Statement by an IMF Mission to Austria
May 24, 2019
An IMF team led by Mr. Jeffrey Franks visited Austria on May 17-24 as part of regular consultations under the country’s 2019 Article IV consultation. The annual review will continue once a new government has been formed. At the end of the visit, Mr. Franks issued the following statement:
“Austria’s economy has performed well in recent years. Growth has been broad based across sectors and employment continued rising, while unemployment has declined. However, the wider slowdown in Europe has begun to affect Austria, with growth easing in the first quarter of 2019 and consumer and business confidence indicators edging down. Inflation has decreased in recent months but remains slightly above the Euro Area average.
“We expect GDP growth to fall below 2 percent in 2019 and settle around the potential of 1¾ percent in the medium term. Inflation will fall below 2 percent in 2019, in line with the anticipated cyclical weakening, but should remain above the euro area average due to higher negotiated real wage increases. Net exports will continue to contribute to growth, albeit less robustly, due to moderating trading partner demand and global trade uncertainty. The current account should remain in surplus in the coming years, reflecting Austria’s well-diversified and high value-added exports.
“The fiscal outturn in 2018 was better than expected. The budget balance moved slightly into surplus, well above the budgeted -0.4 percent of GDP deficit. Revenues were higher than expected, particularly on income taxes. Expenditures were below budget, due to lower unemployment benefit spending but also underexecution of planned investment. The structural balance moved above the government’s medium-term objective (MTO) of -0.5 percent of GDP. Public debt fell by almost five percentage points of GDP, to under 74 percent, below the EU average.
“Austria’s banking system appears overall well-capitalized and sound. Supported by the economic upswing, profitability has been strong in recent years. There was progress in bringing capital levels of systemic banks closer in line with European peers and external vulnerabilities are lower given declining foreign exchange loans and de-leveraging in Central and Eastern European markets. However, there is room for further improvement in building financial buffers and reducing costs.
“Strong economic performance in recent years should not breed complacency. Continued prudent fiscal and financial sector policies are warranted to provide room for a robust response if downside risks materialize. The authorities should use the present relatively favorable moment to undertake reforms, especially to address the medium-term challenges of population aging and waning productivity growth.
“Austria’s strong fiscal position should be safeguarded. Structural deficits of around 0.5 percent of GDP appear appropriate, consistent with the MTO. This fiscal stance would build buffers while ensuring a decline in the public debt ratio to 60 percent of GDP in the medium term. If growth slows further, the economy’s automatic stabilizers could be used fully to cushion the shock.
“The government’s proposed tax reform contains several attractive features, but could be further improved. The package aimed to reduce taxes by a total of 1½ percent of GDP, phased in over three years. Planned tax cuts included reductions in both personal income taxes and social contributions, particularly for low-income workers. These measures would reduce Austria’s high labor tax wedge and could help improve long-term employment and competitiveness. However, the proposed tax cuts should be financially sustainable in the medium-term, particularly in the case of lower healthcare contributions, which will have to be substituted by budgetary resources. Preserving the social safety net and spending on the integration of migrants into the Austrian society should remain paramount to ensure continued low levels of poverty and to maintain social cohesion. Finally, the reform could be reoriented more toward the challenge of climate change, complementing environmental measures already taken. The eco-friendly measures in the draft account for less than 1 percent of the total package. Further revenue neutral efforts to tax carbon and polluting activities could help Austria meet its commitments under the Paris Agreement.
“Austria has a strong international reputation for good economic governance and transparency, and every effort should be made to safeguard this hard-earned status. The country’s reputation allows easier market access, lower borrowing costs, and encourages higher foreign investment. The pending reform of banking supervision, which would reorganize responsibilities between the Central Bank and the Financial Market Authority, should be undertaken in a way so as to guarantee the governance, financing, and operational independence of the overall supervisory framework. Care should also be taken with Statistics Austria to ensure the continued quality, quantity, and equal access to economic data, as well as its institutional autonomy. Finally, the government should ensure that nominees for posts in independent agencies continue to have outstanding qualifications and a reputation for integrity. With an open and consultative process, the authorities can move ahead with public sector reforms in a way which enhances Austria’s standing in the world economy.”
The IMF mission would like to thank the authorities and other counterparts for the excellent organization and fruitful discussions during the visit to Austria.
IMF Communications Department
PRESS OFFICER: Andreas Adriano
Phone: +1 202 623-7100Email: MEDIA@IMF.org