Fast recovery from the pandemic saw GDP growth reaching 4.2% in 2021 and 4.8% in 2022. However, economic activity has been decelerating since the second half of 2022, following the increase in energy prices after the outbreak of the war in Ukraine. Weakening domestic demand was the main reason behind the downturn (Figure 2.1, Panel A). The slowdown has impacted most areas of the economy, in particular large sectors such as wholesale and retail trade, and manufacturing. While Austria’s recovery was similar to the Euro area as a whole before 2023, the economy has since performed less favourably, and the level of output is still below pre-pandemic trends (Figure 2.1, Panel B).
OECD Economic Surveys: Austria 2024
Note: The aggregate of Euro area covers 17 countries of both OECD and Euro area.
Source: OECD (2024), OECD Economic Outlook: Statistics and Projections (database); and Eurostat (2024), National Accounts (ESA2010).
Inflation has increased later, and more, than in many other Euro area countries. Consumer-price inflation reached double-digit levels in the last quarter of 2022. It has since fallen significantly but has spread further into core prices, which are likely to be stickier. Inflation has also declined less rapidly than in the Euro area (Figure 2.2, Panel A). This was driven by two main factors. First, government support in response to higher energy prices has been relatively generous and targeted prices less directly than other European countries, as it supported businesses and households mostly through income-support measures (Hemmerlé et al. (2023[1]) and Figure 2.2 Panel B). Second, the composition of Austria’s economy has contributed to inflation persistence. Higher prices in restaurants and hotels contributed to inflation more than in other countries as they grew faster and their weight in the consumption basket is 50% higher than in the Euro area. In 2023, restaurants and hotels accounted for roughly half of the gap in year-on-year inflation vis-à-vis the Euro area. Finally, the increase in inflation has also been delayed relative to the Euro area because of the slow passthrough of wholesale energy prices to final energy consumption due in particular to long contractual lock-in periods (Moser et al., 2023[2]).
Note: Energy price support measures directly reduce, regulate or cap energy market prices or reduce energy end-use through reductions in VAT or excise duties. Energy-related income support involve budgetary transfers linked to the level of energy consumption while non-energy-related income support directly increase the disposable income of beneficiaries through budgetary transfers or tax reductions without any link to energy consumption.
Source: OECD (2024), OECD Consumer Prices Indices (database); and OECD (2023), Energy Support Measures Tracker.
Domestic demand has been lacklustre
Reflecting rising prices, private consumption growth was subdued in 2023. Private consumption had been the main growth driver in the post-pandemic recovery, supported by real wage growth and government transfers. However, the increase in consumer prices has weakened consumers’ purchasing power. Real disposable income decreased slightly by 0.4% in 2023. In particular, growth in the consumption of non-durable goods (mostly food, energy, and medicine) is far below pre-covid trends. Accumulated savings from the pandemic period remain significant and have likely prevented a stronger consumption slowdown.
Private investment has been hit by supply-chain constraints and labour shortages, and more recently by weak demand. After the trough of the pandemic, business investment was initially hampered by shortages in materials and equipment arising from supply-chain bottlenecks, and by labour shortages in particular in the service sectors. While these constraints have gradually subsided, firms are now facing a slowdown in demand (Figure 2.5, Panel B). Tighter monetary conditions coupled with prolonged uncertainty have also likely contributed to subdued investment activity. In particular, the demand for housing loans has fallen sharply since the second half of 2022, and housing investment has fallen significantly since then.
Exports weakened at the turn of 2022, but performed better than other Euro area countries. The country gained market share in 2021 and 2022 partly due to a relative fall in export prices driven by a decline in relative unit labour costs and depreciation of the euro (Bittschi and Meyer, 2023[3]). However, the relative price advantage is now subsiding, as inflation has been higher in Austria than among its trading partners, while external demand among the country’s main partners has slowed down. Goods exports, which represented 70% of exports in 2022, have hardly grown since the second half of 2022, although they appear to have picked up recently at the beginning of 2024 in particular for intermediate goods. The subdued goods exports are in line with the lack of growth in Germany over this period, which is the destination of 30% of Austria’s exports. Still, Austria’s goods exports have performed better than other Euro area countries even in 2023, which could be explained by several factors including a lower relative exposure to China, a specialisation in specific niches of the machinery and vehicle industry, and lower profit margins set by exporters (Oberhofer et al., 2024[4]). In services, the tourism sector has now fully recovered. The 2022-2023 winter season was the third best season for tourism in terms of overnight stays and the 2023 summer season broke its 2019 record (Stefan Schiman-Vukan and Ederer, 2023[5]; Sebbesen et al., 2023[6]). Freight transport, which represents another quarter of services exports, recovered to pre-covid levels in 2021. Nevertheless, services exports have also flatlined since the second half of 2022. Overall, in 2023, real exports only grew by 0.3% compared to the previous year.
Share of exports on goods and services, by type and trading partner, 2021
Note: Data on merchandise exports based on the two-digit Harmonized System 2017.
Source: OECD (2023), OECD International Trade by Commodity Statistics (database); and OECD Balance of Payment Statistics: EBOPS 2010 - Trade in services by partner economy (database).
Labour demand is easing amid rising wage pressures
The labour market has remained strong despite the slowing economy. The unemployment rate had steadily declined in 2021 during the post-pandemic recovery, reaching a historic low below 4.5% in early 2022. This was echoed in labour force participation and employment rates gradually increasing above pre-covid levels. In parallel, the job vacancy rate jumped to record high levels (Figure 2.5, Panel A). Shortages of workers became the strongest constraint on business activity, particularly in services but also for industrial companies (Figure 2.5, Panel B). Even as the economy has started to weaken since the second half of 2022, the employment rate has remained relatively strong. This phenomenon, which is also observed in other European countries, can be partly explained by labour hoarding by companies. In addition, while the employment rate has held up, the number of hours worked per worker has decreased and is 5% below pre-covid trends, while it has fully recovered in Europe. In particular, part-time jobs as a share of the working-age population have increased and full-time employment has actually decreased since 2019, while employment growth in other European countries was driven by full-time jobs (Figure 2.4, Panel A). This will widen the pre-existing gap in the prevalence of part-time employment between Austria and its peers. In particular, among women aged over 15, the part time employment rate was 33.9% in 2019 against 23.9% in the EU (OECD, 2023[7]) in part due to the incentives generated by the tax and benefits system and the unavailability of high-quality childcare (see Chapter 4). Finally, the fall in the number of hours can also be explained by an increase in the number of sick days in 2022, in line with other European countries (Arce et al., 2023[8]). As a consequence, while productivity per employed worker remains below that in 2019, productivity per hour has increased by 5% and is in line with pre-covid trends (Figure 2.4, Panel B).
Source: OECD (2024), OECD Economic Outlook: Statistics and Projections (database); and Eurostat (2024), Employment and unemployment (Labour force survey).
Note: In Panel B, the surveyed firms respond to the question: What main factors are currently limiting your production?
Source: Eurostat (2024), Job vacancy statistics by NACE Rev. 2 activity and Unemployment by sex and age – quarterly data; and EU harmonised business surveys.
Wages have continued to increase in line with productivity, albeit more slowly than inflation. In Austria, nominal wages tend to adjust to inflation with a lag, because of the backward-looking nature of the wage bargaining process (Box 2.1). Nominal wages did not keep up with increasing prices in 2021 and 2022 but increased sharply after the winter round of collective agreements in 2022-23. As a consequence, the labour share of the economy initially fell but reached pre-covid levels at the end of 2023 (Figure 2.6, Panel A). Overall, since 2019, labour compensation has been in line with productivity trends and economy-wide markups. However, wages have lost purchasing power (Figure 2.6, Panel B). This divergence has been the focus of the recent collective bargaining rounds.
Note: In Panel A, the labour share is computed as the fraction of labour compensation over GDP net of taxes (less subsidies) on production and imports. The dashed line is the 2013-2019 quarterly average. In both panels, the grey area corresponds to the forecast window. In Panel B, the labour compensation rate is the total compensation of employees divided by dependent employment. It is then deflated by the consumption deflator.
Source: OECD calculations based on OECD (2024), OECD Economic Outlook: Statistics and Projections (database) and OECD Quarterly National Accounts Statistics (database).
The economy will slowly recover, but downside risks remain
Economic activity is expected to gradually recover over the next two years, as supply constraints subside and interest rates peak (Table 2.2). Household consumption will be bolstered by strengthening real disposable income due to receding inflation and higher negotiated wages. A further unwinding of excess savings could also support consumption. Tighter financial conditions will continue to discourage business investment in 2024. Business expectations are pessimistic, and the current level of stocks is now above pre-Covid levels. The global macroeconomic tightening, with low growth in Austria’s main trading partners, will also damp export growth, but the forecast recovery in German’s consumption and investment could help reverse the recent slowdown in goods export. The labour market will likely continue loosening, with a slight increase in unemployment. An easing of monetary policy and a global recovery will likely support growth above potential in 2025. Inflation is expected to steadily decrease, but it will remain high and above 2% as inflation in core services should be sticky.
The budget deficit is expected to remain stable around 2.7% of GDP in 2024 and 2025 because the withdrawal of crises-support measures is compensated by higher social benefits and labour compensation, along with new discretionary measures (see below). Given that growth is expected to be below potential in 2024, the fiscal stance measured as the change in the underlying primary balance will be slightly contractionary. However, the negative impact on growth should be contained as the fall in public expenditure reflects the catchup of private domestic income. Fiscal policy will then be broadly neutral in 2025.
Significant global and domestic uncertainties will continue to cloud the outlook, while tail risks exist (Table 2.1). Geopolitical tensions outside Europe can have an indirect but sizeable effect on Austria’s economy through its integration in European value chains for globally marketed goods. Within Austria, the outcome of wage negotiations in the current and future bargaining rounds, along with the eventual passthrough to prices, are key uncertainties. Higher-than-expected nominal wages would support consumption but increase unit labour costs, with a potentially negative impact on investment, employment and competitiveness. It could also lead to more persistent inflation. Recent analyses by the central bank and the Institute for Advanced Studies suggest that a 10% increase in wages is associated with a 2% or 3% increase in prices (Stiglbauer, 2023[9]; IHS, 2023[10]). The final impact on prices will depend on the behaviour or profits and the cost of depreciation, which have tended to drive price growth at the start of the inflation cycle (OeNB, 2023[11]; Fritzer, Reiss and Schneider, 2023[12]). The recent experience with high inflation has illustrated a key weakness in the otherwise effective collective bargaining system. The reference level for wage adjustment lags economic developments, produces inefficient fluctuations after a supply shock, and potentially creates sizeable second-round effects with a delay (Box 2.1). After the economy has normalised, considering the use of a price index excluding volatile elements as a reference for negotiations, based on a commonly agreed measure among social partners, would reduce the recurrence of inefficient labour share fluctuations in the future and the subsequent pressures on collective bargaining negotiations.
Excess private savings accumulated over the last three years could support consumption and investment more than projected. Excess savings in the household sector, as measured by differences with pre-Covid trends in disposable income and consumption, are significant. However, they are also likely concentrated among high-income households with lower propensity to consume (Battistini and Gareis, 2023[13]) and invested in illiquid assets (Battistini, Nino and Gareis, 2023[14]; Schneider and Sellner, 2021[15]). Besides, the net wealth of households has actually shrunk due to Important valuation effects after the increase in interest rates. On the corporate side, the cumulated real disposable income between 2020 and 2022 is 20% higher than what would have been expected before the pandemic. This additional liquidity may limit the negative effects of tighter financial conditions on real economic activity, investment, and labour demand, in the next two years.
Collective bargaining in Austria has performed quite well in the past
Nearly all Austrian workers in the private sector are covered by collective agreements. Collective bargaining takes place primarily at the sectoral level, while only a small share is at the firm level. Collective agreements are generally renegotiated annually.
The collective bargaining institutions of Austria have regularly been identified as performing well. The “organised decentralised” system provides flexibility for adaptation of sector-level agreements at lower levels. Negotiated wages and other conditions can adjust quickly as agreements are usually renegotiated every year. The lack of pure wage indexation also allows for flexibility in adapting compensation to idiosyncratic economic conditions. The quality of labour relations is highly satisfactory (OECD, 2019[16]).
Recently, high imported inflation has put pressure on the collective bargaining system
Austria’s wage settlement mechanism has no formal indexation rule. Informally, wage negotiations often use a starting point based on the national inflation rate in the consumer price index over the last twelve months and an assessment of the medium-term productivity growth rate, as part of the so-called “Benya formula”. Including the inflation rate in the formula helps preserve workers’ purchasing power. In addition, in theory if inflation is equal to the growth in the GDP deflator and productivity is well estimated, this formula implies a constant split between the labour share and the share of gross operating surplus in corporate value-added. The stability of the labour share has been an essential argument for unions in favour of the Benya formula (Mesch, 2015[17]).
However, there can be a misalignment between preserving workers’ purchasing power and the stability of the labour share when consumer inflation and the GDP deflator diverge, in particular in the context of terms of trade shocks. This has been put into stark relief since 2022 when energy prices increased significantly, lifting the price of imports relative to domestic production. This situation has illustrated some of the drawbacks of using past CPI inflation as a reference in wage bargaining: the divergence with the price of domestic value-added can generate large variations in the labour share, and the delayed pass-through of highly volatile inflation to wages generates large variations in workers’ purchasing power.
Proposals have been made to modify the inflation reference in wage negotiations
Several alternatives have been proposed to change the inflation reference measure. Using the GDP deflator as a reference would in theory stabilise the labour share. However, it is less timely than inflation measures and can be revised for up to 3 years. As a result, the Central Bank has suggested the use of core inflation which smooth movements in consumer prices, while being closely correlated with the GDP deflator, but available quickly and less prone to revision (Stiglbauer, 2023[9]). Several OECD countries, such as Belgium, France and Italy, are using core inflation or a similar national index excluding volatile components as a reference or an index in their wage bargaining. The Austrian Institute for Economic Research has also recently proposed to shorten the backward window over which inflation is assessed to calculate the reference inflation, which would align wage adjustments more closely with current economic conditions (Felbermayr, Bittschi and Baumgartner, 2023[18]). However, such a measure may not compensate for large temporary shocks in prices if they happen outside of the horizon window, although real wage developments would likely be similar to the current system over long periods. This would also be less of a problem if the inflation index excludes volatile components. In the future, considering the use of core prices as a reference in the Benya formula, based on a commonly agreed measure, while preserving the flexibility of the current system, would be a simple change addressing the issues that have put pressure on collective bargaining in the last year.
Annual percentage change, volume (2015 prices)
1. Contribution to changes in real GDP.
2. As a percentage of potential GDP.
3. As a percentage of household disposable income.
4. As a percentage of GDP.
Source: OECD (2024), OECD Economic Outlook 115: Statistics and Projections (database)
High inflation, subdued economic conditions and monetary tightening in the Euro area have diminished financing activity and cooled the housing market further. The growth in corporate loans has halved in 2023 compared to 2022. The latest Austrian Bank Lending Survey confirms that, since 2022, banks have become increasingly pessimistic about future economic prospects, which has prompted them to tighten lending standards for corporate loans (OeNB, 2023[19]).
The mortgage loans contracted by 1.2% in August 2023 compared to the same period in the previous year. In addition, house price growth has cooled. The residential property price index decreased by 2.6% in in the first quarter of 2024. The fraction of properties sold relative to the total on offer has fallen significantly for both houses and flats (OeNB, 2023[20]).
Though interest payments by households and corporations have risen, they remain relatively low in international comparison (Figure 2.7). In 2022, more than two thirds of Austrian households (71.1%) were not in debt and high mortgage debts were concentrated among high-income households (OeNB, 2023[20]). The share of vulnerable households with basic payments accounting for more than 70% of income is low (Valderrama et al., 2023[21]). These measures indicate a lower risk of a significant increase in loan default rates and distressed sales. Given that new loans have the highest outstanding amount of debt, it is important to maintain sustainable lending standards. The recent increase in the share of new loans to households with variable interest rates, which reached almost 50%, warrants close monitoring.
Significant systemic risks to financial market stability stemming from gradually deteriorating lending standards in the residential real estate sector have been identified since 2016. Hence, in August 2022, legally binding borrower-based measures were introduced - they cap loan maturity at 35 years, the loan-to-collateral ratio at 90% and the debt-service-to-income ratio at 40% of net income. These measures can help mitigate risks stemming from the residential real estate sector. The constitutional court confirmed the necessity, appropriateness, and effectiveness of borrower-based measures in Austria in January 2024.
Note: For non-financial corporations interest payments are reported as shares of gross operating surplus and mixed income. OECD refers to the average of the shown countries only.
Source: OECD (2024), OECD Quarterly National Accounts database.
The commercial real estate sector also requires higher attention as increasing financing costs and post-pandemic structural changes affect demand for working spaces. A large Austrian real estate company, operating also in other countries, filed for bankruptcy at the end of 2023. Commercial real estate loans in Austria account for a smaller share of Austrian banks’ portfolios, but Austrian banks are more exposed than other EU countries (OeNB, 2023[22]). Therefore, appropriate property valuations and adequate risk provisioning are warranted.
Indicators suggest that Austria’s banking sector remains in good shape. Subdued economic conditions and tight monetary conditions have not had a significant negative effect on the sector so far. The nonperforming loan ratio for both corporate and household loans stayed below 3% as of mid-2023. The banking sector is well-capitalised. The profit of Austrian banks increased by 139% year on year in the first half of 2023 thanks to high interest margins. Compared with levels recorded before the global financial crisis of 2008–09, the Austrian banking sector has more than doubled its capital ratio in line with tighter prudential requirements (OeNB, 2023[22]). The latest stress test conducted by the Austrian Central Bank indicates that the banking system is well placed to withstand substantial macroeconomic shocks combined with a prolonged phase of elevated inflation and interest rates (OeNB, 2023[23]).
The pandemic and the increase in energy prices have led to large fiscal deficits, but the public debt burden was contained because of strong nominal GDP growth. After an average primary surplus of 1% of GDP between 2015 and 2019, the response to the pandemic led to large primary deficits of 6.6% in 2020 and 4.7% in 2021. Pandemic support had not been totally withdrawn in 2022 when the increase in energy prices hit, and energy relief measures contributed to a deficit of 3.3% in 2022 (Figure 2.8, Panel A). Government revenues have recovered to pre-pandemic levels, but expenditures (as a share of GDP) are still 3 percentage points above their level in 2019 (Figure 2.8, Panel B). The public debt ratio rose to 82.9% of GDP in 2020 but has come down subsequently and reached 77.8% in 2023 despite the large primary deficits, thanks to high nominal growth during the economic recovery from the pandemic and the increase in inflation.
Source: OECD (2024), OECD Economic Outlook: Statistics and Projections (database).
The deficit is expected to remain around 2.7% of GDP in 2024 and 2025, which will not allow a significant decrease in the debt level. On the expenditure side, public intermediate consumption and current transfers fall in 2024 via the final drawdown of Covid-related measures. The subsidies implemented for inflation relief will expire: the energy price subsidy for companies in 2024, and the electricity price brake for households in 2025. However, the delayed passthrough of past inflation in higher labour compensation (from collective agreements) and social benefits (via indexation) will contribute to higher expenditures. Additional discretionary expenditures are expected in particular from the new financial equalisation agreement which increases spending by EUR 1.9 bn. On the revenue side, the implementation of the eco-social tax reform continues with additional revenues from carbon pricing more than offset by reductions in income taxation, for both households and corporations. The inflation indexation of tax brackets reduces trend income tax revenues. Indirect taxation will also be supported by the pick up in consumption. Income taxation and social contributions are supported by higher nominal wages and relatively stable employment.
A stable public deficit in the short term despite a high level is warranted given the economic context: the output gap remains large, economic growth will be below potential growth in 2024, and monetary policy will remain contractionary. However, the government needs a stronger medium-term plan to reduce the deficit as the economy picks up.
Moreover, fiscal policy also increasingly needs to address long-term spending pressures such as expenditures related to the climate transition and ageing-related spending. Expenditures on pension, long-term care and health are expected to increase cumulatively by around 5.8% of GDP from 2025 to 2060, under the assumption that pensions will increase in line with wages (OECD, 2019[24]). Without measures to offset these costs, the debt-to-GDP ratio will increase significantly (Figure 2.9, No-Reform scenario). Putting the public finances on a sustainable path will require identifying and addressing inefficiencies in government expenditures, containing spending pressures due to an ageing population, and ensuring that the structure of government revenues promotes sustainable and inclusive growth (Figure 2.9, Reform scenario).
General government debt, Maastricht definition
Note: The “No-reform scenario” is based on the OECD Economic Outlook 115 projections until 2025, the OECD long-term model thereafter. The scenario assumes a continuation of the policy stance with constant structural primary balance deficit of 1.1% of GDP from 2026. The scenario assumes an increased spending on health care, long term care and pensions, which will add on average an additional 0.1 percentage points of GDP to annual government spending assuming no policy change in line with the EC Ageing Report. The “Reform scenario” is based on the OECD Economic Outlook 115 projections until 2025. The reform simulation is based on reform package in the Box 1.2 using OECD Long-Term Model (Guillemette and Turner, 2018), including measures improving the fiscal balance GDP listed in the Box 2.2
Source: Calculations based on OECD (2023), OECD Economic Outlook: Statistics and Projections (database), June; Guillemette, Y. and D. Turner (2018), "The Long View: Scenarios for the World Economy to 2060", OECD Economic Policy Paper No. 22., OECD; and European Commission (2024), "The 2024 Ageing Report - Economic and budgetary projections for the 28 EU Member States (2022-2070)" Directorate-General for Economic and Financial Affairs.
Table 2.3 presents estimates of the fiscal impacts of key reforms recommended in this Survey. Additional expenditures arise from strengthening childcare services and increasing green investment, while revenues are reduced by lowering the tax wedge. Meanwhile the proposals to increase taxation plus the recommended pension reform are expected to improve the fiscal balance. The quantification is merely indicative and does not account for behavioural responses.
In addition, tax revenues would increase by 0.2% of GDP by 2030 due to dynamic effects of reforms on GDP growth (see simulation in Box 1.2).
Fiscal savings (+) and costs (-), % current year GDP
1) Bolstering childcare services: increasing spending in pre-school education to the level of Demark (1.2% of GDP).
2) Linking of retirement age to life expectancy: Increasing the retirement age by 2/3rd of the increase in life expectancy.
3) Improving business regulation: reducing by half the gap in the product market regulation index between Austria and the top 5 countries in the OECD.
4) Boosting green investment: Investment in new low-carbon electrical capacity, based on the OECD energy transition scenario (OECD, 2023[25]).
5) Improving efficiency in the health care sector: Difference between the reference scenario and the healthy-ageing scenario in the European Commission ageing report (European Commission, 2024[26]) (0.1 % of GDP). Closing the gap in spending on hospital services by half between Austria and the next highest in Europe (0.4% of GDP).
6) Improving efficiency through expenditure reviews: Annual savings at 0.13% of GDP comparable to the saving targets set in expenditure reviews in New Zealand (Treasury of New Zealand, 2023[27]). The saving programme should take place throughout 5 years.
7) Increasing recurrent taxes on immovable property: Reducing the gap in revenues as a share of GDP relative to the OECD average by half.
8) Environmental taxation: increasing the revenues from carbon pricing instruments by 0.4% of GDP – a half of the expected potential (OECD, 2023[28]).
9) Reducing the tax wedge: Decrease in the labour tax wedge by 2 p.p. equivalent to 0.8% of GDP.
10) Higher revenues due to higher GDP growth relative to baseline (see Box 1.2).
Source: OECD calculations.
Public expenditures in Austria are high compared to other European countries, largely reflecting a sizeable social protection system (Table 2.4). In 2022, government spending represented 53.2% of GDP against 50.5% of GDP in the Euro area. Social protection accounts for 39% of total expenditure (20.6% of GDP), including old-age spending amounting to 14.4% of GDP. Health-related expenditures account for an additional one-fifth of total expenditure (8.8 % of GDP), including spending on hospital services of 4.7% of GDP. Further population ageing will put upward pressure on these already substantial allocations. This raises the importance of ensuring that the provision of public services and the systems of transfers are efficient, particularly pensions and health care.
General government expenditure by function, % of GDP
Note: The functions of government follow the classification of functions of government (COFOG). Basic research and R&D expenditures have been regrouped so that the other functions exclude research-related expenditures. In 2022, subsidies for foregone revenue and short-time work are included in “Economic affairs excluding transports”.
Source: Eurostat, General government expenditure by function
Increasing the retirement age to limit the rise in pension expenditures
Expenditure on pensions is high in Austria and will continue to increase because of an ageing population. The pension system in Austria consists of a defined-benefit public scheme with an income-tested top-up for low-income pensioners. Given the parameters of today’s pension system, the ratio of pensions to GDP would increase sharply by 2070 because of changes in the age structure of the Austrian population (Table 2.5). The gradual increase of the female retirement age from 60 to 65 between 2024 and 2033, to align it with the male retirement age, will help contain the impact of ageing. In the long run, the indexation of pensions in payment to inflation will help contain the growth in expenditures relative to economic activity – which grows with productivity. This could eventually raise concerns about pension adequacy in the future, as in the past the ratio of pensions to wages has been relatively stable. Despite these features, the most recent Ageing Report from the European Commission still forecasts an increase in pension expenditures of 1.0% of GDP by 2040, and 0.4% by 2070 as the population’s age structure somewhat stabilises (European Commission, 2024[26]).
There are typically three broad dimensions which can be adjusted in order to ensure the sustainability of a defined-benefit public scheme in the long run: the contribution rate, the pension level, and the retirement age. Because the labour tax wedge in Austria is already high in international comparison, and because the average pension is scheduled to decline relative to the average wage, age-related measures are likely to be a key tool to contain pension expenditures. In that context, there is scope to increase the normal retirement age on the one hand, and to continue narrowing the gap between the effective and the normal retirement age on the other hand.
Linking the retirement age to life expectancy would make public finances resilient to the fiscal risk related to higher-than-expected longevity. For example, the European Commission’s 2024 Ageing Report estimates that an increase in life expectancy at birth of two years by 2070 would increase pension expenditures by an additional 0.7% of GDP at that horizon. Linking the retirement age to changes in life expectancy would address this risk and provide a double dividend of reducing expenditures while supporting economic growth. Nine countries in the OECD link retirement ages to life expectancy, by increasing the retirement age by either 2/3 (Finland, Netherlands, Portugal, Sweden) or 100% (Denmark, Estonia, Greece, Italy, Slovak Republic) of the increase in life expectancy (OECD, 2021[29]; OECD, 2023[30]). This linking is all the more relevant for Austria as the country is expected to have one of the lowest effective labour market exit ages in Europe starting in 2030 (European Commission, 2024[26]) and a low normal age in the future relative to other OECD countries which have already passed reforms increasing the retirement age. In addition, life expectancy after labour market exit is among the highest in the OECD today, around 3 years above the OECD average for both men and women (OECD, 2023[30]). Higher retirement ages could be combined with a reduction in the accrual rate to reduce the level of future pensions (the rate which “converts” one year of work into a fraction of earnings feeding the pension level), which is currently the second highest in the OECD.
Such adjustments to the pension system would need to ensure that the elderly have access to the labour market. Indeed, the relative employment rate at old age compared to the rest of the population is low in Austria compared to other OECD countries (see chapter 4), and there remains a large gap between the effective and the normal retirement age among men in particular. Voluntary job separations in Austria, motivated mostly by retirement and disability, are particularly high which suggests scope for further activation of the elderly labour force (OECD, 2023[31]). In line with past recommendations from previous Economic Surveys, Austria has made progress in limiting early retirement pathways, e.g. by abolishing deduction-free early retirement pensions starting in 2022. The government has also announced a phase out of the funding for “blocked partial retirement” whereby employees can reduce working hours by 40 to 60% five years before the normal retirement age and receive 50% of their lost wages from the Public Employment Service (but still paying social security contributions in full and not losing pension entitlements), which also funds the cost to the employer. Those supply-side efforts could be complemented, in particular by further reforming access to disability pensions.
A particular challenge for elderly employment in Austria on the demand side is that there is a large gap in the participation in job-related training between older and younger workers, which can partly reflect a wider gap in digital skills relative to other OECD countries (OECD, 2023[31]). On the employer’s side, some OECD countries encourage employers to invest in training for older employees by reducing the cost of training older workers relative to other employees, complemented by additional measures such as targeted career advice and guidance services to increase the interest and motivation of older adults (OECD, 2019[32]). An interesting Austrian initiative in this area has been a joint program run by the Ministry of Labour and the Economy with the European Social fund, the Demografieberatung Digi+, which provides free consulting for SMEs to support them in adapting to their demographic and digitalisation challenges. Similarly, the Ministries of Labour and of Social Affairs provide free advice to people whose job is at risk due to health problems and to companies who want to promote the work ability and health of their employees, via the program fit2work. On the employee’s side, in addition to reducing costs in general, training may have to be adapted to older workers who may benefit more from applied on-the-job training (OECD, 2023[31]). Age discrimination and negative employer attitudes towards older workers also remain a particular obstacle to old-age employment on Austria (Eurobarometer, 2019[33]; Standard, 2023[34]). Beyond anti-discrimination legislation, some OECD countries have implemented targeted measures. For instance, in the Netherlands, through the initiative “Vacancies for all ages”, classified ads for job vacancies placed in newspapers and on the Internet are screened for age discrimination while in Poland, some firms use the logo “50+ friendly” in their job offers to attract older workers (OECD, 2019[32]).
Such adjustments to the pension system would also need to ensure that vulnerable groups are protected. The poverty rate of the elderly population in Austria is higher than the total population and the depth of poverty is among the highest in the OECD (OECD, 2021[29]). Part of the savings allowed by lower pensions and an increasing retirement age should thus be targeted towards increasing minimal pensions, e.g., by increasing the minimum income threshold currently in place and ensuring that it adjusts with the cost of living. Finally, the impact of inequalities in life expectancy is a particular challenge for pension policies. However, implementing a link to accompany increases in general life expectancy will be neutral in terms of redistribution if there is no trend in those inequalities. In Austria, as in most OECD countries, there is no clear trend in educational and occupational inequalities in life expectancy (OECD, 2023[30]).
Ageing report projections, 2024
Note: The public pensions to GDP ratio is decomposed as the product of the dependency ratio (65+ divided by working-age population), the coverage ratio (number of pensioners among the 65+ population), and the benefit ratio (the average pension relative to GDP per working age population). The long-term projections by the European Commission are based on commonly agreed methodologies and assumptions for macroeconomic projections, and a “no-policy-change” scenario. In particular, the extension of the female retirement age between 2024 and 2033 is included in the projections of ageing expenditures for Austria, as well as the increase in pensions in payment in line with inflation.
Source: European Commission (2024): “The 2024 Ageing Report. Economic and Budgetary Projections for the EU Member States (2022-2070)”.
Containing the increase in health care expenditures
Containing health care expenditures can be helped by greater attention to preventative measures and alongside efficiency gains in health care services themselves. Ageing is likely to also put additional pressure on health care expenditures, but those are harder to target with parametric reforms compared to pensions. There is room to improve health care spending efficiency. Austria’s health care system performs relatively well but is costly and too hospital-centric. The health status of the population is high, population coverage for core services is universal, and Austrians report high satisfaction with the availability of quality health care and low levels of unmet medical needs (OECD, 2021[35]). Still, despite significant public resources invested in health care, the country’s outcomes on key health performance indicators such as life expectancy, or treatable and preventable mortality rates, are often below best performers. Austria has recently agreed on a healthcare reform to increase efficiency while providing substantial investments in dedicated areas such as outpatient care and digitalisation. However, there is still room for more efficiency improvements via additional investment in preventive care and a continuing shift from hospital to ambulatory and primary care services.
Reducing the occurrence of chronic conditions
Health care costs are heavily burdened by behavioural risk factors. Around 40% of all deaths recorded in Austria in 2019 can be attributed to risk factors such as alcohol consumption, tobacco smoking, dietary risks, and low physical activity.
A comprehensive strategy, including higher excise taxes on alcohol, should be put in place to reduce alcohol consumption. The impact of alcohol consumption on health and the economy is higher in Austria than in the average OECD country. Austria has among the highest alcohol consumption per capita in the OECD (Figure 2.10, Panel A), reducing life expectancy by one year and healthy life expectancy by 1.5 years. As a consequence it induces more than 3.5% of total health expenditure and is expected to contribute to an additional fiscal pressure of 0.8 percentage points of GDP in the next thirty years, and to reduce GDP by 2% (OECD, 2021[36]). Public policy can be effective in tackling the harm of alcohol use. Minimum unit price (MUP) and higher taxes, along with restrictions on opening hours, are the most efficient tools to reduce consumption and have a significant impact on disability-adjusted life years. Despite that, Austria has implemented fewer WHO’s recommended pricing measures compared to other OECD countries. The excise taxes on alcohol other than wine are far below the OECD average. Minimum unit prices could be instituted taking the example of Canada where several provinces have implemented such measures. Simulations from the OECD suggest that a tax increase resulting in a 10% price increase, along with the institution of a minimum unit price above the current cheapest segment of the market, would lead to a reduction in alcohol-related health expenditure by 13% (OECD, 2021[36]).
The high prevalence of smoking could also be counteracted with a comprehensive package including higher taxes on tobacco. Austria has a high prevalence of smoking compared to other OECD countries (Figure 2.10, Panel B). One in five Austrians smoke daily or almost daily (Gesundheit Österreich, 2023[37]). In the latest edition of the Global Burden of Disease project, 16.1% of deaths from any cause and 27.7% of cancer deaths were attributed to tobacco use in 2019 (against 15.8% and 27.0% respectively in OECD countries on average). Public expenditure on smoking-attributable diseases has been estimated to 0.2% of GDP while the cost of premature mortality has been estimated to account for 0.6% to 2.8% of GDP (GHK, 2012[38]) (Pock et al., 2018[39]). The price of tobacco consumption in Austria is also low: in 2023, excise taxes and VAT accounted for 77% of the price of a 20-cigarette pack against 81%, on average in Europe; while in 2020 the cost of cigarettes as a share of GDP per capita was among the lowest in the OECD (Hoffer, 2023[40]). Research indicates that increasing tobacco prices is the single most effective and cost-effective measure for reducing tobacco use (WHO, 2021[41]). In particular higher prices are found to be effective in dissuading smoking among younger cohorts (Palali and van Ours, 2019[42]). This is particularly important as Austria had the highest shares of daily smokers of age 15-24 in the EU in 2019 according to the European Health Interview Survey, although smoking among young people has decreased by more than half since 2002. Some recent studies suggest that the elasticity of consumption to tobacco prices has been stable or growing recently, and has been estimated at -0.7%, in line with other European countries (Felsinger and Groman, 2022[43]; Yeh et al., 2017[44]; Kohler, Vinci and Mattli, 2023[45]). Increasing tobacco prices in Austria so that the price of a cigarette pack increases by 20% and match the price in Germany (from EUR 5.15 to EUR 6.18) would thus induce a reduction of consumption by 15%. The 2022 amendment to the Tobacco Tax Act goes in the right direction by steadily increasing the taxation of tobacco products between 2023 and 2026, which would effectively increase the cost of a pack of 20 cigarettes by roughly 5%. It also increases the minimum excise tax rate, which should effectively target price-sensitive consumers. More generally, an increase in tobacco prices will be more effective as part of a comprehensive policy package, since complementary policies can help reinforce the effect of prices on tobacco consumption in addition to their direct effect. For example, the WHO, as part of the MPOWER package, encourages the deployment of a package which combines higher taxes on tobacco with the implementation of smoke-free environments, support for tobacco cessation, adequate information campaigns, and bans on tobacco promotion (WHO, 2008[46]). A policy package implemented in France where an increase of 40% combined with plain packaging, a yearly cessation campaign, and the reimbursement of nicotine replacement products, has been assessed to have a large return: an investment of EUR 1 would reduce health expenditures by EUR 4, along with a major impact on labour force participation (Devaux et al., 2023[47]). The most recent analysis by the WHO suggests that Austria is performing well on the various dimensions of the MPOWER package, but there is room to extend the coverage of smoke-free laws and reduce the promotion of tobacco in addition to increasing tobacco prices (WHO, 2023[48]).
Strategies implemented to reduce carbon emissions will have significant co-benefits for health as Austrians are highly exposed to local air pollution. Epidemiological studies have established that exposure to non-exhaust emissions of particulate matters (PM) is associated with a variety of adverse health outcomes (OECD, 2020[49]). The population in Austria is more exposed to a high level of fine particulates than the average OECD country (OECD, 2023[50]). Overall, premature deaths from outdoor air pollution have been estimated to induce a welfare cost representing the equivalent of 4.5% of GDP for the country every year compared to 3.6 % in the OECD, based on estimates of the value of statistical lives (OECD, 2017[51]). In addition to adverse health outcomes, air pollution has large negative impacts on labour productivity because of absenteeism at work and a reduction in individuals’ cognitive and physical capabilities. Recent OECD estimates suggest that a 1μg/m3 increase in PM2.5 concentration causes a 0.8% reduction in real GDP. As a reference, in 2019, the average exposure in Austria was 11.6 μg/m3, in line with the Euro area average (12.2), but above neighbouring countries like Germany (10.8) or Switzerland (9.6) and significantly above Scandinavian countries like Finland (5.5) or Sweden (6.1). Ninety-five per cent of this impact is due to reductions in output per worker (Dechezleprêtre, Rivers and Stadler, 2019[52]). Emissions of PM2.5 and nitrogen dioxide are driven significantly by energy use in residential and commercial buildings, and road transport. Chapter 5 in this Economic Survey proposes policies to reduce greenhouse gas emissions in those sectors, where the co-benefits in terms of air pollution (e.g. by more efficient use of energy in buildings and transport) will thus be significant.
Note: In Panel A, alcohol consumption is defined as annual sales of pure alcohol in litres per person aged 15 years and older. In Panel B, daily smokers are defined as the population aged 15 years and over who are reporting to smoke every day. Unweighted average of 37 countries in Panel A and 35 countries in Panel B for the OECD aggregate.
Source: OECD (2023), OECD Health Statistics (database).
Shifting health services away from hospitals and reinforcing primary care
Reducing reliance on hospital services and bolstering primary care is a key avenue for improving Austria’s health care system. Austria spends substantially more than most countries on hospital inpatient care (Figure 2.11 and (OECD/European Observatory on Health Systems and Policies, 2021[53])). The average length of stay at hospitals is high relative to other OECD countries, which is also reflected in a large relative number of beds and a low occupancy rate. Avoidable hospitalisations due to chronic conditions are also significantly higher than other developed countries while the share of ambulatory services is lower than most (OECD, 2021[35]). In contrast, spending on prevention and primary care is lower than the OECD average. The share of generalist medical practitioners has decreased by more than 15% since 2000, a faster reduction than other OECD countries, and the number of general practitioners per capita is now among the lowest in the EU (OECD, 2020[54]). Austria does not feature a significant gatekeeping role for primary care and secondary care can be accessed fairly openly which may explain part of the imbalance in expenditure (Hoffmann et al., 2019[55]).
Austria has been improving primary care delivery, but more could be done. Reform has included the 2017 Primary Care Act which promoted a shift from solo practices to group practices. In addition, Austria’s Resilience and Recovery Program (RRP) includes primary care initiatives, including the establishment of new multi-professional primary health care units (PVEs). The recent Primary Care Act, passed in July 2023, adequately facilitate the creation of PVEs in particular by cancelling the veto power of the medical associations for new installations. Finally, the adoption of a new health care package in November 2023 for the period 2024-2028 also goes in the right direction by providing EUR 14 billion for health and care reform. The comprehensive reform focusses on selected areas such as strengthening the outpatient sector by e.g. additional positions for contracted physicians in primary care; structural reforms in hospitals to promote day clinics and specialised outpatient hospital departments; digitalisation and telemedicine; health promotion and prevention as well as vaccinations; measures regarding health work force and patient navigation; and additional funding for nursing and long-term care. Additional steps should be considered, including:
More effectively guiding patients to the best point of service, e.g. through digital tools. Some countries have also reinforced further the role of general practitioners as gatekeepers to secondary care services – through a referral system and incentivised individual registration of a primary care provider.
Greater use of digitalisation and telemedicine. The proportion of primary care physician offices using electronic medical records is relatively low, and telemedicine consultations have increased less than other OECD countries during the Covid period (OECD, 2021[35]). The additional funds included in the new reform package for the digitalisation of the health system are welcome in this context.
Wider roles for pharmacists and nurses. During the pandemic, Austrian pharmacists were temporarily granted wider scope to prescribe a wider range of drugs and to extend prescriptions given by doctors. Consideration should be given to making this permanent. In addition, nurses’ involvement in health promotion and prevention is currently low relative to other OECD countries. In Canada, registered nurses and nurse navigators have an important role in improving co-ordination and continuity of care in the MyHealthTeam model of primary health care. In other OECD countries, such as Estonia, Ireland, Mexico, Sweden and the United Kingdom, registered nurses are also allowed to prescribe medication (OECD, 2020[54]). The Recovery and Resilience Plan and the new reform provide steps in the right direction by funding local community nurses, qualified health and nursing staff who would be central contact persons responsible for coordinating various services, and broadening the responsibilities of non-medical professionals.
In addition to health care, long-term care (LTC) public expenditures are increasing and their growth is expected to continue due to demographic trends, mostly because population ageing increases the size of the dependent population. For example, the latest estimations from the Ageing Working Group of the European Commission suggest that public expenditure on LTC is likely to double in Austria over the next 50 years from 1.6% of GDP in 2019 to 3.1% of GDP in 2070 (Famira-Mühlberger and Trukeschitz, 2023[56]; European Commission, 2024[26]). The current LTC system in Austria combines a system of universal cash benefits and the provision of in-kind services at home or in residences. A large share of the population, around twice the average in other EU countries, is covered by cash benefits which can be used to purchase LTC services at home or in institutions. Those benefits represented around half of total public expenditure on LTC in 2019 (Trukeschitz, Österle and Schneider, 2022[57]). On the other hand, only one-fifth of the dependent population is also covered by in-kind care at home or in institutions compared to two-fifths in the EU on average (European Commission, 2021[58]). These services and in-kind benefits are the responsibility of the federal states for planning and financing, and typically subject to co-payments, while municipalities also contribute to implementation. The main cash benefit is the federal long-term care allowance Bundespflegegeld which provides a non-means tested monthly benefit according to seven different levels depending on care needs. A means-tested benefit is provided to support the employment of formal carers for full-time care (“24-Stunden-Betreuung”). Additional benefits are provided to support informal care. For example, a “care-leave benefit” (Pflegekarenzgeld) is available for caring relatives and a fixed “relatives’ bonus” (Angerhörigenbonus) has been created in 2023.
Austria has started to address some of the challenges faced by its LTC system. Despite a generous and broad cash benefit system compared to other European countries, those benefits do not cover the full cost LTC services for households (European Commission, 2021[59]), which can explain a large reliance on informal work. Indeed, a large majority of people in need of LTC live in private homes, and Austria has one of the largest share of informal carers among people over 50 years old (OECD, 2023[60]), which can represent an additional constraint on the employment of the elderly. In 2017, more than half of LTC in private homes was provided through informal care only (European Commission, 2021[59]) and an estimate from 2018 suggests that around half of informal carers would be theoretically available to participate in the labour market (Nagl-Cupal et al., 2018[61]). The current system faces additional challenges which may eventually put pressure on fiscal policy and economic growth. In addition to the fragmented nature of the LTC system in line with the broader healthcare system as discussed in the next paragraph, LTC faces specific staff shortages (as in other countries), lags behind in terms of digitalisation, and suffers from a lack of systematic, high-quality data e.g. on private spending or the funding of nursing (Rechnugshof Österreich, 2023[62]; Trukeschitz, Österle and Schneider, 2022[57]). Recent reforms have underlined the importance of adapting the LTC system to future challenges for the government. In particular, in 2020 the Ministry of Social Affairs set up a task force for care reform, and a large reform package was adopted in July 2022 which included measures to make training more attractive for nursing and care work, better conditions for LTC workers (including a wage bonus and additional paid leave), and larger benefits for dependents and their carers.
Improved coordination on healthcare and long-term care between the federal states could provide additional efficiency gains and help contain fiscal pressures. As in many countries, the health care system has a complex governance structure. The federal government is responsible for regulating social health insurance and most areas of health care provision. The nine federal states regulate hospital care in their jurisdictions, and are responsible for implementation, organisation and financing of inpatient and outpatient care in hospitals, as well as hospital investment (OECD/European Observatory on Health Systems and Policies, 2021[53]). In long term care, even within the federal states, the control, responsibility and service provision are divided among several legal entities while the definition of care quality can differ widely across borders, and the definitions and targets of LTC processes and outcomes could be harmonised (Rappold et al., 2021[63]; Rechnungshof Österreich, 2020[64]; European Commission, 2021[59]). This fragmentation has the potential to limit incentives to look for efficiency in joint provision (Fiskalrat, 2023[65]). In addition, the funding for inpatient care in the Länder via the fiscal equalisation system is mainly based on negotiations rather than a risk or needs-based allocation formula which may also hamper efficiency.
Public health expenditure decomposition by function of government, 2019
Note: Unweighted average of 30 countries for the OECD aggregate.
Source: OECD (2023), OECD Annual National Accounts Statistics (database).
Improving spending efficiency through spending reviews
Spending reviews can be an effective mechanism for identifying opportunities for efficiency, cost savings, and reallocation of resources (Doherty and Sayegh, 2022[66]). Austria initiated a series of spending reviews as part of the 2017 Intergovernmental Fiscal Relations Act and introduced a roadmap for targeted spending reviews on the green and digital transformations as a priority area within the national Recovery and Resilience Plan in 2021. The reviews are conducted by the Ministry of Finance with thirteen reviews conducted to date. The reviews and the advancements introduced with the 2021 RRP are welcome, but the process could be further improved in terms of coverage, transparency and implementation.
The current round of spending reviews has so far only considered activities that, in total, account for around 5% of government expenditure. Each review has focused on a certain ministry or a specific expenditure programme representing only a small share of spending. Through the RRP, Austria shifted the focus of Spending Reviews to green expenditures, which make up around 10% of current budget. While this increase in coverage is welcome, greater potential savings could be achieved by reviewing more significant areas of government spending. In Slovakia and the Netherlands, targeted reviews are conducted, with the focus shifting annually to different areas. This dynamic approach ensures that a significant portion of expenditures is scrutinised, potentially leading to substantial savings. For example, Slovakia achieved savings of approximately 8% from the total expenditure reviewed, indicating the effectiveness of targeted reviews (Doherty and Sayegh, 2022[66]). For example, spending reviews completed just in the year 2020 identified potential savings amounting to 1.2% of GDP in public employment and wages, defence, and IT spending (OECD, 2022[67]). In the Netherlands and the United Kingdom, the spending reviews process began as comprehensive reviews and they were adopted again following the Global Financial Crisis, respectively in 2010 and 2011. More generally, comprehensive reviews have been used as effective tools in the times where fiscal consolidation is needed, with a whole-of government approach (Elva, Elcoli and Bosch, 2020[68]).
In addition, the spending reviews in Austria currently lack a direct integration into the budget process. While some spending review results have been used internally by line ministries, they did not have a direct role in shaping annual or multi-annual budget decisions so far (OECD, 2020[69]). Commitment to including results of green spending reviews into the annual climate supplement to the budget is a welcome initiative to achieve greater coherence between spending reviews and budgetary decisions (BMF, 2024[70]). However, creating a clear path from spending reviews to the budget is important for effectiveness. In Australia, the outcomes of strategic spending reviews are considered by the budget Expenditure Review Committee as part of the annual budget process. The United Kingdom’s spending review process is undertaken periodically and used as the basis for formulating medium-term expenditure plans for government agencies over a multiyear period (Doherty and Sayegh, 2022[66]). This integration enhances the relevance and impact of spending reviews on fiscal decision-making. In this regard, setting clear strategic objectives at the start of the process is important to ensure that the spending reviews are aligned with medium-term fiscal objectives and deliver tangible results. For example, New Zealand, integrates saving targets into its spending reviews before the budgeting process begins. Ministries then conduct spending reviews to identify opportunities for achieving these savings targets, ensuring that expenditures are focused on areas of the highest priority and efficiency (Government of New Zealand, 2023[71]; Treasury of New Zealand, 2023[27]). Transparency around the spending reviews in Austria can be further improved. Full reports of the three spending review modules conducted within the framework of the national Recovery and Resilience Plan were immediately published on a dedicated webpage. This represents a significant advancement in terms of transparency as out of eight spending reviews that were conducted between 2017 and 2021, only two reports were made publicly available online in 2022. Terms of references, interim and final reports including implementation report data, should be made available online for all spending reviews completed. The amount of reallocation or savings made based on the findings of the Spending Reviews should also be publicly disclosed (Tryggvadottir, 2022[72]).
Another area with potential efficiency gains for public expenditure is Austria’s complex system of fiscal federalism. State and local governments have significant responsibilities and are in charge of most of the expenditure on housing and education. However, they have almost no autonomy on funding. Put another way, Austria has one of the largest vertical fiscal imbalances between revenue and expenditure in the OECD (OECD, 2021[73]). Local governments rely on transfers from the central government and these transfers are allocated via a population key, which barely reflects the actual needs and costs for local governments of their specific responsibilities (Bauer et al., 2010[74]; Schratzenstaller, 2015[75]). Some progress has recently been made to increase targeting in the recent fiscal equalisation agreement negotiated at the end of 2023. In particular, the agreement included the establishment of a “Future Fund” endowed with EUR 1.1 billion with specified targets to be reached in the areas of childcare, housing, and climate protection. Still, this represents a small share of local governments’ revenues and no consequences are foreseen in case of missing targets. Overall, local governments do not have strong incentives to provide public services at the lowest cost.
A more growth-friendly tax system could potentially contribute to the medium-term consolidation and the long-term sustainability of public finances. Tax revenues as a share of GDP are the third highest in the OECD, and a large share of government revenues is derived from the taxation of labour income and a relatively low share from the taxation of consumption and property (Figure 2.12). As a consequence, labour tax wedges are high including for low-income workers where labour demand is highly responsive to labour costs (L’Horty, Martin and Mayer, 2019[76]). The eco-social tax reform, which is introducing gradually increasing carbon prices on sectors not covered by the European Emissions Trading System between 2022 and 2025, will improve the mix of government revenues by reducing both the household income tax for lower-income brackets and the corporate income tax (Box 2.3). This shift towards a tax structure which is more conducive to sustainable and inclusive economic growth is welcome and should be pursued. Higher carbon prices (see Chapter 5) and a further shift away from labour taxation via a reduction in the tax wedge for low income earners (see Chapter 4), towards a higher reliance on the recurrent taxation of immovable property, and on inheritance and gift taxes, would also support growth while reducing inequality (Akgun, Cournède and Fournier, 2017[77]).
Decomposition of tax revenue, 2021
Note: Taxes on income include taxes on profits and capital gains. Unallocable taxes on income refer to receipts that cannot be identified appropriately as income taxes from individuals and corporate enterprises.
Source: OECD (2024), OECD Revenue Statistics, OECD countries: Comparative tables (database).
The eco-social tax reform prices non-ETS emissions starting in 2022
The eco-social tax reform combines a broadening of carbon pricing with tax reductions and other benefits for households and businesses. Pricing is extended beyond the sectors covered by the EU Emissions Trading System. The sectors covered include buildings, transport, agriculture, waste and small industrial plants. It also covers most fossil fuel energy sources: gasoline, diesel, heating oil, natural gas, liquefied gas, coal and kerosene. The tax is paid by the providers of the fuel (the producer or the entity responsible for bringing the fuel in the country).
The pricing mechanism is being phased in gradually. Between 2022 and 2025, the price per CO2 equivalent ton of emissions is fixed according to an increasing schedule. In addition, in 2022 and 2023 there were simplified reporting requirements. The original plan scheduled an increase from EUR 30 per ton in 2022 to EUR 35 in 2023, EUR 45 in 2024, and EUR 55 in 2025. However, the reform included a snapback mechanism allowing the scheduled increase to be halved in case of high energy prices. The fixed price for 2023 was thus EUR 32.5 per ton. In the third phase, trading certificates will be exchanged on a national market.
The national market could be integrated in the EU ETS 2 scheduled in the EU Fit-for-55 package which would create an emissions trading system in 2027 for sectors not covered by the current ETS (and thus in the scope of the eco-social tax reform) in particular for the transport and buildings sector.
Exemptions to the new carbon price include installations already subject to the EU-ETS and small emitters (less than 1 ton of CO2 equivalent in a year). Relief of a fraction of the additional costs induced by carbon pricing is provided to specific sectors with the goal of mitigating competitiveness threats and the potential for carbon leakage in the sectors of agriculture and forestry, energy, and industry.
The eco-social tax reform includes various measures designed to recycle the additional tax revenues and to provide relief to vulnerable groups
Support measures for companies and households are an important part of the global eco-social tax reform. These include:
reduction in personal income tax rates in the second and third income brackets;
reduction in the corporate income tax rate from 25% in 2022 to 24% in 2023 and 23% in 2024;
a tax-exempt “climate bonus”. The bonus provides a lump sum amount of between EUR 110 and EUR 220 to individuals residing in Austria for more than 183 days (children receive half the amount). The amount is adjusted in four categories depending on the location a person’s place of residence, based on the availability of public transport.
Note: in 2022, the formula for the climate bonus was adjusted to respond to the increase in energy prices. The climate bonus was uprated to EUR 250 and combined with an “anti-inflation” bonus of EUR 250.
Source: (BMF, 2022[78]), BMK, Federal Chancellery
Raising recurrent taxation on immovable property, reducing transaction taxes
Austria could consider reducing the taxation of property transactions and increasing recurrent taxes on immovable property. Austria taxes property at low levels, mostly through transaction taxes. The taxation of property is among the lowest in the OECD, with revenues equivalent to around 0.6% of GDP as of 2021 against 1.9% in OECD countries on average. Most of the revenue is raised through a 3.5% tax on real estate transactions (Figure 2.13). Municipalities levy a recurrent property tax but this is based on outdated valuations, which severely limit the revenues it generates: in 2016, the European Commission had estimated that a shift from cadastral values to market values would multiply those tax revenues by a factor of 4 (European Commission, 2018[79]). As a consequence, recurrent taxes on immovable property represent only 0.2% of GDP against 1.1% on average in the OECD. Recurrent taxation on immovable property has attractive features, including that the tax base is (by definition) immobile, the tax is transparent, and, if levied at the local level, can improve government accountability (OECD, 2022[80]). Empirically, previous OECD analyses have suggested that they are among the taxes the least harmful to growth (Akgun, Cournède and Fournier, 2017[77]; Arnold et al., 2011[81]). In contrast, transaction taxes in general are highly distortive. In particular, such taxation can reduce residential and labour mobility (O’Sullivan, Sexton and Sheffrin, 1995[82]; Causa and Pichelmann, 2020[83]). Empirical evidence generally finds that transaction taxes reduce prices and transaction volumes (OECD, 2022[80]).
Decomposition of tax revenue on property, 2021 or latest year available
Source: OECD (2023), OECD Revenue Statistics, OECD countries: Comparative tables (database).
A regular update of property values should be introduced. Property values used for the local recurrent property tax base have not been updated in Austria since the 1980s. The adequate valuation of property is particularly salient in Austria as the inheritance tax was deemed unconstitutional in 2007 due to the outdated valuation of real estate assets compared to financial assets; while outdated cadastral values are one of the main source of low property tax revenues at the local level. Regular updating of property values is feasible, as demonstrated by practices in a number of other countries. For instance, Hungary, Korea, Mexico, and the Netherlands update property valuations every year. Australia, Japan, New Zealand and Portugal update every three years; in Chile every four years; in Lithuania every five years (OECD, 2021[84]). The International Association of Assessing Officers recommends that revaluations take place at least every 6 years (IAAO, 2017[85]).
Property valuation should make full use of digital technologies. For instance, consideration should be given to computer assisted mass appraisal (CAMA, (McCluskey et al., 2012[86])), in which a group of properties are jointly appraised following standardised procedures and testing (OECD, 2021[84]). Similarly, data from digital platforms advertising properties for sale (e.g. Zillow in the United States, SeLoger in France) can be exploited to generate property valuations. Indexation via a construction price index, a house price index, the consumer price index, or a combination thereof, can help update property values between market updates.
Close attention is needed to ensure the acceptability of increased recurrent property taxation. This should include:
Gradual phase-in. A tax shift away from transaction and towards more recurrent property taxation may raise concerns among those property owners who paid transaction taxes and should be implemented gradually. For instance, a gradual shift is being implemented in the Australian Capital Territory (ACT) where the property transfer tax is being phased out over a 20-year period, while broadening the base and increasing the rates of the recurrent tax on unimproved immovable property (Breunig et al., 2020[87]; OECD, 2022[80]).
Embedding regular valuations in a wider tax reform, as for instance was done in Denmark and Ireland (Box 2.4).
Careful design to prevent regressivity and liquidity constraints. Recurrent property taxation can be designed to ensure more progressivity and alleviate liquidity issues, e.g. by allowing for the payment in instalments and for tax deferrals, and by implementing relief using a limited flat rate exemption for all taxpayers (OECD, 2022[80]; Joumard, Pisu and Bloch, 2012[88]). Eventually, the positive redistributive impact of property taxation could be relatively higher in countries such as Austria, where housing wealth is more concentrated. Average wealth in owner-occupied housing is 4.6 times higher in the fifth income quintile than in the first quintile, against 3.6 in the OECD on average (Figure 2.14, (OECD, 2022[80])) while the relative and absolute gap in secondary real estate wealth is even larger.
Note: Income quintiles are calculated on household non-equivalised disposable income or gross income depending on data availability. Wealth values are expressed in 2015 USD by, first, expressing values in prices of the same year (2015) through consumer price indices and, second, by converting national values into PPP USD. See the source for more details on the methodology.
Source: OECD Wealth Distribution Database; and OECD (2022), Housing Taxation in OECD Countries, OECD Tax Policy Studies, No. 29.
Denmark
Denmark froze property values for the purposes of property taxation in 2002, which contributed to booming housing prices and a fall in the effective rate of property taxation. These tax savings were shown to be unequally distributed across regions. In 2017, a property tax reform included updating of property values every second year. Given the nearly two decade-long tax freeze, the reassessments were expected to significantly raise property tax obligations.
To cushion the increased property tax liabilities, the government combined the property revaluation with other property tax reforms. The statutory property tax rate was lowered from 1% to 0.6% and a surtax aimed at high-value properties was applied above a value threshold. In addition, homeowners whose overall property taxes increased with the new system were compensated through a tax rebate in 2021 and will have the option to defer the future increase in recurrent property tax liabilities until the sale of the property.
Ireland
Following the introduction of the Local Property Tax in 2013, property values for tax purposes were due to be revalued in 2016. However, revaluation was delayed, property values were outdated and properties that had been built since 2013 were not subject to the tax. A reform in 2021 cut tax rates, broadened the base, required taxpayers to update their self-assessed property valuation and included previously-exempt housing (built since 2013).
The reform is expected to decrease or leave property tax liabilities unchanged for the majority of taxpayers. Around one third of the taxpayers are expected to face an increase in their recurrent property tax burden of up to EUR 100 (USD 118) per year while only 3% should face an increase of more than EUR 100. To support lower-income households, the reform also increased the income threshold below which taxpayers are eligible for property tax deferral and lowered the interest charged on deferred tax payments from 4% to 3%.
Source: (OECD, 2022[80])
Introducing a tax on intergenerational transfers
The distribution of wealth is highly unequal in Austria, and a relatively large share of wealth is inherited. Wealth is highly concentrated at the top of the distribution relative to other countries. According to the latest available data, around 56% of household wealth was held by the top 10% (Figure 2.15, Panel A, and Balestra and Tonkin (2018[89])). Wealth inequality is among the highest in Europe, and the mean-to-median net wealth ratio is the fifth highest in the OECD (Eurofound, 2021[90]; OECD, 2023[91]). Furthermore, a large share of household wealth is inherited, which may contribute to wealth inequalities. The number of households receiving inheritances or gifts is high in Austria relative to other OECD countries, and the average value of those transfers is the highest among countries with available data (Balestra and Tonkin, 2018[89]; OECD, 2021[92]). Inheritances and gifts represent around half of mean net wealth for Austrian households, double the share in other OECD countries (Figure 2.15, Panel B). In addition, the relative frequency and levels of inheritances received by the wealthiest are higher than in most OECD countries (Figure 2.16). This could potentially contribute to low social mobility in Austria. Evidence suggests that socio-economic outcomes in the country carry over strongly from one generation to the next: more than elsewhere, fathers’ earnings are a strong predictor of the earnings of their prime-age children (Förster and Königs, 2020[93]). At the same time, empirical data from the Household Finance and Consumption Survey and the OECD’s Risks that Matter survey suggest that the majority of the population in Austria is in favour of higher taxation of wealth to reduce inequalities, regardless of the income and wealth situation of their households (Fessler, Lindner and Schürz, 2023[94]), and that in general the rich should be taxed more to support the poor (OECD, 2022[95]).
Note: See Balestra and Tonkin (2018) for details on how the value of inheritances is computed in Panel B.
Source: OECD Wealth Distribution Database; and OECD (2021), Inheritance Taxation in OECD Countries, OECD Tax Policy Studies, No. 28.
Note: Data on inheritances include substantial gifts where a gift is defined as a transfer of assets made during the life of a donor, not connected to the death of that person. Data refer to 2015 or latest year. In Panel B, the OECD aggregate refers to the unweighted average of 18 countries.
Source: OECD (2021), Inheritance Taxation in OECD Countries, OECD Tax Policy Studies, No. 28.
Introducing a tax on intergenerational transfers should be considered. While two-thirds of OECD countries levy wealth transfer taxes, Austria does not tax gifts, inheritances or estates directly although transfers of immovable property through inheritances are still subject to the real estate transaction tax mentioned above (OECD, 2021[92]). A well-designed taxation of intergenerational transfers can improve distributional outcomes and enhance both horizontal and vertical equity (Elinder, Erixson and Waldenström, 2018[96]). Such taxes also have more limited effects on savings than other taxes levied on wealthy taxpayers (Advani and Tarrant, 2021[97]), and positive effects on heirs’ labour supply and savings (OECD, 2021[92]). The taxation of intergenerational transfers could become more relevant as there will be a growing number of wealth transfers as the population ages (Crowe et al., 2022[98]). Finally, the taxation of intergenerational transfers has a number of administrative advantages compared to other forms of wealth taxation as they are levied when property changes hands and needs to be appraised. However, the taxation of inheritances should not be seen as a significant way to directly raise revenue. In countries that still levy taxes on intergenerational wealth transfers, those taxes raise negligible revenue, representing around 0.2% of GDP on average in the OECD.
A new tax on intergenerational transfers needs to be based on fair valuations and to be designed to support progressivity and reduce potential hardships. Similarly to property taxation, the appropriate valuation of assets will be important, especially given the history of inheritance tax in Austria. In addition to the updated valuation of real estate assets discussed above, asset values should be based on fair market values as much as possible. Exempting small inheritances – via a lifetime transfer threshold adjusted with inflation - and setting a progressive tax rate schedule would support the redistributive impact of the tax. Payments in instalments and deferrals under certain conditions should be allowed in order to overcome liquidity issues and potential hardships linked to the one-off transfer of illiquid assets (OECD, 2021[92]). Similarly, this tax should be levied on recipients, not donors, which would promote equality of opportunity in particular if the tax applies to lifetime transfers.
Careful design and international cooperation would limit the impact of tax avoidance and tax evasion responses to the taxation of intergenerational transfers. The taxation of mobile capital is subject to tax planning, and exemptions to the taxation of intergenerational transfers can create opportunities for avoidance – although behavioural responses tend to be lower compared to other forms of net wealth taxes (Schratzenstaller, 2023[99]). Exemptions and reliefs for specific assets (such as the main residence, or business assets) should be limited and carefully designed. A low-rate inheritance tax (and allowing tax payments in instalments, as mentioned above) would significantly reduce the need to exempt or provide significant relief for illiquid assets, and thus reduce avoidance opportunities (Dherbécourt et al., 2021[100]; OECD, 2021[92]). A tax on lifetime wealth transfers like Ireland’s Capital Acquisitions Tax, including inter vivos transfers, would support horizontal and vertical equity while reducing tax avoidance opportunities. The taxation of wealth transfers is also subject to international tax evasion. In particular, financial assets are highly mobile and low barriers to cross-border capital transfers between many countries have allowed taxpayers to hold their capital offshore without declaring it to their tax authorities. However, information exchange agreements as well as further international cooperation on the exchange of information on request, and the automatic exchange of information, reduce opportunities for tax evasion (O’Reilly, Parra Ramirez and Stemmer, 2019[101]).
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