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The following OECD assessment and recommendations summarise chapter 2 of the Economic Survey of Austria 2005 published 31 May 2005.
How can fiscal consolidation best be achieved?
The government appropriately aims at balancing the general government budget by 2008, envisaging a reduction in the spending-to-GDP ratio of 4 percentage points of GDP. Resuming fiscal consolidation by spending restraint is necessary to validate the recent tax reductions and to cope with the challenges of ageing. However, not all of the measures that are required to attain this outcome are yet in place. Consolidation needs to be achieved via policies designed to increase public sector efficiency in order to raise the growth and employment potential of the Austrian economy. Although public sector reform ranks high on the government’s policy agenda, and several measures taken in the recent past will reduce resource absorption by the public sector, further reform is necessary.
Achieving fiscal consolidation through public sector reform requires a rigorous approach to evaluating and prioritising public sector spending.
There is significant scope for developing the budgeting framework at the different levels of government into a fundamental tool for improving public sector decision making.
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At present, no medium-term budget framework is available that accounts for envisaged future developments of spending and revenue items.
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The budgeting framework lacks focus on policy outcomes.
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Systematic evaluation of the costs and benefits of policy programmes is not performed and important information is often not available at the different levels of government.
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A number of future spending commitments such as the states’ future pension obligations for public sector employees remain unrecorded.
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Transparency is hampered by the fact that some accounting rules are not fully harmonised between the different government levels.
Hence, facilitating the setting of spending priorities by policy makers suggests fundamental revisions to the budgeting framework at all levels of government. A medium-term budget framework should be introduced at all levels of government in the same systematic way as in the annual budgets, with an accounting of envisaged budgetary appropriations detailed enough to make transparent the causes for spending and revenue pressures. Long-term fiscal pressures should also be made transparent by providing fiscal sustainability calculations. Moreover, the budget layout should be simplified and budgetary appropriations should be linked directly to functional programmes. The information base for cost benefit analysis of spending and revenue programmes needs to be improved, and the accounting framework should be fully harmonised across government levels.
Which priorities should guide future tax reform steps?
The tax reform of 2004/05 implies substantial reductions in statutory and effective corporate tax rates, which – if combined with fiscal consolidation on the spending side of public budgets – will help to improve Austria’s international competitiveness and support economic activity more generally. Progress has also been made in simplifying the income tax schedule. However, tax laws – personal and corporate income taxation as well as value added taxes – are still subject to many special rules and exceptions that reduce the transparency of the tax system and distort economic activity. Hence, future tax reform should focus on simplifying the tax system and reducing economic distortions by significantly reducing tax expenditures and preferential access to benefits, in exchange for lower statutory rates. A more transparent tax system associated with lower statutory rates would also contribute to maintaining the attractiveness of Austria for foreign investors.
Do the pension and invalidity benefit systems provide sufficient incentives to stay in work and improve working conditions?
Earlier progress in pension reform was followed up by a further step in 2004, the Allgemeines Pensionsgesetz (General Retirement Income Act, APG). Overall, the reform package marks substantial progress in securing the sustainability of general government finances and improves incentives for working longer or searching for a job. Subject to transition periods, this step largely harmonised hitherto separate occupational pension schemes and established individual pension accounts while aiming at actuarial fairness for some part of voluntary deviations from the statutory retirement age. However, the reform also introduced a new channel into early retirement for those engaged in onerous work (“heavy workers”) and reinstated early retirement from age 62 for workers with at least 37.5 insurance years. Consideration should be given to make binding the envisaged demographic correction mechanism for pension benefits, which is only vaguely specified in the current setting. Moreover, reform should continue to further reduce incentives for early retirement:
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The new pension law aims at actuarial fairness for persons eligible for earlier or later retirement on account of an insurance record of 37.5 years. However, there still appears to be a bias in favour of early retirement and against activity beyond the statutory retirement age for employees with a very long insurance record and those engaged in onerous work. All types of old age pensions should be made actuarially fair around the statutory retirement age, while the impact on labour supply should be monitored carefully.
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While the newly introduced early retirement scheme for “heavy workers” aims at some compensation for above average physical or mental stress during working life, the definition of such workers appears ambiguous and the scheme provides no incentives to improve work conditions. Thus, the scheme should be revised. As a minimum, employers of “heavy workers” should be requested to make a financial contribution to the scheme that fully covers the additional costs.
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In general invalidity benefits are granted only in cases of complete disability. However, workers with a certain uninterrupted work history in a regulated trade qualify for full invalidity benefits if their work capacity is considered to be insufficient to continue working in that trade. Instead, such persons should be encouraged to actively search for employment in other occupations that are acceptable on medical grounds and should be offered appropriate assistance by the labour offices.
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The relatively high and apparently rising number of disability benefit recipients suggests that there is scope for reform of the system, which should strengthen the incentives of employers for avoiding work-related accidents and sicknesses and increasing the motivation of persons concerned to stay in the labour market. As a first step, due consideration should be given to the disability pension reform proposals of the respective Working Group of the previous Pension Reform Commission and these proposals should be adapted in the light of recent international experience.
Access to the scheme that subsidises part-time employment for older employees has been made more restrictive and inflows have decreased significantly. The scheme should be monitored closely and phased out if it reduces labour supply.
Number of individuals flowing into early retirement and number of individuals in the subsidised old-age part-time scheme
Thousands
Source: Public Employment Service and Main Association of the Social Insurers.
Do pension systems for public sector workers require further reform?
Phased harmonisation of pensions for federal civil servants with the rules of the general scheme is a major element of the new pension legislation. However, the often more generous pension schemes for civil servants of the states and communities are not yet harmonised. Lower levels of government are urged to provide regularly updated information about their implicit future spending liabilities and to develop systematic fiscal sustainability calculations. The pension schemes for civil servants of the states and municipalities should be harmonised with the rules of the APG scheme. Harmonisation also requires that special early retirement programmes are terminated and more efforts are made to relocate redundant public sector workers.
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A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
Ein Policy Brief auf deutsch kann als pdf Datei heruntergeladen werden. Es enthält die Gesamtbeurteilung und Empfehlungen der OECD auf den Seiten oben.
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