Council Opinion

of 7 July 2009

on the updated stability programme of Austria, 2008-2013

2009/C 166/02

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:

(1) On 7 July 2009 the Council examined the updated stability programme of Austria, which covers the period 2008 to 2013.

(2) The direct impact of the global financial crisis on the Austrian economy has been relatively contained, although the financial sector suffered from a massive slump in profits especially from banks’ foreign activities in Central and Eastern Europe in 2008. As a small and strongly export-oriented economy, Austria is affected by the global recession mainly via the contraction in international trade resulting in a setback in foreign demand in 2009. The manufacturing sector is expected to suffer most, as goods exports are expected to fall sharply, dragging down also private fixed investment. The Commission services’ spring 2009 forecast projects real GDP to shrink by 4 % in 2009, followed by stagnation in 2010. The rise in unemployment has so far been kept in check by the reduction in overtime and recourse to short-time work, but in the wake of the economy sliding into a recession, the jobless rate is set to increase sharply from 3,8 % in 2008 to 7 % in 2010. As a consequence, sizeable government revenue losses and additional expenditure due to automatic stabilisers (estimated at 2¼ % of GDP in 2009) and discretionary measures (estimated at 1¼ % of GDP in 2009) to sustain business activity and household income and stabilise financial markets will weigh significantly on Austria's public finances.

(3) The macroeconomic scenario underlying the April 2009 stability programme envisages that real GDP growth will fall from 1,8 % in 2008 to - 2,2 % in 2009 before recovering to an average rate of 1,6 % until the end of the programme period in 2013. Assessed against currently available information [2], this scenario appears to be based on markedly favourable growth assumptions. Most notably, the programme assumptions for exports and gross fixed capital formation in 2009 are considered to be decidedly optimistic. From 2010, a swift recovery is projected to bring real GDP growth back to potential already in 2011. The programme’s projections for inflation of 0,6 % in 2009 and 1,1 % in 2010 appear realistic.

(4) In 2008, the general government deficit of 0,4 % of GDP was slightly below the target of 0,6 % set in the previous update of the stability programme. A higher-than-anticipated revenue outturn was mainly owed to a carry-over effect from 2007. These extra revenues more than offset the cost of new policy measures taken to curb the loss in household purchasing power due to higher inflation, such as reduced social contribution rates for low-income earners and increased social payments, including measures such as higher outlays for pension benefits and energy cost allowances. As a consequence, the expenditure-to-GDP ratio was about ½ percentage point above expectations. Overall, the budget balance for 2008 was only moderately affected by the dramatic changes in the economic environment — both the revenue shortfalls and the government's stabilisation measures will essentially take effect from 2009 onwards.

(5) The updated stability programme targets a general government deficit of 3,5 % of GDP for 2009, which compares with a projected deficit of 4,2 % of GDP in the Commission services’ spring 2009 forecast. The government has taken sizeable discretionary fiscal counter-action to the tune of about 1,4 to 1,7 % of GDP [3]. Some of these measures were already taken in 2008 to protect households’ purchasing power in the face of rising inflation, but will largely remain effective in 2009 and 2010 (0,4 % of GDP). In addition to discretionary measures, automatic stabilisers will operate, yielding an expansionary impact of 1 ¾ % and ¼ % of GDP [4] in 2009 and 2010, respectively. Furthermore, the front-loading of off-budget construction projects by state-owned enterprises may account for another ¼ % of GDP. Judging by the decline of the structural balance, the fiscal stance is expansionary.

(6) Austria's medium-term objective (MTO) is to achieve a balanced budget, which is part of a more comprehensive three-pillar budgetary strategy including also public investment schemes and structural reform in public administration. The programme update foresees the general government deficit to widen further to 4,7 % of GDP in 2010 and remain at that level until 2012. In 2013, the deficit is to narrow slightly to 3,9 % of GDP. Hence, the MTO will not be achieved within the programme period. Driven by the fiscal stimulus measures in response to the crisis, the expenditure-to-GDP ratio will increase by 2,6 percentage points between 2008 and 2010. At the same time, the revenue-to-GDP ratio is expected to fall by 1,7 percentage points as a result of discretionary tax cuts and the cyclical erosion of tax bases. The structural deficit (i.e. the cyclically-adjusted balance net of one-off and other temporary measures, recalculated by Commission services on the basis of the information provided in the programme using the commonly agreed methodology) is projected to widen to 3 % of GDP in 2009 and further to around 4 % from 2010 to 2012. A substantial part of the measures included in the recovery programme will be permanent, thus the reversibility of policies adopted in response to the crisis is not ensured. Starting from 62,5 % of GDP in 2008, the government gross debt ratio is projected to increase by 16 percentage points until 2013. Further to the rise in the government deficit and the decline in GDP growth, a significant stock-flow adjustment largely reflecting financial sector stabilisation measures contributes to the rise in the debt ratio.

(7) The budgetary outcomes are subject to significant downside risks. First, the markedly favourable growth assumptions of the underlying macroeconomic scenario are surrounded by considerable uncertainty with respect to the duration, extent and macroeconomic impact of the financial crisis. Revenue projections therefore appear optimistic. Moreover, the government financial sector and financial market interventions also carry a risk of higher deficit and/or debt levels than foreseen in the programme.

(8) The long-term budgetary impact of ageing in Austria is lower than the EU average, with pension expenditure projected to increase only slightly as a share of GDP over the long-term. The budgetary position in 2008, as estimated in the programme, is weaker than the starting position of the previous programme, compounding the budgetary impact of population ageing on the sustainability gap. If the 2009 budgetary position as projected by the Commission services Spring 2009 forecast were taken as the starting point, the sustainability gap would widen substantially. Moreover, the current level of gross debt is above the Treaty reference value. The long-term sustainability of public finances would be further undermined if the above-mentioned risks from financial sector stabilisation schemes materialise, to the extent that costs of the government support are not recouped in the future. Achieving high primary surpluses over the medium term and measures to raise the effective retirement age, would contribute to reducing risks to the sustainability of public finances, which are currently at a medium level.

(9) Despite the overall sound quality of public finances and fiscal rules, there is still room for improvement of Austria’s institutional budgetary framework. Austria’s federal fiscal relations — governed by the Fiscal Equalisation Law 2008-2013 and the Domestic Stability Pact 2008 — are rather complex and lack transparency due to overlapping responsibilities, co-administration and co-financing at all three levels of government. The resulting scope for efficiency gains in several areas of public spending should be used, in particular in health care and education. In this context, the 2009 programme update cites the formation of working groups on further reforms of the fiscal equalisation act as well as health and elderly care system. However, tangible proposals are not expected before 2011. At the federal level, Austria embarked on a far-reaching reform of budgetary legislation as a new multi-annual expenditure framework with fixed ceilings set for four consecutive years entered into force as of 1 January 2009 (Federal Budgetary Framework Act — Bundesfinanzrahmengesetz). It is expected to help prevent pro-cyclical spending and enhance the effectiveness of the automatic stabilisers. Starting as of 2013, the introduction of output-based budgeting ("performance budgeting") and the modernisation of the accounting system of public finances are foreseen.

(10) To stabilize financial markets, the Austrian authorities have adopted several measures, including guarantees of bank deposits held by individual persons (unlimited until end of 2009, thereafter up to EUR 100000; for deposits held by small and medium sized enterprises the upper ceiling is EUR 50000). Further incentives have been provided for private household saving through savings and loan associations (Bausparförderung), aimed at safeguarding mortgage loan home financing. For interbank loans and bond issues by the newly funded Austrian Clearing Bank (OeCAG) and for commercial paper issues by commercial banks, the Austrian government provided guarantees up to EUR 75 billion (27 % of GDP). Finally, the government has allocated up to EUR 15 billion (5 ½ % of GDP) for capital injections to financial institutions, of which EUR 6,4 billon have been agreed upon by the mid-May, but only EUR 4,7 billion were demanded so far.

(11) In view of a fiscal position almost close-to-balance in 2008 and the absence of external imbalances, the fiscal stimulus for 2009 and 2010 adopted by the Austrian government is deemed an adequate response to the economic downturn. In line with the European Economic Recovery Programme agreed in December by the European Council, Austria's recovery packages were introduced timely, since a large part of the measures took effect in the first quarter of 2009. The labour market measures adopted are intended to rein in lay-offs and improve vocational training. Support to credit-constrained enterprises comes mainly in off-budget form as guarantees and subsidised loans. Most of the stimulus is provided via private income support, with revenue concessions (1 to 1 ½ % of GDP) dominating additional expenditure (around ½ % of GDP). The net budgetary impact of the fiscal measures is estimated to be 1,4 % and 1,7 % of GDP in 2009 and 2010, respectively. As the major part of the recovery measures will be permanent (85 %), the reversibility of the fiscal stimulus is a concern. Although the reduction in direct taxes and social contributions (especially for low income groups) comply with the government's long-term objective of reducing the high tax burden on labour and providing stronger incentives to work, the gap in public finances remains to be addressed, as the updated stability programme does not foresee any significant consolidation before 2013. Some of the stimulus measures are related to the medium-term reform agenda and the country-specific recommendations proposed by the Commission on 28 January 2009 under the Lisbon Strategy for Growth and Jobs and endorsed by the Spring European Council on 19 March. They aim at strengthening the growth potential (infrastructure and R&D investment) and address long-term challenges such as climate change with a focus on energy efficiency and reduced CO2 emissions.

(12) Following fiscal expansion in 2009 and 2010, the fiscal stance is considered to be broadly neutral in the outer years, as the structural balance is planned to change only marginally in 2011/2012 and to improve by ½ % of GDP in 2013. The deficit is expected to exceed the 3 % of GDP reference value by a sizeable margin between 2009 and 2013, with consolidation to be resumed only at the end of the programme period. The programme announces that "the Austrian government will take all measures needed to achieve a correction until 2012" in order to avoid lasting excess of the 3 % of GDP reference value. However, there is no clearly defined action to ensure deficit reduction before 2013. Similarly, the debt ratio is projected to exceed the Treaty reference value throughout the programme period, with the rising trend reflecting the expansionary stance in 2009 and 2010 and the budgetary effects of the stabilisation measures undertaken.

(13) As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme provides nearly all of the compulsory data and has some gaps the optional data [5].

The overall conclusion is that fiscal policy in Austria will be expansionary in 2009 and 2010; the narrowing of the general government deficit to ½ % of GDP by 2008, driven by strong economic growth in the last years and the absence of external imbalances, gave the Austrian government room for manoeuvre to introduce a sizeable fiscal stimulus in response to the crisis. The response was timely and commensurate to the distress in the financial sector as well as to the scale and pace of the economic downturn. Nevertheless, the measures taken are only partly in line with the general principles of the European Economic Recovery Plan (EERP) since the major part of them is of a permanent nature. Hence a credible and sound strategy is needed for budgetary consolidation to resume as soon as the crisis abates. Yet, the stability programme foresees no reduction in government net borrowing before 2013 (at constant policies), although GDP growth is projected to pick up as from 2010. Moreover, given the markedly benign assumptions for GDP, the authorities’ budgetary projections are subject to substantial downside risks. The direct budgetary implications of the support programmes for enterprises and commercial banks are currently estimated to be limited, as large parts of them are off-budget in the form of guarantees. However, if the number of non-performing domestic and foreign loans increases, public finances would deteriorate further, as additional capital injections by the government would then become necessary.

In view of the above assessment Austria is invited to:

(i) implement the 2009 and 2010 fiscal policy as planned including the stimulus measures in line with the EERP, and within the framework of the SGP reverse the fiscal stimulus in order to support significant budgetary consolidation towards the MTO, starting in 2011 at the latest;

(ii) substantiate the measures deemed necessary to achieve a general government deficit below the 3 % of GDP reference value;

(iii) further improve the budgetary framework to strengthen fiscal discipline at all levels of government through enhanced transparency and accountability notably by aligning legislative, administrative and financing responsibilities between the different levels of government.

Comparison of key macro-economic and budgetary projections

Notes:

[6] [7] [8]

Source:

Stability programme (SP); Commission services’ spring 2009 forecasts (COM); Commission services’ calculations.

| | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 |

Real GDP (% change) | SP Apr 2009 | 3,1 | 1,8 | -2,2 | 0,5 | 1,5 | 2,0 | 2,3 |

COM Spring 2009 | 3,1 | 1,8 | -4,0 | -0,1 | n.a. | n.a. | n.a. |

SP Nov 2007 | 3,4 | 2,4 | 2,5 | 2,5 | n.a. | n.a. | n.a. |

HICP inflation (%) | SP Apr 2009 | 2,2 | 3,2 | 0,6 | 1,1 | 1,3 | 1,5 | 1,9 |

COM Spring 2009 | 2,2 | 3,2 | 0,5 | 1,1 | n.a. | n.a. | n.a. |

SP Nov 2007 | 1,9 | 2,0 | 2,0 | 2,0 | n.a. | n.a. | n.a. |

Output gap [6] (% of potential GDP) | SP Apr 2009 | 2,5 | 2,6 | -0,9 | -1,7 | -1,6 | -1,2 | -0,5 |

COM Spring 2009 [7] | 2,7 | 2,9 | -2,2 | -3,3 | n.a. | n.a. | n.a. |

SP Nov 2007 | 0,4 | 0,4 | 0,5 | 0,5 | n.a. | n.a. | n.a. |

Net lending/borrowing vis-à-vis the rest of the world (% of GDP) | SP Apr 2009 | 3,2 | 2,9 | 1,6 | 0,6 | 1,0 | 1,3 | 1,4 |

COM Spring 2009 | 3,3 | 3,3 | 2,7 | 2,4 | n.a. | n.a. | n.a. |

SP Nov 2007 | 3,5 | 3,7 | 3,7 | 3,7 | n.a. | n.a. | n.a. |

General government revenue (% of GDP) | SP Apr 2009 | 48,0 | 48,2 | 47,5 | 46,5 | 46,4 | 46,1 | 46,1 |

COM Spring 2009 | 48,0 | 48,2 | 47,4 | 46,7 | n.a. | n.a. | n.a. |

SP Nov 2007 | 47,4 | 47,5 | 47,3 | 47,4 | n.a. | n.a. | n.a. |

General government expenditure (% of GDP) | SP Apr 2009 | 48,7 | 48,7 | 51,1 | 51,3 | 51,1 | 50,9 | 50,1 |

COM Spring 2009 | 48,5 | 48,6 | 51,6 | 52,1 | n.a. | n.a. | n.a. |

SP Nov 2007 | 48,3 | 48,1 | 47,7 | 47,2 | n.a. | n.a. | n.a. |

General government balance (% of GDP) | SP Apr 2009 | -0,5 | -0,4 | -3,5 | -4,7 | -4,7 | -4,7 | -3,9 |

COM Spring 2009 | -0,5 | -0,4 | -4,2 | -5,3 | n.a. | n.a. | n.a. |

SP Nov 2007 | -0,7 | -0,6 | -0,2 | 0,4 | n.a. | n.a. | n.a. |

Primary balance (% of GDP) | SP Apr 2009 | 2,3 | 2,2 | -0,6 | 1,7 | -1,4 | -1,3 | -0,4 |

COM Spring 2009 | 2,2 | 2,1 | -1,1 | -2,1 | n.a. | n.a. | n.a. |

SP Nov 2007 | 2,0 | 2,1 | 2,3 | 2,8 | n.a. | n.a. | n.a. |

Cyclically-adjusted balance [6] (% of GDP) | SP Apr 2009 | -1,7 | -1,6 | -3,1 | -3,9 | -4,0 | -4,1 | -3,7 |

COM Spring 2009 | -1,8 | -1,8 | -3,2 | -3,8 | n.a. | n.a. | n.a. |

SP Nov 2007 | -0,9 | -0,8 | -0,4 | 0,1 | n.a. | n.a. | n.a. |

Structural balance [8] (% of GDP) | SP Apr 2009 | -1,7 | -1,6 | -3,1 | -3,9 | -4,0 | -4,1 | -3,7 |

COM Spring 2009 | -1,8 | -1,8 | -3,2 | -3,8 | n.a. | n.a. | n.a. |

SP Nov 2007 | -0,7 | -0,6 | -0,4 | 0,1 | n.a. | n.a. | n.a. |

Government gross debt (% of GDP) | SP Apr 2009 | 59,4 | 62,5 | 68,5 | 73,0 | 75,7 | 77,7 | 78,5 |

COM Spring 2009 | 59,4 | 62,5 | 70,4 | 75,2 | n.a. | n.a. | n.a. |

SP Nov 2007 | 59,9 | 58,4 | 57,0 | 55,4 | n.a. | n.a. | n.a. |

[1] OJ L 209, 2.8.1997, p. 1. The documents referred to in this text can be found at the following website: http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

[2] The assessment notably takes into account the Commission services’ January 2009 forecast, but also other information that has become available since then.

[3] In addition, support is offered to credit-constrained enterprises, provided mainly as guarantees that have a budgetary effect only if called.

[4] Recalculated by Commission services on the basis of information provided in the stability programme. The difference to the Commission services’ estimates based on the Spring 2009 forecast is due to the different macroeconomic scenario (see paragraphs 2 and 3).

[5] In particular, the programme does not provide the levels of the external assumptions for 2007. Of the optional data, detailed categories of net lending vis-à-vis rest of the world, detailed categories of stock-flow adjustment and some detailed items on long-term sustainability are missing.

[6] Output gaps and cyclically-adjusted balances from the programmes as recalculated by Commission services on the basis of the information in the programmes.

[7] Based on estimated potential growth of 1,8 %, 1,7 %, 1,3 % and 1,3 % respectively in the period 2007-2010.

[8] Cyclically-adjusted balance excluding one-off and other temporary measures. There are no one-off and other temporary measures in the most recent programme and Commission services’ spring 2009 forecast.

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