Public Information Notice No. 01/58

Public Information Notice: IMF Concludes Article IV Consultation with Austria

June 13, 2001

On June 11, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Austria.¹

Background

After a vigorous expansion in late 1999-early 2000, growth in the Austrian economy decelerated in mid-2000 in tandem with weaker activity in Europe, bringing annual real GDP growth to 3.2 percent in 2000. Resilient private consumption is projected to support growth at about 2.2 percent this year. The labor market is tight, with unemployment stable at about 3.7 percent. Although headline inflation rose to 2.5 percent in April, it continues to remain below the euro area average.

Fiscal consolidation has taken new momentum with the authorities' revised 2001-04 Stability Program. After 3 years of broadly neutral fiscal policy, the 2001-02 federal budgets, together with savings measures by the lower levels of government, envisage a cumulative structural fiscal adjustment of about 1.5 percent of GDP, bringing the general government budget to balance by 2002.

Privatization of state holdings in commercial enterprises has continued, and liberalization of the electricity and gas markets is planned to be completed well ahead of EU deadlines. The labor market has performed well, with solid employment growth and greater emphasis on active labor market policies helping to reduce unemployment among most target groups, especially older, long-term unemployed and female workers. However, progress with rationalizing market regulation, streamlining administrative requirements, and liberalizing access to the professions has been slow, and labor force participation of older workers remained one of the lowest in Europe.

Executive Board Assessment

Executive Directors endorsed the thrust of the staff appraisal, commending the authorities for the achievement of strong growth, falling unemployment, and low inflation. Although there were no acute economic problems and the outlook was reasonably bright, Directors considered that longer-term policy challenges remained. They welcomed the recent fiscal policy correction and steps to liberalize utilities, but noted that a large public sector with a high tax burden, an underfunded social security system, and a heavily regulated economy cloud the horizon.

Against the background of persistent government deficits, high public debt, and one of the highest expenditure ratios in the EU, Directors stressed that the plan to reach general government balance by 2002 was an important step toward sound public finances. The already legislated 2001 and 2002 federal budgets were seen as consistent with this objective. The next step was to conclude the agreement on the contribution of the lower levels of government to the adjustment and to ensure that consolidation at the lower levels represented genuine fiscal reforms and avoided recourse to expenditure reclassification.

Directors expressed concern as to the sustainability of the proposed adjustment. The lack of structural fiscal reforms risked future fiscal backsliding, and heavy reliance on surpluses by the lower government levels to reach general government balance could jeopardize reaching the objective if cooperation by the lower levels could not be secured or expenditure classification rules changed. In addition, strict adherence to a "zero deficit" on a year-to-year basis would likely require procyclical measures and adoption of a structural fiscal balance target would be preferable.

In light of pressures to reduce the tax burden and narrow the scope of the public sector's direct economic involvement, Directors recommended a longer-term focus in the fiscal policy debate and encouraged the authorities to proceed with the adoption of a comprehensive civil service and administrative reform, with a view to permanently shrinking the size of government.

Directors stressed that long-term fiscal sustainability called for changes to the pension system. Temporary fiscal surpluses, while mitigating the problem, were no substitute for comprehensive pension reform. As delaying such reform would ultimately require more painful adjustment, the authorities were urged to formulate their pension reform plans and implement reform measures.

The authorities were urged to implement their unfinished structural agenda to meet the challenges from international competition. Removal of regulatory and other impediments to competition and flexibility in the product, capital and labor markets were crucial in the absence of an independent monetary policy to deal with increasing competition from abroad, including from future EU enlargement. The authorities were encouraged to complete the first phase of their privatization program and not to delay launching its second phase; pursue liberalization and regulatory reform in the product markets more vigorously and shorten legislative and implementation lags for initiatives already in the pipeline; and stimulate labor supply and ease rigidities in the labor market to prepare for the consequences of population aging.

Directors noted that the growing internationalization of the financial sector, especially the growing activity by Austrian banks in Central and Eastern Europe, required continued vigilance by the supervisors. The planned reform of financial supervision should focus on strengthening its effectiveness, without compromising its full independence. In order not to weaken regulatory capacity in the changeover to the new supervisory arrangement, the transition would need to be carefully managed.

Austria was encouraged to strengthen its efforts to alleviate world poverty and stimulate international trade by raising its official development assistance toward the UN target and using its influence in the EU to promote market access for the exports of developing countries, promote agricultural reform in the EU, and liberalize world trade in agricultural products and services under the auspices of the WTO.

Austria's data provision was considered to be adequate for surveillance, although the timeliness of some statistics could be improved.