Public finance and fiscal policy

Economic survey of Austria 2007: Rationalizing fiscal policy and strengthening public expenditure management

 

Contents | How to obtain this publication | Additional information

The following OECD assessment and recommendations summarise chapter 5 of the Economic survey of Austria published on 13 July 2007.

Contents                                                                                                                           

 

Fiscal balances should be put on a firmer path, through further structural budget measures

Austria’s fiscal position is on a sounder path than in most OECD countries but remains exposed to considerable spending pressures over the long term which must be addressed to secure long term sustainability. The recent fiscal outturn was positive, with a general government deficit of 1.2% of GDP in 2006, better than the 1.9% anticipated in the budget. However, this was mainly on account of stronger than projected growth and exceptionally buoyant tax revenues; the cyclically-adjusted balance did not improve, despite the previous government’s intentions to attain a balanced budget by 2008. The new government – established in January 2007 – postponed the target year for attaining a balanced budget over the cycle to 2010, but has not fully spelled out specific measures to achieve this. In the longer term, health expenditures are projected to grow rapidly and further reforms may be needed to contain them. Pension balances also remain dependent on demographic prospects, and on assumptions regarding the effective average retirement age in the decades ahead, where it will be important to reverse the early retirement incentives discussed above. Despite these challenges, structural budget reforms appear to have stalled. In May 2005 a political agreement had been reached to implement budgetary reforms in line with international best practice, including the implementation of a four-year medium-term budgetary framework and transition to “output-based” budgeting. However, the October 2006 election has led to a delay in the implementation of these reforms. The authorities should implement the previously planned structural budget reforms. They should also produce medium and long-term scenarios for social security balances, closely monitor trends in health expenditures as well as planning the needed health reforms, and ensure the pension system’s sustainability under alternative assumptions. Given that the output gap is closing, any revenue and expenditure windfalls should be used for reducing the deficit.

 

Budgetary room needs to be maintained and created to reduce the tax burden while significantly improving the tax structure

The total tax burden remains significant despite recent cuts, with a tax ratio of 42% of GDP. The previous government had announced its intention to reduce it to below 40% of GDP over the medium-term. The new government, while still intending to lower the overall tax burden, does not have a specific target for this. The next major tax reform initiative is scheduled for 2010. There is consensus on the need to change and optimize the tax structure as well as on the need to shift the tax burden away from heavy taxation of labour and self-employment and towards environmental taxes and excise duties. Some steps in this direction have already been taken in the recent past. A focus on environmental taxes is also justified by Austria lagging significantly behind its Kyoto targets and the need to take additional measures. However, despite such consensus in principle, it seems politically difficult to alter the tax structure in the short term. For example, the inheritance tax will be allowed to expire in 2008 and the gift tax might be abolished too. These steps should be reconsidered. Emerging budgetary room from stronger growth should be maintained and new room should be created with structural reforms, which deliver expenditure savings in order to finance a tax reform that reduces the tax burden and improves the tax structure. Revenue yields from fixed assets such as land and real estate should be increased, first of all by updating the property tax base which has not been revalued for several decades. Excise and environmental taxes should also be increased where justified.

 

Output-based budgeting should be introduced as soon as possible

“Output-based” public expenditure management is needed in Austria, both because the public sector is an important service provider, and because spending is rising sharply in some areas. According to the experience of other OECD countries, there are serious risks of compromise on the quality of newly introduced programmes in areas where public spending is expected to grow rapidly. Spending is also particularly high on social transfers, housing and other subsidies, and tax expenditures. When long-established programmes absorb large resources on a routine basis, constituencies build up with a vested interest in their continuation irrespective of their social benefits and costs. Consequently, there is considerable room for assessing the effectiveness and cost-efficiency of many spending programmes. Such assessments will be required by the transition to “output-based” public expenditure management planned for 2013. Even if this tool still remains experimental across the world, it involves a crucial “information and documentation” element which can be used to increase the quality, effectiveness and cost-efficiency of various programmes. The authorities may wish to accelerate the transition to output-based budgeting in specific pilot areas, by emphasising the formal documentation of the costs and benefits of selected programmes. These assessments should be conducted independently and with high technical standards.

 

The reform of fiscal federal relations is crucial

More effective fiscal federal relations are crucial for making progress with fiscal consolidation in the short term, and for the adoption of modern budget management techniques over the medium-term. Significant quality increases and cost reductions are needed in services jointly funded and provided at the federal and sub-central government levels. Many sub-central governments are hesitant to fully implement earlier OECD recommendations set out in the 2005 OECD Economic Survey, such as increasing their tax-setting powers, enforcing a medium-term budget framework, shifting to output-oriented budgeting, and fully harmonizing accounting rules. Some also do not see the need for harmonising the pension schemes for civil servants of the states and municipalities with the general pension scheme, as has already been done in the case of federal civil servants. Federal and sub-central governments should jointly identify and overcome these objections in the context of negotiations over the next Fiscal Equalization Act and establish a time table for implementing earlier OECD recommendations.

 

 Goverment spending by functional classification, 2005 (or latest year available)

1. Non-weighted average.

2. Excluding Mexico, New Zealand, Switzerland and Turkey.

Source: OECD (2006), National Accounts and IMF (2004) Government Financial Statistics for Australia and Canada.

 

Impact of population ageing on public finances (1)

 

1. Based on EO81 database.

Source: OECD calculations.

 

 

OECD: International comparisons of the overall tax burden

Tax revenue in per cent of GDP, 2005 (1)

1.  2004 for Greece, Portugal, Poland and Australia.

Source:  OECD, Revenue Statistics.

 

How to obtain this publication                                                                                      

The Policy Brief (pdf format) can be downloaded in English. 

The complete edition of the Economic survey of Austria 2007 is available from:

Additional information                                                                                                  

 

For further information please contact the Austria Desk at the OECD Economics Department at eco.survey@oecd.org.  The OECD Secretariat's report was prepared by Rauf Gonenc and Rina Bhattacharya under the supervision of Andreas Wörgötter.

 

 

 

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