## cr1726

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### Recent developments and near-term outlook
- Real GDP growth: 2016 = 1.4 percent; average growth 2012–15 = 0.6 percent.
- Growth drivers in 2016:
  - Private consumption supported by income tax cuts.
  - Recovery in investment.
  - Higher public consumption due to spending on refugees.
- Employment and unemployment:
  - Employment growth picked up in 2016.
  - Unemployment (EU harmonized rate): 2016 = 6.1 percent; national definition = 9.1 percent in 2016.
  - November 2016 unemployment (y/y reference in other section): stabilized at 5.8 percent in November; national registered unemployment rate = 8.9 percent in December.
- Inflation:
  - 1.5 percent year-on-year in November 2016.
  - Inflation driven mainly by rising energy prices and price hikes in tourism-related services.
- Outlook:
  - 2017 outlook appears robust.
  - Medium term: growth projected to decline toward potential, which IMF staff estimate at just above 1 percent.
  - IMF staff project inflation to gradually rise to slightly above 2 percent in the medium term.

### Risks to the outlook
- Principal external risks:
  - International political fragmentation.
  - Slower growth in other advanced economies and/or emerging markets (including CESEE and China).
  - Possible rise in global risk premia; tightening of global financial conditions.
- Specific channels and exposures:
  - Austria’s exports to Britain ≈ 3 percent of total exports.
  - Germany accounts for 30 percent of Austria’s exports.
  - CESEE countries take 31 percent of Austria’s exports and feature extensive banking ties.
- Mitigating factors:
  - 70 percent of Austria’s exports go to the European Single Market.
  - Declining bank exposure to CESEE risks.

### Main macroeconomic projections and indicators (selected)
- Real GDP (expenditure): 2016 = 1.4; 2017 = 1.3; 2018 = 1.2; 2019 = 1.3; 2020 = 1.1; 2021 = 1.1; 2022 = 1.1.
- Potential output: 2016 = 0.9; 2017 = 0.9; 2018 = 0.9; 2019 = 1.1; 2020 = 1.1; 2021 = 1.1; 2022 = 1.1.
- Output gap (% potential GDP): 2016 = -0.6; 2017 = -0.2; 2018 = 0.1; 2019 = 0.3; 2020 = 0.2; 2021 = 0.2; 2022 = 0.2.
- Consumer prices (avg): 2016 = 0.9; 2017 = 1.6; 2018 = 1.8; 2019 = 2.1; 2020–2022 = 2.2 each year.
- Unemployment (EU harmonized rate): 2016 = 6.1; 2017–2022 = 5.9 each year.
- Gross debt (% GDP): 2015 = 85.5; 2016 = 83.6; 2017 = 81.3; 2018 = 78.9; 2019 = 76.3; 2020 = 74.1; 2021 = 72.4; 2022 = 70.8.
- Net lending/borrowing (% GDP): 2016 = -1.4; 2017 = -1.2; 2018 = -0.7; 2019 = -0.5; 2020 = -0.4; 2021 = -0.6; 2022 = -0.7.
- Current account (% GDP): 2016 = 2.4; 2017 = 2.4; 2018 = 2.3; 2019 = 2.2; 2020–2022 = 2.1 each year.
- Nominal GDP (bn €): 2016 = 350; 2017 = 361; 2018 = 372; 2019 = 384; 2020 = 397; 2021 = 409; 2022 = 423.
- Population (million): 2016 = 8.7; 2017 = 8.8; 2018 = 8.8; 2019 = 8.9; 2020 = 8.9; 2021 = 9.0; 2022 = 9.0.
- Selected fiscal figures:
  - General government revenue: 49.5 percent of GDP (2016).
  - Expenditure: 50.9 percent of GDP (2016).
  - Net lending/borrowing (2016): -1.4 percent of GDP.
  - Gross debt (Maastricht def., 2016): 84 percent of GDP.
  - Interest (2016): 2.2 percent of GDP.

### Policy priorities and staff recommendations
- Raise potential output via a comprehensive reform package focused on:
  - Structural reforms to strengthen competition and further reduce firms’ administrative burden.
  - Raising public investment to support private-sector productivity and investment.
  - Shifting the tax mix away from labor toward property, pollution, and consumption.
  - Providing incentives for higher labor force participation among elderly workers, and for full-time employment of women.
- Preserve fiscal sustainability:
  - Use the current window to implement efficiency-boosting expenditure reforms in health, education, and subsidies.
  - Implement further pension reform measures.
  - Adjust fiscal relations between the federal and subnational governments to realize reform potential and savings.
  - Full implementation of reforms would permit further reductions in the labor tax wedge.
- Maintain financial stability:
  - Ensure banks raise capital as planned; boost banks’ capital buffers.
  - Authorities’ introduction of a systemic risk capital buffer is welcome; ensure banks meet capital targets as scheduled.
  - Provide regulators with legal authority to use macroprudential instruments at their discretion to address potential real estate market risks.
  - Bolster AML/CFT framework by enhancing supervision and banks’ compliance.
- Fiscal consolidation:
  - Projections indicate reduction of fiscal deficit and debt in the medium term—largely on account of interest savings and restraint in government consumption—but ageing-related fiscal pressures will re-emerge over the longer term.

### Housing markets, financial soundness, and macroprudential considerations
- Housing price dynamics:
  - Year-on-year house price increase as of June 2016: 9.5 percent (Vienna = 3.1 percent; elsewhere = 12.8 percent).
  - Vienna: municipality-provided social housing accounts for some 70 percent of total housing (eligible-household rental only).
  - Refugee-related fiscal spending increased by €0.6-1 billion in 2016 relative to 2015.
- Real estate and household debt indicators:
  - Nominal real estate loan growth: in the 5–6 percent range.
  - Real estate loans share: around 20 percent of total loans.
  - Average loan-to-value ratio for mortgage loans (mid-2016): about 65 percent.
  - Household debt-to-income ratio: about 90 percent.
  - Share of new mortgages at variable interest rates: 77 percent in 2016:Q1.
- Banking sector soundness:
  - Austrian banks’ capital is low compared to peers.
  - Risk-weighted assets (RWA) have fallen.
  - Nonperforming loans (NPLs) remain relatively high.
  - Exposure to CESEE has declined.
  - Profitability is modest; bank valuations underperformed.
- Macroprudential recommendations:
  - Grant regulators legal authority to expand macroprudential toolkit with real estate-specific instruments when needed.
  - Monitor variable-rate mortgage exposure given potential interest rate rises.

### External Sector Assessment (Annex I) — key points
- International investment position (IIP): moved from -13 percent of GDP in 2006 to +5½ percent in 2016.
- Exports of goods and services: stable at 53–55 percent of GDP in 2010–16.
- Current account balance: 2016 = 2.4 percent of GDP; estimated norm = 3.4 percent of GDP.
- REER: modestly overvalued around 8¾–10½ percent.
- Policy gaps explain about one-third of the current account gap/REER overvaluation; main policy effect from high health expenditure relative to trading partners.
- Banks’ gross external assets: peak well over 100 percent of GDP in 2008; about 76 percent of GDP in 2016; total gross external assets: 1995 = 67 percent; peak 2007 = 273 percent; 2016 = 255 percent.
- Assessment:
  - External position sustainable and broadly in line with fundamentals.
  - Ageing population implies a warranted build-up of external assets as a buffer.
  - Raising efficiency of health expenditures would open significant savings potential.

### Debt Sustainability Analysis (Annex III) — executive summary and scenarios
- Baseline: debt falls from around 84 percent of GDP at end-2016 to 71 percent of GDP by end-2022 under fiscal policy assumption of returning the structural deficit to ½ percent of GDP (Austria’s MTO) by 2020.
- Baseline projection highlights (selected, percent of GDP unless indicated):
  - Nominal gross public debt: 2015 = 77.2; 2016 = 85.5; 2017 = 83.6; 2018 = 81.3; 2019 = 78.9; 2020 = 76.3; 2021 = 74.1; 2022 = 72.4; header context shows end-2022 = 70.8.
  - Public gross financing needs: 2015 = 11.3; 2016 = 9.1; 2017 = 9.3; 2018 = 10.7; 2019 = 11.5; 2020 = 10.5; 2021 = 9.6; 2022 = 9.1.
  - Real GDP growth (percent): 2015 = 1.2; 2016 = 1.0; 2017 = 1.4; 2018 = 1.3; 2019 = 1.2; 2020 = 1.3; 2021 = 1.1; 2022 = 1.1 (header shows 2022 = 1.0).
  - Inflation (GDP deflator, percent): 2015 = 1.8; 2016 = 1.9; 2017 = 1.6; 2018 = 1.7; 2019 = 1.8; 2020 = 2.1; 2021 = 2.1; 2022 = 2.1.
  - Nominal GDP growth (percent): 2015 = 3.0; 2016 = 2.9; 2017 = 3.1; 2018 = 3.0; 2019 = 3.0; 2020 = 3.4; 2021 = 3.2; 2022 = 3.2; header shows 3.2.
  - Effective interest rate (percent): 2015 = 4.0; 2016 = 2.9; 2017 = 2.6; 2018 = 2.2; 2019 = 1.8; 2020 = 1.7; 2021 = 1.5; 2022 = 1.4; header shows 1.3.
- Identified debt-creating flows (2015–22 cumulative, percent of GDP):
  - Change in gross public sector debt: -12.8.
  - Identified debt-creating flows: -13.5.
  - Primary deficit: -4.1.
  - Primary (noninterest) revenue and grants: 94.4.
  - Primary (noninterest) expenditure: 90.3.
  - Automatic debt dynamics: -6.8.
  - Stock-flow adjustment (incl. asset recovery): -2.6.
  - Residual, including asset changes: 0.6.
- Stress tests and illustrative shocks:
  - Low-growth scenario: growth reduced by one standard deviation implying reduction of growth by 2 percentage points in 2017–18; debt-to-GDP would increase by close to 8 percentage points to a peak of 84½ percent in 2019, then decline to 79 percent by 2022.
  - Contingent liability shock: illustrative shock of 10 percentage points of GDP would raise public debt to 97½ percent of GDP, declining to 93½ percent by 2022.
  - Combined macro-fiscal shock: similar path as low-growth scenario.
  - Other standardized shocks (primary balance, real exchange rate, real interest rate) do not lead to large deviations from baseline; Real Interest Rate Shock shows higher effective interest rates (e.g., 2017 = 2.2; 2018 = 1.8; 2019 = 2.1; 2020 = 2.2; 2021 = 2.4; 2022 = 2.7 in that scenario).
- Risk assessment:
  - Vulnerabilities have receded; declining debt reduces likelihood of breaching benchmarks except under large contingent liability shocks.
  - Identified vulnerabilities include a high share of public debt held by non-residents and potential volatility in spreads once ECB asset purchases end.
  - Heat-map benchmark thresholds: bond spreads = 400 and 600 basis points; external financing requirement = 17 and 25 percent of GDP; annual change in share of short-term debt = 1 and 1.5 percent; public debt held by non-residents = 30 and 45 percent.
- Policy implications:
  - Achieving structural balance target (½ percent of GDP) by 2020 supports debt reduction to 71 percent by 2022.
  - Growth shocks or contingent liability realizations can materially raise debt ratios temporarily; contingent liabilities of 10 percent of GDP push debt near 97½ percent.
  - Longer term: ageing cost pressures and higher interest rates starting in the mid-2020s would reverse the declining debt path without further policy measures.

*Source: IMF staff report for the 2016 Article IV consultation with Austria (staff estimates and projections as presented).*

### 1.4 percent, an improvement  over the average growth  of 0.6  percent in  2012–15.  Growth  has

### Austria: Staff Report for the 2016 Article IV Consultation

### Recent developments and near-term outlook
- Real GDP growth was 1.4 percent in 2016, an improvement over the average growth of 0.6 percent in 2012–15.  
- Growth drivers in 2016: private consumption supported by income tax cuts, a recovery in investment, and higher public consumption due to spending on refugees.  
- Employment growth picked up and unemployment stabilized at below 6 percent (EU harmonized rate 6.1 percent in 2016; national definition 9.1 percent in 2016).  
- Inflation: 1.5 percent year-on-year in November 2016; inflation is gradually picking up from low levels, driven mainly by rising energy prices and price hikes in tourism-related services.  
- Outlook for 2017 appears robust; in the medium term growth is projected to decline toward potential, which IMF staff estimate at just above 1 percent.  
- IMF staff project inflation to gradually rise to slightly above 2 percent in the medium term.

### Risks to the outlook
- Principal risks are external: international political fragmentation, slower growth in other advanced economies and/or emerging markets, and a possible rise in global risk premia.
- Overall vulnerability is limited due to the European Single Market and declining bank exposure to risks in CESEE.
- Financial stability risks from the real estate markets are currently limited, but vigilance is warranted.

### Main macroeconomic projections and indicators (selected)
- Real GDP (expenditure): 2016 = 1.4; 2017 = 1.3; 2018 = 1.2; 2019 = 1.3; 2020 = 1.1; 2021 = 1.1; 2022 = 1.1.  
- Potential output: 2016 = 0.9; 2017 = 0.9; 2018 = 0.9; 2019 = 1.1; 2020 = 1.1; 2021 = 1.1; 2022 = 1.1.  
- Output gap (% potential GDP): 2016 = -0.6; 2017 = -0.2; 2018 = 0.1; 2019 = 0.3; 2020 = 0.2; 2021 = 0.2; 2022 = 0.2.  
- Consumer prices (avg): 2016 = 0.9; 2017 = 1.6; 2018 = 1.8; 2019 = 2.1; 2020–2022 = 2.2 each year.  
- Unemployment (EU harmonized rate): 2016 = 6.1; 2017–2022 = 5.9 each year.  
- Gross debt (% GDP): 2015 = 85.5; 2016 = 83.6; 2017 = 81.3; 2018 = 78.9; 2019 = 76.3; 2020 = 74.1; 2021 = 72.4; 2022 = 70.8.  
- Net lending/borrowing (% GDP): 2016 = -1.4; 2017 = -1.2; 2018 = -0.7; 2019 = -0.5; 2020 = -0.4; 2021 = -0.6; 2022 = -0.7.  
- Current account (% GDP): 2016 = 2.4; 2017 = 2.4; 2018 = 2.3; 2019 = 2.2; 2020–2022 = 2.1 each year.  
- Nominal GDP (bn €): 2016 = 350; 2017 = 361; 2018 = 372; 2019 = 384; 2020 = 397; 2021 = 409; 2022 = 423.  
- Population (million): 2016 = 8.7; 2017 = 8.8; 2018 = 8.8; 2019 = 8.9; 2020 = 8.9; 2021 = 9.0; 2022 = 9.0.

### Policy priorities and staff recommendations
- Raise potential output through a comprehensive reform package focusing on four key areas:
  - Structural reforms to strengthen competition and further reduce firms’ administrative burden.
  - Raising public investment to support private-sector productivity and investment.
  - Shifting the tax mix away from labor toward property, pollution, and consumption.
  - Providing incentives for higher labor force participation among elderly workers, and for full-time employment of women.
- Preserve fiscal sustainability:
  - Use the current window of opportunity to implement efficiency-boosting expenditure reforms in health, education, and subsidies.
  - Implement further pension reform measures.
  - Adjust fiscal relations between the federal and subnational governments to realize reform potential and savings.
  - Full implementation of reforms would permit further reductions in the labor tax wedge.
- Maintain financial stability:
  - Ensure banks raise capital as planned; boosting banks’ capital buffers remains important despite challenging low-growth, low-interest-rate conditions.
  - Authorities’ introduction of a systemic risk capital buffer is welcome; ensure banks meet their capital targets as scheduled.
  - Provide regulators with the legal authority to use macroprudential instruments at their discretion to address potential risks in the real estate market.
  - Bolster AML/CFT framework by enhancing supervision and banks’ compliance to preserve Austria’s position as a financial center.
- Fiscal consolidation:
  - Projections indicate a reduction of the fiscal deficit and debt in the medium term—largely on account of interest savings and restraint in government consumption—but ageing-related fiscal pressures will re-emerge over the longer term.

### Executive Board assessment (summary)
- Directors endorsed the staff’s appraisal: Austria benefits from high stability and social cohesion, high per capita income, comparatively low unemployment, strong social protection systems, and an equitable society among advanced economies.
- Directors agreed that raising potential growth and undertaking comprehensive reforms are important to raise living standards, reduce unemployment, and ease demographic fiscal burdens.
- Directors emphasized the importance of reforms to ensure long-term fiscal sustainability and steps to maintain financial stability.

*Source: IMF staff report for the 2016 Article IV consultation with Austria (staff estimates and projections as presented).*

### 4. Financial Soundness Indicators for the Banking Sector, 2011–16 ______________________________ 31

### 4. Financial Soundness Indicators for the Banking Sector, 2011–16

### Recent developments
- Austrians enjoy high quality of life; inequality and poverty are low and living standards high.
- The economy weathered the global financial crisis relatively well; output surpassed pre-crisis levels in 2011.
- The recovery has strengthened:
  - GDP growth in 2016 reached 1.4 percent (y/y) in 2016:Q1–Q3, and is estimated at 1.4 percent for the year as a whole.
  - Growth drivers: private consumption (supported by income tax cuts), a recovery in investment, and higher public consumption (in part due to spending on refugees).
  - Employment growth picked up in 2016, catching up with rising labor supply from migration and higher labor force participation.
  - Unemployment: stabilized recently at 5.8 percent in November (EU harmonized rate); national registered unemployment rate stood at 8.9 percent in December.
  - Inflation: 1.5 percent y/y in November, picking up from low levels, driven mainly by price hikes in tourism-related services.
- Refugee inflows:
  - Austria received 89,000 asylum seekers in 2015.
  - Refugee-related fiscal spending increased by €0.6-1 billion in 2016 relative to 2015.
  - Arrivals have since slowed sharply and processing of asylum applications is gradually catching up; integration challenges remain (language barriers and low skills).
- External position:
  - External position broadly in line with fundamentals and desirable policies (Annex I).
  - External Balance Assessment suggests the current account balance in 2016 was somewhat below the norm; the REER was modestly overvalued.
  - Policy gaps explain about a third of the current account gap/REER overvaluation, with the main policy effect coming from high health expenditure relative to trading partners (see ¶20 and footnote 8).
  - Staff expects the current account surplus to gradually decline from some 2½ percent of GDP in 2016 to 2.1 percent of GDP in the medium term.
  - The international investment position, currently moderately positive, should strengthen accordingly.
- Political situation:
  - Coalition government of Social Democrats and the People’s Party holds a small parliamentary majority; differing views sometimes slow policy design and implementation.
  - Next parliamentary elections due in September 2018.
  - Presidential election re-run in December 2016: Alexander van der Bellen defeated Norbert Hofer.

### Outlook and risks
A. Outlook
- Growth projections:
  - 2017: GDP growth projected to slow marginally to 1.3 percent as the 2016 fiscal stimulus tapers off.
  - Medium term: growth expected to revert to potential rate of just above 1 percent as the negative output gap closes and moderate fiscal consolidation proceeds.
- Inflation:
  - With the output gap eventually turning mildly positive, inflation should run somewhat above 2 percent in the medium term.
- Supporting factors:
  - Momentum in private investment and employment, strengthening demand in major trading partners, positive credit growth, and the ECB’s accommodative policy stance.

B. Risks
- Overall characterization: Risks largely external, with likely limited overall impact (Annex II).
- Enumerated risks:
  - International political fragmentation:
    - Inward-oriented policies in trading partners could undermine coordination, affecting Austria via export and FDI channels.
    - Prolonged Brexit uncertainty could affect Austria indirectly through trading partners; Austria’s exports of goods to Britain comprise only about 3 percent of total exports.
    - Germany: takes 30 percent of Austria’s exports and is more exposed to Brexit effects; Austria is affected largely indirectly through Germany and other partners.
    - Resurgence of immigrant inflows due to dislocation in the Middle East could strain fiscal and economic absorption capacity.
  - Global growth:
    - A slowdown in non-European emerging markets, notably China, would affect Austria largely indirectly via trading partners.
    - Deceleration in CESEE countries (which take 31 percent of Austria’s exports and with which its banks have extensive financial relations) could affect growth directly and the financial system.
    - Structurally weak growth in Austria and other advanced economies would make fiscal consolidation and debt reduction more difficult.
  - Financial conditions:
    - Tightening of global financial conditions and a rise in risk premia could be an upside risk for Austria (sovereign debt widely regarded as safe-haven).
    - Materialization of political or regulatory risks in CESEE that reduce Austrian banks’ profitability could affect confidence in financial stability and deteriorate financial conditions.
- Mitigating factors:
  - 70 percent of Austria’s exports go to the European Single Market, which provides a stable economic framework.
  - Declining bank exposure to risks in CESEE is containing vulnerabilities.

### Policies
- Overarching aim: Increase potential output by raising productivity, public investment, and labor force participation; improve efficiency of public spending to create fiscal space and ensure continued decline of public debt; maintain financial stability.

A. Raising potential output
- Current estimate: Staff estimates potential growth rate at just above 1 percent, limited mainly by low TFP growth.
- Potential impact of a coordinated package:
  - A package of structural and fiscal policies can have an appreciable impact on potential output—some 3 percent within ten years and up to 5 percent in the long run.
- Structural reforms:
  - Focus on strengthening innovation and competition.
  - Scope to lower barriers to entrepreneurship: regulations hindering entry and competition in professional services; high administrative burdens on companies and start-ups; barriers to investment in network sectors.
  - Improving Austria’s product market regulation score by some 20 percent through reforms could boost potential output by about 1.5 percent in the medium term.
  - Authorities’ start-up promotion package and increased support for R&D in 2016 are positive steps.
- Public investment:
  - Austria’s infrastructure quality is high but investment is low: in 2015 gross budget investment (including capital transfers) stood at 3.7 percent of GDP, resulting in net investment below ½ percent of GDP.
  - Austria has fallen back in the World Economic Forum’s global ranking of infrastructure quality between 2009/10 and 2016/17.
  - Staff simulation: increasing public investment by ½ percent of GDP (bringing it back to 2010–11 levels), compensated by reform-driven cuts in government consumption, could raise GDP by about 1 percent in the medium term and up to 2 percent in the long term.
- Tax mix:
  - Austria’s high labor tax wedge remains a drag on employment creation despite recent tax relief.
  - Shifting taxation away from labor toward property, pollution, and consumption (by improving VAT efficiency) would reduce distortions, improve resource allocation, and raise output.
  - Simulation: if 1 percent of GDP in income taxes is replaced by a combination of increased consumption and property taxes, potential GDP would rise by about ½ percent over the medium term.
  - If low-income households are adversely affected, protections could include raising eligibility thresholds and associated amounts for means-tested social benefits.
- Labor force participation:
  - Overall LFP close to OECD AE average, but significantly lower in the 55–64 age group and lower than the Nordics.
  - Long-run measures: bring forward increases in pension age, tighten early retirement options, index pension age to life expectancy.
  - Policies to make full-time work more attractive for women (including extension of kindergarten and school hours where needed) should raise hours worked.
  - Planned introduction of incentives to work beyond the official pension age would help.

Authorities’ views on policy measures
- Authorities broadly concurred with staff on need to raise potential output but estimate medium-term potential growth somewhat higher, at around 1¼–1½ percent, citing higher TFP growth.
- On structural reforms:
  - Authorities reported initiatives to reduce financial and administrative burdens on start-ups and increase R&D support.
  - Agreed deregulation of professional services could strengthen competition but cautioned that some regulation is needed to ensure high quality standards.
- On public investment:
  - Authorities generally satisfied with Austria’s quality of public infrastructure; prefer focusing public investment on R&D, digitalization, and education.
- On tax mix:
  - Authorities see merit in reducing social security contributions but find politically difficult to identify offsetting tax measures; prefer improved tax administration and expenditure savings.
- On labor force participation and pensions:
  - Authorities agreed that extending childcare and school hours would help; pointed to efforts to lengthen school hours and a legislated education/training guarantee for youth up to age 21.
  - Views split on additional pension measures; some satisfied with recently legislated reforms, others argue for further measures before population ageing raises costs.
  - On refugee integration: programs for language training and skills recognition exist, but uneven skills slow employment prospects.

### Box 1 — Growth and female labor force participation: key points
- Increasing female LFP and promoting employment for the elderly could significantly affect labor supply and cushion demographic change.
- Background:
  - Increase in employment over past 20 years has been entirely in part-time employment, mostly by women.
  - Average number of hours worked has declined significantly.
- Causes:
  - Caregiving cited by 38 percent of women as main reason for working part-time.
  - Limited availability of full-time childcare outside cities contributes; however, childcare attendance has increased significantly since 1995 and is free or subsidized.
  - Only 11 percent of women and 16 percent of men work part-time involuntarily, below OECD AE averages.
- Impact:
  - High incidence of part-time work leads to lower pensions in an insurance-based system; old-age poverty overall low due to means-tested minimum income for pensioners.
  - Austria’s public expenditure on pensions is among the highest in the OECD.
  - Potential output is lower than if more part-time workers worked full time.
- Policy measures:
  - Already legislated pension reforms: increase in retirement age for women (60 years, set to rise to 65 from 2024 to 2033) and tightening early retirement eligibility.
  - Further reforms (not gender-specific) will be required to contain rising pension costs.
  - Increasing childcare and long-term care availability could widen women’s choices and encourage full-time work.
- Simulation results:
  - If female part-time work declined to the OECD AE level (male part-time unchanged) with corresponding increase in full-time employment, full-time equivalent employment in Austria would rise by 2.9 percent, ceteris paribus.
  - An increase in overall LFP in the 55–64 age group to the OECD AE average (and employment of the additional workers) would increase employment by a further 3.5 percent.
- Childcare provision share in 1995 vs 2014:
  - Age 0–2: 1995 = 4.6; 2014 = 23.8
  - Age 3–5: 1995 = 70.6; 2014 = 92.0
  - Age 6–9: 1995 = 7.0; 2014 = 16.5

*International Monetary Fund. Austria: Selected chapter — Financial Soundness Indicators for the Banking Sector, 2011–16.*

### Box 1. Growth and Female Labor Force Participation (concluded)

### Box 1. Growth and Female Labor Force Participation (concluded)

### Key findings
- Female labor supply has increased.
- Labor force participation (LFP) is overall in line with AE peers.
- LFP is low for elderly workers, both men and women.
- The rise in employment has been exclusively due to a rise in part-time work.
- Part-time work is disproportionately carried out by women.
- The increase in part-time employment has contributed to a decline in average hours worked.

### Quantitative indicators (as reported)
- Austria: Employment (millions) by category, selected years:
  - Female, part time (1995: 0.3; 2015: 0.7)
  - Female, full time (1995: 1.3; 2015: 1.3)
  - Male, full time (1995: 2.0; 2015: 2.0)
  - Male, part time (1995: 0.06; 2015: 0.2)
- Hours Worked (Avg. annual; thousands): chart scale and series shown for Adv. OECD, Nordics, Austria with axis ticks 1.5, 1.6, 1.7, 1.8, 1.9 (1995–2015).
- Labor Force Participation by age group (All persons; by age group, %): age groups shown 15-24, 25-34, 35-44, 45-54, 55-64 with comparative series Nordics, Austria, Avg. Advanced OECD.
- Part-time Employment (Part-time/total employment, %; advanced OECD): separate series for Women and Men with comparative solid dots for Nordics, Austria, Adv. OECD.
- Austria: Female Labor Supply chart shows series for Part-time workers (percent of total; LHS), Unadjusted wage gap (percent; LHS), Labor force participation (percent) over 1995–2015 (OECD source).

### Implications and interpretation
- The employment expansion in Austria over 1995–2015 reflects a compositional shift toward part-time work rather than increases in full-time employment.
- The disproportionate concentration of part-time employment among women has mechanically lowered average hours worked.
- Low LFP among older workers (both genders) suggests scope for policies to raise participation in those age groups.
- Cross-country comparisons (Nordic countries, advanced OECD) are used as benchmarks for Austria’s LFP and part-time employment patterns.

*Source: OECD; figures and series reproduced from the source material.*

### Box 2. Fiscal Federalism in Austria (concluded)

### Box 2. Fiscal Federalism in Austria (concluded)

### Major findings on subnational fiscal structure
- Subnational governments have little own revenue; revenue composition is heavily weighted toward transfers and earmarked grants.  
- Austria stands out for its fiscal rigidity.  
- This helps explain high spending, e.g., in health and education, but limited efficiency.  
- Interregional redistribution is relatively strong.  
- Equity can also be achieved with more fiscal autonomy.

### Key statistics and chart values (as presented)
- Revenue Sources (Percent of total, 2015) — data labels visible: 14.3, 5.4, 62.2, 81.4, 23.5, 13.2.  
- Revenue and Expenditure Autonomy (Latest available data): axes range shown 0.0 to 1.0 for Revenue autonomy (index) and share of earmarked grants in total revenue for Expenditure autonomy.  
- Revenue Autonomy and Hospital Beds (Latest available data): Hospital beds per 10,000 inhabitants plotted against Revenue autonomy (index) (axes: 0.0 to 1.0 for revenue autonomy).  
- Education Spending and Results (Latest available data): PISA 2012 score plotted against Spending on education (% of GDP per capita per student). Numeric axes include ranges such as 470–530 for PISA and 0–8 for spending levels.  
- Expenditure Autonomy and Reduction of Regional Disparities (Latest available data): Reduction of regional disparities 3/ plotted against Expenditure autonomy (share of earmarked grants in total revenue); axes indicate “More autonomy” and “More reduction of disparities.”  
- Regional Dispersion of Disposable Income (2014): chart lists country codes and shows National average, Max, Min, and Avg. disposable income (1,000 $). Annotation: 1/ Excl. Canberra.

### Notes and methodological definitions (as provided)
- 1/ States exclude Vienna, local governments include Vienna.  
- 2/ Revenue autonomy index: different revenue types are assigned an autonomy index between 0 and 1, dependent on the degree of control of local authorities over the revenue source. The overall index is the weighted average.  
- 3/ Reduction of regional disparities: ratio of GDP per capita disparities across regions over disposable income disparities: (((Max(GDP per capita_states)-Min(GDP per capita_states))/GDP per capita_national)/ (((Max(Disp. income per capita_states)-Min(Disp. income per capita_states))/Disp. income per capita_national).

*AUSTRIA  INTERNATIONAL MONETARY FUND*

### 3.9 percent in Vienna and 9.6 percent in the rest of the

### cr1726 - 3.9 percent in Vienna and 9.6 percent in the rest of the

### Housing price dynamics
- Year-on-year house price increase as of June 2016: 9.5 percent (3.1 percent in Vienna and 12.8 percent elsewhere).
- Recent drivers:
  - Low interest rates have loosened credit constraints and increased households’ borrowing capacity, putting upward pressure on housing demand.
  - Prices have been kept high by supply side constraints and other idiosyncratic factors, especially in Vienna.
  - In Vienna, municipality-provided social housing (which can be rented only by eligible households) accounts for some 70 percent of total housing.
  - Strong international demand for luxury housing is affecting price developments.
- Policy implication:
  - Reviewing and relaxing local planning systems and regulations to facilitate the supply response to price movement can help contain the price rises close to the long run trend.

### Financial stability and macroprudential considerations
- Current indicators suggesting limited immediate systemic risk:
  - Nominal real estate loan growth is in the 5–6 percent range.
  - Real estate loans account for around 20 percent of total loans.
  - As of mid-2016, the average loan-to-value ratio for mortgage loans is about 65 percent.
  - Household debt-to-income ratio is about 90 percent, described as low compared to peers.
  - Large share of new mortgages at variable interest rates: 77 percent in 2016:Q1.
- Risks and recommendations:
  - Authorities need legal authority to expand the macroprudential toolkit with real estate-specific instruments when needed, to limit potential risks to banks’ portfolios if real estate price bubbles were to emerge.
  - The large share of variable-rate new mortgages raises concerns about debt service affordability if interest rates begin to rise.

### Banking system and market context
- Capital and asset quality:
  - Austrian banks’ capital is low compared to peers (figures shown in charts).
  - Risk-weighted assets (RWA) have fallen.
  - Nonperforming loans (NPLs) remain relatively high.
  - Exposure to CESEE has declined.
- Profitability and valuation:
  - Profitability is modest; reflected in banks’ valuation (price-to-book ratios and other indicators).
- Financial markets:
  - Borrowing costs have fallen further and risk perceptions remain low.
  - Bank bond yields and bank CDS spreads have declined.
  - Sovereign bond yields show spreads over 10Y Bunds.
  - The stock market has underperformed, as have some bank equities.

### Macroeconomic outlook and reform priorities
- Overall outlook:
  - Growth picked up in 2016 but is projected to slow gradually toward the medium-term potential rate of just above 1 percent as the output gap closes and fiscal policy turns back to consolidation.
  - Unemployment is set to remain elevated for some time as employment creation keeps pace with the rising labor force.
  - Inflation is projected to gradually rise to slightly above 2 percent in the medium term.
- Risks:
  - International political fragmentation or slow growth in other advanced economies and/or emerging markets would undermine Austria’s performance through trade and financial channels.
  - With the European Single Market and declining bank exposure to risks in CESEE, overall vulnerability is limited.
- Recommended comprehensive reform package to raise potential growth:
  - (i) Structural reforms to strengthen competition and further reduce firms’ administrative burden.
  - (ii) Raising public investment to support private sector productivity and investment.
  - (iii) Shifting the tax mix away from labor toward property, pollution, and consumption.
  - (iv) Providing incentives for higher labor force participation among elderly workers, as well as for full-time employment of women.

### Fiscal sustainability and public finances
- Medium-term projections and pressures:
  - Projections indicate a reduction of the fiscal deficit and debt in the medium term—largely on account of interest savings and restraint in government consumption.
  - Fiscal pressures will re-emerge over the longer term as the population ages, and debt will start to rise again without further reforms.
- Policy recommendations:
  - Use the current window of opportunity to put in place efficiency-boosting expenditure reforms in health, education, and subsidies, as well as further pension reform measures.
  - Many reforms require adjustments in fiscal relations between the federal and subnational governments.
  - Potential savings, combined with growth-raising reforms, are considered sufficient to ensure long-term fiscal sustainability and to allow reducing the labor tax wedge further.
- Fiscal data excerpts (selected):
  - General government revenue: 49.5 percent of GDP (2016).
  - Expenditure: 50.9 percent of GDP (2016).
  - Net lending/borrowing (2016): -1.4 percent of GDP.
  - Gross debt (Maastricht def., 2016): 84 percent of GDP.
  - Interest (2016): 2.2 percent of GDP.

### Policy implementation and institutional recommendations
- Financial stability:
  - Ensure banks raise capital as planned and avail regulators with macroprudential tools to address potential risks in the real estate market.
  - Authorities’ introduction of a systemic risk capital buffer is welcome; they need to ensure that banks meet their capital targets as scheduled.
  - Regulators should be given the legal authority to use macroprudential instruments at their discretion.
- AML/CFT:
  - To preserve Austria’s position as a financial center, bolster the AML/CFT framework, notably by enhancing supervision and banks’ compliance with AML/CFT obligations.
- Consultation scheduling:
  - It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

*International Monetary Fund staff appraisal (Austria).*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### External position
- International investment position (IIP) moved from -13 percent of GDP in 2006 to a moderate +5½ percent in 2016.
- Exports of goods and services remained stable at 53–55 percent of GDP in 2010–16.
- Austria’s share in world goods exports has declined, while exports of services (mainly tourism) have expanded strongly.
- Weak domestic demand during the global financial crisis and its aftermath reduced imports somewhat.
- Banks sharply reduced reliance on foreign wholesale financing (and exposure to CESEEs); the decline in foreign liabilities exceeded the decline in assets as deposits rebounded both at home and in CESEEs.
- Banks’ gross external assets declined from a peak of well over 100 percent of GDP in 2008 to about 76 percent of GDP in 2016, still above the 1995 level of about 40 percent of GDP.
- Austria’s total gross external assets increased from 67 percent of GDP in 1995 to a peak of 273 percent in 2007, before receding to 255 percent in 2016.

### Current account balance and real exchange rate (REER)
- Current account balance in 2016: 2.4 percent of GDP.
- Estimated norm for current account balance: 3.4 percent of GDP.
- REER was modestly overvalued: around 8¾–10½ percent.
- Both the current account gap and REER overvaluation are largely due to an unexplained residual.
- Policy gaps explain about one-third of the current account gap and REER overvaluation, with the main policy effect coming from high health expenditure relative to trading partners.
- In the current account analysis, the low budget deficit relative to trading partners partially offsets the effect of the high health spending.

### Capital and financial account
- Net direct investment outflows to both CESEE countries and the EU15 recovered quickly after the GFC, driven by real-sector investment, keeping the FDI position in surplus.
- Net portfolio investment outflows have been strong and are expected to remain so, despite further retrenching of Austrian banks’ foreign holdings.
- The negative net portfolio investment position is expected to close gradually.
- This dynamic will be mirrored by a decline in the positive net “other investments” position.

### Overall assessment and policy implications
- Austria’s external position is sustainable and broadly in line with fundamentals.
- The ageing population implies that a build-up of external assets in the next few years is warranted as a buffer for future withdrawals.
- Policies are broadly appropriate.
- Raising the efficiency of health expenditures would open significant savings potential to help ensure fiscal sustainability in the long run.

*Annex I. External Sector Assessment — International Monetary Fund*

### Annex III. Debt Sustainability Analysis

### Annex III. Debt Sustainability Analysis

### Executive summary
- Austria’s debt outlook has improved. Public debt is sustainable within the medium-term projection horizon, though ageing cost pressures are looming in the longer term.
- Under the baseline, debt will fall from around 84 percent of GDP at end-2016 to 71 percent of GDP by end-2022.
- Standardized macro-fiscal stress tests indicate that lower growth and a combined macro-fiscal shock could shift the debt-to-GDP ratio upwards, even though debt would remain on a downward trajectory under these shocks.
- In the longer term (starting in the mid-2020s), ageing cost pressures and higher interest rates would reverse the debt path without additional policy measures.

### Baseline projections and drivers
- Fiscal policy assumption: return the structural deficit to ½ percent of GDP (Austria’s MTO) by 2020.
- HETA (wind-down unit of the former Hypo Alpe Adria bank) asset recovery and the structural adjustment together bring gross public debt to 71 percent of GDP by 2022, a decline of 13 percentage points from 2016.
- Gross financing needs are described as moderate in the period 2017–22.
- Key baseline projection table highlights (percent of GDP unless otherwise indicated):
  - Nominal gross public debt: 2015: 77.2; 2016: 85.5; 2017: 83.6; 2018: 81.3; 2019: 78.9; 2020: 76.3; 2021: 74.1; 2022: 72.4; (end-2022: 70.8 appears in header context).
  - Public gross financing needs: 2015: 11.3; 2016: 9.1; 2017: 9.3; 2018: 10.7; 2019: 11.5; 2020: 10.5; 2021: 9.6; 2022: 9.1; 2015–22 cumulative figures shown in table.
  - Real GDP growth (in percent): 2015: 1.2; 2016: 1.0; 2017: 1.4; 2018: 1.3; 2019: 1.2; 2020: 1.3; 2021: 1.1; 2022: 1.1; 2022 in header: 1.0.
  - Inflation (GDP deflator, in percent): 2015: 1.8; 2016: 1.9; 2017: 1.6; 2018: 1.7; 2019: 1.8; 2020: 2.1; 2021: 2.1; 2022: 2.1.
  - Nominal GDP growth (in percent): 2015: 3.0; 2016: 2.9; 2017: 3.1; 2018: 3.0; 2019: 3.0; 2020: 3.4; 2021: 3.2; 2022: 3.2; header shows 3.2.
  - Effective interest rate (in percent): 2015: 4.0; 2016: 2.9; 2017: 2.6; 2018: 2.2; 2019: 1.8; 2020: 1.7; 2021: 1.5; 2022: 1.4; header shows 1.3.
- Identified debt-creating flows (selected, percent of GDP):
  - Change in gross public sector debt (2015–22 cumulative): -12.8.
  - Identified debt-creating flows (2015–22 cumulative): -13.5.
  - Primary deficit (2015–22 cumulative): -4.1.
  - Primary (noninterest) revenue and grants (2015–22 cumulative): 94.4.
  - Primary (noninterest) expenditure (2015–22 cumulative): 90.3.
  - Automatic debt dynamics (2015–22 cumulative): -6.8.
  - Stock-flow adjustment (incl. asset recovery) (2015–22 cumulative): -2.6.
  - Residual, including asset changes (2015–22 cumulative): 0.6.

### Stress tests and shocks
- Low-growth scenario:
  - Assumes growth reduced by one standard deviation of the historical outturn, implying a reduction of growth by 2 percentage point in 2017–18.
  - Debt-to-GDP ratio would increase by close to 8 percentage points to a peak of 84½ percent of GDP in 2019 and then decline to 79 percent of GDP by 2022.
- Contingent liability shock:
  - Illustrative contingent liability shock of 10 percentage points of GDP would raise public debt to 97½ percent of GDP, which would slowly decline to 93½ percent of GDP by 2022.
- Other standardized shocks:
  - Primary balance shock, real exchange rate shock, and real interest rate shock will not lead to significant deviations from the baseline debt path.
- Combined macro-fiscal shock:
  - Driven by assumed lower growth; leads to a similar debt path as in the low-growth scenario.
- Stress-test specific underlying assumptions (selected):
  - Real GDP growth and inflation paths differ by scenario; examples:
    - Real GDP growth in baseline: 2017: 1.3; 2018: 1.2; 2019: 1.3; 2020: 1.1; 2021: 1.1; 2022: 1.0.
    - Real GDP growth in Real GDP Growth Shock: 2017: 1.3; 2018: -0.8; 2019: -0.7; 2020: 1.1; 2021: 1.1; 2022: 1.0.
    - Primary balance under Contingent Liability Shock: 2018 value shown as -14.9 (percent of GDP) in the scenario table for 2018.
  - Effective interest rate varies across shocks; e.g., Real Interest Rate Shock shows higher effective interest rates (2017: 2.2; 2018: 1.8; 2019: 2.1; 2020: 2.2; 2021: 2.4; 2022: 2.7).

### Alternative scenarios and composition
- Alternative scenarios presented include Baseline, Historical, and Constant Primary Balance.
- Composition of public debt charts indicate:
  - Gross nominal public debt projected path under Baseline, Historical, and Constant Primary Balance.
  - Public gross financing needs projection by scenario.
  - By maturity: share of medium and long-term vs short-term debt (percent of GDP) shown historically and projected.
  - By currency: local currency-denominated vs foreign currency-denominated shares (percent of GDP) shown historically and projected.

### Realism checks and forecast track record
- The document provides realism diagnostics:
  - Forecast track record comparisons for Real GDP Growth, Primary Balance, and Inflation (Deflator) versus medians of peers; Austria-specific percentile ranks and forecast errors displayed.
  - Boom-Bust Analysis and assessments of projected fiscal adjustment realism using 3-year CAPB (Cyclically-Adjusted Primary Balance) adjustments and levels with percentile ranks (examples: 3-year CAPB adjustment percentile rank 50%; 3-year average level of CAPB percentile rank 56%).
  - Note: Some diagnostic entries are marked "Not applicable for Austria" where relevant criteria do not apply.

### Risk assessment and heat map highlights
- Vulnerabilities have receded: declining debt level implies potential shocks would not push Austria’s debt (except for a contingent liability shock) over relevant thresholds.
- Identified vulnerabilities:
  - High share of public debt held by non-residents and attendant external financing requirements — could be a potential vulnerability, though limited by Austria’s perception as a safe-haven Euro Area country.
  - Potential for higher volatility in spreads, especially once the ECB’s asset purchases end, depending on interest rate dynamics outside Austria and residual risks from commercial banks’ CESEE exposure.
- Heat map interpretation rules noted:
  - Green: debt burden benchmark of 85% is not exceeded under specific shock or baseline.
  - Yellow: exceeded under specific shock but not baseline.
  - Red: benchmark exceeded under baseline.
- Benchmark thresholds stated in heat-map notes:
  - Bond spreads: 400 and 600 basis points.
  - External financing requirement: 17 and 25 percent of GDP.
  - Annual change in share of short-term debt: 1 and 1.5 percent.
  - Public debt held by non-residents: 30 and 45 percent.

### Policy implications and longer-term risks
- Medium-term: Achieving the structural balance target of ½ percent of GDP by 2020 supports debt reduction to 71 percent of GDP by 2022.
- Short-to-medium-term risks: growth shocks or contingent liability realizations can materially raise debt ratios temporarily; contingent liabilities of 10 percent of GDP would push debt near 97½ percent of GDP.
- Longer term: ageing cost pressures and higher interest rates starting in the mid-2020s would reverse the declining debt path without additional policy measures.

*Source: IMF staff (Annex III. Debt Sustainability Analysis, as provided).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1726.pdf_