Austria

   

Economic Policies

#19
Key Findings
With a growing economy and a gradual shift in economic focus, Austria’s economic policy falls into the middle ranks (rank 19) internationally. Its score on this measure has improved by 0.2 points since 2014.

The economy has followed European trends, with stronger growth and declining unemployment. The new coalition government passed working-hour legislation without the consent of organized labor, setting the stage for future conflict and a potentially less productive social partnership.

Fiscal consolidation and banking restructuring policies are ongoing, with the new coalition largely following its predecessor’s budgetary policies. Redistribution mechanisms have increasingly favored older citizens at the expense of younger workers and public research funding. Inequality levels remain quite high.

Unemployment is closely associated with low educational levels. Open borders and labor migration have contributed to falling real incomes for blue-collar workers. The EU single market continues to be viewed by many as a threat, and the new governing coalition has obstructed implementation of the EU financial transactions tax.

Economy

#15

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
7
The Austrian economy has remained in the general European context. The economic upswing – expressed in economic growth and, at last, lower unemployment – has affected Austria. Austrian politics has not prevented that general trend from benefiting the Austrian economy. Nevertheless, more significant steps toward reform – especially concerning the labor market – have been discussed, but are not yet or not fully implemented. A significant part of the relative success is due to the presence of social partners, which are responsible for negotiating institutional and other reforms, and which thus ensure a comparatively peaceful and cooperative relationship between the country’s various economic players. A substantial part of Austrian economic policy is prepared by the social partners. As in other EU member states, however, an ever-more-significant portion of economic policy falls under the European Union’s jurisdiction, thereby creating an increasingly harmonized European economic framework.

At the end of 2017, a new Austrian government was formed without the Social Democrats who continue to dominate organized labor. The new center-right government may have an impact on the balance of Austria’s social partnership. The national-liberal FPÖ, in coalition with the conservative ÖVP, intends to weaken the main chambers (business, labor, agriculture) by weakening or abolishing obligatory membership laws. This will provoke a reaction from the chamber of labor, united with the ÖGB (Austrian Trade Union Federation) – which will include labor conflicts – as well as the chamber(s) of commerce.

The Austrian export industry has contributed significantly to the country’s overall success. Austria’s economy has profited from the inclusion of former communist, central and eastern European countries in the European Single Market. However, Austria’s financial sector, in particular, suffered significant losses in eastern Europe during the financial crisis due to its substantial exposure. The Austrian finance (banks, insurance) and construction industries play an important role in the four Visegrád countries and in most former Yugoslav republics.

A process of fiscal consolidation is currently underway, with the goal of keeping the government deficit below 3% of GDP. Future burdens may arise from the ever-more-significant redistribution of resources to people aged over 50 (to the disadvantage of younger generations), a trend that clouds the outlook for the young generation and the future of Austria’s economy more generally.

Austria’s rise to become one of the most prosperous countries in Europe, a development with its roots in the early 1950s, is still reflected in its comparatively high rankings in terms of per-capita income and employment. However, the country fares less well on rankings of inequality and equality of opportunity; according to a study done by the European Central Bank and published in April 2013, private property in Austria is distributed in an extremely unequal way. The richest 5% of the households in Austria own 37.2% of the overall property in Austria, while the top 50% own 94% of the country’s property. Among the members of the euro zone, only Germany has a more unequal distribution of property.

This seems to contradict the traditional view of Austria as having one of Europe’s most stable social-welfare systems. But these data underline the fact that the Austrian economic success story is not one of increasing equality; indeed, just the opposite is true.

As the implications of the innovations introduced by the new coalition government between the ÖVP and the FPÖ are not yet visible, no reliable evaluation regarding the new government’s performance is possible. The tendency of the government’s economic policy seems to favor market liberalization, but within strict limits. The present government has not as yet tried to break with the policies of its predecessor. However, while the new labor law (which allows more flexibility concerning the daily and weekly workload of employees) is not a substantial legislative break, it must be seen as a procedural break as the law was passed without the consent of organized labor.

Labor Markets

#25

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
6
Austrian labor market policies are comparatively successful, if the reference is to labor markets in other European (especially other EU member) states. In recent years, Austria’s unemployment figures have persistently been among Europe’s lowest. Despite some negative trends (concerning the relative success of Austria’s labor market policy), the recent economic upswing has had a positive impact on the Austrian labor market. However, unemployment remains high among less well-educated persons, persons over 50 years old and first-generation immigrants.

One factor contributing to the still quite successful labor market outcomes is the social partnership between the Austrian Trade Union Federation (Österreichischer Gewerkschaftsbund, ÖGB) and the Austrian Economic Chambers. Many labor market policies in Austria are effectuated through the Public Employment Service, another institution key to the country’s employment successes. The Austrian dual system of vocational education, in which young people receive on-the-job vocational training while still attending school, has also been successful and is drawing international attention. The consensual way employers and employees address wage developments, resulting in an extremely low number of open conflicts like strikes, must still be considered a positive factor.

Nonetheless, unemployment rates have risen significantly in Austria over the last 20 years. Though this trend reversed in 2017 due to large economic growth. Both neoliberalism and globalization have been cited as decisive factors. Neoliberalism is cited in explaining job losses associated with privatization, a trend that could arguably be reversed if decision-makers would act more decisively to secure a stable labor market with better opportunities for employment. Globalization, however, involves the decline of traditional state power as a result of increasingly open global markets and is therefore not subject to control by any single national government. The shifting of public resources in favor of older generations has also been cited as a cause of rising youth-unemployment rates and declining international competitiveness for the highly skilled.

Labor market policies are traditionally influenced by organized labor, represented by the Austrian Trade Union Federation. Like other European trade unions, the ÖGB has seen its ability to attract members decline, but still enjoys a comparatively high membership density.

Austrian labor policy suffers from the fact that most political actors and society at large are hesitant to adopt a transnational outlook with regard to the labor market. The free movement of goods and people within the European Single Market is seen by too many as a threat rather than an opportunity, and there is no consistent policy approach to managing inflows of migration (whether legal or illegal) from outside the European Union. Open borders, liberalized Austrian labor markets and the influx of foreign workers and migrants have also contributed to a decline in real incomes among lower-wage Austrian blue-collar workers over the last years.

As pension reforms have lengthened Austrians’ working lives and continued immigration has increased the labor supply, a concerted effort to tackle the unemployment problem is crucial, in particular with respect to defeating populist parties and policies. Moreover, unemployment is a distinctly educational problem, and educational and vocational training systems must be addressed.

The new ÖVP-FPÖ coalition has recently liberalized working time regulations by significantly relaxing the maximum weekly working hours (working time act). Although this reform has prompted protests from trade unions and the social democratic party, it was unilaterally pushed through by the government. This move can thus be interpreted as an attempt to push back the Austrian social partnership and challenge its traditional role as a “shadow government” for labor regulations. At the same time, this move will likely provoke stronger opposition from organized labor. The central labor union (the ÖGB as well as its specific organizations) sees itself in a defensive position in opposition to the government without the support of the social-democratic SPÖ – the party the majority of the unionized labor identifies with. For that reason, greater labor unrest (e.g., more strikes) can be expected.

Taxes

#27

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
5
Austrian tax policy is characterized by a significant bias, as the source of tax revenue is overwhelmingly skewed toward the personal income of the working population. As employees and self-employed individuals pay the maximum tax rate beginning at a level of income considered to be only middle class, and the country has virtually no property taxes and no inheritance taxes, the system of taxation as a whole is unbalanced. The new government has declared its will to lower the tax burden for labor. However, ÖVP and FPÖ (the new coalition alliance) have also declared they will aim to achieve a zero-budget deficit. In order to create incentives for business, the new government will also reduce the tax burden on businesses (e.g., for startups). As tax cuts and a balanced budget are difficult to reconcile even during an economic boom, these ambitious goals may be difficult to achieve simultaneously. So far, no significant innovation has been implemented.

The Austrian tax system – compared to transfers – has a rather minimal redistribution effect. As the maximum income tax rate is today paid by a significant and increasing proportion of income taxpayers, the tax system seems to be less responsible for any redistributive effect than are the welfare system and other direct transfers designed to reduce inequality and improve the living standards of the poor. Taxation is clearly secondary – the Austrian social system relies more on welfare transfers.

The tax system and its supposed imbalances have become a controversial political issue. Politically conservative actors have sought to reduce the income tax generally, while politically leftist and economically more interventionist actors are promoting a shift from the income tax to greater reliance on property and inheritance taxation.

Budgets

#17

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
8
Most of Austria’s decision-making elite agree on the need to reduce the country’s budget deficit. However, given the robust nature of the Austrian economy, at least in the European context, and cross-party consensus regarding most social policies, there is comparatively little incentive to limit expenses. The political parties seemed reluctant to confront their specific clienteles (farmers and public servants for the Austrian People’s Party (ÖVP), and unionized workers and retirees for the Social Democratic Party of Austria (SPÖ) with policies that might undermine their particular interests. This may change under the new coalition alliance between the ÖVP and FPÖ. The FPÖ represents a younger electorate of largely non-unionized employees, working outside the government bureaucracies, and may be more tempted to cut through the “red tape” which protects traditional interests.

In the past, Austrian budgetary policies have followed a biased Keynesian approach: In times of low growth, the government has engaged in extra spending regarded as an investment in the improvement of growth. In times of high growth, however, available funds have not been used effectively to prepare the government for worse times.

Austria enacted the Federal Medium-Term Expenditure Framework Act (BFRG), which enables the government to plan the budget over the medium term. The BFRG prescribes binding ceilings on expenditures for four years in advance, on the basis of five categories that correspond to the main functions of the federal government. This multi-year approach should help improve the sustainability of the federal budget.

As hopes of significant future economic growth grew increasingly out of reach, contradicting interpretations of Keynesian policies became sharper under the previous government. The SPÖ preferred using the deficit as an instrument to boost economic growth, while the ÖVP argued that – in the long run – deficit spending would result in disaster and proposed introducing a zero-deficit clause into the Austrian constitution. With the SPÖ out of government, the Keynesian tradition is under threat. However, in its first year, the new government has not indicated that it intends to change the budget parameter of its predecessor significantly.

Research, Innovation and Infrastructure

#18

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
5
Public research in Austria is mainly university centered. However, this is a challenging environment, as universities are overburdened by high numbers of students, while researchers in some disciplines are overwhelmed by teaching obligations. The Austrian Academy of Sciences is plagued by insufficient funding. The Austrian Science Fund (Fonds zur Förderung der Wissenschaftlichen Forschung) is tasked with coordinating academic research but has shown only partial success in this task. Research funded by private corporations has little tradition in Austria, and at least in the near future, offers little hope of improving this situation. The deficiencies in public-funded research cannot be counterbalanced by privately funded operations. The whole sector is in acute need of more funding, but the budgetary situation and the growing shift of public funds from the young toward older generations, a trend driven by demographic change, make the outlook quite dire. The government seems to be aware of this critical situation and some steps have been taken to improve the financial situation of universities.

The strong dependence on government funding implies that any new orientation of the incoming government could be decisive. There is an expectation that innovation policy may significantly change. But, at the moment, the focus of the new government seems to be oriented first and foremost to balancing the budget. This could mean that there will be no significant increase in spending on innovation and research.

This does not prevent excellent research from being conducted in some fields. Important and significant innovations in disciplines such as biological science and medical research are still possible in Austria. The consequences of Austria’s membership in the European Union and the European Single Market is opening Austrian universities and other research institutions to non-Austrian scholars. Step by step, this provides a more transnational attitude to research and innovation.

More broadly, links between industry and science are sound, and a high share of public research is funded by industry. In contrast to basic research, industry-sponsored research is mostly aimed at the applied sciences and does not necessarily affect universities. Integration within international networks is strong, and a high share of the labor force is occupied in science and technology-related occupations. Business R&D is particularly strong in niche markets, often performed by specialized small and medium-sized enterprises (SMEs). Other pillars of Austrian business research include large companies, affiliates of foreign corporations and the medium- to low-tech manufacturing sector. Although Austria does not feature any of the world’s top 500 corporate R&D investors, there are – according to OECD data – some dynamic startups on the Austrian market. These startups, however, are not a direct result of Austrian research policy.

It currently seems that the new government will continue to improve the financial basis of Austria’s universities. Thus, the overall trend (i.e., a gradual improvement in the financial situation of Austrian universities) will continue. Though this does not affect the depth and breadth of research outside the universities, which is still comparatively underdeveloped. Due to European competition, non-university research will probably be strengthened, too.

Global Financial System

#15

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial System
7
As a member of the European Union, Austria’s economy is closely linked to the other members of the European Single Market. Austria has nevertheless sought to defend special national interests against the implementation of general standards such as banking transparency. Therefore, Austria has come under pressure from the United States and fellow European Union members to open its financial system according to standards widely acknowledged and respected by most other financial actors worldwide. This led to the decision to essentially abolish banking secrecy, for which Austria was long known.

Austria – under the former government – had been particularly engaged in the promotion and implementation of an EU-wide tax on financial transactions. In January 2013, 11 European countries agreed to introduce a financial transaction tax. However, under the new government, Austria has obstructed rather than promoted progress in the implementation of this new tax.

The Austria’s presidency of the European Council (during the second half of 2018) started (at least) with a declaration of the intention to continue the debate concerning the transactional tax. Though, as this has been overshadowed by the Brexit debate, nothing significant has been achieved. Generally, Austria does not play a specific role within the European Union’s Economic and Monetary Union. Austria follows the general trends as defined by the global economy, and the European Central Bank and other EU institutions.
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