Austria

   

Economic Policies

#19
Key Findings
With its rightward shift arrested by the fall of the government, Austria’s economic policy falls into the upper-middle ranks (rank 19) internationally. Its score on this measure has improved by 0.3 points since 2014.

The recent trend of steady economic growth has continued, with unemployment figures remaining low. Before the collapse of the ÖVP/FPÖ government, the coalition passed pro-business reforms seen as reducing organized labor’s power.

The coalition sought to implement tax cuts and bring the budget deficit down to zero; however, these goals proved difficult to reconcile, and efforts were cut short by the government collapse. The tax structure is skewed toward social security contributions and payroll taxes, with net average tax rates for single and married workers is significantly higher than the OECD average.

The government has obstructed implementation of the EU-wide financial-transaction tax. Successive governments have failed to improve university-based research in any significant way.

Economy

#17

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 economic situation remains within the general European context, despite significantly greater political uncertainty. The former government, a coalition between the center-right ÖVP and the right-wing populist FPÖ, with a stable parliamentary majority, initiated some (neo-)liberal policies, such as a (comparatively) moderate liberalization of working time regulations. Those steps did not have much time to significantly impact on the country’s economic performance before the center-right coalition collapsed in early summer 2019. Following the coalition’s collapse, the current non-partisan government – appointed by the head of state and tolerated by parliament until a new government can be formed after the September 2019 elections – has not attempted to formulate any specific economic policies. The overall performance of the Austrian economy remains within the framework of the European Union – a course which can be described as stable.

Austria’s economy can be seen as a relative success story, defined by moderate economic growth and social stability. The September 2019 elections have not yet resulted in a coalition agreement. However, as it seems clear that no coalition can be formed without the ÖVP, the new government will be led by the same party (and the same chancellor, Sebastian Kurz) as the previous one. The ÖVP’s coalition partner may change, but the overall economic tendency will not, at least not significantly.

The outcomes of the previous government’s policies did not have any visible impact on the overall consensus-oriented tradition of Austrian politics. This may change with a new government, especially as a new coalition partner will likely try to reformulate some of the former government’s economic policies.

Labor Markets

#16

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
7
During the 18 months of the previous coalition government between the ÖVP and FPÖ, some reforms were initiated, which were seen by organized labor as a shift toward a pro-business, pro-market policy approach – directed against the tradition of Austrian neo-corporatism (“social partnership”). Labor argued that the government was attempting to reduce labor’s veto power in various fields of social affairs. The rather unexpected implosion of the government in June 2019 occurred before any substantial backlash – initiated by organized labor or the opposition in parliament (especially the Social Democrats) – occurred.

As unemployment figures before and after the coalition’s collapse remained low, any significant labor unrest has been avoided. First and foremost, this has been the result of a period of economic growth which started before 2017 (i.e., before the ÖVP-FPÖ coalition came to power) and has survived the coalition’s end. However, as unemployment is linked to immigration (from EU members states as well as from other countries and regions), any new government will have to deal with the consequences of a rigid immigration policy (which was especially favored by the FPÖ) and recent labor market developments. Immigration and its effects on the labor market will be a big issue for the next government, which may not be formed before the beginning of 2020.

Taxes

#29

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

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 lacks property and inheritance taxes, the system of taxation is unbalanced in terms of equity. The previous government had declared that it would lower the tax burden on labor. However, the ÖVP and FPÖ (the former coalition parties) had also targeted a zero-budget deficit. As tax cuts and a balanced budget are difficult to reconcile even during an economic boom, these ambitious goals proved difficult to pursue simultaneously and no significant innovation was achieved. Moreover, as the coalition imploded after only 18 months, it is not possible to evaluate in a serious way the result of government’s ambitions.

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.

According to the OECD, Austria ranked 6 out of 36 OECD countries in terms of the tax-to-GDP ratio in 2018. Relative to the OECD average, the tax structure in Austria is characterized by higher revenues from social security contributions and payroll taxes, and less revenue from taxes on personal income, capital gains, corporate profits and, in particular, property.

For single workers in Austria, the net average tax rate was 32.8% in 2018, compared to an OECD average of 25.5%. Taking into account child-related benefits and tax provisions, the net average tax rate for employed married workers with two children in Austria was reduced to 19.6% in 2018, the 10th highest in the OECD, compared to an average of 14.2% for the OECD.

Therefore, a shift in the tax burden away from payroll taxes to taxes on corporate profits, capital gains and property seems possible. Concerning environmental taxes, Austria has a very high tax revenue from petrol taxes. However, 34% of net carbon emissions from energy use face no price signal at all. Therefore, there is still a lot of room for maneuver in the environmental tax system to significantly strengthen price signals for CO2 emissions from energy use.

Budgets

#21

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 has been for many years 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 changed under the former coalition alliance between the ÖVP and FPÖ. The FPÖ represents a younger electorate of largely non-unionized employees, working outside government bureaucracy. As such, the FPÖ may be more tempted than other parties to cut through the “red tape” which protects traditional interests. Against this political background, the ÖVP-FPÖ coalition promised to reach “zero deficit” within a short timeframe.

Government attempts to consolidate Austria’s budget made some progress but the end of the coalition in summer 2019 made further progress difficult. As the electoral results of September 2019 made it clear that the ÖVP will again be the senior partner in the next government coalition, budget consolidation will continue.

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 SPÖ-ÖVP government in power until 2017. 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 has come under threat. At the end of 2019, negotiations to form a new coalition have not been finalized and the possibility of a return of the SPÖ as a junior partner in an ÖVP-led government cannot completely be ruled out. Nevertheless, the old “Austro-Keynesianism” form is unlikely to return.

Research, Innovation and Infrastructure

#14

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
6
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 coalition that governed Austria between 2017 and 2019 seems to have been aware of this critical situation and some steps have been taken to improve the financial situation of universities. However, successive governments have failed to significantly improve university-based research.

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

#14

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 former government, Austria obstructed rather than promoted progress in the implementation of this new tax. Indeed, a statement issued by the Ministry of Finance in 2019 indicated that Austria would completely withdraw from all transaction tax plans.

More 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.

The implosion of the previous coalition and the summer 2019 electoral campaign produced the expected results. General promises concerning the tax system (e.g., the introduction of a transaction tax or – as a consequence of the debate regarding climate change – new forms of taxes on CO2 emissions) cannot be adopted before a new government can be formed. The new government will likely be an ÖVP-led government with a new coalition partner, possibly the Greens. This would allow the government majority to transform campaign pledges into legislation.
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