IMF Concludes Article IV Consultation With Austria

by Ulrika Lomas, Tax-News.com, Brussels

22 September 2009

On September 9, the Executive Board of the International Monetary Fund (IMF) concluded its Article IV consultation with Austria.

After a string of strong years, Austria’s open economy started to slow down in 2008. As a result of the downturn and a generous stimulus package, consisting mostly of lasting tax cuts, deficits and debt are expected to rise and remain high in the medium term.

The economy is projected to shrink considerably in 2009, with a recovery expected to start in 2010. Exports and investment declined strongly already, and more recently consumption has been affected as well. Inflation is expected to remain low this year, with a slight increase in 2010. The uncertainties surrounding the outlook are considerable.

The underlying fiscal position has deteriorated significantly as a result of policy measures. The 2009/10 budget includes a stimulus package of 1.5% of GDP in 2009 and an additional 0.4% of gross domestic product (GDP) in 2010. The stimulus and automatic stabilizers will widen the deficit to 4.2% of GDP in 2009 and 5.6% of GDP by 2010. Absent consolidation measures, deficits are projected to remain above 3% of GDP throughout the forecast horizon. Debt is projected to rise above 80% of GDP by 2012.

The Austrian banking system is strongly exposed to Central, Eastern, and Southeastern Europe (CESE). The authorities have been implementing a large banking stabilization package, including public capital injections and guarantees. Risks in the financial sector arise from the economic downturn – both in Austria and CESE – and the financial crisis. While Austrian banks have access to a solid base of domestic deposits and have had relatively little exposure to US-based structured securities, vulnerabilities arise from their significant involvement in CESE.

In its recommendations, the IMF noted that, following several years of strong growth performance, Austria’s economy is now experiencing the full impact of the global financial crisis and the decline in world trade.

The Executive Board welcomed the sizeable and timely fiscal stimulus measures, although it was generally felt that they could have been better targeted. The IMF also observed that the measures included in the package are largely permanent, and accordingly the stimulus, in combination with large automatic stabilizers and financial sector support, will therefore result in a sharp rise in public debt.

Against this backdrop, the IMF encouraged the authorities to prepare a credible fiscal consolidation plan which would strengthen the market’s confidence in fiscal sustainability, and contribute to a lowering of borrowing costs. It recommended that debt be brought back on a downward path to accommodate the costs of population aging and avoid crowding out the private sector. The Executive Board encouraged the authorities to work towards an early agreement on plans for fiscal consolidation, so that implementation can start when the economy recovers.

The Executive Board noted that since taxation levels in Austria remain relatively high, expenditure measures should have priority, with a focus on administration at lower levels of government, continued pension reform, and efficiency gains in education and health. The Executive Board welcomed the establishment of a Working Group on Fiscal Consolidation and looked forward to the early development of specific recommendations. The Directors welcomed this year’s introduction of a medium-term budget, and encouraged the authorities to adopt more ambitious ceilings consistent with long-term sustainability. They called for further structural reform over the medium term to boost potential growth and labor market participation.

The IMF board commended the authorities for their timely and effective response to the financial crisis, welcoming the ample provision of liquidity to the financial system, the sizeable banking support package, and the strengthened financial sector supervision, including cooperation with foreign supervisors. While these measures, along with the solid deposit base of Austrian banks, have helped to support financial stability, continued contingency planning and close monitoring of exposures to Central, Eastern, and Southeastern Europe (CESE), including the risks posed by foreign currency lending, are needed, according to the Board.

In light of this, the Board welcomed the use of stress tests to identify banks’ vulnerabilities. It noted that the recent tests indicate that the capital ratios of all systemic banks would remain above minimum regulatory requirements under a range of shocks. The IMF advised the authorities to repeat these tests at regular intervals and use them as input for discussions with the banks about the need for possible stronger capital buffers.

Concluding the Executive Board welcomed government initiatives looking at the reform of private pension system. Directors also supported continued efforts to strengthen the regulatory framework in response to crisis lessons, and in line with European Union and wider international initiatives.

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