IMF Issues Preliminary Conclusions On Article IV Consultation With Austria

by Mike Godfrey, Tax-News.com, Washington

07 July 2009

Following its Article IV Consultation with Austria, the IMF has issued preliminary conclusions. The IMF sees the key policy challenges for the authorities to be responsible fiscal policy and financial stability. The financial sector has been expanding rapidly especially in Eastern Europe bringing great benefits, but also increased risks and vulnerabilities. Financial stability will be essential, in the view of the IMF, for ensuring macroeconomic stability, fiscal sustainability, and a return to growth. It will also have important spillovers to regional economic and financial stability, from which Austria stands to benefit. At the same time the IMF see medium-term fiscal sustainability, especially after the large fiscal stimulus package, as a precondition to maintaining financial stability. The IMF expects GDP to decline by around 4% in 2009 and to recover in the course of 2010—depending on global developments. Inflation is expected to remain low and the external position sound.

The government has approved a fiscal stimulus package of 1.5% of GDP in 2009 and an additional stimulus of 0.3% of GDP in 2010. This is higher than the European average in 2009 and will continue to stimulate demand in 2010. However, this stimulus consisted largely of bringing forward planned permanent tax cuts for middle-income earners and the IMF do not regard it as optimally effective in raising demand. An additional stimulus will come through the advancement of public investment by state-owned companies. The IMF consider that this stimulus will be instrumental in keeping the deficit at 5-6% of GDP over the next few years. As a result of these deficits and capital support for the banks, public sector debt should, according to the IMF, rise to above 80% of GDP by 2012, from slightly above 60% only four years earlier. The IMF recommend no further stimulus at this stage.

The medium-term budget framework, implemented this year for the first time, establishes binding ceilings to 2013 for broad categories of federal government expenditures and is welcomed by the IMF. However it regards the ceilings in the current budget as unambitious. The IMF want to see a credible fiscal consolidation plan, once the economy stabilizes, to strengthen the market’s confidence in fiscal sustainability. Since taxation in the major categories remains relatively high in Austria, expenditure measures should have priority according to the IMF. Key areas for consolidation were identified in various studies by national and international organizations, to include administration at lower levels of government, pensions, and education and health, where efficiency gains are possible without reductions in service levels. The IMF could envisage accompanying measures on the revenue side including increases in non-distortionary taxes such as the fuel tax or the real estate tax; however it expects the potential increase in these revenues to be limited.

In the view of the IMF, the federal equalization law for 2008-13 needs to be complemented by better enforced limits on subnational deficits and by greater cooperation between municipalities to reap efficiency gains. Lastly the IMF want to see in the medium-term budget framework long-term demographic projections that accommodate the costs of aging.

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