## _cr04236 - 2000. The next parliamentary elections are to take place by November 2006. ## Source details **Canonical URL:** [_cr04236 - 2000. The next parliamentary elections are to take place by November 2006.](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04236.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04236.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04236.pdf.json) --- ### Executive summary — background and achievements - Growth and labor market - Real GDP growth averaged 1 percent during 2001-03. - Unemployment rose by almost 1 percentage point but stood at 4½ percent in mid-2004. - Average duration of unemployment fell to 101 days in 2003. - Policy shift and objectives - Government strategy: balance the budget over the cycle; reduce the tax burden to 40 percent of GDP by 2010; contain fiscal pressures from population ageing; increase growth potential. - Concrete achievements: first (small) fiscal surplus in over 30 years in 2001; three years of structural budget balance; major pension reform in 2003; privatizations and deregulation; tax reforms in 2004-05. - Fiscal outcome and stance - General government deficit was 1.4 percent of GDP in 2003, implying a broadly neutral fiscal stance. - Authorities targeted a general government deficit of 1.2 percent of GDP in 2004 (0.4 percent of GDP above budget plans). ### Short-term outlook and risks - Staff baseline projections and key short-term indicators - Growth forecast: 1.6 percent in 2004 and 2.4 percent in 2005. - Inflation projected to remain around 1¾ percent during 2004-05. - Calendar adjustment: includes a one-off calendar adjustment of 0.1 percentage point in Austria. - Sources of growth and demand dynamics - 2004: investment and exports expected to be main growth drivers; consumption expected to recover only slowly. - 2005: consumption expected to contribute more; exports projected to rise further; imports expected to gather momentum so external sector makes virtually no contribution to growth in 2004-05. - Uncertainties and risks (evenly balanced) - Uncertain behavior of private consumption and savings (private savings rose in 2003 despite a drop in consumption growth). - External environment risks: fragile euro-area recovery (notably Germany); persistent global imbalances and potential disorderly appreciation of the euro. - Positive factors: strong competitiveness, expansion into new export markets (including Southeastern Europe), healthy financial system, corporate de-leveraging, tax cuts planned for 2005 and extension of tax incentives through end-2004. ### Fiscal policy and tax reform — findings, projections, and recommendations - Authorities’ plans and fiscal implications - Tax burden target: reduce to 40 percent of GDP by 2010. - Tax reform of 2005 expected to temporarily widen the fiscal deficit in 2005-06 because planned expenditure savings will come on stream gradually. - Authorities envisaged a return to budget balance in 2008, when the next wave of tax reform is expected. - Design of the 2005 tax reform (selected measures) - Corporate tax rate reduction from 34 to 25 percent. - Relaxation of rules on taxation of groups of companies; elimination of tax-free transfer of realized hidden reserves; elimination of interest deduction on the increase of own capital. - Additional incentives for spending on R&D. - Authorities estimated the planned measures would reduce the effective corporate tax rate to 21-22 percent. - Personal income tax: brackets reduced from four to three; tax-exempt threshold raised from € 14,500 to € 15,770; top marginal rate to remain at 50 percent. - Total net revenue loss from tax reform estimated at 1 percent of GDP. - Short-term fiscal outlook and numerical projections (2005–06) - Authorities projected deficit to increase temporarily to 1¾ percent of GDP in 2005 and 1½ percent of GDP in 2006. - Without full implementation of planned expenditure measures, the deficit could reach 2 percent of GDP in 2005 and 2006. - Staff assessment and policy recommendations - Staff: temporary widening in 2005-06 would not threaten fiscal sustainability if limited and reversed quickly but cautioned that deviation from structural-balance policy—especially before an election year—might raise questions about medium-term intentions. - Short-run recommendations: secure the savings already planned to contain the deficit in 2005-06; ensure regional governments contribute to the consolidation effort. - Medium-term recommendations: achieve necessary expenditure cuts by re-thinking the role of the state and introducing a comprehensive medium-term expenditure framework with multi-year targets broken down by major program. ### Fiscal projections and debt outlook (baseline and scenarios) - Baseline medium-term projection (2002–09, selected series) - General government debt (percent of GDP): 1999: 67.5; 2000: 67.0; 2001: 67.1; 2002: 66.6; 2003: 64.9; 2004 Proj.: 64.2; 2005: 63.6; 2006: 63.1; 2007: 62.5; 2008: 61.9; 2009: 61.2. - Staff baseline projects a decline in the general government debt ratio of about 4 percentage points to about 61 percent of GDP by 2009. - Key macro-fiscal assumptions (selected) - Real GDP growth: 1999: 2.7; 2000: 3.4; 2001: 0.8; 2002: 1.4; 2003: 0.7; 2004: 1.6; 2005: 2.4; 2006: 2.5; 2007: 2.4; 2008: 2.3; 2009: 2.3. - Average nominal interest rate on public debt (in percent): 1999: 5.9; 2000: 5.9; 2001: 5.7; 2002: 5.4; 2003: 5.1; 2004: 5.1; 2005–09: 5.5. - Inflation rate (GDP deflator, in percent): 1999: 0.7; 2000: 1.4; 2001: 2.1; 2002: 1.4; 2003: 2.0; 2004: 1.5. - Sensitivity and stress tests (selected scenario outcomes, debt-to-GDP in percent) - Scenario 1 (historical means): 64.9, 66.0, 65.0, 65.1, 65.2, 65.3, 65.3. - Scenario 4 (primary balance at historical average minus two standard deviations): 64.9, 67.8, 70.4, 70.4, 70.1, 69.6, 69.1. - Scenario 7 (10 percent of GDP increase in other debt-creating flows): 64.9, 74.2, 73.7, 73.7, 73.4, 73.0, 72.5, 71.9. - Scenario 8 (revenue-to-GDP at historical average minus two standard deviations): 64.9, 63.7, 61.8, 61.8, 61.3, 60.7, 60.0, 59.3. - Interpretation - Debt outlook is resilient to various macroeconomic shocks; except for implausible large bailout scenarios, implications are manageable and other plausible scenarios show improvement. ### Financial sector assessment, risks, and supervisory responses - FSAP and FSSA findings - Austrian financial system generally sound, well supervised, and resilient to shocks; high degree of compliance with international standards in banking, insurance, securities, and anti–money laundering. - Banking sector: about 900 banks with total assets of about 270 percent of GDP at end-2003. - Bank capital ratios comfortably above prudential minima; stress tests confirm resilience. - Identified vulnerabilities and medium-term concerns - Expansion in the CEECs increased exposure to local clients there and raised new risks. - Growth in foreign currency lending, particularly to households without a foreign currency hedge, is a source of concern. - Bank and branch density remain high, leaving room for further restructuring and consolidation. - Sectoral deposit insurance has worked well but restructuring argues for revisiting the system to reduce likelihood of recourse to public funds. - Need to resolve legal issues (public liability of supervisors) to strengthen supervision. - Supervisory and industry responses - Supervisors intensifying on-site inspections (including abroad); MoUs with CEECs being expanded. - FMA issued minimum standards to improve banks’ risk management and drafted amendments requiring full disclosure of risks to consumers. - Authorities emphasized customer education on foreign-currency risks and improvements in bank risk management. - Deposit insurance reforms to be considered in the medium term and require full support of banks. ### Structural policies, reforms achieved, and unfinished agenda - Achievements since 2000 (selected) - Strengthened public finances; major pension reform in 2003; begun to reduce tax burden; unified financial sector supervision; modernized competition policy; deregulated product and labor markets; privatizations. - R&D: goal to raise R&D spending to 2.5 percent of GDP by 2006 and 3 percent of GDP by 2010; R&D spending reached 2.3 percent of GDP in 2004 following an R&D tax premium financed at 0.15 percentage points. - Remaining priorities and recommendations - Harmonization of the various public pension systems is the key outstanding commitment; authorities planned full harmonization by end-2004 (effective January 1, 2005) with contribution rate: 22.8 percent of gross wages; farmers pay 15 percent; self-employed pay 17.5 percent. - Further priorities: rationalize disability pensions; pursue efficiency gains and budgetary savings in the health sector; raise participation of older workers; reduce red tape; liberalize services; privatize remaining state holdings. - Complete the medium-term expenditure framework and link balanced-budget-over-the-cycle objective with spending ceilings by program and ministry. - Austria Convention seen as an opportunity to streamline intergovernmental relations, align spending authority with taxing responsibility, and redefine essential government functions. - Staff empirical support for reform - Reducing government size (both revenues and expenditures) by 5 percentage points of GDP in high-tax economies would increase the long-term growth rate by about ¼ of a percentage point per year. - Impact could be higher if tax reductions focus on direct, rather than indirect, taxes. - Lowering corporate taxes has a positive impact on private investment. - Staff endorsed reducing the burden on labor after lowering the tax burden on capital in 2004-05. ### Trade policy, ODA, and international stance - Trade policy stance - Austria supports multilateral trade liberalization within EU membership, preferential treatment of poorer countries, removal of access barriers for non-agricultural products, and special and differential treatment for developing countries. - Authorities viewed outcome of the Cancún Ministerial Conference as a setback but remained committed to the Doha Development Agenda. - Expected only a small macroeconomic or budgetary impact from CAP reform. - Official development assistance - Authorities committed to raise official development assistance to 0.33 percent of GNP by 2006; staff encouraged raising it further toward the U.N. target of 0.7 percent of GNP. ### Key macroeconomic and statistical indicators (selected exact figures) - GDP per capita (2003): US$ 31,377. - GDP growth (selected years): 1999: 2.7; 2000: 3.4; 2001: 0.8; 2002: 1.4; 2003: 0.7; 2004 Proj.: 1.6. - Unemployment rate (standardized, survey-based, in percent): 1999: 4.0; 2000: 3.7; 2001: 3.6; 2002: 4.3; 2003: 4.4; 2004 Proj.: 4.4. - Consumer price index (year average): 1999: 0.5; 2000: 2.0; 2001: 2.3; 2002: 1.7; 2003: 1.3; 2004 Proj.: 2.1. - General government revenue (percent of GDP): 1999: 51.6; 2000: 50.6; 2001: 51.7; 2002: 50.9; 2003: 49.7; 2004 Proj.: 49.3. - General government expenditure (percent of GDP): 1999: 54.0; 2000: 52.3; 2001: 51.6; 2002: 51.3; 2003: 51.2; 2004 Proj.: 50.5. - General government balance (percent of GDP, ESA95): 1999: -2.4; 2000: -1.7; 2001: 0.1; 2002: -0.4; 2003: -1.4; 2004 Proj.: -1.2. - General government debt (percent of GDP): 1999: 67.5; 2000: 67.0; 2001: 67.1; 2002: 66.6; 2003: 64.9; 2004 Proj.: 64.2. - Banking sector indicators (selected): total banking assets about 270 percent of GDP at end-2003; foreign exchange loans (April, percent) 2004: 19.9; risk-based capital asset ratio, total (April): 14.0; stock market index (ATX, 2004 June 16): 191.4. *Source: IMF staff report (data and text reflect information received by June 16, 2004).* ### 2000. The next parliamentary elections are to take place by November 2006. ### _cr04236 - 2000. The next parliamentary elections are to take place by November 2006. ### Executive summary — background and achievements - Growth and labor market - Real GDP growth averaged 1 percent during 2001-03. - Unemployment rose by almost 1 percentage point but stood at 4½ percent in mid-2004. - Average duration of unemployment fell to 101 days in 2003. - Policy shift and objectives - Government strategy: balance the budget over the cycle; reduce the tax burden to 40 percent of GDP by 2010; contain fiscal pressures from population ageing; increase growth potential. - Concrete achievements: first (small) fiscal surplus in over 30 years in 2001; three years of structural budget balance; major pension reform in 2003; privatizations and deregulation; tax reforms in 2004-05. - Fiscal outcome and stance - General government deficit was 1.4 percent of GDP in 2003, implying a broadly neutral fiscal stance. - Authorities targeted a general government deficit of 1.2 percent of GDP in 2004 (0.4 percent of GDP above budget plans). ### Short-term outlook and risks - Staff baseline projections and key short-term indicators - Growth forecast: 1.6 percent in 2004 and 2.4 percent in 2005. - Inflation projected to remain around 1¾ percent during 2004-05. - Calendar adjustment: includes a one-off calendar adjustment of 0.1 percentage point in Austria. - Sources of growth and demand dynamics - 2004: investment and exports expected to be main growth drivers; consumption expected to recover only slowly. - 2005: consumption expected to contribute more; exports projected to rise further; imports expected to gather momentum so external sector makes virtually no contribution to growth in 2004-05. - Uncertainties and downside/upside risks (evenly balanced) - Uncertain behavior of private consumption and savings (noted puzzle: private savings rose in 2003 despite a drop in consumption growth). - External environment risks: fragile euro-area recovery (notably Germany); persistent global imbalances and potential disorderly appreciation of the euro. - Positive factors: strong competitiveness, expansion into new export markets (including Southeastern Europe), healthy financial system, corporate de-leveraging, tax cuts planned for 2005 and extension of tax incentives through end-2004. ### Fiscal policy and tax reform — findings and recommendations - Authorities’ plans and fiscal implications - Tax burden target: reduce to 40 percent of GDP by 2010. - Tax reform of 2005 expected to temporarily widen the fiscal deficit in 2005-06 because planned expenditure savings will come on stream gradually. - Authorities envisaged a return to budget balance in 2008, when the next wave of tax reform is expected. - Staff assessment and concerns - Temporary widening of the deficit in 2005-06 does not, per staff, raise concerns about fiscal sustainability if limited and reversed quickly. - Staff cautioned that deviation from structural-balance policy—especially before an election year—might raise questions about medium-term intentions. - If the widening is not limited and reversed quickly, the next wave of tax reform may not be feasible. - Policy recommendations (short and medium term) - Short-run: secure the savings already planned to contain the deficit in 2005-06; ensure regional governments contribute to the consolidation effort. - Medium-term: achieve necessary expenditure cuts by re-thinking the role of the state and introducing a comprehensive medium-term expenditure framework. - Fiscal stance in 2004: staff endorsed allowing automatic stabilizers full play; first-round tax reform had virtually nil net budgetary impact in 2004. ### Financial sector issues and FSAP findings - Overall assessment - The FSAP found the Austrian financial system to be generally sound, well supervised, and resilient to shocks, with a high degree of compliance with international standards. - Identified vulnerabilities and medium-term concerns - Potential risks from Austrian banks’ exposure in central and eastern European countries (CEECs). - Exposure to foreign currency loans to households. - Scope for strengthening supervision and reviewing the current deposit insurance system over the medium term. - Implications - Healthy domestic financial system and corporate de-leveraging support financing of investment, but cross-border exposures and household FX lending warrant monitoring and supervisory adjustments. ### Structural policies and unfinished agenda - Progress to date - Major pension reform in 2003; privatizations; deregulation in product and labor markets; tax reforms in 2004-05. - Remaining priorities - Harmonization of the various public pension systems is a key outstanding commitment of the government. - Tax reform beyond 2004-05 will be required to reach the 40 percent of GDP tax-burden target by 2010, implying extensive expenditure restructuring across all levels of government. - Staff guidance - Completing the remaining reform agenda should be the main policy objective going forward, with immediate priority on pension harmonization. *Source: IMF staff report (data and text reflect information received by June 16, 2004).* ### 16. The authorities considered the tax reform planned for 2005 to be a critical step ### _cr04236 - 16. The authorities considered the tax reform planned for 2005 to be a critical step ### Tax reform in 2005: design and expected fiscal impact - Corporate tax measures: - Tax rate reduction from 34 to 25 percent. - Relaxation of rules on taxation of groups of companies, allowing a group headquartered in Austria to offset local profits with losses elsewhere. - Widening of the tax base by eliminating the tax-free transfer of realized hidden reserves of corporations and the interest deduction on the increase of own capital. - Additional incentives for spending on R&D. - Authorities estimated the planned measures would reduce the effective corporate tax rate to 21-22 percent. - Personal income tax changes: - Brackets reduced from four to three. - Tax-exempt personal income threshold raised from € 14,500 to € 15,770. - General tax credit to be built into the tax schedule to make marginal tax rates more transparent. - Top marginal rate to remain at 50 percent. - Tax credits for sole earners and single parents to increase effective 2004. - Other measures: - Some small-yield taxes to be abolished (tax on sparkling wine) or reduced (tax on beer). - Fiscal impact: - Total net revenue loss from tax reform estimated at 1 percent of GDP. - Policy rationale: - Emphasis on reducing corporate taxes to enhance Austria’s attractiveness as a business location, promote investment and growth, and reflect capital mobility and trends in neighboring countries. ### Short-term fiscal outlook and risks (2005–06) - Expenditure and deficit projections: - Authorities anticipated temporary structural deficits in 2005-06 due to timing mismatch between tax cuts and expenditure savings. - Deficit projected to increase temporarily to 1¾ percent of GDP in 2005 and 1½ percent of GDP in 2006. - Without full implementation of planned expenditure measures, the deficit could reach 2 percent of GDP in 2005 and 2006. - Planned expenditure measures (November 2003 Stability Program): - Health spending reductions via hikes in certain contributions and co-payments. - Public administration staff reduction by 10,000 by 2006. - Operating expenses to be lowered by 3 percent at the federal level. - Education spending at the regions to be controlled through increasing the student-teacher ratio. - Medium-term fiscal objective: - Measures, cyclical strengthening, and the impact of the 2003 pension reform expected to offset tax cuts by 2007 and return the general government budget to broad balance by 2008. - Staff view: - Staff questioned the planned temporary widening of the deficit in 2005-06. - A temporary deficit of this size would not threaten macroeconomic stability or fiscal sustainability, even with various adverse macroeconomic shocks. - Concern that deviation from balanced-budget-over-the-cycle policy, especially before an election year, might raise questions about medium-term intentions. ### Authorities’ defense and conditions for further reform - Authorities’ arguments: - Timing mismatches unavoidable because expenditure measures require consensus across government levels and cannot be expedited. - Many planned savings depend on regional governments and ongoing negotiations on the Finanzausgleich and internal stability pact. - Long-term benefits of tax reform seen as outweighing temporary deficit costs; Austria had previously reduced taxes while cutting the deficit. - Preconditions for further tax reform: - Both sides agreed that unless the widening of the deficit was limited and reversed quickly, further tax reform after 2005 would not be feasible. - Short-run requirement: secure planned savings in public administration, health spending and other transfers; Finanzausgleich should ensure significant subnational contributions. - Medium-term requirement: re-thinking the role of the state and introducing a comprehensive medium-term expenditure framework with multi-year targets broken down by major program. - Note: a draft linking balanced-budget-over-the-cycle objective with overall spending ceilings by program and ministry had been prepared, but legal constraints (annual budgets submitted to parliament) could impede implementation. ### Staff empirical findings supporting reform - Key empirical results from staff research (Selected Issues paper on 18 OECD countries): - Reducing government size (both revenues and expenditures) by 5 percentage points of GDP in high-tax economies would increase the long-term growth rate by about ¼ of a percentage point per year. - Impact could be higher if tax reductions focus on direct, rather than indirect taxes, because the former are more distortionary. - Lowering corporate taxes has a positive impact on private investment. - Staff endorsement: - Staff endorsed authorities’ plans to next reduce the burden on labor after lowering the tax burden on capital in 2004-05. ### Financial sector: stability, risks, and policy responses - FSAP main conclusions: - Austrian financial system generally sound, well supervised, and resilient to shocks; high compliance with international standards in banking, insurance, securities, and anti-money laundering. - Banking sector consists of about 900 banks with total assets of about 270 percent of GDP at end-2003. - Medium-term challenges and risks identified: - Expansion in the CEECs boosted performance but increased exposure to local clients there, implying new risks. - Bank and branch density remain high by international standards, leaving room for further restructuring and consolidation. - Growth in foreign currency lending, particularly to households without a foreign currency hedge, is a source of concern. - Sectoral deposit insurance system has worked well but restructuring argues for revisiting the system to reduce the likelihood of recourse to public funds. - Need to resolve legal issues, in particular the public liability of supervisors, to strengthen financial supervision. - Supervisory and industry responses: - Supervisors intensifying on-site inspections (including abroad) and planning further inspections in insurance and securities supervision. - Four existing MoUs with CEECs, with two MoUs to be concluded soon and more in the pipeline. - Authorities emphasized continued monitoring of CEEC exposure, customer education on foreign-currency risks, and improvements in bank risk management. - FMA issued minimum standards to improve banks’ risk management and drafted amendments requiring full disclosure of risks to consumers. - Deposit insurance: - Changes to the deposit insurance system were not an immediate priority given multiple lines of defense and ongoing restructuring; reforms would need full support of banks. ### Structural policies and broader reforms - Pension reform and harmonization: - 2003 pension reform yielded small budgetary savings that would increase over time. - Decision to let the 10 percent cap on benefit losses expire in 2032 removed some uncertainty. - Authorities planned full harmonization of public pension systems by end-2004 to reduce inequities and distortions; generating additional savings was a secondary, long-run objective. - Staff noted harmonization would improve fairness, labor-market mobility, and reduce distortions from differing contribution rates and benefit levels. - Progress on structural reforms since 2000 (highlights): - Privatization: stakes sold in ten enterprises; ÖIAG to be dissolved after completion of privatization. - Competition: independent Federal Competition Authority created; Cartel Law strengthened in 2002; draft amendments to align with EU law under deliberation. - Network industries: electricity liberalized in 2001; gas in 2002. - R&D: goal to raise R&D spending to 2.5 percent of GDP by 2006 and 3 percent of GDP by 2010; tax incentives and national R&D foundation established. - Labor market: abolition of placement restriction by private employment agencies (2001); new severance pay scheme (2003); measures to reduce nonwage labor costs and increase older workers’ participation. - Business environment: Industrial Code liberalized; administrative burdens on new business reduced; tax concessions and funds for SMEs. - Outcomes and outlook: - Early signs of reform impact: marginal rise in labor force participation of older workers in 2002-03; business start-ups jumped over 12 percent in 2003; R&D spending rose; increased foreign business interest following corporate tax cut plans; electricity liberalization led to lower consumer prices. - Government to continue deregulation, with near-term amendment to Cartel and Competition Laws to align with EU law and medium-term focus on opening sheltered sectors to competition and reducing red tape. - Trade policy stance: - Austria supports multilateral trade liberalization within EU membership, preferential treatment of poorer countries, removal of access barriers for non-agricultural products, and special and differential treatment for developing countries. - Authorities viewed outcome of the Cancún Ministerial Conference as a setback but remained committed to the Doha Development Agenda. - Expected only a small macroeconomic or budgetary impact from CAP reform. *Source: IMF Country Report content in the supplied PDF excerpt.* ### 32. A strategic policy shift since 2000 has made Austria a showcase for reforms. In a ### 32. A strategic policy shift since 2000 has made Austria a showcase for reforms. In a ### Reform achievements since 2000 - Strengthened public finances. - Implemented a bold pension reform that strengthened significantly the long-term sustainability of the system. - Began to reduce the tax burden. - Unified financial sector supervision. - Modernized the legal and institutional framework of competition policy. - Took measures to make the labor market more flexible, stimulate R&D, and encourage entrepreneurship. ### Near-term economic prospects - The near-term economic prospects are positive although uncertainties remain. - Drivers supporting recovery: - The improving global outlook. - Austria’s strong competitiveness. - A rebound in domestic investment. - Key uncertainty: - The pace of recovery will depend on the behavior of consumption, whose prospects are uncertain. ### Fiscal challenge and unfinished reform agenda - The challenge ahead is to complete the unfinished reform agenda. - To manage fiscal implications of recent and future reforms, especially of the tax system, while maintaining a balanced budget over the cycle, the government needs continued perseverance similar to that shown since 2000. ### Tax reform plans and implications - The government’s tax reform plans, whose first major round comes next year, are appropriate. - Expected outcomes of the 2005 reform: - Reduce further the tax burden. - Make Austria more attractive as a business location. - Boost investment and growth in the long run. - Medium-term objective: - Lower the tax burden to 40 percent of GDP by 2010. - Policy emphasis recommended: - Lower the tax burden on labor, which is among the highest in developed countries. ### Fiscal risks from timing of tax and expenditure measures - The planned tax reform implies a widening of the deficit in 2005-06, possibly up to 2 percent of GDP, meant to be temporary as savings accelerate over time. - Assessment: - A temporary deficit of this magnitude would not endanger macroeconomic stability or fiscal sustainability. - It would represent a substantial deviation from the government program targets, raising questions about medium-term intentions. - Unless the widening of the deficit is reversed, further tax reform after 2005 will not be feasible. ### Recommendations to restore structural balance - Short-term focus: - Implement planned expenditure measures. - Ensure subnational levels of government contribute to the fiscal effort to contain the increase in the deficit in 2005-06. - Medium-term requirements: - Restore structural budget balance and reduce the tax burden further through substantial, durable savings. - Re-think the role of the state to generate necessary savings. - Institutional opportunity: - The Austria Convention is highlighted as an excellent opportunity to: - Streamline relations between various levels of government. - Align spending authority with taxing responsibility. - Redefine the essential functions of the government in a modern market economy. - Improve efficiency in the delivery of public services. ### Medium-term expenditure framework - Success of expenditure reduction measures requires a comprehensive medium-term expenditure framework. - Suggested features: - Supplement the Stability Program with a multi-year framework. - Include annual targets broken down by major program. - Benefits: - Illustrate tradeoffs. - Enhance transparency. - Facilitate policy choices. - Strengthen credibility. - Status: - Advancement of work in this area since last year is welcome; the authorities should carry this agenda forward to the cabinet and, eventually, parliament. ### Financial system assessment and risks - Current assessment: - The financial system is generally sound, well supervised, and resilient to shocks. - The banking system is profitable. - Bank capital ratios are comfortably above prudential minima. - Stress tests confirm the resilience of the system. - High standard of financial supervision and a high degree of observance of international standards in banking, insurance, securities, and anti-money laundering. - Authorities commended for taking prompt action in areas identified by the FSAP. - Medium-term challenges and potential risks: - Expansion in the CEECs has raised exposure to risks and requires continued vigilance. - Scope remains for further restructuring and consolidation in the banking sector. - Extent of foreign currency lending, particularly to households, is a source of concern. - Recent measures to make banks and households more aware of risks are welcome; continued proactive approach urged. - The sectoral deposit insurance system has worked well, but ongoing banking industry restructuring would require reexamining the system in the medium term. - Financial supervision should be strengthened further and outstanding legal issues resolved so supervisors can carry out their mandate effectively. ### Remaining structural reforms and priorities - Authorities are encouraged to complete the structural reform agenda. - Highest priority: - Harmonizing the various pension systems to deliver on the major commitment and cement gains from last year’s pension reform. - Other recommendations: - Continue rationalization of disability pensions, focusing on targeting them to those truly unable to work. - Pursue efficiency gains and budgetary savings in the health sector. - Continue efforts to raise labor force participation of older workers. - Reduce red tape further. - Liberalize services. - Privatize the remaining state holdings in the government holding company. ### Official development assistance (ODA) - Staff welcomes the authorities’ commitment to raise official development assistance to 0.33 percent of GNP by 2006 and encourages them to raise it further toward the U.N. target of 0.7 percent of GNP. *International Monetary Fund staff report excerpt* ### 43. It is proposed that the next Article IV consultation be held on the standard 12-month ### _cr04236 - 43. It is proposed that the next Article IV consultation be held on the standard 12-month ### Next Article IV consultation - It is proposed that the next Article IV consultation be held on the standard 12-month cycle. - Austria is on a 12-month consultation cycle. The last consultation was completed on November 24, 2003 (EBM/03/109). ### Country summary and basic data - Total area: 83,850 square kilometers - Total population (2003): 8.07 million - GDP per capita (2003): US$ 31,377 ### Recent and projected macroeconomic performance (selected series, percentage changes at 1995 prices unless otherwise indicated) - GDP: 1999: 2.7; 2000: 3.4; 2001: 0.8; 2002: 1.4; 2003: 0.7; 2004 Proj.: 1.6 - Total domestic demand: 1999: 2.9; 2000: 2.6; 2001: -0.2; 2002: 0.0; 2003: 1.8; 2004 Proj.: 1.7 - Consumption: 1999: 2.6; 2000: 2.4; 2001: 0.7; 2002: 0.6; 2003: 1.1; 2004 Proj.: 1.1 - Gross investment: 1999: 4.5; 2000: 3.3; 2001: -2.5; 2002: -3.3; 2003: 4.6; 2004 Proj.: 3.5 - Foreign balance (change in percent of previous year's GDP): 1999: 1.0; 2000: -0.2; 2001: 0.8; 2002: 0.9; 2003: 1.4; 2004 Proj.: -1.0; 2005 Proj.: -0.1 - Exports of goods and nonfactor services: 1999: 8.5; 2000: 13.4; 2001: 7.5; 2002: 3.7; 2003: 1.0; 2004 Proj.: 4.3 - Imports of goods and nonfactor services: 1999: 9.0; 2000: 11.6; 2001: 5.9; 2002: 1.2; 2003: 3.0; 2004 Proj.: 4.7 ### Labor market and prices (period averages and levels) - Labor force (percent change): 1999: 0.5; 2000: 0.0; 2001: 0.7; 2002: 1.1; 2003: 1.1; 2004 Proj.: 0.8 - Employment (percent change): 1999: 1.2; 2000: 1.0; 2001: 0.4; 2002: -0.5; 2003: 0.2; 2004 Proj.: 0.7 - Employment rate (in percent): 1999: 62.3; 2000: 62.5; 2001: 62.5; 2002: 62.0; 2003: 61.9 - Unemployment rate (registered, in percent of total labor force): 1999: 6.0; 2000: 5.3; 2001: 5.5; 2002: 6.2; 2003: 6.2; 2004 Proj.: 6.3 - Unemployment rate (standardized, survey-based, in percent): 1999: 4.0; 2000: 3.7; 2001: 3.6; 2002: 4.3; 2003: 4.4; 2004 Proj.: 4.4 - GDP deflator: 1999: 0.7; 2000: 1.4; 2001: 2.1; 2002: 1.4; 2003: 2.0; 2004 Proj.: 1.5 - Consumer price index: 1999: 0.5; 2000: 2.0; 2001: 2.3; 2002: 1.7; 2003: 1.3; 2004 Proj.: 2.1 - Unit labor costs (manufacturing): 1999: -1.3; 2000: 1.2; 2001: 1.5; 2002: 0.9; 2003: 0.8; 2004 Proj.: 0.9 ### General government finances (ESA95 basis; percent of GDP unless indicated) - Revenue: 1999: 51.6; 2000: 50.6; 2001: 51.7; 2002: 50.9; 2003: 49.7; 2004 Proj.: 49.3 - Expenditure: 1999: 54.0; 2000: 52.3; 2001: 51.6; 2002: 51.3; 2003: 51.2; 2004 Proj.: 50.5 - Balance: 1999: -2.4; 2000: -1.7; 2001: 0.1; 2002: -0.4; 2003: -1.4; 2004 Proj.: -1.2 - Gross debt (end of period): 1999: 67.5; 2000: 67.0; 2001: 67.1; 2002: 66.6; 2003: 64.9; 2004 Proj.: 64.2 ### Fiscal accounts and medium-term projections (selected projected paths) - Scenario I: Unchanged Policies (GDP and fiscal indicators, 2002-09) - GDP growth: 2002: 1.4; 2003: 0.7; 2004: 1.6; 2005: 2.4; 2006: 2.5; 2007: 2.6; 2008: 2.4; 2009: 2.3 - General government revenue (percent of GDP): 2002: 50.9; 2003: 49.7; 2004: 49.3; 2005: 48.4; 2006: 47.8; 2007: 47.8; 2008: 47.8; 2009: 47.8 - Expenditure (percent of GDP): 2002: 51.3; 2003: 51.2; 2004: 50.5; 2005: 50.2; 2006: 49.9; 2007: 49.6; 2008: 49.5; 2009: 49.5 - Balance (percent of GDP): 2002: -0.4; 2003: -1.4; 2004: -1.2; 2005: -1.8; 2006: -2.0; 2007: -1.8; 2008: -1.7; 2009: -1.7 - Debt (percent of GDP): 2002: 66.6; 2003: 64.9; 2004: 64.2; 2005: 63.6; 2006: 63.1; 2007: 62.2; 2008: 61.4; 2009: 60.7 - Scenario II: Stability Program (GDP and fiscal indicators, 2002-09) - GDP growth: 2002: 1.4; 2003: 0.7; 2004: 1.6; 2005: 2.4; 2006: 2.4; 2007: 2.2; 2008: 2.3; 2009: 2.3 - Revenue (percent of GDP): 2002: 50.9; 2003: 49.7; 2004: 49.3; 2005: 48.4; 2006: 47.8; 2007: 47.8; 2008: 47.8; 2009: 47.8 - Expenditure (percent of GDP): 2002: 51.3; 2003: 51.2; 2004: 50.5; 2005: 50.2; 2006: 49.3; 2007: 48.4; 2008: 48.0; 2009: 48.0 - Balance (percent of GDP): 2002: -0.4; 2003: -1.4; 2004: -1.2; 2005: -1.8; 2006: -1.4; 2007: -0.6; 2008: -0.1; 2009: -0.1 - Debt (percent of GDP): 2002: 66.6; 2003: 64.9; 2004: 64.2; 2005: 63.6; 2006: 62.6; 2007: 60.8; 2008: 58.6; 2009: 56.5 ### External sector and financial vulnerability (selected indicators) - Trade balance (billions of euros): 1999: -3.4; 2000: -3.0; 2001: -1.4; 2002: 3.7; 2003: 1.7; 2004 Proj.: 1.3 - Current account (billions of euros): 1999: -6.3; 2000: -5.4; 2001: -4.1; 2002: 0.7; 2003: -2.1; 2004 Proj.: -2.3 - Current account (in percent of GDP): 1999: -3.2; 2000: -2.6; 2001: -1.9; 2002: 0.3; 2003: -0.9; 2004 Proj.: -1.0 - Exports (annual percentage change, in U.S. dollars): 1999: 3.9; 2000: 0.4; 2001: 4.1; 2002: 8.6; 2003: 22.0; 2004 Projection: 15.2 - Imports (annual percentage change, in U.S. dollars): 1999: 4.4; 2000: -0.3; 2001: 2.3; 2002: 4.8; 2003: 24.5; 2004 Projection: 15.7 - Official reserves (in billions of U.S. dollars, May): 1999: 15.1; 2000: 14.3; 2001: 12.5; 2002: 9.7; 2003: 8.5; 2004: 7.9 (May) - Official reserves in months of imports: 1999: 1.9; 2000: 1.8; 2001: 1.5; 2002: 1.1; 2003: 0.8 - Foreign assets of the financial sector (in billions of U.S. dollars, April): 1999: 140.0; 2000: 145.4; 2001: 139.9; 2002: 146.2; 2003: 218.9; 2004: 205.9 (April) - Foreign liabilities of the financial sector (in billions of U.S. dollars, April): 1999: 156.9; 2000: 161.0; 2001: 154.9; 2002: 174.6; 2003: 225.2; 2004: 210.7 (April) ### Interest rates, credit, and exchange rates (selected levels/changes) - Three-month interbank rate: 1999: 3.0; 2000: 4.4; 2001: 4.3; 2002: 3.3; 2003: 2.3; 2004 Proj.: 2.1 (June 16) - 10-year government bond yield: 1999: 4.7; 2000: 5.6; 2001: 5.1; 2002: 5.0; 2003: 4.1; 2004 Proj.: 4.5 (June 16) - Domestic credit to nonbanks (year-on-year percent change): 1999: 5.3; 2000: 6.8; 2001: 3.5; 2002: 1.2; 2003: 1.8; 2004 Proj.: 3.1 (April) - Credit to enterprises (y-o-y): 1999: 6.5; 2000: 7.1; 2001: 2.7; 2002: -1.9; 2003: -0.2; 2004 Proj.: 1.6 (April) - Credit to households (y-o-y): 1999: 10.8; 2000: 9.6; 2001: 6.0; 2002: 6.9; 2003: 3.3; 2004 Proj.: 5.2 (April) - Euro per US$: 1999: 0.94; 2000: 1.09; 2001: 1.12; 2002: 1.06; 2003: 0.89; 2004 Proj.: 0.83 (June 16) - Nominal effective exchange rate (1990=100): 1999: 102.2; 2000: 99.9; 2001: 100.2; 2002: 100.6; 2003: 102.6; 2004 Proj.: 103.0 (May) - Real effective exchange rate (ULC based, 1990=100): 1999: 80.3; 2000: 78.7; 2001: 78.5; 2002: 79.0; 2003: 80.7; 2004 Proj.: 81.2 (May) - Real effective exchange rate (CPI based, 1990=100): 1999: 100.4; 2000: 97.7; 2001: 98.5; 2002: 99.6; 2003: 101.9; 2004 Proj.: 102.9 (April) ### Financial sector indicators and vulnerability assessment - Stock market index (ATX; level end of period): 1999: 119.8; 2000: 107.3; 2001: 114.0; 2002: 115.0; 2003: 154.5; 2004: 191.4 (June 16) - Price-earnings ratio (ATX): 1999: 16.6; 2000: 18.8; 2001: 15.3; 2002: 18.2; 2003: 15.2; 2004: 16.7 (June 16) - Foreign exchange loans (April; percent): 1999: 16.8; 2000: 19.1; 2001: 19.9; 2002: 20.3; 2003: 19.6; 2004: 19.9 - Foreign exchange loans, share in total loans (April, percent): 1999: 15.7; 2000: 17.5; 2001: 18.2; 2002: 18.8; 2003: 18.4; 2004: 19.1 - Risk-based capital asset ratio, total: 1999: 13.1; 2000: 13.3; 2001: 13.7; 2002: 13.3; 2003: 14.4; 2004: 14.0 (April) - Return on assets (in percent): 1999: 0.3; 2000: 0.4; 2001: 0.5; 2002: 0.3; 2003: 0.4 - Return on equity (in percent): 1999: 6.9; 2000: 9.4; 2001: 9.8; 2002: 5.4; 2003: 7.2 ### Policy stance and short-term outlook (narrative highlights from figures) - Austria has weathered the recent slowdown better than its euro area partners, but the output gap has grown. - Macroeconomic policies have been broadly neutral; real interest rates have declined and the real exchange rate has appreciated, yet competitiveness has held up and spreads have remained low. - A modest but tentative recovery appears under way with strong investment growth in 2003; consumption faltered in the fourth quarter. - Business indicators are improving, but retail sales and employment gains are uncertain and consumer confidence is shaky. ### Fund relations and IMF-specific details (as of April 30, 2004) - Membership: Joined August 27, 1948; Status: Article VIII from August 1, 1962. - Quota (SDR million): Quota 1,872.30 (100.00 percent) - Fund holdings of currency: 1,119.53 (59.79 percent) - Reserve position in Fund: 752.79 (40.21 percent) - SDR Department: - Net cumulative allocation: 179.05 (100.00 percent) - Holdings: 118.81 (66.35 percent) - Outstanding purchases and loans: None - Latest financial arrangements: None - Projected payments to Fund (SDR Million; charges/interest): 2004: 0.75; 2005: 0.99; 2006: 0.99; 2007: 0.99; 2008: 0.99 - Exchange system: As of January 1, 1999, the currency of Austria is the euro. Austria’s exchange system is free of restrictions on payments and transfers for international transactions except for restrictions notified to the Fund (EBD/03/116, 12/17/03) and national restrictions implementing CFSP decisions within the EU. ### Statistical issues and data adequacy - Austrian statistics are adequate for surveillance; Austria has subscribed to the Fund’s SDDS and its metadata are on the DSBB. - Austria uses SDDS flexibility options for timeliness of the industrial production index and merchandise trade data. - Timeliness could be improved for national accounts, industrial production, the (accrual based) current account, international investment position, and merchandise trade; publication lags by at least one month compared with Germany and France. - Transition to ESA95 complicated national accounts and fiscal analysis: - New national accounts provide no household disposable income series (only an economy-wide aggregate), preventing calculation of household saving ratio. - Reclassification of public hospitals in 1997 introduced a break in public/private consumption series. - Fiscal data from 1995 (ESA95) are not complete; government stocks of assets, liabilities, and net worth have not yet been reported for inclusion in the Government Finance Statistics Yearbook. - Large difference exists between goods trade data recorded by Statistics Austria and payments data recorded by the Austrian National Bank. - Accrual-basis data are available only with long lag; BoP Manual, fifth edition–based data available only back to 1992. ### Administrative and appendix items - Technical assistance noted: 7/19-8/4/2000 — FAD evaluated current systems of public pensions and intergovernmental fiscal relations. - Resident representatives: None. - Appendix III mentioned: Fiscal sustainability analysis. *Source: _cr04236 - 43.* ### 1. This Appendix presents medium-term projections for general government debt, as ### _cr04236 - 1. This Appendix presents medium-term projections for general government debt, as ### Baseline medium-term projections for general government debt - Staff baseline projects a decline in the general government debt ratio of about 4 percentage points to about 61 percent of GDP by 2009. - Baseline is predicated on: - the staff’s macroeconomic forecast for the projection period; - the authorities’ budget projection for 2004; - the staff’s fiscal projections for 2005-06. - Projections for 2007-09 assume unchanged structural balance from 2006. - Historical trajectory noted: - general government debt rose from 57 percent of GDP in 1990 to 67½ percent of GDP in 1999; - small decline in the debt ratio by 2003 following a policy shift toward fiscal consolidation in 2000. - Table 5 highlights baseline values (selected series, in percent of GDP unless noted): - General government debt 1999–2009: 67.5, 67.0, 67.1, 66.6, 64.9, 64.2, 63.6, 63.1, 62.5, 61.9, 61.2 - Foreign-currency denominated share of debt: 16.9, 9.5, 9.3, 8.9, 8.7, 8.6, 8.5, 8.5, 8.4, 8.3, 8.2 - Change in general government debt: 2.7, -0.5, 0.1, -0.6, -1.7, -0.7, -0.6, -0.4, -0.6, -0.6, -0.7 - Identified debt-creating flows (4+7+12): 1.7, -0.7, -1.4, -2.8, -1.0, -1.6, -0.6, -0.4, -0.6, -0.6, -0.7 - Primary deficit (- = surplus): -1.3, -2.2, -3.8, -3.1, -1.9, (blank), -2.0, -1.5, -1.3, -1.5, -1.5, -1.5 - Revenue and grants: 51.6, 50.6, 51.7, 50.9, 49.7, 49.3, 48.4, 47.8, 47.8, 47.8, 47.8 - Primary (noninterest) expenditure: 50.3, 48.5, 47.9, 47.7, 47.9, 47.3, 46.9, 46.5, 46.4, 46.3, 46.4 - Automatic debt dynamics: 3.1, 1.4, 2.4, 0.3, 0.9, 0.4, 0.9, 0.9, 0.9, 0.9, 0.8 - Contribution from interest rate/growth differential: 1.6, 0.7, 1.9, 1.8, 1.5, 1.3, 0.9, 0.9, 0.9, 0.9, 0.8 - Contribution from real interest rate: 3.3, 2.9, 2.3, 2.7, 2.0, 2.3, 2.4, 2.4, 2.3, 2.3, 2.2 - Contribution from real GDP growth: -1.7, -2.2, -0.5, -0.9, -0.5, -1.0, -1.5, -1.5, -1.4, -1.4, -1.4 - Contribution from exchange rate depreciation: 1.5, 0.8, 0.5, -1.5, -0.7, -0.9, 0.0, 0.0, 0.0, 0.0, 0.0 - Residual (2-3): 0.9, 0.2, 1.6, 2.3, -0.7, 0.9, 0.0, 0.0, 0.0, 0.0, 0.0 - General government debt-to-revenue ratio: 130.9, 132.3, 130.0, 130.8, 130.4, 130.3, 131.3, 132.0, 130.7, 129.4, 127.9 - Gross financing need (percent of GDP): 16.8, 17.1, 14.3, 16.4, 16.4, 16.0, 16.4, 16.4, 16.0, 15.6, 15.4 - Gross financing need in billions of U.S. dollars: 35.3, 32.6, 27.2, 33.7, 41.7, 46.7, 49.9, 51.9, 52.7, 53.6, 55.2 - Key macroeconomic and fiscal assumptions (selected): - Real GDP growth (in percent): 2.7, 3.4, 0.8, 1.4, 0.7, 1.6, 2.4, 2.5, 2.4, 2.3, 2.3 - Average nominal interest rate on public debt (in percent): 5.9, 5.9, 5.7, 5.4, 5.1, 5.1, 5.5, 5.5, 5.5, 5.5, 5.5 - Average real interest rate (in percent): 5.2, 4.5, 3.6, 4.1, 3.1, 3.7, 3.9, 4.0, 3.8, 3.8, 3.7 - Inflation rate (GDP deflator, in percent): 0.7, 1.4, 2.1, 1.4, 2.0, 1.5, 1.5, 1.6, 1.6, 1.6, 1.7 - Growth of real primary spending (deflated by GDP deflator, in percent): 3.0, -0.2, -0.5, 1.1, 1.0, 0.3, 1.5, 1.7, 2.1, 2.2, 2.4 ### Sensitivity and stress tests - Debt outlook resilient to various macroeconomic shocks; range of scenarios shown in Table 5. - Scenario highlights (debt-to-GDP ratio outcomes, in percent): 1. Historical means of real GDP growth, real interest rate, and primary balance prevail in 2004-2009: 64.9, 66.0, 65.0, 65.1, 65.2, 65.3, 65.3 2. Real interest rate at historical average plus two standard deviations in 2004 and 2005: 64.9, 65.7, 65.1, 64.7, 64.1, 63.5, 62.9 3. Real GDP growth at historical average minus two standard deviations in 2004 and 2005: 64.9, 65.2, 66.2, 65.7, 65.1, 64.5, 63.7 4. Primary balance at historical average minus two standard deviations in 2004 and 2005: 64.9, 67.8, 70.4, 70.4, 70.1, 69.6, 69.1, 68.5 5. Combination of 2-4 using one standard deviation shocks: 64.9, 67.7, 70.6, 69.6, 67.9, 66.4, 64.9 6. One time 30 percent real depreciation in 2004: 64.9, 69.2, 68.7, 68.7, 68.3, 67.8, 67.2, 66.6 7. 10 percent of GDP increase in other debt-creating flows in 2004: 64.9, 74.2, 73.7, 73.7, 73.4, 73.0, 72.5, 71.9 8. Revenue-to-GDP ratio at historical average minus two standard deviations in 2004-05: 64.9, 63.7, 61.8, 61.8, 61.3, 60.7, 60.0, 59.3 - Interpretation notes: - Scenario 7 (“assumption of debt”) shows a sizeable but temporary increase in the debt ratio; after an initial peak the debt ratio resumes decline once the shock fades. - Scenario 1 shows a marginal rise (by ½ percentage point of GDP) and steady increase in the debt ratio if historical means persist; this result is cautioned as it ignores the systemic policy shift since 2000 and Austria’s commitments to the EU Stability and Growth Pact. - Overall, aside from implausible large bailout scenarios, implications are manageable and other plausible scenarios show improvement. ### Long-term pension pressures and the 2003 pension reform - Population aging will raise pressures on the pension system over the longer term. - The 2003 pension reform is expected to eliminate over one-third (about 1½ percent of GDP annually) of the projected increase in pension spending in the long run. - Accounting for direct and indirect effects of the reform: - Pension system deficit projected to rise from about 1½ percent of GDP in 2005 to a peak of 3¾ percent of GDP around 2035, and decline thereafter. - Fiscal sustainability conditionality: - Such deficits would not undermine fiscal sustainability as long as the government returns to its goal to balance the budget over the cycle, which would place the debt-to-GDP ratio on a robust downward trajectory. ### Fiscal policy actions, tax reform, and short-term outlook (authorities’ statement) - Short-term growth: - Real GDP growth in Q1 2004 at a rate of 0.7 percent of GDP; more recent indicators point to acceleration with exports as main driver and private consumption lagging. - Fiscal consolidation and recent performance: - Sharp fiscal adjustment of some 2 percent of GDP in 2001 resulted in a small budget surplus (0.3 percent in Maastricht definition). - Average fiscal deficit for 2000—03 amounted to 0.6 percent. - Investment contributed 1.3 percentage points to GDP growth in 2003. - R&D tax premium financed expenditures to the tune of 0.15 percentage points, raising R&D spending to 2.3 percent of GDP in 2004. - Due to lower tax revenues, deficit widened to 1.3 percent in 2003; authorities expect a budget deficit of about 1.1 percent of GDP in 2004. - 2004-05 tax reform (adopted May 2004, amounting to 1.3 percent of GDP): - Personal income tax schedule simplified; tax-free income threshold increased, especially for families and single parents. - Some minor taxes abolished or reduced. - Corporate tax rate reduced by 9 percentage points from 34 percent to 25 percent, with the tax base broadened. - Group taxation introduced to foster Austria as a headquarter location. - Authorities view the reform as non–pro-cyclical given negative output gap until 2006 and phasing of investment incentives and public expenditure reductions. - Government committed to return to a balanced budget over the cycle; expects to achieve a balanced budget again in 2008. - Ongoing structural policy initiatives: - Renewal of the internal stability pact; revision of law regulating fiscal relations between national and regional authorities. - Austria Convention to revise the role of the state and reduce administrative layers. - Ministry of Finance proposed a medium-term expenditure framework to the Convention. - Pension harmonization (reform agreed July 12; effective January 1, 2005): - Individual, transparent pension accounts for all pension entitlements. - Harmonized contribution base with same floor and ceiling for all insured. - Contribution rate: 22.8 percent of gross wages; farmers pay 15 percent; self-employed pay 17.5 percent. - Provisions address social hardship, flexible entry age, and reward parenting, unemployment, military service. - System includes a factor correcting for increasing life expectancy. - Persons currently above 55 years of age remain in the old system. - Authorities consider the harmonization broadly in line with staff recommendations and supportive of long-term sustainability. - Other structural actions: - Continued privatizations (sale of federal housing company). - Amendment to competition and cartel law to align with European standards. ### Financial Sector Assessment (FSSA) — key points from authorities’ statement - General assessment: - FSSA provided timely supervision of Austrian financial market supervision soon after establishment of the new Financial Market Authority (FMA). - Authorities view results as confirmation of supervisory solidity and encouragement for further improvement. - Two noteworthy FSSA results: 1. Confirmation of overall stability of the financial system and success of Austrian banks’ strategies in Central and Eastern Europe and domestic consolidation. 2. Confirmation of the reform of financial supervision, including the launch of the FMA and successful inter-institutional cooperation with ministry of finance and central bank; intention to strengthen FMA powers as part of Basel II implementation. - Future work and policy actions: i) Deposit insurance — current system functions well; longer-run adjustments to be considered; authorities exploring IMF-suggested solutions. ii) New pension instruments ("Zukunftsvorsorge") — FMA has designed risk management and reporting requirements; will publish results and develop prudential guidelines. iii) Public liability — efforts to: - Clarify auditor liability (auditor acts for company, not FMA); - Identify the Federal Republic as principal addressee of claims; - Discuss public liability in connection with deposit insurance reform. iv) Foreign currency lending — measures taken or planned: - Inform consumers clearly about features and risks; - Oblige banks to ascertain customer information levels; - Publish guidelines; consider legal steps to enhance client information and ensure risk awareness. - Anti–Money Laundering (AML/CFT): - Austria has achieved a high level of compliance with the FATF 40+8 Recommendations. - Substantial progress from legal amendments and active FMA policy; FIU conducts seminars and onsite inspections. - Austria will continue implementing EU Directives and instruments (e.g., Market Abuse Directive, Prospectus Directive, Investment Services Directive II, Basel II Directive, 3rd Anti Money Laundering Directive) as relevant to improve assessed sectors. *Source: IMF staff report and authorities’ statements contained in the Appendix and Table 5 of the cited document.* ### 0.7 percent as private consumption growth came to a halt in the last quarter. However, other ### _cr04236 - 0.7 percent as private consumption growth came to a halt in the last quarter. However, other ### Economic activity and outlook - Private consumption growth came to a halt in the last quarter; other indicators point to a gradual recovery of activity. - Current account remained broadly balanced in 2003 despite the appreciation of the euro. - Unemployment rose almost 1 percentage point during 2001-03, but at 4.4 percent in mid-2004 remains well below the EU average. - Inflation averaged 1.8 percent during the referenced period; its rise to 2.1 percent in May 2004 reflects the impact of higher energy prices. - Short-term prospects: - Growth of real GDP is expected to pick up to 1.6 percent in 2004 and average 2.4 percent in 2005, supported by robust investment and exports. - Uncertainties remain related to private consumption and the global environment; risks to the outlook are characterized as balanced. - The inflation outlook is described as benign. ### Fiscal policy and tax reform - Fiscal strategy: maintain a balanced budget over the cycle while making room for tax cuts. - General government deficit (on ESA95 basis) was 1.4 percent of GDP in 2003 and is expected to narrow to 1.2 percent of GDP in 2004 (0.4 percent of GDP above budget plans) while maintaining the broad structural balance achieved in 2003. - Planned tax reform: - First significant step in tax reform planned for 2005. - Tax reform will contribute to a temporary widening of the general government deficit in 2005-06 as corresponding expenditure savings come on stream gradually. - Government envisages a return to budget balance by 2008, when the next wave of tax reform is planned. - Executive Directors’ guidance: - Support tax reform plans for 2005 and the medium-term objective of lowering the tax burden to 40 percent of GDP by 2010. - Suggested focus for next round: reduce the tax burden on labor. - Stressed that success hinges on durable expenditure cuts, particularly in public administration, health, and transfers. - Noted that the targeted deficit increase in 2005-06 represents a substantial deviation from a cyclically adjusted balance and that fiscal balance may not return until about 2007. - Urged all levels of government to contribute to consolidation and use negotiations with regional governments on revenue sharing to seek regional savings. - Welcomed progress toward a comprehensive medium-term fiscal framework and encouraged legislative steps to implement it. ### Financial sector and supervision - FSAP conclusions: Austrian financial system generally sound, well supervised, and resilient to shocks; compliance with international standards in banking, insurance, securities, and anti-money laundering is high. - Banking sector: profitable, well-capitalized, has undergone major restructuring and consolidation, and successfully expanded in Central and Eastern European Countries (CEECs). - Risks and supervisory agenda: - Potential risks from Austrian banks’ exposure in the CEECs and from foreign currency loans to households. - Scope for strengthening supervision and reviewing the current deposit insurance system over the medium term. - Authorities have taken steps to strengthen supervision and to address foreign currency lending risks. - Continued monitoring and vigilance required given banks’ expansion in CEECs; further restructuring and consolidation likely to continue. ### Structural reforms - Progress since 2000 described as impressive; reforms expected to boost productivity and long-run growth. - Unfinished priorities: - Harmonization of the various public pension schemes identified as a key government commitment and top priority. - Further priorities: rationalize the disability pension, reform the health sector for efficiency and budgetary savings, liberalize services further, complete the privatization program. - Need to raise participation of older workers in the labor force. - Institutional opportunity: Austria Convention on a new constitution seen as a chance to streamline relations between levels of government and improve public service efficiency. ### Executive Board assessment (summarized) - Commended authorities for balancing the budget, reducing taxes, containing public spending, and launching reforms with notable results. - Endorsed medium-term objectives: sustain balanced budget over the cycle, reduce tax burden, pursue structural reforms to raise growth potential. - Emphasized managing fiscal implications of tax and other reforms while maintaining macroeconomic stability. - Welcomed Austria’s commitment to trade liberalization and contribution to official development assistance toward the UN target of 0.7 percent of GNP. ### Selected economic indicators (key figures) - GDP growth: 2000: 3.4; 2001: 0.8; 2002: 1.4; 2003: 0.7; 2004: 1.6 - Domestic demand: 2000: 2.6; 2001: -0.2; 2002: 0.0; 2003: 1.8; 2004: 1.7 - CPI (year average): 2000: 2.0; 2001: 2.3; 2002: 1.7; 2003: 1.3; 2004: 2.1 (figure for 2004 refers to May) - Unemployment rate (in percent): 2000: 3.7; 2001: 3.6; 2002: 4.3; 2003: 4.4; 2004: 4.4 (figure for 2004 refers to May) - Gross national saving (percent of GDP): 2000: 22.9; 2001: 22.6; 2002: 23.8; 2003: 23.2; 2004: 22.7 - Gross domestic investment (percent of GDP): 2000: 25.5; 2001: 24.5; 2002: 23.5; 2003: 24.1; 2004: 23.7 - Central government balance (percent of GDP, ESA95): 2000: -1.8; 2001: -0.7; 2002: -1.1; 2003: -1.9; 2004: -1.7 - General government balance (percent of GDP, ESA95): 2000: -1.7; 2001: 0.1; 2002: -0.4; 2003: -1.4; 2004: -1.2 - General government balance (EDP basis): 2000: -1.5; 2001: 0.3; 2002: -0.2; 2003: -1.3; 2004: -1.0 - General government debt (percent of GDP): 2000: 67.0; 2001: 67.1; 2002: 66.6; 2003: 64.9; 2004: 64.2 - M3 (end of year, percent change): 2000: 2.2; 2001: 11.4; 2002: 1.3; 2003: 7.8; 2004: 5.1 (figure for 2004 refers to April) - Domestic credit (end of year, percent change): 2000: 6.8; 2001: 3.5; 2002: 1.2; 2003: 1.8; 2004: 3.1 - Money market rate (percent): 2000: 4.4; 2001: 4.3; 2002: 3.3; 2003: 2.3; 2004: 2.1 (figure for 2004 refers to June 16) - Government bond yield (percent): 2000: 5.6; 2001: 5.1; 2002: 5.0; 2003: 4.1; 2004: 4.5 (figure for 2004 refers to June 16) - Trade balance (percent of GDP): 2000: -1.4; 2001: -0.7; 2002: 1.7; 2003: 0.8; 2004: 0.5 - Current account (percent of GDP): 2000: -2.6; 2001: -1.9; 2002: 0.3; 2003: -0.9; 2004: -1.0 - Fund position (as of April 30, 2004): - Holdings of currency (in percent of quota): 59.8 - Holdings of SDRs (in percent of allocation): 66.4 - Quota (in millions of SDRs): 1,872.3 - Exchange rates and competitiveness: - Exchange rate regime: Member of euro area - Euro per US dollar: 2000: 1.09; 2001: 1.12; 2002: 1.06; 2003: 0.89; 2004: 0.83 (figure for 2004 refers to June 16) - Nominal effective rate (1990=100): 2000: 99.9; 2001: 100.2; 2002: 100.6; 2003: 102.6; 2004: 103.0 - Real effective rate (1990=100, based on relative normalized unit labor costs in manufacturing): 2000: 78.7; 2001: 78.5; 2002: 79.0; 2003: 80.7; 2004: 81.2 *Source: IMF staff report and Executive Board assessment as presented in the document.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04236.pdf_