The debt watchdogs expect a decline of 3.9 percent of gross domestic product (GDP) this year and 4.1 percent next year. In the spring they had assumed a loss of 3.4 (2024) and 3.2 percent (2025). The Fiscal Council therefore considers the initiation of an EU deficit procedure to be “probable,” according to a press release.
Austria’s debt ratio continues to rise despite low interest expenditure and, at 79.7 percent (2024) and 81.6 percent (2025) of GDP, is likely to be well above the Maastricht reference value of 60 percent. That is around ten percentage points above the value before the Covid-19 pandemic (71.0 percent in 2019).
Only a smaller part of the expected budget deficit is due to the recession, emphasized Johannes Holler, senior economist in the Office of the Fiscal Council. Structural deficits make up the lion’s share – this is expected to be 3.1 percent in 2024 (of a total of 3.9 percent) and 3.5 percent in 2025 (of a total of 4.1 percent). The influence of flooding is small. The office expects 550 million euros for each of the years 2024 to 2025, or 0.1 percent of GDP.
As justification for the high deficits compared to the years before the corona pandemic, the debt watchdogs cite “long-term economic policy measures” such as the reduction in corporate tax, the income tax tariff reform including the abolition of cold progression, and the “overcompensation of the CO2 tax through the Climate bonus” or the long-lasting budgetary burdens caused by Covid-19 economic support such as the investment bonus or the Corona bonus for pensioners.
In addition, there would be increases in spending as a result of the new financial equalization, such as through the future fund, the sharp increases in military spending as well as investments in rail infrastructure and demographically-related structural spending increases for care, health and pensions.
Inflation led to more social spending
The high inflation of recent years, in turn, caused a significant increase in social spending (due to indexation, note) as well as in the wages and salaries of public employees, who were fully compensated for the inflation. The biggest cost drivers by sector were the eco-social tax reform, various Covid measures and inflation compensation.
The head of the Fiscal Council, Christoph Badelt, has not yet been able to quantify exactly how much consolidation will be required under the new EU fiscal rules from 2025. Depending on the measures, there is room for negotiation – but according to current data, it is assumed that it will be at least 4.4 billion euros. But no one will probably deny that there is a great need for consolidation even without Brussels and fiscal rules.
At the same time, we have to pay attention to which path of consolidation we take “without destroying the tender shoots of economic recovery,” said Badelt. He did not want to make any recommendations for the time being – the Fiscal Council will present them in around six weeks. But it will probably have to be a mix of income and expenditure measures. And: Any structural measures decided by a new government would have little effect in the short term, as they would only take effect in two to three years at the earliest.
Doubling the climate bonus “excessive”
Badelt is still personally critical of measures such as the energy cost subsidy 2 for companies, which replaced costs that they had already passed on anyway. The doubling of the climate bonus was also “excessive”. However, he assessed the abolition of cold progression differently. Retaining it would have brought massive revenue for the budget, but would also have led to “non-normal tax rates”. “Neither the government nor the economy could have endured that.”
The Office of the Fiscal Council still does not understand the significantly lower deficit estimates from the Ministry of Finance. “We simply don’t believe the values of the Ministry of Finance,” said Badelt. These are too optimistic when it comes to income and too “unreal” when it comes to expenses. In the ministry, all the leeway that one has when it comes to forecasts is only interpreted in one direction. “We don’t do that.”
ePaper
### Interview with Johannes Holler, Senior Economist at the Austrian Fiscal Council
**Interviewer:** Thank you for joining us, Johannes. The recent public finance report highlights a projected budget deficit of 2.7% of GDP for 2023 and a continuing trend of rising debt ratios. How alarming are these figures in the current economic climate?
**Johannes Holler:** Thank you for having me. Yes, the anticipated budget deficit is concerning, particularly as we are observing a structural component that significantly contributes to it. The expected structural deficits for the upcoming years—3.1% in 2024 and 3.5% in 2025—indicate that we are dealing with a deeper, systemic issue rather than just a result of economic fluctuations.
**Interviewer:** You mentioned that structural deficits make up a large portion of the overall deficit. Can you explain what specific policies or measures are leading to this situation?
**Johannes Holler:** Absolutely. The budget deficits can be attributed to several long-term economic policy measures. These include reductions in corporate tax, significant reforms like the income tax tariff adjustments, and measures related to climate policies. Furthermore, we cannot ignore the substantial financial burdens incurred from Covid-19 support programs, which continue to impact our budget.
**Interviewer:** How does the rising debt ratio, projected to reach around 81.6% of GDP by 2025, compare to historical trends, particularly pre-pandemic?
**Johannes Holler:** The debt ratio is distinctly higher than it was before the pandemic, which stood at 71.0% in 2019. This upward trajectory is troubling, especially considering that it is projected to remain well above the Maastricht reference value of 60%. It highlights a fiscal reality that necessitates urgent reform to avoid repercussions, such as the potential initiation of an EU deficit procedure.
**Interviewer:** Given the projected budget deficits and rising debt, what measures do you think are necessary for fiscal consolidation?
**Johannes Holler:** While we are still analyzing the precise actions needed, preliminary estimates suggest that around €4.4 billion will be necessary under the new EU fiscal rules from 2025. However, any measures we undertake must balance the need for fiscal discipline with supporting economic recovery. A cautious, mixed approach involving both expenditure cuts and new revenue measures is essential.
**Interviewer:** There’s been criticism regarding specific government measures, such as the energy cost subsidies for companies and the doubling of the climate bonus. What are your thoughts on these actions?
**Johannes Holler:** I share concerns about certain measures being excessively generous, like the doubling of the climate bonus. While the intention may be good, the fiscal implications may prove unsustainable. Conversely, some reforms, such as the abolition of cold progression, have mitigated potential revenue losses that would otherwise have led to unfavorable tax rates.
**Interviewer:** Lastly, have you had any discussions with the Ministry of Finance regarding their more optimistic projections for the budget deficit?
**Johannes Holler:** Yes, we have expressed skepticism regarding their figures. We believe the Ministry’s estimates are overly optimistic about revenue and underestimate the corresponding expenditures. It’s crucial that we base our fiscal outlook on a realistic assessment rather than an overly favorable interpretation.
**Interviewer:** Thank you, Johannes, for your insights. It seems that Austria faces a challenging road ahead in balancing fiscal responsibility with economic recovery.
**Johannes Holler:** Thank you for having me. Indeed, it will be a delicate balance, and careful planning is essential.
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