of revenues from swaps. 2004 expenditures were recently revised to include a one-off capital transfer to the Austrian Railways amounting to 2½ percent of GDP.

2008 number is for April.

2008 number is for February.

Table 2.

Austria: Staff’s Medium-Term Macroeconomic Framework, 2003-12

article image
Sources: Austrian authorities; IMF, International Financial Statistics; and IMF staff estimates and projections.

On ESA95 basis. The Maastricht Excessive Deficit Procedure (EDP) definition differs from this due to the inclusion of revenues from swaps. 2004 expenditures were recently revised to include a one-off capital transfer to the Austrian Railways amounting to 2½ percent of GDP.

Figure 1.
Figure 1.

Austria: GDP Growth, 2002-07

Citation: IMF Staff Country Reports 2008, 188; 10.5089/9781451802405.002.A001

Sources: Austria Statistical Office; and IMF staff estimates.
Figure 2.
Figure 2.

Austria: Leading Indicators, 2002-2008

Citation: IMF Staff Country Reports 2008, 188; 10.5089/9781451802405.002.A001

Source: OeNB.

4. Employment growth remains strong, but the trend of a declining unemployment rate appears to be tapering off. As economic activity has picked up in recent years, employment growth has accelerated strongly to reach high levels (Figure 3). The effect on the unemployment rate has been moderate, although this rate (4.1 percent in April) remains significantly lower than in the euro area. The relative unresponsiveness of unemployment to employment growth can partly be explained by an influx of foreign workers into Austria.

Figure 3.
Figure 3.

Austria: Labor Markets, 2002-07

Citation: IMF Staff Country Reports 2008, 188; 10.5089/9781451802405.002.A001

Sources: OeNB; and Fund staff calculations.

5. Tighter labor market conditions have not resulted in sharp wage increases, but negotiated wages for 2008 are up. In the past few years social partners have been able to agree on moderate wage increases (Figure 4). This reflects stronger international competition through both trade and increased inflows of migrant workers. As a result, unit labor costs have been contained and compare favorably with the rest of the euro area. Negotiations for 2008 resulted in a 3½ percent wage increase for industry workers, which exceeds outcomes in recent years.

Figure 4.
Figure 4.

Austria: Wages, 2002-08

Citation: IMF Staff Country Reports 2008, 188; 10.5089/9781451802405.002.A001

Source: Eurostat.

6. Austria’s external position remains strong, despite a recent decline in competitiveness. The current account turned positive in 2002 and has remained strong on account of strongly growing exports (Table 3). This reflects a period of wage moderation combined with robust productivity growth, resulting in strengthened competitiveness (Figure 5). In the last year, the ULC based REER has started to edge up again, but it still compares favorably with the euro area. Meanwhile, the world market export share has improved somewhat, although it is still below the levels in 2004–05. CGER calculations indicate that Austria’s real exchange rate is around its long-run equilibrium.2

Table 3.

Austria: Balance of Payments, 2003-12

article image
Sources: Austrian National Bank; IMF; and staff projections.
Figure 5.
Figure 5.

Austria: Competitiveness, 2001-08

Citation: IMF Staff Country Reports 2008, 188; 10.5089/9781451802405.002.A001

Sources: OeNB; World Integrated Trade System; Eurostat; and IMF staff calculations.

7. Headline inflation jumped in late 2007 due to sharp increases in energy and food prices. Headline inflation was 3.4 percent, year-on-year, in April 2008. Core inflation, excluding energy, food, alcohol, and tobacco, has been contained and now stands at around 1.6 percent. Thus far, there is little indication of wages driving up inflation, and services inflation was only 1.6 percent in April (Figure 6).

Figure 6.
Figure 6.

Austria: Inflation, 2002-08

Citation: IMF Staff Country Reports 2008, 188; 10.5089/9781451802405.002.A001

Sources: Eurostat and Fund staff calculations.1/ Excluding energy, food, alcohol, and tobacco.

8. The general government fiscal deficit narrowed significantly in 2007, but the structural deficit remains high (Table 4). There was a 1 percentage point of GDP improvement compared to 2006, but this number needs to be interpreted with caution. The structural deficit remains large (Figure 7). The authorities’ goal of balance over the cycle remains a challenge and Austria’s performance is falling behind its EU-15 peers (Figure 8). Tax cuts in recent years have not been offset by corresponding expenditure measures. The outcome for lower level governments is still uncertain as the data have been prone to revisions in the past.

Table 4.

Austria: General Government Accounts, 2002-10

(In percent of GDP, unless otherwise indicated)

article image
Sources: Federal Ministry of Finance; Austrian Stability Program; and IMF staff estimates and projections.

2004 expenditures were recently revised to include a one-off capital transfer to the Austrian Railways amounting to 2½ percent of GDP.

Negative of the change in the structural balance.

The Maastricht Excessive Deficit Procedure (EDP) definition is used by the Austrian authorities. The difference from ESA95 is due to the inclusion of revenues from swaps.

Figure 7.
Figure 7.

Austria: Recent Fiscal Developments, 2001-2007 1/

(In percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2008, 188; 10.5089/9781451802405.002.A001

Sources: Austria Ministry of Finance and Staff calculations.1/ 2004 expenditures were recently revised to include a one-off capital transfer to the Austrian Railways amounting to 2½ percent of GDP.
Figure 8.
Figure 8.

Austria: Fiscal Trend Comparisons, 1997-2007

(In percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2008, 188; 10.5089/9781451802405.002.A001

Sources: IMF, IFS;and WEO.1/ 2004 expenditures were recently revised to include a one-off capital transfer to the Austrian Railways amounting to 2½ percent of GDP.2/ Unweighted average.

9. Progress in reforming the fiscal federal system has been limited. A new revenue sharing agreement (“Finanzausgleich”) between the federal and lower level governments, covering 2008–13, was reached in October 2007. The intergovernmental transfer system was simplified by converting most federal transfers into fixed unconditional shares of the joint revenues collected at the federal level. However, the weak tax autonomy at the sub-national level was not addressed. Also, with effect from 2011 the agreement increases the revenue shares of small municipalities (with less than 10,000 inhabitants) at the expense of the larger municipalities, which would reduce incentives for municipalities to merge and generate economies of scale.

10. The recent financial market turmoil does not appear to have had a major short-term impact on Austrian banks, but has increased funding costs. Banks’ exposures to affected asset classes, including off-balance sheet risks, are reported to be small. The three largest Austrian banks have all reported strong 2007 results and limited write downs. Stock prices of listed major Austrian banks’ fell in early 2008, to some extent reflecting their exposure to CESE and CIS countries, but have since rebounded somewhat (Figure 9). Overall, financial sector soundness indicators point to a resilient Austrian banking sector (Table 5).

Table 5.

Austria: Financial Soundness Indicators for the Banking Sector, 2004-2007

(In percent, end-of-period)

article image
Source: OeNB.

Data as of end-2006.

2007 numbers refer to the third quarter.

Figure 9.
Figure 9.

Austria: Financial Market Indicators, 2007-08

Citation: IMF Staff Country Reports 2008, 188; 10.5089/9781451802405.002.A001

Sources: Thomson Financial/DataStream and Bloomberg.

11. Austrian banks’ exposure to CESE has increased significantly. The expansion of financial institutions in CESE, and further east, has continued and Austrian exposures there, at 60 percent of GDP, are larger than those of European peers. In 2006, the total assets of the six largest Austrian banks in the CESE region were equivalent to around 20 percent of total banking assets, and generated almost 40 percent of banks’ profits. However, concerns that Austrian parent banks would squeeze their funding of CESE activities in response to the global financial turmoil have so far not materialized. Banks generally have access to ample retail deposits, and they report that the supply of financing through private placements and the issue of Pfandbriefe (a form of covered bond) has held up well.

12. Higher interest rates have tightened monetary conditions somewhat (Figure 10). Austrian short-term interest rates have risen with the rest of the euro area. Long term rates have risen as well, and the spread over German Bunds has edged up. Overall credit growth to non-banks decelerated slightly in 2007 to 3.4 percent year-on-year by end-year. Household credit growth accelerated by about 2 percentage points to 5.9 percent. Loans in foreign exchange (mainly Swiss francs) remained important, but their share in total loans declined to about 16½ percent, down by about 4 percentage points from the peak.

Figure 10.
Figure 10.

Austria: Monetary Developments, 1997-2008

Citation: IMF Staff Country Reports 2008, 188; 10.5089/9781451802405.002.A001

Sources: OeNB; IMF, IFS; ECB; and Eurostat.1/ Weighted average of changes in interest and exchange rates relative to their average values in a base period. An increase (decrease) indicates a monetary tightening (loosening).

13. Past difficulties in individual institutions, where internal controls failed to contain management errors and abuses, prompted an adjustment of the bank regulatory framework, with an enhanced role for the OeNB. Although the FMA retains overall responsibility (and in particular responsibility for regulation and enforcement), besides its responsibilities in the nonbank area, banking inspection and analysis will now wholly be assigned to the OeNB. Important measures have also been taken or are being taken to strengthen corporate governance, including requiring a “fit and proper” test for the chairman of the supervisory board and strengthened internal audit provisions.

III. Report on the Discussions

14. Discussions were guided by the 2007 Surveillance Decision. As Austria is member of a currency union, the focus was on five distinct but related areas central to maintaining competitiveness and domestic stability:

  • The risks to the short-term outlook, especially if global financial troubles were to deepen and prolong the economic downturn.

  • Competitiveness, wages, and inflation, and in particular the role of wage moderation in maintaining competitiveness.

  • Near- and medium-term fiscal policies, including fiscal sustainability, and the fiscal stance.

  • Reform of federal and lower level government financial relations to enhance the efficiency of public spending.

  • Financial sector stability, and the findings and recommendations of the December 2007 FSAP Update.

A. Short-Term Outlook and Risks

15. After two years of strong growth, a slowdown is now expected. Staff expects growth to drop to around 2 percent in 2008-09, reflecting developments in major trading partners. Private consumption growth in Austria is expected to hold up at current modest levels, while growth in exports and investment is expected to come down due to an unfavorable international environment and tighter financial conditions. The authorities were slightly more optimistic as economic indicators so far have been relatively strong. Notably, employment growth had accelerated, boosted by favorable weather conditions for both construction and tourism. They also noted that Austria is more structurally flexible than the European average, and is oriented towards the fast growing eastern European countries, which has so far served as a cushion for Austrian exports.

16. It was agreed that the impact of the global financial turmoil and the expected economic downturn on Austria constitutes a risk to the outlook. Thus far, there are few discernable direct real effects on the Austrian economy from the international financial turbulence and repricing of risks. Over time, though, tighter lending conditions and lowered expectations about the future are expected to have an impact, including on the countries that are Austria’s main export markets and investment destinations. Private consumption growth could be affected by decelerating employment growth and real wages eroded by sustained high inflation. At the same time, consumption growth has already been quite low through 2007, despite a strong economy. Investment is naturally sensitive to relatively small changes in economic developments and prospects. The euro exchange rate constitutes an additional risk.

B. Competitiveness, Wages, and Inflation

17. Continued wage moderation would be essential to preserve competitiveness. The authorities stressed that social partners had been responsible in past years. This trend was expected to carry on as there is still a strong consensus regarding the need for wage moderation. Recent negotiated wage increases had in fact been moderate, although higher than in recent years, and there were few signs of a wage-price spiral in current wage data. However, there was agreement on the need for continued vigilance, as the recent jump in consumer price inflation could still prompt elevated wage demands in coming negotiations, fueling second round inflation effects.

18. The authorities were concerned about the recent jump in inflation and saw this as an argument to step up structural policy implementation. They were in particular considering measures to open up markets for competition, including in the energy sector and in the free professions. The mission supported such measures as they promote efficiency gains and may lead to lower prices, but cautioned that the effect on inflation would likely be limited and lagged. In this context, the mission noted that the resources and investigative powers of the Federal Competition Authority could be further enhanced, and urged the authorities to fully implement the EU directive on services.

19. The authorities argued that the labor market is quite flexible, and recent reforms have made it even more so. Reforms include increased working time flexibility, reform of the severance payment system, longer shop opening hours, and the introduction of unemployment benefits for self employed persons. Pension reforms, when implemented as planned, would encourage labor market participation of older workers, while also contributing to long-run fiscal sustainability. Furthermore, it was agreed that coming tax cuts should focus on labor taxes in order to boost employment and competitiveness.

C. Fiscal Policy

20. The authorities reaffirmed the objective of a structurally balanced budget by 2010. A balance over the cycle is required to: (i) ensure fiscal sustainability as pressures from aging rise in the medium and long term, in particular on health, care and pension expenditures; (ii) keep public debt on a downward path from its current level of just below 60 percent of GDP, which also reduces interest costs; and (iii) meet Stability and Growth Pact commitments.

21. However, reaching that target appears challenging. In 2007, the general government was still in deficit at what seems to be the peak of the business cycle and the structural deficit was around 1 percent of GDP. The 2008 budget implies limited improvement, and the government recently proposed to bring forward increases in pensions and to reduce social security contributions for low-income households within the context of the revamped government work plan. This pushes most of the required consolidation to 2009 and 2010. Furthermore, tax-cuts in the order of 1 percent of GDP are planned to be implemented by 2010. Thus, structural balance by 2010 would require measures to the tune of about 2 percent of GDP. In addition there are plans to implement major infrastructure projects through public companies, which raises the prospect of a substantial increase in the contingent liabilities of the government. The authorities agreed that the needed consolidation would be challenging. At the same time they were more optimistic about economic growth and the underlying strength of revenues, and emphasized the government’s commitment to a structurally balanced budget by 2010.

22. Most of the needed improvement will have to come through expenditure savings. In addition, over the medium to long-term more would be needed to offset aging pressures. Studies point to a risk of substantial long run increases in pension and health expenditure, despite recent reforms.3 The authorities noted that they have embarked on a reform of the health system, which should generate efficiency gains.

23. The adoption of a medium-term budgetary framework was welcomed. Forceful implementation paired with transparency would be key to establish credibility.4 For the new framework to be most useful, long term considerations, such as the implications of aging, should be integrated into the framework.

D. Fiscal Federal Relations

24. The authorities and staff agreed on the merits and broad direction of reform of fiscal federal relations. Most public sector savings and efficiency gains achieved in recent years have been accomplished at the federal level, with the provincial governments lagging in the implementation of pension and administrative reform and the adoption of a medium term expenditure framework. Achieving major and lasting expenditure savings would require strengthening accountability and incentive structures at the sub-national level (Box 2).

Fiscal Federalism in Austria5

Austria’s federal system consists of the federal government, 9 provincial governments, and 2,357 municipalities (including cities and towns). The federal parliament consists of two chambers: the Bundesrat with members appointed by the provincial parliaments, and the Nationalrat with directly elected members. Thus, legislative initiatives typically require provincial support to pass. Municipalities vary widely in size: about 1,500 municipalities contain less than 2,000 persons, and there are only 24 municipalities with more than 20,000 persons. Intergovernmental fiscal relations are complex and often opaque, and have generated various incentive problems and inefficient spending. Key characteristics include:

  • In several areas—most notably in health and education—closely related and overlapping expenditure tasks are allocated to different levels of government, alongside a variety of co-financing arrangements, blurring the lines of responsibility.

  • Low subnational tax autonomy has weakened incentives to contain spending at the sub-national level. Over 90 percent of taxes are collected and regulated at the federal level as joint taxes to be shared with sub-national governments.

  • The revenue equalization mechanism is complex, with pervasive earmarking of funds. This has generated inefficiencies in the allocation of expenditure and made it very difficult to assess the efficiency of various spending activities.

  • Weak disclosure and accounting standards limit public accountability, particularly at the subnational level. For example, parts of health care spending are carried out through a variety of extra budgetary units, with the proportion of such spending that appears on-budget varying considerably across the various subnational governments.

This structure has undermined the accountability of sub-national governments and reduced the efficiency of expenditure. An attempt at constitutional reforms needed to rationalize the system stalled in 2005.

25. However, the authorities explained that achieving a broad political consensus on such reform would be difficult. Implementing a new allocation of expenditure responsibilities across different levels of government would require changes to the constitution. Even though the current grand coalition government has a large majority in parliament, agreeing on a constitutional reform, which would also require agreement by lower level governments, would be difficult.

E. Financial Sector

26. The financial system has benefited from macroeconomic stability at home and profitable growth opportunities in CESE and some CIS countries, which, however, have brought new exposures (Box 3). As documented in the accompanying Financial System Stability Assessment (FSSA) Update, the system and in particular the banks are profitable, well-capitalized, and liquid. Nonetheless, the authorities and the banks themselves noted the challenges of managing a loan book that is expanding rapidly in emerging market countries which have no recent experience of a conventional business downturn and where competition for market share is intensifying. Certain individual banks have relatively concentrated exposures. Stress tests corroborate that managing credit risk in Austria, CESE, and the CIS is the main potential challenge for Austrian banks; a particular concern is the sizable indirect foreign exchange risk through foreign currency lending at home and abroad.

27. Direct effects of recent global financial turbulence have been modest because banks have concentrated on originate-and-hold business. The authorities pointed out that the rise in funding costs associated with the recent turmoil may slow credit growth to a more sustainable pace. Staff noted that it may also reveal credit quality problems, notably where macroeconomic imbalances are pronounced, and a major slowdown in the region would likely feed back into the quality of Austrian assets. Higher funding costs and the maturation of CESE financial markets are likely to thin the banks’ (currently comfortable) profitability cushions

28. Financial regulation and supervision have become more risk-based. The authorities noted that this would continue, with more frequent on-site supervision and further enhanced off-site analysis, including through stress testing. Given Austria’s role as both home and host supervisor, on-going international cooperation is a high priority.

29. The recent reorganization of banking supervision, whereby all inspection and analysis work is assigned to the OeNB while the FMA retains other responsibilities, will require the two institutions to cooperate very closely. The allocation of responsibilities is clearer than before, but any split brings certain risks. Arrangements must be in place to ensure that, even in stress situations, decisive, timely and well-informed action can be taken. The authorities are instituting mechanisms to this end.

Main Recommendations of the FSAP Update

The FSAP Update recommendations broadly accord with the authorities’ own priorities, and they have already taken steps to implement some of them. The main immediate areas for action (which mostly apply to nonbanks as well as banks) are as follows:

Cooperation with foreign home and host supervisors will need to be developed further. The Austrian authorities are active in the various EU-level mechanisms to facilitate supervisory cooperation (and the recent EU-wide Memorandum of Understanding on crisis management enhances some mechanisms, such as the use of supervisory colleges). They also work with supervisors further afield. But more will have to be done as financial systems integrate, for example, through joint analysis, more coordinated inspections, and the conduct of cross-border crisis simulations.

On-site inspections need to be more frequent, and complemented with the use of sophisticated systems for the early detection of potential strains. The traditional reliance on external auditors for much on-site work may not cope well with cross-border financial institutions employing complex techniques and products in fast-moving financial markets. The authorities are going to have to continue to understand banks’ evolving risk models, for example, and develop further their understanding of systemic factors, such as the connections between regional macroeconomic performance and financial sector soundness. Supervisors will need resources to achieve all this.

The OeNB and the FMA will need to be fully and publicly committed to intense cooperation in banking sector oversight. Steps are already being taken to operationalize this cooperation, for example, through the establishment of a common database. Protocols for dealing with problem cases will need to be developed.

The supervisors should ensure that banks continue to manage indirect credit risk stemming from foreign currency loans and promote borrowers’ awareness of the risks. There are considerable indirect credit risks associated with foreign currency lending, both domestically and abroad.

Government institutional liability for financial sector supervision should be defined more narrowly. Under current provisions, the failure of a financial institution generates numerous court cases claiming damages from government for negligence in supervision. Taxpayers bear a heavy cost, supervisors are distracted from their normal duties, and moral hazard may be engendered.

The state-sponsored pension scheme (Zukunftsvorsorge) has established itself, so the time has come to loosen some restrictions that apply. For example, the requirement to invest in small stock exchanges, and the mandatory full guarantee of principal should be reconsidered.

IV. Staff Appraisal

30. In line with developments in major trading partners, a slowdown is expected for 2008-09. The economy grew strongly in 2006–07, driven by robust exports and investment. Employment growth accelerated and has reached historical highs, while unemployment remains significantly lower than in the euro area. Looking ahead, growth is expected to soften to around 2 percent in 2008–09, as activity in trading partners dampens. Risks to this outlook are balanced.

31. Inflation has increased considerably and continued wage moderation will be essential to maintain Austria’s competitiveness and relatively low unemployment. As elsewhere in Europe, inflation in Austria went up due to sharp increases in energy and food prices. So far, there is little indication of a wage-price spiral: wages have been increasing moderately, despite higher labor demand, and unit labor costs have been contained. This is welcome, as significant wage increases would worsen Austria’s healthy external position, with negative repercussions for growth, exports, and employment.

32. Staff strongly supports the government’s objective of targeting a balanced budget over the cycle, but current policies are unlikely to deliver a structurally balanced budget by 2010. The deficit for 2007 was smaller than projected, but this primarily reflected the effect of the cycle. On a structural basis there has been limited consolidation in recent years, and this pattern is likely to be repeated in 2008. Although the government’s projections imply strong consolidation in 2009–10, measures to deliver this outcome have not yet been identified, while a substantial tax cut has been announced for 2010. Under the current economic outlook the automatic stabilizers should be allowed to operate.

33. Efforts to reform fiscal federal relations should be intensified. Notwithstanding the political difficulties, reform of fiscal federal relations should be given high priority as it is key to achieving major and lasting expenditure savings and efficiency gains. Reform should focus on strengthening accountability and incentive structures at the sub-national level.

34. The introduction of a medium-term budgetary framework later this year will be a major step forward. For the new framework to be most useful, long term considerations, such as the implications of aging, should be integrated into the framework. Sub-national governments should be fully incorporated as well.

35. The Austrian financial system is generally robust. Soundness indicators for banks and other financial institutions are at satisfactory levels, and 2007 has been a good year for the industry. Improved cost efficiency has helped restore the profitability of domestic operations.

36. The financial system’s rapid expansion into CESE and the CIS has brought higher profits and diversification, but also increased risks. Some economies in the region exhibit large macroeconomic imbalances, while certain individual institutions have large exposures to individual markets. The significant volume of foreign currency denominated lending represents a risk factor that deserves special attention by supervisors and banks’ risk managers. Stress tests conducted as part of the FSAP Update exercise indicate considerable resilience, while confirming these pressure points.

37. The recent global financial market turmoil has not had a major short-term impact on Austrian banks, but has increased funding costs. Banks’ direct exposures to affected asset classes and off-balance sheet risks seem to be modest. Funding costs and risk premia are likely to remain elevated, which will make it more expensive to expand credit in CESE and CIS countries.

38. The recent amendment of the bank supervisory framework will require close cooperation between the OeNB and FMA. The amendments have clarified that the FMA, besides its responsibilities in the nonbank area, retains overall responsibility for banking supervision, while banking inspection and analysis has been assigned wholly to the OeNB. For the new financial supervisory structure to be effective, the OeNB and FMA will need to be committed to seamless cooperation; worthwhile initiatives to enshrine this cooperation in operational procedures are already under way.

39. Financial sector oversight has become more demanding and more reliance must be placed on international cooperation and direct supervision by the authorities. Financial institutions and their operations have become more complex, and the supervisory authorities will need to conduct effective and timely on- and off-site supervision. In addition, Austria should continue its efforts to develop cross-border supervisory arrangements. The effectiveness of supervision would also be enhanced by providing better legal protection for supervisory action; the current broad definition of institutional liability (“Amtshaftung”) is not in line with international practice, costly to the taxpayer, and creates moral hazard.

40. Recent structural reforms are welcomed, and the authorities are encouraged to focus on further measures that support competition. Recent reforms include the relaxation of regulations on working and shop opening hours. There is scope for increasing competition in the free professions, and full implementation of the EU directive on services would further deregulate the services sector and foster entry and competition. Pension reforms should be implemented firmly to contribute to long-run fiscal sustainability and encourage labor market participation and flexibility. Initiatives to enhance public and private sector R&D in the context of the Lisbon agenda are welcomed, provided the cost-effectiveness of these measures is ensured.

41. Staff commends Austria for its official development assistance reaching 0.5 percent of GNP in 2007; it encourages a further increase towards the UN target of 0.7 percent of GNP.

42. It is proposed that the next Article IV consultation be conducted on the standard 12-month cycle.

1

A team comprising Mr. Hilbers (head), Mr. Lundback, Mr. Kanda, Mr. Rosenberg (all EUR) and Mr. Hardy (MCM) visited Vienna during March 7-17, 2008. Austria is an Article VIII country and data provision is adequate for surveillance (see Informational Annex).

2

The macro balance approach indicates a 3 percent undervaluation and the external sustainability approach a 6 percent undervaluation, while the equilibrium real exchange rate approach points to a 7 percent overvaluation.

3

See OECD, Economic Survey Austria, 2007; and Daniel Kanda, “Long-Run Fiscal Challenges in Austria,” IMF Country Report No. 07/143.

4

Erik Lundback, “A Medium-Term Budgetary Framework—What Can Austria Learn from Other Countries?” IMF Country Report No. 07/143.

5

Daniel Kanda, “Perspectives on the Reform of Fiscal Federal Relations in Austria,” Selected Issues Paper 2008.

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Cover IMF Staff Country Reports
Austria: 2008 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Austria
Author: International Monetary Fund
Volume/Issue:
Volume 2008: Issue 188
Publisher:
International Monetary Fund
ISBN:
9781451802405
ISSN:
1934-7685
Pages:
43
DOI:
https://doi.org/10.5089/9781451802405.002

Austria: GDP Growth, 2002-07

Austria: Leading Indicators, 2002-2008

Austria: Labor Markets, 2002-07

Austria: Wages, 2002-08

Austria: Competitiveness, 2001-08

Austria: Inflation, 2002-08

Austria: Recent Fiscal Developments, 2001-2007 1/

(In percent of GDP, unless otherwise indicated)

Austria: Fiscal Trend Comparisons, 1997-2007

(In percent of GDP, unless otherwise indicated)

Austria: Financial Market Indicators, 2007-08

Austria: Monetary Developments, 1997-2008