## 1autea2021001 - introduction of carbon prices, using the revenue raised to compensate low-income and vulnerable

## Source details

**Canonical URL:** [1autea2021001 - introduction of carbon prices, using the revenue raised to compensate low-income and vulnerable](https://www.imf.org/-/media/files/publications/cr/2021/english/1autea2021001.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2021/english/1autea2021001.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2021/english/1autea2021001.pdf.json)

---

### Key issues, context, and outlook
- Austria entered the pandemic from a strong position: in 2019, GDP growth was above the euro area average; public debt was 70.5 percent of GDP and on a declining path; household and corporate balance sheets were relatively healthy; the banking sector was well capitalized.  
- Real GDP contracted by 6.3 percent in 2020 and declined further in early 2021.  
- Outlook:
  - Real GDP growth: 2018: 2.6; 2019: 1.4; 2020: -6.3; 2021 (Proj.): 3.5; 2022 (Proj.): 4.5.  
  - Inflation (percent): 2018: 2.1; 2019: 1.5; 2020: 1.4; 2021 (Proj.): 2.1; 2022 (Proj.): 1.8.  
  - Unemployment (Harmonized) (percent): 2018: 4.9; 2019: 4.5; 2020: 5.3; 2021 (Proj.): 5.5; 2022 (Proj.): 5.3.  
  - Growth expected to rebound to 3½ percent in 2021, rise to 4½ percent in 2022, and return to potential of around 1¾ percent over the medium term; real GDP level projected to remain below its pre-COVID trend by about 1½ percent in 2026.  
- Main risks: pandemic developments (delta variant representing 80 percent of new cases analyzed), vaccine effectiveness, premature withdrawal of support measures, disorderly structural transformation, sharp rise in commodity prices, and climate change.

### Fiscal policy, pandemic support, and recovery stance
- Pandemic fiscal response:
  - Government announced 13 percent of GDP in multi-year support measures.
  - Overall fiscal deficit in 2020: 8.8 percent of GDP.
- General government finances (percent of GDP):
  - Revenue: 2018: 48.9; 2019: 49.2; 2020: 49.0; 2021 (Proj.): 48.6; 2022 (Proj.): 48.2.  
  - Expenditure: 2018: 48.7; 2019: 48.6; 2020: 57.9; 2021 (Proj.): 54.7; 2022 (Proj.): 51.6.  
  - Fiscal balance: 2018: 0.2; 2019: 0.6; 2020: -8.9; 2021 (Proj.): -6.2; 2022 (Proj.): -3.3.  
  - Public debt: 2018: 74.0; 2019: 70.5; 2020: 83.9; 2021 (Proj.): 85.3; 2022 (Proj.): 82.6.  
- 2021 budget and measures:
  - Revised 2021 budget: discretionary measures totaling 4.5 percent of GDP.
  - Jumpstart allocation: 1.5 percent of GDP (mainly private investment promotion, green investment premium).
  - Fiscal deficit projected to reach 6.2 percent of GDP in 2021; staff project overall deficit to improve from 6.2 percent of GDP in 2021 to below 1 percent of GDP in 2024.
- Transparency and targeting:
  - Lifeline support should be temporary and targeted; extend if downside risks materialize.
  - Recommendations: grant public access to procurement contracts and large-benefit recipients; publish ex-post audit reports on COVID-19 spending.

### Structural reforms and climate fiscal policy recommendations
- Structural objectives: promote a green, digital, and inclusive recovery; support labor reallocation; ensure universal broadband and ICT skills.
- Climate fiscal policy recommendations:
  - Gradual and phased introduction of carbon taxes.
  - Use carbon tax revenue to compensate low-income and vulnerable households and to support other reform priorities.
  - Adopt green budgeting practices to integrate climate considerations into fiscal frameworks.
- Labor tax wedge and labor market:
  - Further reduce labor tax wedge: consider lowering PIT rates for the second and third lowest income brackets or lowering social security contributions alongside pension reform.
  - PIT brackets should be indexed to inflation to avoid bracket creep.
- Pension reforms: further reform needed to address population aging and raise labor force participation for those 55–64.

### Financial sector vulnerabilities and policy priorities
- Pandemic impact and financial indicators:
  - STWS limited job losses; registered unemployment as of June 2021: 7 percent (modestly above 6.5 percent in June 2019).
  - Corporate insolvencies fell by 40 percent in 2020 vs. 2019; corporate liquidity substantial.
  - Capital to risk-weighted assets: 16.8 percent in 2020:Q4 (from 15.9 percent in 2019:Q4).
  - Broad money (% change): 2018: 8.0; 2019: 4.6; 2020: 9.7; 2021 (Proj.): 4.7; 2022 (Proj.): 4.3.
  - Credit to the private sector (% change)1/: 2018: 4.8; 2019: 5.1; 2020: 3.7; 2021 (Proj.): 2.6; 2022 (Proj.): 3.3.
- Banking and corporate solvency:
  - Corporate debt-to-income ratio surged by almost 15 percentage points in 2020; estimated equity gap around 1 percent of GDP concentrated in SMEs.
  - Recommendation to shift from liquidity support to solvency support (hybrid instruments, private sector participation); allow nonviable firms to exit.
  - Monitor loans in IFRS Stage 2 and potential rise in NPLs; make prudential housing lending guidelines binding.
- Deposit guarantee and bank failures:
  - Failures of Anglo Austrian AAB AG and CBM activated ESA payouts totalling EUR 550 million (EUR 60 million and EUR 489 million respectively); Anglo Austrian AAB AG affected 90,000 depositors; CBM affected approximately 13,500 depositors.
  - Contribution rate in 2020: 0.3 percent of outstanding retail deposits plus a small risk-based factor.
  - Maximum deposit guarantee: EUR 100,000 per person and institution with a seven-day payout.
  - Raiffeisen sector (40 percent of total deposits) decided to form its own DGS; withdrawal constraints limit immediate funding impact but increase fragmentation risks.

1/ Households and non-financial corporations. Exchange rate adjusted.

### AML/CFT progress and remaining gaps
- Reforms since 2016:
  - National Anti-Corruption Strategy (January 2018); Financial Markets AML Act; transposition of the 5th EU Anti-Money Laundering Directive; BO register operational since 2017; account register operational from October 2016.
  - FMA increased resources and onsite inspection plan; AI-based monitoring of suspicious transactions.
- Remaining concerns:
  - Need to enhance risk-based supervision, cross-border information sharing, and ensure private entities report suspicious transactions related to proceeds of corruption.
  - Concerns about amendments to tipping-off and confidentiality provisions (Art. 20 (3) and Art. 22 (2)) and low court sanctions for ML.

### Annex VI — Carbon pricing proposal: context and objectives
- Austria’s commitments: climate neutrality by 2040; EU-wide net domestic reduction of at least 55 percent in greenhouse gas emissions by 2030 compared to 1990.
- Emissions and sectoral breakdown:
  - Total emissions at end-2019 were about 2 percent higher than in 1990.
  - Non-ETS sectors comprise 63 percent of total GHG emissions and 72 percent of energy-related CO2 emissions (IEA, 2020).
  - Domestic transportation sector has effectively doubled its emissions since the 1990s and is the single largest emitter of non-ETS emissions.
- Existing pricing gap:
  - About 68 percent of carbon emissions are priced from energy use; only 48 percent are priced at a rate above EUR 60 per tonne of CO2, leaving a pricing gap of about 52 percent (OECD, 2021).
  - Majority of unpriced emissions are from industrial, residential, and commercial sectors.

### Modeling approach and simulation assumptions
- Operational approach: carbon taxes as charges on fossil fuels equal to fuel’s CO2 emissions factor multiplied by a CO2 emissions price.
- Model assumptions include future GDP growth, income elasticities for energy products, rates of technological change, future international energy prices, existing ETS arrangements, and an assumed 5 percent growth in ETS permit price per annum.
- Emission response depends on fuel price pass-through and fuel price elasticities (electricity and fuels generally around -0.5 to -0.8).

### Key simulation results and scenarios
- Phasing proposal: carbon tax introduced gradually starting at €25 per metric ton of CO2 in 2022.
- By 2030 projected emission reductions relative to baseline (BAU):
  - €100 per metric ton → reduce emissions by 13 percent relative to BAU.
  - €150 per metric ton → reduce emissions by 16 percent relative to BAU.
- Price effects under €100 scenario:
  - Average increase in price of fuels, excluding coal: around 35 percent.
  - Carbon taxation would increase the price of coal by over 150 percent.
- Combination scenarios:
  - Combining the €100 carbon tax with all-sector energy efficiency policies would reduce baseline emissions by almost 20 percent by 2030.
  - Adding further measures from the national climate plan could further narrow the gap toward the NDC (EU net reduction target of 55% in GHG emissions by 2030 vs. 1990).

### Revenue impacts, macro effects, and revenue use
- Revenue:
  - €100 carbon tax scenario would yield additional revenues of nearly 6 percent of GDP over the next decade.
- Potential uses of additional revenues:
  - Finance tax reductions in other areas.
  - Resources for investment in climate-enhancing R&D.
  - Support for jobs growth and boosting spending on investment and employment to have a positive medium-term effect on GDP growth.
- Net impact reported in policy costing:
  - Phased Carbon Tax: (25 real EUR per ton of CO2 in 2023 increasing to 100 by 2030): Net impact reported as -4.0 (2022-2030) with transfers to compensate vulnerable households costed at 2.1 (2022-2030). (Negative value indicates revenue gain; costs cumulative unless otherwise indicated.)

### Distributional considerations and compensation
- Distributional risks:
  - Share of energy expenditure among the poorest households (lowest quintile) is more than three times that of the richest (topmost quintile); carbon taxes could be regressive without recycling.
  - Carbon tax is likely to affect 4.7 percent of total consumer spending for affected households; those households’ energy consumption corresponds to about 18 percent of total CO2 emissions in Austria.
- Recommendation: use part of additional revenues to adequately compensate low-income and vulnerable households; design revenue use to support transition, mitigate regressivity, and protect competitiveness.

### Public preferences and political economy
- Survey data from May 2020:
  - Almost 51 percent of households were in favor of higher taxes to address climate change.
  - Household approval rates for specific measures: Lower VAT on renewables: 92%; 1-2-3 Climate Ticket (subsidized public transportation): 88%; Carbon Tax for Companies: 82%; Cease new gas/oil heating: 82%; Air Traffic Tax: 82%; Pay Higher Taxes: 51%.

### Policy design and complementarities
- Carbon pricing should be part of a multipronged reform package combining price and non-price policies.
- Complementary measures recommended:
  - Additional economy-wide energy efficiency measures.
  - Targeted measures for industrial, residential, and commercial sectors.
  - Revenue recycling for compensation, green investment, and lowering labor taxes.
- Expected contribution to targets:
  - A €100 carbon tax by 2030 would contribute to narrowing Austria’s 2030 emissions target gap; combining €100 carbon tax with energy efficiency could deliver almost 20 percent reduction in baseline emissions by 2030.

### Selected key statistics and figures (as presented)
- Real GDP growth: 2018: 2.6; 2019: 1.4; 2020: -6.3; 2021 (Proj.): 3.5; 2022 (Proj.): 4.5.  
- Public debt: 2019: 70.5 percent of GDP; 2020: 83.5 percent of GDP; projected 85.3 percent of GDP in 2021; projected to fall to 74.8 percent of GDP in 2026.  
- Emergency measures size: almost 13 percent of 2020 GDP.  
- €100 carbon tax → additional revenues of nearly 6 percent of GDP (next decade).  
- Carbon tax likely to affect 4.7 percent of total consumer spending for affected households.  
- Those households’ energy consumption corresponds to about 18 percent of total CO2 emissions in Austria.  
- Combining €100 carbon tax with energy efficiency → almost 20 percent reduction in baseline emissions by 2030.  
- Public DGS payouts for two small bank failures: total EUR 550 million (ESA payouts: EUR 60 million and EUR 489 million).  
- Deposit guarantee maximum: EUR 100,000 per person and institution with a seven-day payout.  
- Contribution rate in 2020 to DGS: 0.3 percent of outstanding retail deposits plus a small risk-based factor.

*International Monetary Fund. Staff report for the 2021 Article IV Consultation - Austria.*

### introduction of carbon prices, using the revenue raised to compensate low-income and vulnerable

### 1autea2021001 - introduction of carbon prices, using the revenue raised to compensate low-income and vulnerable

### Key issues, context, and outlook
- Austria entered the pandemic from a strong position: in 2019, GDP growth was above the euro area average; public debt was 70.5 percent of GDP and on a declining path; household and corporate balance sheets were relatively healthy; the banking sector was well capitalized.  
- The government formed in early 2020 (ÖVP and the Green party) set an ambitious reform agenda to boost productivity and green the economy.  
- Real GDP contracted by 6.3 percent in 2020 and declined further in early 2021. The 2021 recovery is expected to be modest; tourism and hospitality sectors remain affected. Over the medium term, growth will accelerate in 2022 and then stabilize at potential, but the output level will remain somewhat below the pre-COVID trend. Uncertainty remains high.  
- Growth projections and inflation:
  - Real GDP growth: 2018: 2.6; 2019: 1.4; 2020: -6.3; 2021 (Proj.): 3.5; 2022 (Proj.): 4.5 (table: Austria: Selected Economic Indicators, 2018–22).  
  - Inflation (percent): 2018: 2.1; 2019: 1.5; 2020: 1.4; 2021 (Proj.): 2.1; 2022 (Proj.): 1.8.  
  - Unemployment (Harmonized) (percent): 2018: 4.9; 2019: 4.5; 2020: 5.3; 2021 (Proj.): 5.5; 2022 (Proj.): 5.3.  
- Outlook and risks:
  - Growth is expected to rebound to 3½ percent in 2021, rise to 4½ percent in 2022, and return to potential of around 1¾ percent over the medium term, with the output gap gradually closing by 2025. The real GDP level is projected to remain below its pre-COVID trend by about 1½ percent in 2026.  
  - Inflation is expected to rise in 2021 due to temporary factors, before easing to 2 percent in the medium term.  
  - Risks are slightly tilted to the downside. Key risks include pandemic developments (delta variant representing 80 percent of new cases analyzed), vaccine effectiveness, premature withdrawal of support measures, disorderly structural transformation, a potential sharp rise in commodity prices, and climate change.

### Fiscal policy and pandemic support
- Authorities’ pandemic fiscal response:
  - The government announced 13 percent of GDP in multi-year support measures to save lives, protect workers, and support households and firms. Measures included a short-term work scheme (STWS), grants to firms, expanded unemployment support, tax deferrals, and public loan guarantees.  
  - These measures and the decline in GDP resulted in an overall fiscal deficit of 8.8 percent of GDP in 2020.  
- General government finances (percent of GDP):
  - Revenue: 2018: 48.9; 2019: 49.2; 2020: 49.0; 2021 (Proj.): 48.6; 2022 (Proj.): 48.2.  
  - Expenditure: 2018: 48.7; 2019: 48.6; 2020: 57.9; 2021 (Proj.): 54.7; 2022 (Proj.): 51.6.  
  - Fiscal balance: 2018: 0.2; 2019: 0.6; 2020: -8.9; 2021 (Proj.): -6.2; 2022 (Proj.): -3.3.  
  - Public debt: 2018: 74.0; 2019: 70.5; 2020: 83.9; 2021 (Proj.): 85.3; 2022 (Proj.): 82.6.  
- Policy recommendations for fiscal policy:
  - Near-term targeted support should be extended as needed if the pandemic lingers and be gradually withdrawn once the recovery takes hold.  
  - Low borrowing costs and a relatively low debt burden provide an opportunity to pursue a more ambitious “comeback” plan, including facilitating labor reallocation, reducing the labor tax wedge, stepping up digitalization, and greening the economy.  
  - Further pension system reforms are needed to address population aging in coming years.  
- Specific recommendation on climate fiscal policy:
  - A gradual and phased introduction of carbon taxes, along with revenue compensation measures to vulnerable households, would narrow Austria’s climate gap while preserving low inequality.  
  - Directors encouraged adopting green budgeting practices to integrate climate considerations into the government’s fiscal frameworks.

### Financial sector policy and vulnerabilities
- Pandemic impact and policy support:
  - The STWS limited job losses and supported household income. As of June 2021, the registered unemployment rate stood at 7 percent, modestly above the 6.5 percent registered in June 2019.  
  - Corporate liquidity was substantial; corporate insolvencies fell by 40 percent in 2020 compared to 2019. Unwithdrawn credit lines increased markedly; public loan guarantees were less utilized.  
  - Financial sector remained resilient: capital to risk-weighted assets rose to 16.8 percent in 2020:Q4 (from 15.9 percent in 2019:Q4); return on assets declined but remained positive. NPLs remained low, though loans in IFRS Stage 2 rose sharply. Credit growth moderated. Mortgage loans moderated while house prices continued to climb.  
- Financial policy recommendations:
  - Continue careful monitoring of credit quality, NPLs, and corporate insolvency.  
  - Gradually shift broad-based corporate liquidity support toward solvency support for viable firms to ensure resilient recovery.  
  - In line with FSAP recommendations: develop granular data for commercial real estate, develop tools allowing for borrowing-based limits, and make prudential guidelines for housing lending binding to address vulnerabilities in the real estate market.  
- Financial sector indicators (selected):
  - Broad money (% change): 2018: 8.0; 2019: 4.6; 2020: 9.7; 2021 (Proj.): 4.7; 2022 (Proj.): 4.3.  
  - Credit to the private sector (% change)1/: 2018: 4.8; 2019: 5.1; 2020: 3.7; 2021 (Proj.): 2.6; 2022 (Proj.): 3.3.  
  - External debt (% of GDP): 2018: 149.8; 2019: 153.7; 2020: 164.1; 2021 (Proj.): 167.5; 2022 (Proj.): 145.6.  
  - Reserves (months of imports): 2018: 1.2; 2019: 1.2; 2020: 1.6; 2021 (Proj.): 2.0; 2022 (Proj.): 1.8.  
  - Current account (% of GDP): 2018: 1.3; 2019: 2.8; 2020: 2.5; 2021 (Proj.): 2.0; 2022 (Proj.): 2.3.  
  - FDI (% of GDP): 2018: 0.5; 2019: 1.7; 2020: 2.8; 2021 (Proj.): 1.7; 2022 (Proj.): 1.7.

1/ Households and non-financial corporations. Exchange rate adjusted.

### Structural policies and reform priorities
- Structural policy objectives:
  - Promote a green, digital, and inclusive recovery while safeguarding financial stability and limiting economic scarring.  
  - Support labor reallocation and reduce regional and skill mismatches.  
  - Ensure universal access to broadband, provide digital skill training, and promote wider use of ICT.  
- Specific structural policy recommendations:
  - Gradual and phased introduction of carbon taxes, with revenue used to compensate low-income and vulnerable households and to support other key reform priorities.  
  - Adopt green budgeting practices to integrate climate considerations into fiscal frameworks.  
  - Labor market policies to support worker reallocation and reduce skill mismatches.  
  - Strengthen digital infrastructure and digital skills training to smoothen digital transformation.  
- Mission and process notes:
  - The mission took place virtually during May 26 to June 15, 2021. The team met authorities including the Minister of Finance and the Central Bank Governor, and consulted ministries and financial sector stakeholders. The report was approved by Mahmood Pradhan (EUR) and Delia Velculescu (SPR) on August 3, 2021.

### Key statistics (from Austria: Selected Economic Indicators, 2018–22)
- Output: Real GDP growth (%) — 2018: 2.6; 2019: 1.4; 2020: -6.3; 2021 (Proj.): 3.5; 2022 (Proj.): 4.5.  
- Employment: Unemployment (Harmonized) (%) — 2018: 4.9; 2019: 4.5; 2020: 5.3; 2021 (Proj.): 5.5; 2022 (Proj.): 5.3.  
- Prices: Inflation (%) — 2018: 2.1; 2019: 1.5; 2020: 1.4; 2021 (Proj.): 2.1; 2022 (Proj.): 1.8.  
- General government finances (% of GDP): Revenue — 2018: 48.9; 2019: 49.2; 2020: 49.0; 2021 (Proj.): 48.6; 2022 (Proj.): 48.2. Expenditure — 2018: 48.7; 2019: 48.6; 2020: 57.9; 2021 (Proj.): 54.7; 2022 (Proj.): 51.6. Fiscal balance — 2018: 0.2; 2019: 0.6; 2020: -8.9; 2021 (Proj.): -6.2; 2022 (Proj.): -3.3. Public debt — 2018: 74.0; 2019: 70.5; 2020: 83.9; 2021 (Proj.): 85.3; 2022 (Proj.): 82.6.

*International Monetary Fund. Staff report for the 2021 Article IV Consultation - Austria.*

### 10.      In 2021, fiscal policy strikes an appropriate balance between addressing the pandemic

### 10.      In 2021, fiscal policy strikes an appropriate balance between addressing the pandemic and jumpstarting the recovery

### Fiscal stance and 2021 measures
- Revised 2021 budget: discretionary measures totaling 4.5 percent of GDP.
- In tandem with emergency measures, 1.5 percent of GDP is allocated to jumpstart the economy, mainly through private investment promotion, notably an investment premium, particularly for green investment.
- Fiscal deficit projected to reach 6.2 percent of GDP.
- Staff project overall deficit to improve from 6.2 percent of GDP in 2021 to below 1 percent of GDP in 2024.
- Drivers of deficit reduction cited:
  - Austria does not index income taxes for inflation, causing a rise in income tax revenue yearly of around 0.1–0.2 percent of GDP.
  - Interest payments on the debt are forecast to fall by 0.5 percent of GDP.
  - Previous civil service reform contributes to a falling public sector wage bill over time.

### Transparency, accountability, and targeting of support
- Lifeline support should be temporary and targeted to limit post-pandemic distortions; lifeline support should be further extended if downside risks materialize.
- Staff welcome authorities’ monthly reporting of COVID-19 spending implementation.
- Further strengthening recommended by:
  - granting public access to public procurement contracts and large-benefit recipients;
  - publishing ex-post audit reports on COVID-19 spending.
- Note: The Court of Audit had access to all procurement contracts and published the first report on financial aid measures at the onset of the pandemic (link in source text).

### Post-crisis recovery plan and EU support
- Authorities’ Stability Programme (SP) envisages a shift from emergency to recovery measures over 2022–24, with estimated discretionary spending of 1.3 percent of GDP on climate, digitalization, and innovation.
- Austria expected to receive EUR 3.5 billion grants under the EU Recovery and Resilience Facility; 59 and 53 percent of total grants specified in Austria’s Resilience and Recovery Plan (ARP) have been tagged as green and digital transitions, respectively.
- Total discretionary measures, as specified in Table 19 of the Stability Plan, are estimated at over 6 percent of GDP, comprising both revenue and expenditure measures (note in source).

### Key discretionary measures (selected figures from Table 1)
- COVID emergency response (2021): 4.46 (percent of GDP).
- Short-term work arrangement (2021): 0.75.
- Firm and municipality support (2021): 2.03.
  - Fixed cost subsidy and guarantees (2021): 0.98.
  - Hardship fund (self employed) (2021): 0.31.
  - Municipality investment act (2021): 0.15.
- Health (2021): 0.59.
- Revenue measures (2021): 0.89.
- Stimulus and new priorities (2021): 1.50.
  - Expenditure measures (2021): 0.97.
  - Innovation and education (2021): 0.04.
  - Climate (2021): 0.33.
  - Green investment premium grants (2021): 0.14.
  - Investment premium grant (2021): 0.17.
  - Digitalization (2021): 0.16.
  - Labor reallocation (2021): 0.10.
- Revenue measures with permanent budgetary impact (2021): 0.53.
  - Income tax reduction (2021): 0.46.
  - Declining depreciation rule (2021): 0.07.

(Notes from table: 1/ Domestically-financed measures (except for investment premium, which includes grants from the ARF). 2/ Include loss carry back and temporary deduction of sales tax. 3/ Assumptions on allocation of grants. Table entries preserved as presented.)

### Policy recommendations to support recovery and limit scarring (Text Table 2)
- Improve corporate balance sheets via solvency support for viable firms, including hybrid instruments and private sector participation.
- Tackle climate change including introduction of carbon tax.
- Address labor market issues and promote digitalization.
- Further reduce the labor tax wedge:
  - Consider lowering PIT rates for the second and third lowest income brackets or lowering social security contributions alongside pension reform.
  - To ensure permanent reduction, PIT brackets should be indexed to inflation to avoid bracket creep.
- Specific recommended measures and illustrative estimated costs:
  - Targeted and one-off hiring subsidies and job-search assistance: 0.1-0.5 (percent of GDP) in 2021; 0.1-0.2 (percent of GDP) in 2021 for hiring subsidies targeted at youth and low-wage workers.
  - Solvency support through hybrid instruments: estimated equity gap of 1-2 percent of GDP concentrated around SMEs (mobilization options described).
  - Digitalization: infrastructure (broadband, 5G readiness, fiber optic cables), funding to firms for digitalization projects, ICT skills upgrade training; one-off and multi-year financing noted (reference to Broadband Strategy 2030: total financing requirement EUR10-12 billion, with 40 percent assumed financed by public resources).
  - Phased Carbon Tax: (25 real EUR per ton of CO2 in 2023 increasing to 100 by 2030): Net impact reported as -4.0 (2022-2030) with transfers to compensate vulnerable households costed at 2.1 (2022-2030). (Negative value indicates revenue gain; costs cumulative unless otherwise indicated.)
  - Labor tax wedge measure: Assuming tax reduction to 30 and 40 percent for the second and third lowest income brackets (from 35 and 42 percent), respectively: estimated cost 0.40 (percent of GDP) annually from 2023.

### Pension and aging-related fiscal pressures
- Austria’s pension system currently financially healthy due to past reforms (raising effective retirement ages, tightening early retirement schemes, containing fiscal costs).
- Austria’s effective retirement age and statutory retirement age are still low by international standards; labor force participation for those 55–64 is well below EU and OECD averages.
- Future aging will increase pension and health care costs while contributions decline.
- Further actions needed: discourage early retirement and strengthen labor force participation to ensure long-term pension sustainability.

### Financial sector policies — corporate solvency, banking resilience, and housing risks
- Corporate sector
  - Emergency support mitigated liquidity challenges, but corporate solvency risks increased.
  - Corporate debt-to-income ratio surged by almost 15 percentage points in 2020.
  - Staff analysis suggests an equity gap of around 1 percent of GDP compared to pre-crisis levels.
  - Policy shift recommended from liquidity support to solvency support for viable firms, with private sector participation encouraged; allow nonviable firms to exit.
  - Enhance debt restructuring mechanisms: provide tools/incentives for voluntary debt resolution, increase court capacity, implement 2019 EU Restructuring Directive.
- Banking sector
  - Banking sector entered crisis with strong capital (CET1 around 15 percent in 2020) but low profitability and high exposure to affected sectors.
  - IMF analysis: policy measures (loan guarantees, debt moratoria, short-term work arrangements) helped halve average default rates in each sector and limited contraction in core capital.
  - Support measures reduce estimated decline in CET1 from 1.6 percent to 1.1 percent by end-2021 (source estimates).
  - Staff estimates expected insolvency rate 3.4 percent in 2021; authorities estimate 3.1 percent.
  - Banks should remain vigilant: monitor rise in loans classified at IFRS Stage II and prepare for possible increase in NPLs, especially in tourism and hospitality.
  - Recommend deeper integration of ICT to reduce persistently high operating costs.
- Housing and real estate
  - Growing vulnerabilities in the housing sector call for stricter enforcement of prudential guidelines.
  - OeNB analysis: house prices decoupling from fundamentals; share of new lending not complying with Financial Market Stability Board (FMSB) sustainability recommendations.
    - Detailed monitoring: loan maturity conforms to 35-year cap; about half of new loans at end-2020 do not comply with own-funds rules (resulting in an LTV at about 90 percent for newly originated mortgages); 18 percent of new loans extended above the 40 percent recommended boundary for debt-service to income.
  - Authorities should make existing prudential guidelines for lending binding.
  - Increased vacant inventories in office and retail due to tele-working and online sales warrant close monitoring of banks’ commercial real estate exposures.
  - Development of granular data on commercial real estate recommended to allow close monitoring of risks.

*Source: IMF staff report excerpt provided in the content unit.*

### 21.      The failure of two small banks points to the need to reinforce auditing and supervision

### 21.      The failure of two small banks points to the need to reinforce auditing and supervision

### Bank failures, deposit guarantee schemes (DGS), and systemic implications
- Two small banks failed: Anglo Austrian AAB AG and Commerzialbank Mattersburg im Burgenland AG (CBM).
- The failures:
  - Activated payout of the DGS totaling EUR 550 million.
  - ESA payouts: EUR 60 million (Anglo Austrian AAB AG) and EUR 489 million (CBM).
  - Anglo Austrian AAB AG affected 90,000 depositors; CBM affected approximately 13,500 depositors.
- Institutional responses:
  - Authorities set up a working group to analyze lessons and design policies to strengthen supervision.
  - Banks are expected to substantially increase contributions to replenish losses and increase coverage by 2024.
- Structure and coverage of the Austrian DGS:
  - The Austrian DGS now consists of two networks: Sparkassehaftungs GmbH (S-Haftung) and Einlagensicherung Austria GmbH (ESA).
  - Contribution rate in 2020: 0.3 percent of outstanding retail deposits plus a small risk-based factor.
  - Maximum deposit guarantee: EUR 100,000 per person and institution with a seven-day payout.
  - EU national target under the Deposit Guarantee Schemes Directive: at least 0.8 percent of covered deposits by July 2024, with contributions based on risk.
  - In case of insolvency, Austrian Banking Act provides for sharing of resources from other schemes if any DGS has insufficient funds.
- Fragmentation risk:
  - The Raiffeisen sector (40 percent of total deposits) decided to split off and form its own DGS.
  - The Raiffeisen group can only withdraw 12 months of contributions from the ESA and must fund its own scheme fully to the 0.8 percent level.
  - While withdrawal will not have a significant impact on overall funding given these constraints, fragmentation increases complexity and reduces benefits from risk mutualization across diverse business models.

### Anti-money laundering and combating the financing of terrorism (AML/CFT)
- Reforms and legal framework enhancements:
  - Austria adopted a comprehensive set of reforms in line with FATF standards, including supervision, regulation of virtual assets and virtual asset service providers (VA/VASPs), and designated financial businesses and professions.
  - Financial Markets AML Act (FM AML Act) assigns registration and control of VA/VASPs to the FMA and enhances monitoring of suspicious transactions through an artificial intelligence-based approach.
  - Austria transposed the 5th EU Anti-Money Laundering Directive into national law and amended the BORA Act.
  - Austria adopted an updated National AML/CFT Risk Assessment (May 2021).
  - FMA increased resources and intensified its onsite inspection plan with more supervisory focus on group-wide AML/CFT policies and on subsidiaries/branches of Austrian banks operating abroad.
- Remaining concerns and recommendations:
  - Ongoing reform should enhance risk-based supervision by relying on cross-border risks and group-wide supervision and information sharing, particularly outside EU/EEA countries.
  - Authorities are encouraged to reconsider recent amendments to tipping-off and confidentiality provisions under the FM AML Act (in particular, Art. 20 (3) and Art. 22 (2)) as they are not fully consistent with FATF requirements and might have negative implications.
  - Austria does not pursue ML as a priority commensurate with its profile as an international financial center; sanctions applied by courts for ML are not dissuasive (penalties are very low).
  - Further efforts needed to ensure all private entities adequately report suspicious transactions related to proceeds of corruption and enhance overall AML/CFT effectiveness.

### Financial Sector Assessment Program (FSAP) progress and gaps
- Progress since 2020 FSAP:
  - Significant progress in insurance supervision and in strengthening the AML/CFT framework.
  - Plans to roll out new tools for financial stability analysis, including datasets, analytical models, and policy tools for monitoring risks in CRE and RRE.
  - Improved financial crisis management through better coordination between main supervisory agencies.
- Remaining gaps:
  - Clarification needed on stabilization mechanisms and bankruptcy regimes.
  - Continued work required to implement working group recommendations on the two bank failures.

### Authorities’ views and policy priorities
- Authorities broadly agreed with staff’s assessment and see the need to strengthen corporate balance sheets.
- Observations by authorities:
  - Credit continued growing; Austrian significant institutions performed above SSM averages despite reduced profitability.
  - Monitoring of banking exposure to hard-hit sectors (hospitality and tourism) has intensified.
  - Need to shift priority to strengthen corporate balance sheets by actively seeking to build equity—especially in SMEs—and various policy options are being considered.
  - Identified risks in the housing sector and the need for broader actions to counter these developments.
  - Noted that deposit guarantee risks would increase somewhat due to higher complexity of the system and the smaller number of ESA members, but aggregate pay-out capacity would not be affected by the new Institutional Protection Scheme given buffers within and arrangements across the schemes.
  - Authorities planned to fully implement the recommendations of the working group on the failure of the two small banks.

*Source: IMF staff report excerpt (section 21).*

### 33.      Since 2016, Austria has continued enhancing the overall AML/CFT framework designed

### Since 2016, Austria has continued enhancing the overall AML/CFT framework designed to prevent foreign officials from concealing the proceeds of corruption but further efforts are needed.

### AML/CFT reforms and institutional measures
- National Anti-Corruption Strategy adopted in January 2018 committing to integrity, transparency, awareness-raising, and enhanced domestic and foreign cooperation.
- Government Program 2020–2024 increased efforts on AML/CFT.
- Financial Markets AML Act and sectoral laws for designated non-financial businesses and professions were strengthened, including preventive framework for politically exposed persons (PEPs) and entity transparency.
- Register of Beneficial Owner of legal persons and arrangements created in 2017 to ensure beneficial ownership information is available, accurate and easily accessible.
  - The BO register is set up within the Federal Ministry of Finance and is fully operational. Authorities conduct safeguards including close monitoring and random-sample checks.
- Account register operational from October 2016 granting access inter alia to the prosecution authorities; later extended to allow the FIU to access safe deposit boxes and grants.
- Changes to the Criminal Procedure Code to facilitate seizure of assets.
- In June 2021, a draft bill passed the Justice Committee of the Austrian Parliament providing for improvements with respect to confiscation of proceeds of crime.
- Progress acknowledged by the FATF in its two follow-up reports (2017 and 2018). A follow-up assessment by the FATF on effectiveness is yet to be conducted.

### Authorities’ views on green, digital, and job-rich transformation
- Authorities welcomed recommendation to adopt green budgeting practices to integrate climate considerations into fiscal frameworks.
- Authorities agreed carbon pricing is necessary and were negotiating among coalition partners with a view to introducing some form of carbon pricing by 2022:Q1; they stress the measure should be implemented in a revenue-neutral way.
- On digitalization, authorities cited limited capacity as a key consideration for accommodating additional spending.
- On employment, authorities agreed on regional and skills mismatches but viewed training component of the recovery plan as adequate; they supported targeted hiring subsidies in principle but noted concerns about relatively large deadweight losses.
- Authorities agreed the short-time work scheme should become more targeted and less generous progressively but differed with staff on parametrization and duration of the phase-out.

### Staff appraisal — macroeconomic position and pandemic impact
- Austria entered the pandemic from a strong position: pre-crisis growth above the euro area average, falling unemployment, well capitalized banking sector, strong fiscal position, and declining public debt.
- Real GDP contracted by 6.3 percent in 2020 due to lockdowns.
- Unemployment rose but job losses were mitigated by strong support from the SWTS.
- Recovery progress:
  - Weak winter tourism and renewed lockdowns early in the year delayed recovery; Austria had a weaker initial rebound than peers.
  - Assuming no resurgence of the pandemic, growth is expected to accelerate in 2022 and surpass pre-pandemic levels.
  - Medium-term GDP level expected to be below its pre-crisis trend notwithstanding large uncertainties.
  - Downside risks include resurgence of the pandemic due to new variants and/or lower vaccine coverage or effectiveness.
- Emergency measures during the pandemic (increased health spending, direct financial support, public loan guarantees, short-term work scheme, expanded unemployment benefits, loan moratoria) amounted to almost 13 percent of 2020 GDP.
- Expected overall deficit of 6.2 percent of GDP in 2021.

### Policy recommendations to support recovery and resilience
- Fiscal space utilization:
  - Austria still has fiscal space—given favorable market conditions and savings from previous reforms—to implement additional measures to boost recovery.
  - Suggested measures: solvency support to viable firms, added investment in green initiatives and digitalization, further steps to lower labor tax wedge, and active labor market policies to address skills and regional mismatches.
- Solvency and restructuring:
  - Firms’ debt-to-income ratio surged and equity gap rose during the pandemic, pointing to growing solvency risks.
  - Introduce solvency support mechanisms consistent with EU state-aid rules to restore corporate balance sheets.
  - Enhance debt restructuring mechanisms and swiftly transpose the EU Restructuring Directive to facilitate firm exits and improve capital reallocation efficiency.
- Labor market policies:
  - Prioritize employment support policies (hiring cost subsidies and job search assistance) targeted at those disproportionately impacted to prevent long-run unemployment and income scarring.
  - Additional support: German language training for migrant and refugee workers, re-skilling programs, and relocation assistance to reduce regional and skill mismatches.
- Climate policy:
  - Gradual and phased-in carbon prices, coupled with expanded energy efficiency measures, are necessary to meet Austria’s emission reduction target.
  - Revenue from carbon pricing should compensate vulnerable households, boost climate-friendly investment, and finance additional labor tax cuts.
  - Adopt green budgeting practices to integrate climate considerations into fiscal frameworks.
- Digitalization:
  - Additional spending to improve digital access and utilization can boost growth potential.
  - Suggested spending: productivity-enhancing support to high-technology start-ups, funding for firms’ digitalization projects, and ICT-skills training.
- Financial sector vigilance and reforms:
  - Close monitoring needed on credit quality and NPL developments as emergency policies unwind, especially in hard-hit sectors.
  - Make prudential guidelines for real estate lending binding given housing sector risks.
  - Strengthen supervision of less significant institutions following failures of two small banks prior to the pandemic; implement working group recommendations promptly.
  - Address fragmentation of the deposit guarantee system to avoid undermining efficiency.
  - Commit to implementing remaining 2020 FSAP recommendations, including on real estate and risk monitoring.

### Key fiscal and macro-financial indicators (selected exact figures from tables)
- Real GDP growth: 2018: 2.6, 2019: 1.4, 2020: -6.3, 2021: 3.5, 2022: 4.5, 2023: 2.3, 2024: 2.2, 2025: 2.0, 2026: 1.8 (annual percent change).
- Overall deficit: expected 6.2 percent of GDP in 2021.
- Emergency measures size: almost 13 percent of 2020 GDP.
- Net lending/borrowing (general government): 2018: 0.2, 2019: 0.6, 2020: -8.8, 2021: -6.2, 2022: -3.3, 2023: -1.9, 2024: -0.8, 2025: -0.7, 2026: -0.5 (percent of GDP).
- Gross debt (Maastricht def.): 2018: 74.0, 2019: 70.5, 2020: 83.5, 2021: 85.3, 2022: 82.6, 2023: 80.8, 2024: 78.2, 2025: 77.8, 2026: 74.8 (percent of GDP).
- Current account (% GDP): 2018: 1.3, 2019: 2.8, 2020: 2.5, 2021: 2.0, 2022: 2.3, 2023: 2.1, 2024: 2.0, 2025: 2.3, 2026: 2.4.
- Consumer prices (avg): 2018: 2.1, 2019: 1.5, 2020: 1.4, 2021: 2.1, 2022: 1.8, 2023: 2.0, 2024: 2.0, 2025: 2.0, 2026: 2.0 (percent).
- Labor market: EU harmonized unemployment rate: 2018: 4.9, 2019: 4.5, 2020: 5.3, 2021: 5.5, 2022: 5.3, 2023: 5.0, 2024: 4.7, 2025: 4.7, 2026: 4.7 (percent of labor force).

*International Monetary Fund staff appraisal based on the Austrian Article IV consultation content provided.*

### Annex I. Key Policy Measures in Response to the Pandemic

### Annex I. Key Policy Measures in Response to the Pandemic

### External Sector Assessment — Major Findings
- External position in 2020 remained broadly in line with fundamentals and desirable policy settings after adjusting for transitory tourism impacts from the COVID-19 crisis.
- Current account gap: close to zero; based on EBA estimates the current account balance in 2020—after adjusting for cyclical and temporary factors—stood at 2.5 percent of GDP, compared with an estimated norm of 2.1 percent of GDP.
- Net international investment position (IIP): declined slightly to 11 percent in 2020 (from 12 percent in 2019), largely from valuation effects; projected to increase further as the current account is expected to remain in surplus.
- Banking sector external funding and lending:
  - Austrian banks sharply reduced reliance on foreign wholesale financing and exposure to CESEEs.
  - Loan-to-deposit ratio of Austrian banking subsidiaries declined from a peak of over 100 percent of GDP in 2008 to about 75 percent of GDP in 2020.
- Capital and financial account: financial account posted net outflow of 1.4 percent of GDP in 2020, driven by FDI and reduction in other investment liabilities; net portfolio investment inflows remained strong as foreign investors increased holdings of Austrian debt securities.
- External Balance Assessment (REER and gaps):
  - Applying a semi-elasticity of 0.4, an indicative REER gap is estimated at 0.16 percent.
  - EBA REER estimates suggest the REER, which appreciated by 10 percent in 2020, was overvalued within a range of 10.5–13.3 percent, though these estimates are mostly driven by unexplained residual.
- Overall assessment: Austria’s external position in 2020 was assessed as broadly consistent with fundamentals and desirable policy settings; policies are broadly appropriate in the near term though structural reforms could reignite growth. In the long run, raising efficiency of health expenditures and reforming pensions would open significant savings potential to help ensure fiscal sustainability.
- External Balance Assessment table (selected figures):
  - Total current account gap: 0.4 percent (with policy gaps and temporary COVID-related adjustment breakdown shown in source table).
  - REER (index) total gap range: 10.5–11.1 (see table for components).
  - REER (level) total gap range: 13.3–12.3 (see table for components).

### Risk Assessment Matrix — Key Risks, Likelihood, Impact, and Policy Responses
- Global resurgence of the COVID-19 pandemic
  - Relative likelihood: Medium
  - Impact if realized: Medium
  - Effects: Domestic demand weakening in contact-intensive sectors; larger economic scarring; persistent increase in unemployment.
  - Policy response: Maintain public health safeguards including contact tracing and widespread testing; use available fiscal space to support households and firms and encourage resource reallocation.
- Disorderly transformations and impeded reallocation
  - Relative likelihood: Medium
  - Impact if realized: High
  - Effects: Larger economic scarring; persistent increase in unemployment; high insolvency rate.
  - Policy response: Provide training and hiring subsidies; provide solvency support for viable firms; transpose the EU Directive on Restructuring and Insolvency.
- Widespread social discontent and political instability
  - Relative likelihood: Medium
  - Impact if realized: Medium
  - Effects: Increase in unemployment and inequality.
  - Policy response: Sustain supports to vulnerable households.
- Rising commodity prices amid bouts of volatility
  - Relative likelihood: Medium
  - Impact if realized: Medium
  - Effects: Higher input costs for firms.
  - Policy response: Implement reforms to boost productivity and potential growth.
- Higher frequency and severity of natural disasters related to climate change
  - Relative likelihood: Medium
  - Impact if realized: Medium
  - Effects: Weaker demand for winter tourism and lower growth.
  - Policy response: Support affected sectors and rebuild damaged infrastructure; reallocate fiscal spending as needed; diversify tourism export base.
- De-anchoring of U.S. inflation expectations leading to rising core yields and risk premia
  - Relative likelihood: Medium
  - Impact if realized: Medium
  - Effects: Weaker confidence could reduce investment.
  - Policy response: Implement reforms to boost productivity and potential growth.
- Cyber-attacks on critical infrastructure and financial systems
  - Relative likelihood: Medium
  - Impact if realized: Medium
  - Effects: Loss of confidence in financial markets and the economy.
  - Policy response: Deploy measures to strengthen cyber security.
- Domestic risks
  - Weakness in coordinating and implementing domestic reforms
    - Relative likelihood: Medium; Impact: Medium.
    - Policy response: Outline reform details in a comprehensive package; identify key expenditure-side measures; publish progress reports periodically.
  - Premature withdrawal of support
    - Relative likelihood: Medium; Impact: Medium.
    - Effects: Economic scarring from weak corporate balance sheets suppressing investment and capital accumulation.
    - Policy response: Careful monitoring of credit quality; provide solvency support.

### Public Sector Debt Sustainability Analysis — Baseline, Projections, and Stress Tests
- Pre-pandemic and pandemic debt levels:
  - Public debt declined to 70.5 percent of GDP in 2019.
  - Public debt rose to 83.5 percent of GDP in 2020 due to fiscal support.
- Baseline key assumptions:
  - Growth: projected at 3.5 percent in 2021, accelerate to 4 percent in 2022, then gradually decline to potential level of 1.8 percent over the medium term.
  - Baseline incorporates fiscal support announced in the 2021 budget (first revision) and announced recovery plan during 2021–24; authorities revising the budget and extending fiscal support due to renewed lockdown in April 2021.
  - Sovereign ratings remained strong; Austria 10-year and Germany 10-year spread stabilized at around 20 basis points.
- Debt dynamics and projections:
  - Public debt rose to 83.5 percent of GDP in 2020; under extended support public debt will reach 85.3 percent of GDP in 2021.
  - As temporary support unwinds, public debt projected to fall to 74.8 percent of GDP in 2026.
  - Estimated gross financing needs will decline to about 10 percentage points during 2020–26.
- Realism of baseline assumptions (historical forecast errors):
  - Median forecast error for growth during 2011–19: -0.37.
  - Median forecast error for inflation: -0.43.
  - Median forecast error for primary balance: 0.46.
- Projected fiscal adjustment:
  - Three–year adjustment of the cyclically adjusted primary balance (CAPB) places Austria in the top quartile; projected fiscal adjustment deemed feasible as emergency responses unwind by end–2021 and GDP accelerates in 2022.
- Stress tests and shocks:
  - Stress tests indicate debt dynamics worsen under shocks though in most cases public debt falls below its peak in 2021.
  - Largest shocks to debt dynamics: growth shocks and contingent liability shock.
  - GDP shock scenario: assumes growth is slower by one standard deviation of historical outturn, implying a reduction by almost 4 percentage points in 2022–23; in this scenario public debt-to-GDP would be 85 percent of GDP in 2026—a 11 ppt increase compared to the baseline.
  - Other standardized macro shocks (primary balance shock, real exchange rate shock, real interest rate shock) do not lead to significant deviations from baseline; combined shock driven by assumed lower growth yields a similar path to the low-growth scenario.
- Selected quantitative projections and indicators (from Table 1 and figures):
  - Nominal gross public debt: 81.2 (2019), 70.5 (2020), 83.5 (2021), 85.3 (2022), 82.6 (2023), 80.8 (2024), 78.2 (2025), 74.8 (2026) — all values in percent of GDP as presented in source table.
  - Public gross financing needs: 10.6 (2019), 10.3 (2020), 18.5 (2021), 15.6 (2022), 14.4 (2023), 12.5 (2024), 9.9 (2025), 9.2 (2026) — all in percent of GDP.
  - Real GDP growth (in percent): 1.6 (2019), 1.4 (2020), -6.3 (2021), 3.5 (2022), 4.5 (2023), 2.3 (2024), 2.2 (2025), 2.0 (2026) as shown in the table.
  - Inflation (GDP deflator, in percent): 1.7 (2019), 1.7 (2020), 1.2 (2021), 2.2 (2022), 2.0 (2023), 2.0 (2024), 2.7 (2025), 1.5 (2026).
  - Nominal GDP growth (in percent): 3.3 (2019), 3.2 (2020), -5.1 (2021), 5.8 (2022), 6.5 (2023), 4.3 (2024), 5.0 (2025), 3.6 (2026).
  - Effective interest rate (in percent): 3.0 (2019), 2.0 (2020), 1.8 (2021), 1.1 (2022), 0.9 (2023), 0.8 (2024), 0.8 (2025), 0.9 (2026).
  - Change in gross public sector debt (cumulative): -0.6 (2019), -3.5 (2020), 13.0 (2021), 1.7 (2022), -2.7 (2023), -1.8 (2024), -2.6 (2025), -0.4 (2026), -2.9 (cumulative) — as per table layout.
- Alternative scenarios illustrated in figures:
  - Baseline vs. Historical vs. Constant Primary Balance scenarios with differing paths for Real GDP growth, Inflation, Primary Balance, and Effective interest rate (see figures for exact underlying assumptions).
  - Stress test scenarios include Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, and Contingent Liability Shock — each scenario’s projected Real GDP growth, Inflation, Primary balance, and Effective interest rate are provided in source figures.
- Public DSA risk assessment and heat maps:
  - Debt burden benchmark of 85 percent used for color-coding stress-test outcomes.
  - Market perception indicators shown (e.g., bond spread, external financing requirement, annual change in short-term public debt, public debt in foreign currency, public debt held by non-residents) with benchmark thresholds specified in the source.

*Source: IMF staff (Annexes I–IV as provided in the supplied content).*

### Annex V. Authorities’ Responses to 2020 FSAP Recommendations

### Annex V. Authorities’ Responses to 2020 FSAP Recommendations

### Financial Sector Oversight
- Recommendation: Review legislation to clarify and narrow the BMF’s role in oversight of the FMA and remove industry participation in its Supervisory Board.
  - Time Frame: MT
  - Status: No change
- Recommendation: Make the OeNB the chair of FMSB and increase its voting representation.
  - Time Frame: NT
  - Status: No change
- Recommendation: Strengthen related party risk framework and establish ex-ante approval for LSI significant investments in non-financial undertakings.
  - Time Frame: NT
  - Authorities’ response: The Austrian authorities (FMA/OeNB) reiterate that a change in EU legislation is a prerequisite for legislation change in Austria.
- Recommendation: Phase-out the role of state commissioners in supervisory boards.
  - Time Frame: MT
  - Authorities’ response: FMA and OeNB: There are no plans to substitute the state commissioner; the FMA revised its internal processes to intensify the interactions with the supervisory boards of the credit institutions under its supervision.
- Recommendation: Enhance internal guidelines for supervisory action based on qualitative factors.
  - Time Frame: I
  - Authorities’ response: FMA and OeNB: The authorities are continuously updating and refining the internal SREP manuals (the SSM SREP and the EBA SREP GL) to reflect EU regulatory developments. Training and Guidance to staff are provided on a regular basis.
- Recommendation: Stress-test insurance segments / business lines with material future profitability and follow-up with appropriate actions, such as capital add-on.
  - Time Frame: NT
  - Authorities’ response: The 2020 stress test for insurance companies was replaced with:
    - (1) Multiple ad-hoc surveys and analyses on the implication of COVID-19 pandemic on insurance obligations and provision of insurance services,
    - (2) an EIOPA-coordinated monthly liquidity assessment related to the Covid-19 crisis on risks to short-term liquidity from the three participating insurance companies; this assessment did not identify liquidity issues; and they will continue in 2021,
    - (3) Assessment of the exposure towards economic sectors which are potentially affected by COVID 19 pandemic,
    - (4) an comprehensive impact assessment on the effects of interest risk module,
    - (5) Complementary information to evaluate the impact associated with the new extrapolation method and the adjustment of the long term guarantee measures.
    - In 2021 the scope of the stress test includes the largest group identified according to EIOPA criteria.
- Recommendation: Review resources for the maintenance of Solvency II, insurance market conduct supervision and potential recovery and resolution framework, and AML supervision for all entities, including VASPs.
  - Time Frame: NT
  - Authorities’ response: The FMA continuously reviews human resources and new needs identified. Recent responsibilities, VASPs experts assigned within AML receive regular on the job trainings to fulfill new responsibilities.
- Recommendation: Revise AML/CFT risk scoring reflecting cross-border risks, increase onsite inspections of low risk banks, branches and subsidiaries and improve non-EU/EEA information exchange.
  - Time Frame: NT
  - Authorities’ response:
    - (i) The FMA's risk scoring toolkit includes quantitative and qualitative data to properly capture risks. Qualitative data include audit reports, results from previous on-site inspections and off-site measures as well as other perceptions (e.g. media reports, information provided by the prudential team,...). On cross border risk monitoring includes qualitative data and the count of branches and subsidiaries in every country, which is taken into account in each country's aggregate risk score.
    - (ii) The FMA has increased the frequency of its onsite supervision for low risk institutions (considering overall risks) by Q4/2020 in order to raise awareness of the entities under supervision on AML, asses the implemented AML/CFT frameworks, and check the data submitted for the FMA's AML/CFT's risk-assessment tool. The evaluation concentrated on transactions carried out by the customers of typically small and regional banks.
    - (iii) The FMA has increased OSIs dealing with group-wide policies both within the parent institution and in foreign branches and subsidiaries to the effectiveness of the measures implemented. Due to Covid19, some of the measures had to be modified.
    - (iv) Non-EU/non-EA exchange of information: improvement of cross-border information exchange is part of the ongoing supervision. The FMA has the explicit legal basis to share information. MoUs help practical modalities. FMA is also conducting routine reviews of group-wide strategies during its on-site inspections. The FMA is currently updating its MoU for insurance supervision with Montenegro; the UA Emirates is seeking to engage the FMA on a MoU, where a symmetrical involvement for EBA will be needed for an equivalence assessment.
- Recommendation: Monitor the effectiveness of the FMSB’s sustainable lending guidance and prepare regulatory actions, such as binding macroprudential limits, if the risk profile does not improve.
  - Time Frame: NT
  - Status: No change
- Recommendation: Enhance oversight of inward spillover risks from the inverse ownership structure of the Raiffeisen sector.
  - Time Frame: NT
  - Authorities’ response: The FMA is constantly monitoring the specific risks of the Raiffeisen sector with a focus on the supervision of the Institutional Protection Scheme (IPS). There are regular meetings between FMA/OeNB staff with the auditors, the management bodies of the credit institutions within the Raiffeisen sectors, and with the Austrian Deposit Guarantee Scheme (Einlagensicherung Austria Ges.m.b.H.). Plans to refine supervisory activities as regards the specific risks of the Raiffeisen sector. Spillover risks are also investigated during the resolution planning cycle that will be finished by Q4 2021.

### Financial Stability Analysis
- Recommendation: Close data gaps, including in the real estate and NFC sectors, and improve coverage and granularity of CESEE data.
  - Time Frame: MT
  - Authorities’ response (OeNB):
    - (i) Data gaps with regard to real estate and NFC sectors were implemented for residential real estate; the implementation is ongoing for commercial real estate.
    - (ii) Data gaps with regard to CESEE: They are implemented using risk-based parameters. The AnaCredit data of other countries provide NFC risk parameters. The implementation is ongoing on country risk statistics for the use of the enhanced use of OeNB's “Financial Stability Cube”.
- Recommendation: Enhance stress testing framework to consider second round effects, dynamic balance sheets, and contagion/spillover effects.
  - Time Frame: MT
  - Authorities’ response (OeNB): Implementation ongoing with a focus on incorporating a dynamic balance sheet perspective.
- Recommendation: Ensure resources and organizational structure are adequate to meet stress testing framework objectives.
  - Time Frame: NT
  - Authorities’ response: Implemented: One temporary position (duration 2 years) was created and another temporary position (duration 2 years) was redirected to support further development.

### Financial Crisis Management and Safety Nets
- Recommendation: Explicitly provide for purchase and assumption transactions in the bankruptcy regime.
  - Time Frame: NT
  - Status: No change
- Recommendation: Seek legislation for standing authority to implement stabilization measures, support funding in resolution, and explore mechanisms for prepositioning BMF to support borrowing by DGSs.
  - Time Frame: I
  - Status: No change
- Recommendation: Consider cross-border spillovers in national crisis contingency plans.
  - Time Frame: NT
  - Authorities’ response: A crisis cooperation manual between OeNB and FMA was concluded in Q2 2020. Cross-border spillovers are dealt with in the established procedures of the Resolution Colleges.
- Recommendation: Enhance insurance crisis preparedness, introducing pre-emptive recovery planning for eligible insurers.
  - Time Frame: NT
  - Authorities’ response: The FMA contacted the MoF in connection with the modernization of FMA's supervisory instruments. Discussions with the MoF have advanced and first legislative drafts are currently under discussion. FMA's positions were presented at EIOPA level to prepare the technical advice for the European Commission. FMA and BMF have similar positions on the preparation of draft legislation and the FMA supports BMF's EU negotiation position on the implementation of a harmonized resolution regime.

*NT “near-term” is 1–3 years; MT “medium-term” is 3–5 years; I “Immediate” is within one year.*

---

### Annex VI. Closing the Climate Gap: A Carbon Pricing Proposal for Austria

### Context and objectives
- Austria’s commitments:
  - Climate neutrality by 2040.
  - EU-wide net domestic reduction of at least 55 percent in greenhouse gas emissions by 2030 compared to 1990.
- Current emissions and trends:
  - Total emissions at end-2019 were about 2 percent higher than in 1990.
  - EU emissions fell by 30 percent between 1990 and 2019.
  - Non-ETS sectors comprise 63 percent of Austria’s total GHG emissions and 72 percent of its energy-related CO2 emissions (IEA, 2020).
  - The domestic transportation sector has effectively doubled its emissions since the 1990s and is the single largest emitter of non-ETS emissions.
- Policy framework:
  - Austria guided by EU climate policy framework and domestic Climate Change Act (2011).
  - Climate Change Act sets annual targets for six sectors (so far up to 2020) and rules on cost-sharing between the federal government and the provinces.
  - Federal Government committed to climate neutrality by 2040 and adopted the Austrian Climate and Energy Strategy (#mission2030), mandating 2030 emissions targets for non-ETS sectors, expanding renewable energy and improving energy efficiency.

### Current policy gap and fiscal measures
- Existing policies prior to the pandemic would fall short of meeting the 2030 emissions target; substantial additional efforts needed.
  - At end-2019 Austria was off-track to meet the 2020 targets (about 20 percent reduction relative to 1990) with non-ETS emissions only 10 percent below the 2005 level.
  - COVID-19 crisis likely to reduce GHG emissions by over 10 percent relative to 2019, but decline expected to be temporary and reverse by 2021.
- Recovery package and green spending:
  - Historically, fiscal spending on green and environmental policies averaged around 0.4 percent of GDP annually.
  - Advanced economy average historically: 0.5 percent of GDP.
  - A fifth of the announced recovery package consists of measures on climate change and environmental protection (includes climate-friendly investments, decarbonizing public transport, forest conservation, scaling-up renewables, green renovation).
  - Some measures (low-emission mobility, thermal renovation, scaling up renewables) will help increase energy efficiency but may deliver only a small fraction of necessary savings by 2030.
- Carbon pricing status:
  - Effective carbon rates in Austria consist of fuel and electricity excise taxes and to a smaller extent permit prices from the EU-ETS.
  - About 68 percent of its carbon emissions are priced from energy use and only 48 percent are priced at a rate above EUR 60 per tonne of CO2, leaving a pricing gap of about 52 percent (OECD, 2021).
  - The majority of unpriced emissions are from the industrial, residential, and commercial sectors.
  - Tax Reform Act 2020 (Steuerreformgesetz 2020) implements some ecological measures in transport and introduces tax subsidies for sustainable fuels (registration tax dependent on price and emissions, CO2 component in engine-related insurance tax, exemptions/rebates for electric vehicles, biogas, sustainable hydrogen and liquefied natural gas).
  - Fuel exports in vehicle tanks are estimated to account for approximately 23 percent of total diesel and petrol sold in Austria in 2016 (IEA, 2020).

### Rationale for carbon pricing and modeling approach
- Carbon pricing would be comprehensive and broad-based to efficiently price all fuels and internalize environmental externalities.
- Operational approach: introduce carbon taxes as charges on fossil fuels with rates equal to the fuel’s CO2 emissions factor multiplied by a CO2 emissions price.
- Model assumptions for simulations (Carbon Price Assessment Tool framework):
  - Future GDP growth.
  - Income elasticities for energy products.
  - Rates of technological change (improve energy efficiency).
  - Future international energy prices.
  - Existing ETS arrangements.
  - Model assumes a 5 percent growth in ETS permit price per annum.
- Emission reductions depend on:
  - Proportionate effect of measures on fuel prices.
  - Fuel price responsiveness (price elasticities for electricity and fuels generally around -0.5 to -0.8).

### Key simulation results and scenarios
- Proposed phasing and impacts:
  - Carbon tax introduced gradually starting at €25 per metric ton of carbon emission in 2022.
  - By 2030:
    - A carbon tax of €100 per metric ton would reduce emissions by 13 percent relative to the baseline, BAU (no policy measure), emission path.
    - A carbon tax of €150 per metric ton would reduce emissions by 16 percent relative to the baseline, BAU emission path.
  - The sectors contributing majorly to emission reductions under the carbon tax: power, industry, and transport.
- Price effects:
  - Under the €100 carbon tax scenario:
    - The average increase in the price of fuels, excluding coal, is around 35 percent.
    - Carbon taxation would increase the price of coal by over 150 percent, bringing it closer to its socially efficient `Pigouvian’ price which internalizes global warming, local pollution, congestion costs, accident costs, and road damage.
- Relation to targets:
  - The carbon tax trajectories (e.g., €75, €100, €150 scenarios shown) compared with Baseline and NDC Target (EU net reduction target of 55% in GHG emissions by 2030 vs. 1990) indicate that a €100 carbon tax by 2030 would contribute to narrowing the 2030 emission target gap.
  - Note: BAU scenario does not directly model impact of existing policy measures (including recovery package) other than through effects on GDP, technological change and energy prices. The NECP’s WEM scenario projects a 20 percent emissions reduction in 2030 relative to 2005 under different modeling assumptions.

### Policy implications and complementary measures
- Carbon taxation balances reducing incentives for exporting fuel in vehicles while avoiding substantial changes in investment decisions.
- Complementary measures recommended:
  - Additional economy-wide energy efficiency measures to further reduce emissions by reining in energy consumption.
  - Targeted measures to address unpriced emissions in industrial, residential, and commercial sectors.
  - Consideration of distributional and competitiveness effects and design of revenue use to support transition and mitigation objectives.

*Prepared by Manasa Patnam (EUR). The author thanks Jeffrey Franks, Michelle Hassine, Angela Koeppl, Stefan Schleicher, Nujin Supaphiphat, Barbara Posch, Simon Black and Victor Mylonas, and Jankeesh Sandhu for contributions referenced in the source document.*

### 9.      The introduction of a carbon pricing scheme could also provide substantial revenue

### 9.      The introduction of a carbon pricing scheme could also provide substantial revenue

### Revenue impacts and macro effects
- The €100 carbon tax scenario would yield additional revenues of nearly 6 percent of GDP over the next decade.
- Additional revenues could finance:
  - tax reductions in other areas;
  - resources for investment in climate-enhancing R&D;
  - support for jobs growth.
- The remaining part of revenues could be used for boosting spending on investment and employment, which would contribute to having a positive effect on GDP growth in the medium-term.
- Figure summary (as reported): GDP & Revenue Impacts of Carbon Taxation show annual GDP growth (LHS) and percent of GDP (RHS) for Baseline GDP growth, Carbon tax, Personal income tax, Public investment, Current Spending, Transfers, Net GDP (€100 Co2 Tax), and Additional Revenue (RHS). (Sources: IMF Staff Estimates)

### Distributional considerations and compensation
- Part of the additional revenues should be used to adequately compensate low-income and vulnerable households from the adverse impact of the tax.
- Rationale: the share of energy expenditure amongst the poorest households (lowest quintile) is more than three times the expenditure shares of the richest (topmost quintile), which could render carbon taxes regressive without tax recycling (see Köppl and others, 2019).
- The carbon tax is likely to affect 4.7 percent of the total consumer spending by households whose energy consumption corresponds to about 18 percent of the total CO2 emissions in Austria.

### Public preferences and political economy
- Survey data from May 2020 indicate:
  - The median household in Austria is sufficiently concerned about climate change and believes that the government has a role in providing climate protection.
  - When asked about policy preferences, almost 51 percent of households were in favor of higher taxes to address climate change.
  - Households also identified other preferred policy measures, with approval rates reported as:
    - Lower VAT on renewables: 92%
    - 1-2-3 Climate Ticket (subsidized public transportation): 88%
    - Carbon Tax for Companies: 82%
    - Cease new gas/oil heating: 82%
    - Air Traffic Tax: 82%
    - Pay Higher Taxes: 51%
  (Sources: CoronaPanel Survey, IMF Staff Estimates)

### Carbon pricing within a multipronged policy package
- Carbon pricing should be considered as a vital part of a multipronged reform strategy to meet environmental objectives.
- Because of heterogeneity in public preferences and distributive concerns, carbon taxation should be viewed as part of a broader package combining price and non-price climate policies (Stern and Stiglitz, 2017; Stiglitz, 2019).
- Austria has expanded renewables and reduced emissions intensity but falls short of the EU-wide reduction level in energy consumption, implying a need to prioritize economy-wide energy efficiency across all sectors.
- Policy combination impacts on emissions (reported scenarios):
  - Baseline vs. policy scenarios for GHG emissions (mtCO2e excl. LULUCF) include:
    - Baseline
    - Co2 Tax €75
    - Co2 Tax €100
    - Co2 Tax €150
    - Co2 €100 + Energy Efficiency
    - Co2 €100 + National Plan Measures
  - Combining the €100 carbon tax with all-sector energy efficiency policies would reduce baseline emission by almost 20 percent by 2030.
  - Adding further granular measures (for example, sectoral recommendations in the national climate plan) could further propel Austria closer to its emissions target (NDC: EU's net reduction target of 55% in GHG emissions by 2030 vs. 1990).

### Key statistics and figures (preserved from source)
- €100 carbon tax → additional revenues of nearly 6 percent of GDP (next decade).
- Carbon tax likely to affect 4.7 percent of total consumer spending for affected households.
- Those households’ energy consumption corresponds to about 18 percent of total CO2 emissions in Austria.
- Survey support: almost 51 percent favor higher taxes to address climate change.
- Household policy approval rates: 92%, 88%, 82%, 82%, 82%, 51% (items listed above).
- Combining €100 carbon tax with energy efficiency → almost 20 percent reduction in baseline emissions by 2030.
- NDC target: EU net reduction target of 55% in GHG emissions by 2030 vs. 1990.

*Source: IMF staff estimates and analysis, excerpt from 1autea2021001.*

### 3.  On July 30, 2021, the Financial Markets Authority suspended the operations of

### 3.  On July 30, 2021, the Financial Markets Authority suspended the operations of 

### Bank suspension and deposit insurance
- AutoBank AG suspended on July 30, 2021; shareholders failed to produce a viable wind-down plan and filed for initiation of insolvency proceedings on August 12, 2021.
- At closure the bank held EUR 109 million in deposits, of which EUR 107 million are covered by the deposit guarantee.
- As of mid-August, some EUR 76 million have already been paid out by the deposit insurance scheme (Einlagensicherung).
- Assessment: The failure of this non-systemic bank is unlikely to jeopardize Austria’s financial stability.

### Recent economic activity indicators (Q2 2021 and June)
- Flash GDP estimate: growth of 4.3 percent (q/q); output remained below the pre-crisis level.
- Industrial production in June: +11.3 percent (y/y); slipped 1.8 percent (m/m); stands 1.7 percent above the pre-crisis levels.
- Tourism (overnight stays) in June: +42.5 percent (yoy); still 40.8 percent below the precrisis figure.

### Inflation
- Annual inflation: edged up in July to 2.9 percent, from 2.8 percent in June.
- Main drivers: transportation costs (+8.0 percent) and household energy prices (+3.3 percent).
- Staff view: these price developments are largely temporary.

### Gross international reserves and SDRs
- Gross international reserves in 2021 increased with the SDR allocation of EUR 4.56 billion.
- Authorities intend to save the new SDR allocation as international reserves; macroframework updated accordingly.

### Statement by Mr. Just — Latest outlook and risks
- Q2 outturn stronger than expected: quarter-on-quarter growth rate of 4.3 percent.
- Weekly OeNB and WIFO indicators may imply pre-crisis output level might be reached in Q3 2021 (first time since start of crisis), implying another quarter-on-quarter growth of around 3 percent in Q3.
- GDP growth in 2021 could reach 4 to 4.5 percent in 2021; carry over for 2022 will be substantial.
- Medium-term GDP level could be closer to pre-COVID trend than IMF staff assumed (−0.5 percent instead of −1.6 percent in 2026).
- Inflation risks: may reach 2 ½ percent in 2021 and could remain above 2 percent in 2022, almost 0.5 percentage points higher in both years than expected by IMF staff.
- Risks: mainly on the upside in the short run; downside pandemic risks dominate in the medium term; higher inflation could lead to higher wage settlements.

### Economic policy and recovery assessment
- Austria’s pandemic support: package of income and liquidity support amounting to 13 percent of GDP.
- 2020 outcome: 6.3 percent drop in GDP in 2020 and still negative growth in Q1 2021.
- Recovery drivers: reopening of service sector, vaccination roll-out stimulating consumption; Q2 2021 pickup.
- Main challenge: reverse pandemic impact on consumption while allowing resource reallocation from non-viable sectors.
- Authorities’ view: further stimulus would not be very effective in raising GDP in near term due to:
  - construction sector operating at potential,
  - manufacturing production surpassed pre-crisis level,
  - labor shortages with just three unemployed per reported vacancy,
  - scarcity of certain raw materials raising input prices.

### Measures to support firm solvency and structural priorities
- Austrian Recovery and Resilience Plan (ARP) measures to strengthen equity positions, including converting government-guaranteed loans into equity or equity-like instruments and anchoring collective investment schemes into company law.
- Green Finance Agenda: mobilise private investment for green projects by providing services to improve bankability.
- ARP measures to address skill mismatches, focusing on digital skills.

### Fiscal policy stance
- Crisis response left deep scars in public finances; swift recovery will help stabilize public finances.
- Compared to 2020, government balance will improve in 2021 as tax revenue rebounded in first half of 2021, while crisis-related expenditures remain high.
- Policy mix should shift from targeted crisis management to supporting a sustainable recovery.
- Relief measures being phased out in line with economic cycle; continued support to sectors still affected.
- New priorities: greening of the tax system, measures to reduce the labour tax wedge, strengthening equity capital, reform of long-term care.
- Authorities committed to return to a sustainable budget policy to create fiscal space for shocks and long-term aging-related spending pressures.

### Financial sector condition
- Austrian banking sector supported the real economy despite 2020 challenges.
- Macroprudential capital buffers and regulatory guidance on retaining earnings increased banks’ capital ratios.
- Early 2020: banks increased risk provisioning, weighing on sector profits.
- Credit quality has not yet deteriorated despite expiry of some support measures.
- Residential real estate: low interest rates and pandemic-driven housing demand buoyed credit and price growth.
- Variable interest rate loans still account for a significant share of new loans.
- Current lending standards for housing loans increasingly exceed threshold criteria for sustainable residential real estate lending defined by the Austrian Financial Market Stability Board (FMSB).

*August 24, 2021 — AUSTRIA — INTERNATIONAL MONETARY FUND*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1autea2021001.pdf_