Public Information Notice No. 00/58

Public Information Notice: IMF Concludes Article IV Consultation with Austria

August 8, 2000

On August 3, 2000, the Executive Board concluded the 2000 Article IV consultation with Austria.¹

Background

Barely dented by the global slump in late 1998 and early 1999, the Austrian economy has been growing at an annual rate in excess of 3 percent since mid-1999. The vigorous expansion is sustained by both external and internal factors: merchandise exports are benefiting from Austria's close links with the reforming central and eastern European countries and from the recovery in the EU; fiscal stimulus from tax cuts and increased social transfers as well as healthy employment gains are sustaining a rapid expansion in private consumption; and monetary conditions remain expansionary despite the recent increases in official interest rates. Inflation is low: although the increase in oil prices boosted headline consumer price inflation to 1.6 percent in May, underlying inflation remains at around 1 percent. An increase in indirect taxes in June is expected to push prices further up. Benefiting from rapid growth and intensified labor market programs, the unemployment rate has dropped to about 3½ percent of the labor force, the third lowest in the euro area.

Fiscal policy has essentially been on hold, following a major consolidation effort in 1996-97 amounting to some 3 percent of GDP. The primary underlying surplus―the general government balance net of interest payments, cyclical effects, subsidized lending, and one-off measures―was roughly unchanged during 1998-99, and is expected to fall slightly in 2000. At about 53¾ percent of GDP, the expenditure-to-GDP ratio is the highest in the euro area. Last year, public sector debt increased to nearly 65 percent of GDP, reflecting the appreciation of dollar and yen denominated debt.

Experience with deregulation in the telecommunications and electricity sectors has been encouraging: increased competition in these sectors has brought about substantial price reductions and a booming supply of new services. Moreover, greater emphasis on active labor market policies and innovative programs like job coaching and training have been instrumental in reducing unemployment. On the other hand, little progress has been made in reducing red tape, liberalizing access to professions, and rationalizing market regulation.

The prospects for a sustained expansion are good. Strong external demand and continued economic liberalization should contribute to sustaining economic expansion at a rate of close to 3 percent per annum in 2001-02.

Executive Board Assessment

Directors welcomed the authorities' recent decision to accelerate and strengthen their consolidation effort. They viewed the objective of overall fiscal balance by 2002 as an important step in the right direction, and looked forward to the articulation of the authorities' supporting measures in the period ahead.

With strong economic growth and expansionary monetary conditions from an Austrian perspective, Directors judged that cyclical reasons would support a front-loaded approach to fiscal consolidation. They urged the authorities to use revenue windfalls from stronger growth and the sale of mobile phone licenses to accelerate the reduction of the deficit and lower public debt.

In view of the large size of the government sector, Directors recommended that fiscal consolidation be achieved through durable expenditure reduction rather than tax increases or one-off measures. They considered that expenditure cuts would need to be substantial enough to achieve a structural fiscal balance and to create room for measures to reduce nonwage labor costs.

Directors considered that long-term fiscal sustainability would require steps to shore up the pension finances against the consequences of population aging. In this regard, they welcomed the adoption of the 2000 pension reform law which represented a significant step in this direction. Directors noted that more adjustment was needed, however, which should focus on curbing entitlements, as higher contributions would weaken work and employment incentives, as well as external competitiveness.

Directors underscored the importance of a suitable agreement on the reordering of the financial relations between the three levels of government. Such an agreement should establish a better balance between tasks and own financial resources at each level, including the transfer of some power to tax to lower levels of government, and the phasing out of revenue earmarking.

Directors encouraged the authorities and the social partners to build on their past achievements by rapidly agreeing to measures to enhance the functioning of labor and product markets. Among the crucial measures in Directors' views were improvements in the employment conditions for older workers; increased wage flexibility; liberalization of access to the professions and an easing of regulations governing their exercise; adoption of a time-bound one-stop procedure for the approval of investment projects; and establishment of an independent competition agency. Directors also welcomed the authorities' intention to sell the government equity holdings in commercial enterprises. They encouraged the authorities to bring this process to a speedy conclusion.

Directors considered that rising competitive pressures in the financial sector required financial supervisors to remain appropriately vigilant, including with respect to Austrian banks' operations in Central and Eastern Europe and their lending to nonbank residents in non-euro currencies. The planned reform of banking supervision should be used to strengthen its operational independence and effectiveness.

For the purpose of surveillance, Directors viewed Austria's data provision as generally adequate, although the timeliness of some national accounts and external statistics could be improved. Directors encouraged the authorities to lift official development assistance toward the UN target and to use its standing in the EU to promote increased market access for the exports of the least developed countries.