Austria: Staff Report for the 2013 Article IV Consultation

This paper presents details of Austria’s 2013 Article IV Consultation. Austria has been growing economically but is facing challenges in the financial sector. Full implementation of medium-term fiscal adjustment plans require specifying several measures and plans that need gradual strengthening to take expected further bank restructuring cost into account. It suggests that strong early bank intervention and resolution tools, a better designed deposit insurance system, and a bank-financed resolution fund would help reduce the need for budgetary support to any troubled banks in the future.


This paper presents details of Austria’s 2013 Article IV Consultation. Austria has been growing economically but is facing challenges in the financial sector. Full implementation of medium-term fiscal adjustment plans require specifying several measures and plans that need gradual strengthening to take expected further bank restructuring cost into account. It suggests that strong early bank intervention and resolution tools, a better designed deposit insurance system, and a bank-financed resolution fund would help reduce the need for budgetary support to any troubled banks in the future.


1. Austria remains an area of relative strength in the European landscape. The economy is affected by the regional slowdown but less so than elsewhere, and growth and employment have held up comparatively well (Figure 1). Unemployment, though on the increase, is the lowest in the EU. The 2012 fiscal outturn was favorable, and the medium-term fiscal adjustment plan accommodates currently weak economic conditions. The easing of tail risks in the euro area has sharply reduced Austrian sovereign spreads (Figure 2).

Figure 1.
Figure 1.

Austria: Recent Economic Developments

Citation: IMF Staff Country Reports 2013, 280; 10.5089/9781475575088.002.A001

Sources: Austrian authorities; WIFO; Eurostat; Haver; WEO; and IMF staff calculations.
Figure 2.
Figure 2.

Austria: Financial Market Indicators

Citation: IMF Staff Country Reports 2013, 280; 10.5089/9781475575088.002.A001

Sources: Thomson Financial/Data Stream and Bloomberg.

2. Financial stability and related policies were recently evaluated under the IMF’s Financial Sector Assessment Program (FSAP). The FSAP noted that Austria’s large banking system, which plays a dominant role in CESEE, appears resilient to adverse scenarios on the whole. Aggregate bank capitalization, funding and liquidity conditions have improved, and Austrian banks’ foreign subsidiaries have reduced their reliance on parent bank funding. Nevertheless, bank asset quality is still deteriorating in several CESEE countries, while depressed credit demand is hurting profitability. A group of intervened medium-sized banks face uncertain prospects and pose fiscal risks.

3. With elections to be held in September 2013, discussions focused on the policy priorities for the next government. The current medium-term fiscal adjustment plan needs to be fully implemented in structural terms and strengthened to compensate for additional costs from intervened banks. Public spending can be made more effective, with additional expenditure savings used for reducing the high and distortionary tax burden on labor. As to financial stability, as recommended by the FSAP a comprehensive framework for early bank intervention and resolution would help reduce the need for state support in the future, as would a reform of the existing system of five private deposit insurance schemes and the creation of a separate bank resolution fund.

Recent economic developments, outlook, and risks


4. Growth has stalled since early 2012, which is increasingly reflected in the labor market. Real GDP has been flat since the second quarter of 2012, resulting in an annual growth rate of 0.9 percent for 2012, down from 2.8 percent in the year before. Both external and domestic demand components have been weak and reflected developments in main trading partners, in particular Germany and CESEE, investment uncertainty, an unwillingness of households to further reduce their savings rate from already low post-2009 crisis levels, and fiscal consolidation. While employment growth remained relatively strong in 2012, labor market conditions are now weakening in line with economic developments. As a consequence, unemployment has been gradually increasing but remains low. Credit growth also mirrors economic activity and has decelerated since mid-2012, mainly driven by weak credit demand while tightening in credit conditions has been limited.

5. Inflation has remained above 2 percent. Inflation fell from its 2011 peak of 3.6 percent to 2.6 percent in 2012, with a pick-up in the second half of the year. It dropped again to 2.2 percent in June 2013. Nevertheless, both headline and core inflation remain above the level in Germany, to a large extent reflecting higher services inflation. In spite of backward-looking wage setting, gross nominal wage increases in 2012 exceeded inflation only slightly due to some negative wage drift, leading to very modest real wage growth.

6. The current account is in a modest surplus. The surplus has fallen considerably from its pre-crisis level of almost 5 percent of GDP in 2008 and amounted to 1.8 percent of GDP in 2012, with a deficit in goods more than offset by a surplus in services (Figure 3). The REER has appreciated somewhat in 2012 reflecting the positive inflation differential with major trading partners.

Figure 3.
Figure 3.

Austria: External Sector

Citation: IMF Staff Country Reports 2013, 280; 10.5089/9781475575088.002.A001

Sources: Austrian National Bank; Eurostat; Haver; and IMF staff calculations.

Outlook and risks

7. Staff projects gradually accelerating economic activity. A gradual recovery for the remainder of 2013 and 2014 would be consistent with the modest pick-up in external demand suggested by some high frequency indicators and a related recovery in investment activity, some catch-up in private consumption on the back of modest growth in real wages and disposable income, and fiscal expansion in 2013. This would lead to growth rates of 0.4 and 1.6 percent for 2013 and 2014, with the output gap bottoming out at around -1½ percent in 2013. Unemployment will rise to almost 5 percent in 2013/2014 and recede thereafter.

8. The current account is somewhat stronger than predicted by fundamentals, but the gap has shrunk and recent trends support euro area rebalancing. According to the IMF’s external balance assessment (EBA), the current account is somewhat above the norm suggested by fundamentals, while the real effective exchange rate is broadly in line with fundamentals. The current account divergence does not reflect policy gaps included in the EBA exercise, i.e. it is an unexplained regression residual.1 The surplus in the current account is evident since the early 2000s and reflects both a decline in the investment rate and an increase in the savings rate. Importantly, the current account regression residual has shrunk over time and unit labor costs relative to euro area partners are on the rise, which should contribute to rebalancing within the monetary union.

9. The most acute risks stem from a re-intensification of the euro area crisis. Overall, risks are tilted to the downside. They are summarized in the Risk Assessment Matrix (see text table). The main risk is that stalled or incomplete delivery of euro area policy commitments or policy slippages in key countries under market pressure could deal a new blow to fragile market confidence, leading to adverse aggregate demand shocks and/or a prolonged period of weak growth. Direct trade ties remain dominated by relatively stable Germany, and cyclical developments follow closely the German ones despite Austria’s increased eastward integration.2 Nonetheless, while direct exposures to euro area program countries are small, Austria’s ties with Italy are relatively strong, as Italy is a sizable trading partner, the second largest bank in Austria is a subsidiary of an Italian bank, and cross-border exposures, at about 3 percent of GDP, are non-negligible. If a euro area recession spilled over to CESEE, this would further delay the recovery of real estate and credit markets and may result in further currency depreciation in that region, leading to higher NPLs and lower profitability for Austrian banks already burdened by the crisis legacy.3

The authorities’ view

10. Authorities’ and staff forecasts and risk assessment are broadly in line. The latest forecasts for 2013 and 2014 by the Austrian Central Bank (OeNB) and the leading Austrian research institute WIFO deviate only marginally from staff projections, while the Institute for Advanced Studies is a bit more optimistic and forecasts growth of 0.6 and 1.8 percent for 2013 and 2014. The authorities agreed on the main downside risks to recovery, but also stressed upside risks and explained that fundamentals were in place for a vigorous output response if a stronger-than-expected external demand impulse materialized.

11. The authorities argued that the current account surplus since the early 2000s is mainly the lagged result of structural changes in the 1990s. In the OeNB’s view, the Austrian external position benefited in particular from a gradual rise in trade and FDI with CESEE, with rising exports and lagged profits from FDI being the main drivers.

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Figure 4.
Figure 4.

Austria: Fiscal Developments and Outlook

Citation: IMF Staff Country Reports 2013, 280; 10.5089/9781475575088.002.A001

Sources: Austrian authorities; WEO; and IMF staff calculations and projections.1/ The structural balance excludes revenue from the 2012 tax treaty with Switzerland and the following bank restructuring cost (in percent of GDP): 0.6 in 2010; 0.2 in 2011; 0.9 in 2012; budgeted 0.4 in 2013.2/ Authorities’ consolidation plans fully implemented; with staff macroeconomic baseline projections.3/ Authorities’ consolidation plans fully implemented; compared to staff baseline projections, 1/4 ten-year standard deviation lower real GDP growth (and 1/4 pp lower inflation) from 2014 onwards.4/ Authorities’ consolidation plans fully implemented; compared to staff baseline projections, 200 bps higher sovereign interest rate from 2014 onwards.

Policy Discussions

The discussions focused on enhancing financial stability, more effective intervened bank restructuring, and prospects for public debt reduction, as well as a post-election agenda for more efficient public spending and stronger work incentives in particular for low-skilled workers and women.

A. Financial Stability


12. The three largest Austria-based banks have improved their capitalization, and funding and liquidity conditions are comfortable. The banks reported Core Tier 1 ratios above 10 percent at end-2012, slightly below international peers (Figure 5) but improved relative to end-2011, reflecting a combination of earnings retention and reductions in risk-weighted assets. For two of the banks, these ratios include hybrid (participation) capital, most of it provided by the government during the crisis, which is being phased out under Basel III. At the same time, internal capital generation has been reduced by the still sizable NPL provisioning needs and falling net interest margins, while equity valuations are low even in comparison with other European banks. Nonetheless, one large bank has issued new equity and repaid all participation capital in August 2013. On the funding and liquidity side, conditions have improved markedly since last year. Deposits have been growing in Austria and in CESEE, and banks have largely repaid LTROs and are able to tap markets for term funding at favorable rates.

Figure 5.
Figure 5.

Austria: Banking Sector

Citation: IMF Staff Country Reports 2013, 280; 10.5089/9781475575088.002.A001

Sources: OeNB; Bloomberg; SNL Financial; BIS consolidated banking statistics; and IMF staff calculations.1/ Austrian banks are shown in red and non-Austrian banks are shown in blue. The set of “large European banks” includes 2 Belgian banks, 1 Danish bank, 5 French banks, 5 German banks, 5 Italian banks, 2 Dutch banks, 1 Norwegian bank, 5 Spanish banks, 4 Swedish banks, 2 Swiss banks, and 5 British banks.

13. Adverse spillovers from Austria to CESEE through deleveraging have been contained thus far. Austrian banks continue to regard CESEE as a core market and key source of future profitability, despite rising NPLs in some countries and higher capital requirements at the group level and locally in recent years. For the banking system as a whole, CESEE exposure has grown by 3.5 percent over 2008–12, though recently there has been a reallocation across markets, with reductions in Ukraine, Hungary, and Romania and increases in Czech Republic, Poland, Turkey, and Croatia. In general, cross-border lending and parent funding of subsidiaries have declined, and subsidiaries have become more reliant on local funding, reflecting a move away from foreign currency lending, guidance by Austrian supervisors, and strong growth in local deposits.4

14. A group of medium-sized banks has been fully or partly nationalized and is under restructuring. At end-2012, these banks represented about 8 percent of the banking sector and 28 percent of GDP. These banks had refocused their business models away from their traditional core (and low-profitability) domestic activities, including through a number of ill-advised acquisitions, expansion into CESEE, and exposure to euro area periphery sovereigns (Box 1).

Austria’s Mid-Sized Intervened Banks

Hypo Alpe Adria (HAA) was initially a regional mortgage bank based in the state of Carinthia. It aggressively expanded into SEE in the first half of the last decade, equipped with a state guarantee. After years of weak performance, HAA received its first government support in 2008 and was nationalized in 2009, with assets of EUR 41.1 billion. Total assets at end-2012 were EUR 33.8 billion (some 3 percent of total banking sector assets or 11 percent of GDP), of which about one third had been placed in an internal wind-down portfolio, and about another third were in the SEE subsidiary network to be re-privatized. Some of the banks in this network have a sizable presence in the local market (Bosnia-Herzegovina, Serbia, Croatia).

Kommunalkredit (“new”) had a balance sheet size of EUR 15.9 billion at end-2012. It is the “good bank” part of Kommunalkredit (“old”)—a bank nationalized in 2008, after deviating from its low-profitability core business of public investment financing by taking on considerable bond and CDS exposure (primarily to the euro area periphery). Efforts to re-privatize this bank failed, and as of May this year, the bank does not engage in any new banking business activity. Assets of the “good bank” are mainly loans, of which nearly 70 percent were advanced in Austria, mainly to municipalities.

KA Finanz is the “bad bank” part of Kommunalkredit (“old”) and it operates in a wind down mode, while still holding a banking license. At end-2012, assets on its balance sheet amounted to EUR 10.9 billion, while its off-balance sheet exposure was EUR 6.2 billion. While assets on balance sheet are mainly comprised of sovereign bonds, the off-balance sheet assets are CDS positions.

Austrian Volksbanken AG is the apex institution of one of Austria’s cooperative banking groups. Over the two last decades, it had embarked on an ill-fated acquisition and expansion strategy, including into CESEE. After a first public capital injection of EUR 1 billion in 2009, it had to be (partly) nationalized in 2012. The EC has approved a restructuring plan that envisages a reduction of the bank’s balance sheet to a size commensurate with its core function as apex institution—from currently EUR 27.7 billion (end-2012) to some EUR 19 billion by 2017.

15. Negative feedback loops between the sovereign and the banking sector remain a risk, with potential adverse spillovers to CESEE. The Austrian banking sector is large (with assets of over 3½ times GDP) and internationally exposed (with exposure to CESEE and CIS countries at 105 percent of GDP). At the height of the last financial crisis, the government provided capital and funding guarantees to the banking sector, and sovereign spreads became elevated for a short period of time as fears about CESEE exposures mounted. On the banks’ side, while banks’ holding of sovereign debt is limited, funding conditions for the larger banks benefit from market perceptions that the fiscally sound sovereign will step in, as reflected in the considerable support credit rating uplift. If sovereign creditworthiness was called into question, the resulting worsened bank funding conditions might cause negative spillovers to CESEE through reduced supply of credit by Austrian banks in the region.

Policy issues

16. Large, internationally active banks should continue to strengthen their capital position. With market expectations of capital levels well ahead of current regulatory minimum requirements, still volatile global financial markets, and uncertainty about asset quality in CESEE, focus on strengthening capital buffers should continue, as emphasized by the FSAP. Against this background, supervisors should continue to monitor the size and quality of capital buffers at large banks closely, and stand ready to take action if needed (e.g. by restricting dividend payouts), including with a view to the forthcoming balance sheet assessment exercise in the context of the transition to the new single supervisory mechanism in the euro area.

17. Faster medium-sized bank restructuring will assist in containing final fiscal cost. Restructuring strategies should focus on minimizing the ultimate fiscal cost regardless of any short-term effects on fiscal headline figures. While the downsizing of Austrian Volksbanken AG (OeVAG) appears on track and the approach to operate Kommunalkredit in a “no-new-business” mode until assets run off seems workable, the strategy to sell off the SEE operations of nationalized bank Hypo Alpe Adria (HAA) as a going-concern to private investors en bloc has not succeeded so far. To speed up disposal, a further bad asset carve-out is necessary. The carved-out assets, together with HAA’s already existing internal wind-down portfolio, should be transferred to a defeasance structure without banking license and disposed of within a clearly limited timeframe. In addition, a rapid sale of remaining viable units individually or even in parts should follow to limit further asset deterioration.5 An asset quality review conducted by external experts may facilitate this process. As the bank is restructured, efforts should be made to minimize adverse spillovers to HAA’s SEE markets and the broader CESEE region. In a similar vein, it would be useful to withdraw the banking license from “bad bank” KA Finanz to prevent asset disposal from being held back by lack of loss-absorbing capital. The restructuring of intervened banks should be used as an opportunity to reduce capacity and improve cost efficiency in the Austrian market.6

18. Stronger financial oversight to promote better risk management and governance practices in the small and medium-sized bank segment would help prevent a recurrence of past problems. According to the FSAP, the Financial Market Authority (FMA) and Austrian National Bank (OeNB) collaborate effectively in performing banking supervision, including on a cross-border basis. Nonetheless, they could usefully step up the use of supervisory tools and powers for corrective action and the promotion of stronger risk management and governance standards, especially among small and medium-sized banks.

19. As recommended by the FSAP, early intervention and resolution powers and the deposit insurance system should be bolstered to reduce the likelihood of future government bailouts. A recent amendment to the Banking Act covers early intervention, but falls short of FSAP recommendations in some areas, while no initiative is in the works for resolution yet.7 In addition, given the significant size of Austrian banks’ cross border operations, it would be important to better define cross-border resolution arrangements with host country supervisors, for instance by expanding cross-border stability groups. As to deposit insurance, among the reasons why the authorities supported some banks in recent years might have been concerns about depositor panic and possible domino effects from the activation of sectoral deposit guarantees. To reduce the need for future bailouts, allow for different modes of bank resolution, and ensure rapid payouts, the FSAP recommends the unification of the five existing private deposit insurance schemes to a publicly-administered pre-funded scheme.

20. Future crisis management would benefit from the creation of a bank resolution fund. Such a fund, which would be used to facilitate resolution rather than finance bailouts, could be financed through the existing financial stability tax currently levied on banks and could be rapidly deployed to support bank intervention in a crisis situation. Austrian banks are broadly supportive of the financial stability tax being allocated to a resolution fund rather than to the general budget. The existing tax, which yields about 0.2 percent of GDP per year, could, in 3-4 years time, grow large enough to provide temporary capital support to a large institution in case of difficulties.

Authorities’ view

21. The authorities highlighted progress in a number of areas aimed at enhancing financial stability. They welcomed the FSAP’s findings about the resilience of the overall banking system to various solvency shocks, while emphasizing the need for some individual banks to continue strengthening capital buffers. They also noted that policy measures taken to reduce CESEE-related spillovers, including encouragement of greater reliance of Austrian banks’ subsidiaries on local funding, have helped reduce systemic vulnerability, and have not resulted in large-scale deleveraging in the CESEE region. They indicated that developments with regards to bank resolution frameworks and deposit guarantee schemes would have to wait until decisions are finalized at the EU level, while at the national level, discussion of early intervention triggers on capital and liquidity has been initiated. On intervened bank restructuring, the authorities emphasized concerns about the immediate debt implications of creating defeasance structures located within general government, and informed that external consultants had been hired to explore alternative design options.

B. Balance Sheets and Housing Market Developments


22. Households have relatively low debt, but carry a sizable share of Swiss franc denominated debt and are exposed to a rising interest rate environment. Households have assets of nearly 3 times net disposable income while gross liabilities are less than one-third of assets. Only about 36 percent of households have any debt, more than half of it mortgage credit mainly at variable interest rate. While total mortgage indebtedness is low, the high share of Swiss-franc denominated debt (23 percent of the total)—much of it mortgages with bullet maturity and tied to an investment vehicle—presents some risk. The overall funding gap of repayment vehicle loans, the difference between the loan principal and the amount accumulated in an investment vehicle, was assessed by the FSAP at EUR 5.5 billion, 18 percent of loan principal, in September 2012.

23. The housing market has experienced strong price growth but from low levels. In nominal terms at end-2012, house prices rose 14.9 percent y-o-y in Vienna compared with 11.5 percent y-o-y for Austria overall. In real terms and from a medium-term perspective, the price increase appears more modest: a cumulative 40 percent over 10 years in Vienna and about 5 percent in the rest of Austria. Housing market activity seems to be driven largely by non-resident buyers and domestic investors seeking an alternative to low fixed-income returns, though continued immigration also likely supported demand for housing in urban areas. Mortgage credit has exhibited slow growth, suggesting the prevalence of equity buyers.

24. Aggregate corporate debt is around the euro area median. Over the past two decades, corporates have increasingly substituted bank loans with debt issued in the markets, which has risen to 19 percent of total corporate debt at Q2 2012 compared with just 7 percent in 1995. This long-term trend accelerated in recent months reflecting rising risk appetite among global investors and falling yields. Only 8 percent of corporate debt is in foreign currency, ¾ of which in Swiss francs. Thus, vulnerability to adverse exchange rate movements appears limited in the aggregate. After falling for two years, bankruptcies in the corporate sector picked up in 2012 as macro-economic conditions slowed. The recent high profile failure of one large construction company has raised some concerns about the operating environment for the construction sector.

Policy issues

25. Risks from Swiss franc-denominated mortgages are manageable. The FSAP stress test suggests that the funding gap would increase substantially in the face of a 200 bp interest rate shock and 5 percent Swiss franc appreciation shock at maturity. However, given the long residual maturity of these loans, the impact of such a shock could be absorbed with a relatively modest increase in provisioning. Furthermore, banks no longer offer foreign-currency loans domestically (with very limited exceptions).

26. While there are no major immediate domestic imbalances, the work to put in place a full-fledged macroprudential policy framework should start now. As recommended by the FSAP, the authorities should consider strengthening the macroprudential framework with the OeNB in a leading role in the envisaged committee. This would ensure that decisions are based primarily on its economic and risk expertise, as recommended by the European Systemic Risk Board. Going forward the committee should consider a broad set of macroprudential tools, including for instance maximum loan-to-value and debt-service-to-income ratios, and should promote the construction of the statistical database needed to use these tools.8

Authorities’ view

27. The authorities agree with the need to strengthen the macroprudential framework and have already taken steps in this direction. A Financial Market Stability Committee will be instituted at the beginning of 2014. It would be comprised of senior officials from the MoF, the Fiscal Council, the FMA and the OeNB and chaired by a MoF representative, and it would be tasked with making recommendations to the FMA on the activation of macroprudential policies. At present, it would have the ability to implement changes in the macroprudential tools proposed under CRD / CRR IV, namely the countercyclical buffer and the systemic risk surcharge, but other tools could be considered at a later date.

C. Reducing Public Debt While Absorbing Further Bank Restructuring Costs


28. The authorities’ consolidation plans remain largely unchanged. On the back of broad-based underspending (including on interest cost) and overperforming labor taxes, the headline and structural deficit in 2012 amounted to respectively 2.5 and 1.3 percent of GDP, about ½ percentage point better than targeted a year ago (Figure 5). The 2014–17 update of the authorities’ budgetary framework broadly confirms earlier deficit targets. Given last year’s favorable outcome, the 2013 budget now implies a structural expansion, notched up by a recently-approved stimulus package with minor deficit effects in 2013 and 2014.9 10 Gradual adjustment is resumed in 2014, and a structural deficit of 0.45 percent is targeted by 2016, in compliance with Austria’s new fiscal rule framework.

29. However, implementation gaps and uncertainties remain. As regards health care expenditure, although stakeholders have agreed to reduce its growth rate from 4.3 percent in 2013 to the projected medium-term nominal GDP rate of 3.6 percent by 2016, the underlying measures still need to be further specified, and the new decision-making framework created for this purpose is complex.11 In a similar vein, the planned savings volume on subsidies has not yet been underpinned by specific cuts. Furthermore, there are uncertainties on the revenue side, mainly from the envisaged EU financial transaction tax (FTT, budgeted as of 2014), and proceeds from the treaties with Switzerland and Liechtenstein on the taxation of interest earned by Austrian residents on assets held in the two countries (budgeted in 2013, or projected in 2014). Unspecified expenditure measures and revenue from the FTT are not taken into account in the staff’s baseline projections.12

Staff Baseline and Authorities’ Adjustment Scenario

(percent of GDP unless indicated otherwise)

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Sources: Austrian Stability Program 2012–17; IMF staff projections.

The structural balance excludes revenue from the 2012 tax treaty with Switzerland (estimated at 0.3 percent of GDP in 2013) and the following bank restructuring cost (in percent of GDP): 0.6 in 2010; 0.2 in 2011; 0.9 in 2012; budgeted 0.4 in 2013;

Based on the January 2013 medium-term projections of the Austrian research institute Wifo.

30. In addition, further costs from the restructuring of nationalized mid-sized banks are imminent. Until 2012, these banks have received about 1.7 percent of GDP in capital transfers, in addition to government guarantees. An additional capital transfer of 0.4 percent of GDP is already budgeted for 2013. However, further significant bank restructuring costs will emerge as these banks are downsized more decisively than in the past and medium-term fiscal planning does not yet cater for these costs.

31. Furthermore, there are contingent liabilities from non-financial public enterprises and guarantees. Public enterprise debt amounted to around EUR 43 billion at end-2012, of which about EUR 11 billion are already included into general government debt. Another part will likely need to be included when revised ESA national accounting rules come into effect in 2014, with the debt effect expected by the authorities at 2 to 3 percent of GDP. Most of public enterprise debt is covered by explicit federal or subnational guarantees. Other guarantees relate mainly to export promotion, and the financial sector. Financial sector guarantees are not only crisis-related but comprise also state guarantees to regional banks that are slated to expire in 2017 under EU rules.

Policy issues

32. The authorities’ adjustment plans already accommodate currently weak economic conditions. In particular, the structural expansion implied by the 2013 budget is appropriate, given currently sub-par growth.13 On the other hand, additional discretionary fiscal stimulus would not seem to be warranted under current growth projections, given the moderate output gap and low unemployment and medium-term consolidation needs. From this perspective, the recently passed stimulus package or other new spending initiatives should be financed within the existing budgetary envelope. The swift further specification of measures to underpin the planned savings in health care and subsidies should gain center stage.

Public Enterprise Debt 2006–2012 1/

(In billion euro unless indicated otherwise)

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Source: Federal Ministry of Finance.

Non-financial public enterprises

Preliminary results

Data no longer available since 2009.

33. Further bank restructuring cost will not preclude debt reduction to pre-crisis levels around end-decade if fiscal adjustment is gradually strengthened. While the final impact on government debt from the on-going restructuring of medium-sized banks is difficult to gauge at present, staff assesses costs as manageable.14 Specifically, reducing public debt to the pre-crisis level of close to 60 percent of GDP in the first years of the next decade should be achievable. To this end, however, structural fiscal adjustment will need to be strengthened gradually in the next budget and medium-term fiscal planning exercises (covering the years 2014–18), with a moderate temporary overperformance on Austria’s fiscal rule in the outer years. Bringing debt back to pre-crisis levels around the end of the decade is advisable in light of contingent and implicit public liabilities, including from population aging, and tail risks from the continued foreign activities of large banks.


Debt Dynamics: Planned Consolidation and Illustrative Bank Restructuring Cost 1/

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 280; 10.5089/9781475575088.002.A001

1/ With staff macroeconomic projections.2/ Authorites’ consolidation plans fully implemented.3/ As in footnote 2, but with illustrative bank restructuring cost scenario.4/ Strengthened consolidation in reaction to illustrative bank restructuring cost.Sources: National authorities; and IMF staff calculations.

Authorities’ view

34. The authorities stressed that planned consolidation measures are on track. Newly created coordination bodies had been tasked to map health care expenditure ceilings into multi-annual agreements among stakeholders, first at the federal level and then in each individual state. Subsequently, these agreements were to be further broken down into annual implementation plans. Similarly, although specific measures to save on subsidies had not been decided yet, efforts to create a subsidy “transparency database” as decision-making tool were progressing as planned. The authorities were confident in their revenue estimates, and informed that the recent “stimulus package” would only have marginal effects on the deficit, which could indeed potentially be compensated within the existing budgetary envelope. The authorities acknowledged that significant further costs from bank restructuring were to be expected and were open to the idea of building buffers for bank restructuring costs into the next vintage of their medium-term fiscal framework.

D. Restructuring Public Finances and Strengthening Work Incentives


35. Gaps in expenditure efficiency remain considerable.15 Even after the current consolidation plans are fully implemented, the room for reductions in health care, subsidies, and pension expenditures will be large: (1) As regards health care, the room for further savings without diminishing health care outcomes has been estimated by the OECD at 2 percent of GDP, with particular rationalization potential in the hospital area (see text chart).16 (2) As for subsidies and capital transfers, Austria spends about 3¾ percent of GDP more than the euro area average. Even abstracting from subsidies to hospitals and capital transfers to banks, the currently targeted cuts of less than 0.2 percent of GDP would not exploit all possibilities; (3) pension expenditures are high, especially given a relatively favorable age dependency ratio (see text chart), and will continue to rise despite recent reforms.17 As pointed out in previous staff reports, accelerating plans to align the low female statutory retirement age of 60 with the male retirement age of 65 and introducing automatic adjustors for the retirement age to life expectancy would generate savings. In most of these and other areas, decision making is fragmented across and within government levels and spending powers are not coupled with financing responsibilities.


Spending on Hospital Services, 2011

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 280; 10.5089/9781475575088.002.A001

1/ Excluding Belgium, Spain and Slovak Republic due to missing data.Source: Eurostat.

Old-age Spending and Support Ratio in the Euro Area, 2011 1/

Citation: IMF Staff Country Reports 2013, 280; 10.5089/9781475575088.002.A001

1/ excluding Belgium and Slovakia due to missing old-age spending data.2/ 2010 DataSources: Eurostat; and IMF staff calculations.

36. Austria’s tax burden is high and labor is taxed heavily.18 Austria ranks among the high tax countries in the euro area and has the highest labor tax share in total taxation (see text chart). Social contributions and payroll taxes amount to almost 50 percent of gross wages, and statutory marginal income tax rates range from 36.5 to 50 percent.19 Negative work incentives from such high labor taxes in Austria seem to be particularly sharp for low-skilled workers and secondary earners, as evidenced by a relatively low employment rate in the former case and the high share of part-time work among women in the latter. Negative incentive effects may be aggravated by interactions with the benefit system, i.e. too rapid social benefit withdrawals as work income increases, and the additional childcare cost incurred by mothers working full-time.


Total Tax Revenue and Taxes on Labor

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 280; 10.5089/9781475575088.002.A001

1/ Euro area average includes only OECD members.Sources: OECD and Eurostat.

Policy issues

37. A bolder approach to expenditure and fiscal federalism reform should be a priority. Specific decisions on further expenditure reforms should be embedded into the next medium-term fiscal framework for 2015–18. In the context of the renewal of the financial equalization law expiring at end-2014, this should be combined with a reform of inter-governmental fiscal relations to streamline and connect more closely spending powers and financing responsibilities across government levels. Furthermore, efforts to strengthen the fiscal governance toolkit of states in areas such as budgeting, medium-term fiscal planning, accounting and financial management should continue. At the federal level, the full independence of the fiscal council, which is being created in the context of the fiscal governance reforms in the euro area, should be ensured to maximize its effectiveness.

38. Expenditure savings could assist in financing a comprehensive reform of the tax-benefit-system, including family benefits, in a deficit-neutral way. As recommended in previous staff reports, work incentives and job creation for low-skilled workers should be strengthened by selectively lowering social security contributions and payroll taxes. In addition, income tax rates should be reduced, in particular for the first income bracket, while higher in-work benefits would mitigate negative interactions with the social benefit system. These reforms should be coupled with a simplification and redesign of the complex and relatively costly family benefit system to strengthen work incentives for women (text chart). The current system is tilted heavily toward monetary transfers that are neither conditional on the working status of the parents nor means-tested. A reallocation of funds from monetary transfers to the provision of high-quality and affordable childcare facilities and after-school programs would offer more women the choice to work longer hours. Monetary transfers could also be subjected to some means-testing to save budgetary resources or to in-work conditionality for both parents to further leverage work incentives.


Public Spending on Family Benefits, 2009

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 280; 10.5089/9781475575088.002.A001

1/ Euro area average includes only OECD members.Sources: OECD; and IMF staff calculations.

Authorities’ view

39. There are currently no agreed plans for additional expenditure reforms or a reconfiguration of the tax-benefit system. As regards expenditures, the current focus is on the implementation of the already agreed reforms also after the elections. In the pension area, efforts are concentrated on aligning actual and statutory retirement ages, while changes in statutory parameters are not under consideration. While there was general agreement that a reduction of the high tax burden on labor would be desirable, views among the two coalition partners differed on the specific parameters to be changed, and there had still not been any consensus on how to finance such changes.

40. The authorities were also not prepared for a more fundamental redesign of family benefits. The authorities generally agreed that Austria’s family benefit system was too complex as regards the number and features of programs and would benefit from simplification. They had taken small steps to simplify child allowances, but there were no plans at the moment for a more comprehensive reallocation and reform of monetary benefits. In contrast, the authorities favored very much the provision of additional childcare facilities and had just agreed on more federal transfers to states for this purpose.

Staff Appraisal

41. While Austria’s macroeconomic fundamentals are relatively healthy, growth has stalled and the forecast is for a slow recovery. After a swift post-crisis rebound, real GDP has been flat since early 2012 with weakness in both domestic and foreign demand. Economic activity should start to recover in the second part of this year, mainly driven by an expected gradual strengthening in the international environment. Risks from the still difficult situation in the euro area, an emerging market slowdown, and volatile global financial markets could delay the recovery.

42. The medium-term fiscal plan’s accommodation of currently weak economic conditions is welcome. The 2013 budget envisages a structural expansion, which is appropriate given the current sub-par growth performance. Going forward, it will be essential to focus on the further specification of measures necessary to implement the already envisaged fiscal adjustment, particularly related to health care and subsidies. Efforts should be made to finance the recently-announced new stimulus measures within the existing budgetary envelope.

43. Further significant but manageable fiscal costs from medium-sized banks under restructuring should be compensated with additional gradual fiscal adjustment. To contain these costs, faster disposal of troubled assets and downsizing of non-viable entities than in the past is necessary, and the authorities are moving in this direction. Correspondingly, structural fiscal adjustment should be strengthened gradually in the fiscal planning for 2014–18 to absorb bank restructuring costs in the medium term, with a view to bringing public debt down to its pre-crisis level in the first years of the next decade.

44. While measures are being implemented to rein in early retirement, further reforms to make public spending more efficient would be desirable. As noted in earlier consultations, there is considerable scope for reducing spending in pensions, health care, and subsidies. An earlier equalization of male and female statutory retirement ages and automatic longevity adjustors would be welcome. A better targeting of subsidies towards more clearly defined long-term objectives is desirable. Further efficiency improvements in the health care area should be encouraged, even if the currently envisaged expenditure containment path is fully implemented. As pointed out in previous IMF staff reports, better aligning spending powers and financing responsibilities in the federal system, and strengthening the latter by introducing meaningful tax autonomy for states, would facilitate expenditure rationalization.

45. Expenditure savings could be used to finance a comprehensive reform of labor taxation and social and family benefits to foster labor supply and potential growth. Austria has a relatively high tax burden on labor which hampers work incentives in particular for the low-skilled and women. As pointed out in previous IMF staff reports, an income tax reform and the selective lowering of social security contributions, taking interactions with social benefits into account, could help to remedy the situation. In addition, a simplification and redesign of the complex and costly family benefit system could strengthen work incentives for women. In particular, a reallocation of funds from unconditional monetary transfers to the provision of high-quality and affordable childcare facilities would offer more women the choice to work longer hours.

46. A comprehensive framework for bank resolution would help reduce the need for state intervention in the future. While a common EU framework is the ultimate goal, in the interim the Austrian authorities should put in place a bank resolution regime consistent with international best practices and already-agreed elements of the forthcoming EU directive. This would complement the current legislative package, which covers early intervention tools and the preparation of recovery and resolution plans by banks.

47. As part of this new framework, the deposit insurance system should be unified and a bank resolution fund created. A unified and privately pre-funded scheme administered by the government would make it easier to close down failing banks without incurring excessive public liabilities. The forthcoming EU DGS Directive is an opportunity to move along this path. Future crisis management would also benefit from the creation of a bank resolution fund, which could eventually be integrated into a newly-created EU resolution fund. Proceeds from the existing bank financial stability contributions could be used for this fund.

48. Recent progress in strengthening the macroprudential framework is welcome and the OeNB should be given a leading role. The OeNB should be given a decisive role in the new macroprudential committee, in line with recommendations by the European Systemic Risk Board. Going forward the committee should consider a broad set of macroprudential tools, including for instance maximum loan-to-value and debt-service-to-income ratios, and the availability of related statistical information to diagnose emerging imbalances should be improved.

49. It is recommended that the next Article IV consultation with Austria be held on the standard 12-month cycle.

Table 1.

Austria: Selected Economic Indicators, 2007–14

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The structural balance excludes revenue from the 2012 tax treaty with Switzerland (estimated at 0.3 percent of GDP in 2013) and the following capital transfers to banks (in percent of GDP): 0.6 in 2010; 0.2 in 2011; 0.9 in 2012; and budgeted 0.4 in 2013.

Sources: Austrian authorities; and IMF staff estimates and projections.
Table 2.

Austria: Medium-Term Macroeconomic Framework, 2007–18

(in percent of GDP unless indicated otherwise)

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Sources: Austrian authorities; and IMF staff estimates and projections.

The structural balance excludes revenue from the 2012 tax treaty with Switzerland (estimated at 0.3 percent of GDP in 2013) and the following capital transfers to banks (in percent of GDP): 0.6 in 2010; 0.2 in 2011; 0.9 in 2012; and budgeted 0.4 in 2013.

Table 3.

Austria: Balance of Payments, 2007–18

(In percent of GDP)

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Sources: Austrian National Bank; WIFO; and IMF staff projections.
Table 4.

Austria: General Government Operations, 2007–18

(In percent of GDP, unless indicated otherwise)

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Sources: Authorities, Eurostat, and IMF staff projections.

The structural balance excludes revenue from the 2012 tax treaty with Switzerland (estimated at 0.3 percent of GDP in 2013) and the following capital transfers to banks (in percent of GDP): 0.6 in 2010; 0.2 in 2011; 0.9 in 2012; and budgeted 0.4 in 2013.

Table 5.

Austria: General Government Balance Sheet, 2007–12

(In billions of Euro)

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Sources: Statistical Office of Austria and Eurostat.

At market value

Table 6.

Austria: Financial Soundness Indicators, 2008–12


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Sources: OeNB; and

Domestically controlled, cross-border and cross sector consolidation basis

Domestic consolidation basis

Total loans include loans to financial institutions

Table 7.

Austria: Authorities’ Response to Past IMF Policy Recommendations

(Scale—fully consistent, broadly consistent, or marginally consistent)

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