Council opinion

of 13 May 2003

on the updated Stability Programme for Austria, 2003 to 2007

(2003/C 123/01)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies(1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 13 May 2003 the Council examined the updated stability programme for Austria which covers the period 2003 to 2007. The Council notes that the submission was late as compared to the date required in the revised "code of conduct on the content and format of stability and converge programmes", and therefore the update complies only partly with the requirements of the code. The new Austrian government, which was sworn in on 28 February, following the early general elections of 24 November 2002, was able to present a programme update within a relatively short period of time. However, more detailed quantitative information, as contained in the draft federal budget proposal, was not available at the time of the update's submission.

The Council notes with satisfaction that, in spite of lower-than-projected growth, government finances in 2001 improved more rapidly than expected, although this favourable result was brought about mainly by a strong increase in tax revenues. However, in 2002 government finances weakened noticeably and deviated from the target, reaching a deficit of 0,6 % in cyclically-adjusted terms according to Commission calculations.

The Council notes, moreover, that the debt ratio, which is still above the 60 % of GDP reference value, increased substantially in 2001 and 2002, mostly due to a reclassification in the Austrian gross debt reporting. The Council notes with concern that, as a consequence, the goal of bringing gross consolidated debt below the 60 % of GDP reference value has now been significantly delayed. The update projects the general government deficit to widen from 0,6 % of GDP in 2002 to 1,3 % in 2003, mainly due to deferred payments for flood damages and a widening output gap. After a temporary improvement in 2004, the deficit is projected to increase markedly to 1,5 % in 2005 owing to a sizeable income tax reform. Thereafter, the deficit is estimated to gradually narrow to 1,1 % of GDP in 2006 and 0,4 % of GDP by 2007. The cyclically-adjusted deficit follows the pattern of the nominal figures: it widens by 0,5 percentage points in 2003 to some 1 % of GDP, improves by virtually the same amount in 2004, before rising strongly to 1,3 % in 2005 due to the planned net tax relief. Despite narrowing thereafter, the deficit in cyclically-adjusted terms remains at 1,1 % of GDP in 2006 and improves by the required 0,5 percentage point to 0,5 % of GDP only as late as in 2007. The government gross debt is expected to decrease from its peak of 67,8 % of GDP in 2002 to slightly below the 60 % reference value in 2007.

The budgetary projections of the programme are based on a macro-economic scenario expecting economic activity to gradually resume from its current cyclical weakness. Real GDP growth is forecast to accelerate from 1,0 % in 2002 to 2,5 % by 2005 and thereafter, amounting to annual average growth of 2,1 % over the entire programme period. Although somewhat above trend, the Council considers this growth outlook feasible, given that no significant macroeconomic imbalances prevail in the Austrian economy and provided that the external environment improves as projected.

The Council regrets that the Austrian government will not reach its previous target of maintaining budgetary balance and moving to a small surplus in 2004 and 2005. While recognising that this is due to the planned tax reform, the Council recalls that in its opinion(2) on the last update it considered a budgetary surplus in the medium term central in bringing down the debt level decisively, which the Council regarded as appropriate in view of the long-term expenditure pressures resulting from population ageing. Indeed, on the basis of current policies, the risk of unsustainable public finances in light of ageing populations can not be excluded.

In this context, the Council welcomes the attention paid to longer-term issues, as demonstrated by the fundamental pension reform which is being prepared to tackle financial and economic pressures from population ageing. The Council strongly encourages the Austrian government to implement with determination the ambitious reform projects in the fields of pensions and health care, addressing many of the key problems in these areas. The Council emphasised repeatedly, also in its opinion on the last update and in the Broad Economic Policy Guidelines, the importance of raising the low effective retirement age in Austria and encouraging labour force participation, in particular of older workers and women. Therefore, the Council considers the planned pension and health care reforms, provided they are fully implemented, vital for containing upward pressure on expenditures in the long run, apart from important medium- and even short-term budgetary effects. Likewise, the Council encourages the Austrian government to implement its plans for rationalising public administration, thereby enhancing the accomplishments to date. Beyond these undertakings, the national stability pact should be fully implemented, which would require spending restraint to attain sustainable structural surpluses at the Länder level.

The Council notes the Austrian government's intention to reduce, as recommended, the high tax burden significantly. In particular, the Council invites the Austrian government to implement the reduction in non-wage labour cost, already postponed several times. The Council recalls, however, its opinion on the last update, stating that revenue reductions should be accompanied by equivalent reductions of expenditure. Therefore, in order to avoid the projected sizeable increase in the cyclically-adjusted deficit and the risk of a pro-cyclical stance, the Council urges the Austrian authorities to compensate the cost of the tax reform by additional structural expenditure cuts. Past experience shows that tax cuts only partly matched by commensurate spending restraint are a particularly risky strategy.

Given the considerable widening of the deficit, both in nominal and structural terms after 2004, and the current debt level, the Council considers that the envisaged path of government finances in the updated stability programme is only partly in line with the requirements of the Stability and Growth Pact, because the cyclically-adjusted deficit stays close to balance only in the years 2004 and 2007. Although the projected path of government finances would leave sufficient safety margin to prevent the deficit from breaching the 3 % of GDP reference value in the event of a normal cyclical downturn, the risks to the government's strategy are non-negligible. In particular, if the announced expenditure savings were only partly implemented, Austria would not have sufficient budgetary leeway to let the automatic stabilisers work fully in the event of a cyclical slowdown.

The Council, therefore, considers that the expenditure cuts need to be implemented as planned. In addition, the envisaged tax relief ought to be accompanied by additional expenditure restraint in order to avoid the risk of budgetary slippage and to allow Austria to return earlier than foreseen to a budgetary position close to balance. Already in 2003, the government should seek to achieve a better deficit outcome than projected, especially if growth should turn out higher than expected or if the flood-related emergency funds were not fully called upon.

(1) OJ L 209, 2.8.1997.

(2) OJ C 33, 6.2.2002.