## _cr05248

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---

### Executive Summary — recent developments and macroeconomic performance
- Growth of real GDP accelerated to 2.2 percent in 2004, supported by strong exports.
- Growth averaged 1¾ percent during 2000–04, comparable to the euro zone average.
- Exports of goods surged over 12 percent in real terms in 2004.
- Company profitability increased and the Vienna stock exchange rose "up more than 50 percent for the year" in 2004.
- Nominal wage increases averaged 2 percent in 2004; industrial productivity rose 5½ percent in 2004.
- Relative unit labor costs declined; Austria’s REER rose 1½ percent in ULC terms over the past 12 months.
- HICP inflation: period average 2.0 percent in 2004; 12-month inflation was 2.0 percent in May 2005.
- Underlying inflation rose more moderately; recent inflation drivers included rising energy prices, energy tax hikes, and increases in rents.
- The unemployment rate has been about 4½ percent for over a year (a record high for Austria).
- The output gap has begun to narrow.
- Monetary conditions remained accommodative with declines in real interest rates.

### Short-term outlook
- Staff projects growth to average 1.9 percent in 2005 and 2.2 percent in 2006.
- Consumer price inflation is expected to average 2 percent in 2005.
- Sources of growth expected to shift gradually from external to domestic demand:
  - Private consumption expected to strengthen, supported by further employment gains.
  - Investment growth expected to remain robust, aided by export prospects, increased corporate earnings, favorable financing conditions, and capacity utilization above long-run averages.
  - Export growth expected to slow due to a softening of external demand; with imports growing strongly, the external sector is expected to make virtually no contribution to growth in 2005–06.
- Downside risks warrant close monitoring:
  - Domestic demand has yet to take off decisively; the baseline hinges on a rebound in private consumption.
  - Uncertainty associated with pension reforms may have raised savings and weighed on consumption.
  - External risks include weaker activity in the euro area (particularly Germany), higher oil prices, and a large, disorderly appreciation of the euro.

### Fiscal policy and public finances
- Fiscal stance became more accommodative in 2004 due to discretionary fiscal measures and front-loading of tax measures.
- General government deficit widened to 1.2 percent of GDP in 2004; the fiscal impulse was nearly ½ percent of GDP.
- Authorities’ medium-term objectives: balance the budget over the cycle and reduce the tax burden to 40 percent of GDP by 2010.
- Fiscal deficit expected to widen in 2005–06 because of tax reform:
  - Widening by an average of 0.7 percentage point of GDP in nominal terms in 2005–06.
  - Worsening is about 1 percent of GDP in structural terms.
- Staff view: temporary and limited widening does not threaten macroeconomic stability if followed by credible consolidation.
- Key fiscal implementation challenge: identify areas for further expenditure savings and build consensus (including among subnational authorities) to return to budget balance in 2008 as planned.
- Staff would have preferred more ambitious deficit targets for 2005–06, but acknowledged expenditure cuts take longer to design and implement given political economy constraints.

### Stability Program projections (Official projections, November 2004)
- Receipts (percent of GDP for 2004 2005 2006 2007 2008): 48.7 47.5 46.2 46.0 45.8
- of which: tax burden (percent of GDP): 42.7 41.6 40.5 40.3 40.0
- Expenditures (percent of GDP): 50.0 49.5 48.0 46.7 45.8
- Overall fiscal balance, EDP definition (percent of GDP): -1.3 -1.9 -1.7 -0.8 0.0
- General government debt ratio (percent of GDP): 64.2 63.6 63.1 61.6 59.1
- Note: 1/ Official projections, November 2004. 2/ Maastricht Excessive Deficit Procedure (EDP) definition, which differs from ESA95.

### Expenditure savings, intergovernmental fiscal relations, and efficiency measures
- Federal-level identified areas are insufficient to deliver required savings; subnational initiatives expected to help meet Austrian Stability Pact targets but not to further improve the general government balance.
- Finanzausgleich and the Austria Convention have potential to increase efficiency, streamline functions, generate savings, and realign spending responsibilities and revenue-raising powers, but neither has yet addressed subnational government efficiency sufficiently.
- Mission urged a modern, efficient constitutional framework for intergovernmental relations to be provided by broad political consensus.
- Areas with considerable scope for rationalization:
  - Size of public administration, especially at the subnational level.
  - Health sector: additional savings possible through rationalization and cooperation of subnational governments while maintaining accessibility and quality.
  - Subsidies: reexamine size and role; housing subsidy amounts to about 1 percent of GDP and is particularly costly and not well targeted.
  - Social transfers: more frequent means-testing of social transfers would be desirable.
- Selected fact: In the latest Austrian Stability Pact for 2005–08, subnational governments agreed to raise their aggregate fiscal surplus from ½ percent of GDP in 2005 to ¾ percent of GDP by 2008.

### Medium-Term Expenditure Framework (MTEF) and budgetary reform
- Ministry of Finance preparing fiscal budgeting and accounting reform with three components: (i) introduction of a Medium-Term Expenditure Framework (MTEF); (ii) more target-based budgeting; and (iii) improved accounting and information systems.
- Broad basic political support for an MTEF with intention to have a law passed to take effect in 2007.
- MTEF design elements:
  - Cover four years, revised and updated annually on a rolling basis with binding expenditure ceilings.
  - Ceilings on cyclical expenditures guided by prevailing economic conditions; ceilings on other expenditures set in nominal terms.
  - Intended to set strategic expenditure priorities; ceilings broken down by broad categories and allocated among ministries, binding only for the next annual budget.
  - MTEF would cover only the federal government, although budgetary targets for provinces and municipalities set in the Austrian Stability Pact.
- Early legislative approval important to enable framework to be operational by 2007.

### Tax reform and fiscal policy design
- Authorities emphasized tax reform agenda not yet completed; recent measures mainly targeted taxes on profits and capital.
- Measures expected to attract business and boost employment, investment, and growth in the medium term and beyond.
- Little has been done to reduce the burden on labor, which remains high by international standards.
- Tax allowances and preferential tax treatments run counter to the need to widen the tax base.
- Mission emphasized tax reform should simplify the system, increase transparency, and minimize distortions; further tax cuts should coincide with corresponding expenditure measures.

### Structural policies, labor market, and pensions
- Since 2000 Austria pursued fiscal consolidation and liberalization: small fiscal surplus in 2001 and marked reduction in the size of government during 2000–04; major pension reform in 2003 and harmonization effective 2005; privatization and deregulation in product and labor markets; tax reform in 2004–05.
- Progress impressive but additional tasks remain: further liberalization of labor, product, and services markets; full pension harmonization including regional governments; proper use of the disability pension system.
- Labor market specifics:
  - Austria’s labor market relatively flexible, but labor force participation of older workers remains among the lowest in the EU.
  - Pension reform expected to help raise participation rates; additional policies needed to integrate older workers.
  - Services (including free professions) remain heavily regulated; implementation of more flexible shop-opening hours by provinces has stalled.
  - Authorities urged to continue cutting red tape, strengthen the Federal Competition Authority, and proceed with remaining privatization plans.
  - Importance of bringing public and private R&D spending to internationally agreed levels emphasized.
- Pension reform details:
  - Effective January 1, 2005, most groups of workers included in a unified pension system (applicable to those currently 50 years or younger).
  - Unified system guided by ASVG principles: (i) 45 years of contributions; (ii) gradual rise in the retirement age to 65 by 2017; (iii) benefits amounting to 80 percent of lifetime earnings.
  - Special provisions: lower retirement age (60 years) for hard physical labor; lower contribution rates for farmers and the self-employed with the federal government covering the difference.
  - Pension increases based on changes in the cost of living.
  - The 10 percent cap on benefit losses under the 2003 ASVG reform reduced to 5 percent, to rise by 0.25 percentage point annually until it reaches 10 percent in 2024.
- Mission recommended completing harmonization (including pensions of most civil servants at the subnational level) and safeguarding proper use of disability pension schemes; noted number of new disability pension claimants remains high.

### Financial sector issues, supervision, and vulnerabilities
- 2004 FSAP found the financial system generally sound, well supervised, and resilient to shocks.
- Financial conditions improved in 2004: companies issued equity to cover external financing needs; lower real interest rates helped firms.
- Authorities strengthened supervision and collaborate with local supervisors in CEECs.
- Key supervisory priorities: vigilance regarding foreign exchange lending to households and banks’ rapidly expanding activities abroad; closely monitor Austrian banks’ risk exposures in Central and Eastern Europe.
- Selected banking sector indicators, 2000–2004:
  - Net interest income (in percent of total assets): 1.2 1.2 1.2 1.2 1.1
  - Operating profit (before tax, in percent of total assets): 0.8 0.8 0.7 0.7 0.7
  - Cost/income ratio (in percent): 66.6 67.4 69.3 68.2 67.2
  - Loan-loss provisions (in percent of bank claims): 2.9 3.1 3.3 3.3 3.3
  - Capital adequacy ratio (in percent): 13.3 13.7 13.3 14.5 14.7
  - Return on equity (in percent): 9.4 9.8 5.4 6.3 9.3
  - Total assets (billions of euros): 562.7 587.7 573.3 605.1 652.8
- Household foreign-currency loans:
  - By end-March 2005, about 30 percent of outstanding loans to households were in foreign currency.
  - Foreign currency loans account for about half the growth of total credit to households.
  - Staff study: rapid spread cannot be fully explained by economic determinants and seems to reflect herd behavior; supply factors (bank promotion, fee income) played a role; loans expose borrowers and lenders to exchange and interest rate risks and potential credit risk; policy measures so far have not had a significant impact on levels or growth rates of these loans.
  - Staff supported public information campaigns and FMA measures to improve bank risk management, urged continued consumer information and protection, and close monitoring of developments.

### Supervision and financial-market developments
- Recent developments in asset markets being monitored closely; staff encouraged financial sector authorities to remain vigilant.
- Expansion in the CEECs brought new risks, including with regard to lending in foreign exchange.
- FMA developed further strategy to improve supervision of Austrian financial institutions in the region.
- Amendments of the Banking Act and the Financial Market Authority Act clarified state liability for supervisors' duties and limited state liability for external auditors except when examinations performed following FMA request.
- Supervisors would have preferred amendments regarding external auditors enacted as constitutional law and potential liability of supervisors limited further.

### External linkages and diversification
- Austria’s economic links diversifying from Germany toward the CEECs and Southeastern Europe:
  - 1992: Germany accounted for 40 percent of Austria’s exports and CEECs 8 percent; by 2004 Germany’s share dropped to 32 percent while CEECs’ share doubled to 16 percent.
- German and Austrian business cycles are less synchronized than before.
- These evolving linkages have helped diversify and cushion Austria from some Western European weaknesses.

### Key policy implications and recommendations (summarized)
- Maintain fiscal consolidation momentum and ensure temporary deficit widening from tax reform is reversed through identified expenditure savings to meet government’s objective of a balanced budget over the cycle.
- Proceed expeditiously to mobilize consensus, including with regional governments, for expenditure restraint and pension harmonization to preserve feasibility of returning to budget balance by 2008.
- Continue to liberalize labor, product, and services markets to raise growth potential and avoid complacency.
- Sustain proactive financial supervision, monitor foreign exchange lending and banks’ CEEC exposures, and cooperate with local supervisors to manage cross-border risks.
- Design and set in motion now the expenditure cuts that would enable the next government to return to a budget balance by 2008.
- Identify areas where expenditure savings can be implemented and proceed expeditiously to mobilize necessary consensus.
- There is scope for rationalizing public administration—especially at the subnational level—the health sector, and various subsidies.
- Progress in designing a medium-term expenditure framework is welcome; ensure it becomes operational by 2007.
- Continue public information and consumer protection efforts regarding foreign-currency borrowing; enhance cooperation and exchange of information with local supervisors.

### Macroeconomic indicators and short-term projections (selected)
- GDP (2000–2005): 3.4 0.7 1.2 0.8 2.2 1.9 (Proj. 2005)
- CPI inflation (2000–2005): 2.0 2.3 1.7 1.3 2.0 2.0 6/
- Unemployment rate (percent, 2000–2005): 3.7 3.6 4.2 4.3 4.5 4.6 5/
- Growth of real GDP gathered speed in 2004 on the back of strong exports; Q1 2005: GDP growth was 0.2 percent (quarter-on-quarter) and 2.1 percent year-on-year.
- Staff projections, GDP (2003–2010): 0.8 (2003), 2.2 (2004), 1.9 (2005), 2.2 (2006), 2.1 (2007), 2.2 (2008), 2.2 (2009), 2.1 (2010).
- CPI inflation (2003–2010): 1.3, 2.0, 2.0, 1.8, 1.7, 1.7, 1.7, 1.7.
- Unemployment rate (percent, 2003–2010): 4.3, 4.5, 4.5, 4.2, 4.0, 4.0, 3.9, 3.8.
- Current account balance (percent of GDP, 2003–2010): -0.5, 0.6, 0.1, 0.0, 0.3, 0.6, 0.5, 0.4.

### Fiscal accounts and medium-term projections (selected ESA95 series)
- Revenue (2001–2008): 51.0, 50.2, 49.5, 49.4, 47.9, 47.2, 45.8, 45.7
- Expenditure (2001–2008): 50.9, 50.6, 50.8, 50.6, 49.9, 49.1, 46.7, 45.8
- Overall balance (ESA95 basis, 2001–2008): 0.1, -0.4, -1.3, -1.2, -2.0, -1.8, -0.9, -0.1
- Structural balance (ESA95 basis, 2001–2008): -0.6, -0.2, -0.2, -0.7, -1.6, -1.6, -0.7, 0.0
- Fiscal impulse (2001–2008): -2.7, -0.4, 0.0, 0.5, 0.9, 0.0, -0.9, -0.7
- Public debt (end-period, 2001–2008): 66.1, 65.7, 64.5, 63.6, 63.5, 62.9, 61.4, 59.2

### Debt sustainability and long-term fiscal outlook
- General government debt (end-2004): 63.5 percent of GDP.
- Baseline medium-term scenario projects decline to 55.0 percent of GDP by end-2010 (drop of about 8½ percentage points from end-2004), reflecting planned return to balanced budgets by 2008 and balanced budgets assumed for 2009–2010.
- Alternative scenarios and stress tests (selected outcomes example): B6 (10 percent of GDP increase in other debt-creating flows in 2006) produces sharp increase, e.g., debt up to 72.9 in 2006 in that scenario.
- Debt-stabilizing primary balance indicated as 0.5 (baseline projection column, Table 5).
- Long-term projections (percent of GDP, selected):
  - Pension expenditures: 14.2 (2005), 14.2 (2010), 14.2 (2015), 14.6 (2020), 14.8 (2025), 14.9 (2030), 15.1 (2035), 14.5 (2040), 14.1 (2045), 13.6 (2050).
  - Health and other care expenditures: 5.8 (2005), 6.1 (2010), 6.3 (2015), 6.6 (2020), 6.8 (2025), 7.1 (2030), 7.3 (2035), 7.6 (2040), 7.8 (2045), 7.9 (2050).
  - Interest payments: 3.1 (2005), 2.7 (2010), 2.6 (2015), 2.3 (2020), 2.1 (2025), 2.0 (2030), 2.0 (2035), 2.0 (2040), 1.9 (2045), 1.8 (2050).
  - Overall balance under long-term scenario: -2.0 (2005), -0.1 (2010), -0.2 (2015), -0.5 (2020), -0.8 (2025), -1.1 (2030), -1.4 (2035), -1.2 (2040), -0.8 (2045), -0.4 (2050).
- Staff conclusion: medium-term fiscal position resilient to shocks; long-term pressures from aging manageable given recent pension reforms expected to improve projected expenditures by as much as 3 percentage points of GDP in the long term and limit pension expenditure increase to about 1 percentage point from 2005 to the peak in 2035.
- Demographics: projected share of population aged 65+ relative to population 16–64 by 2050 is 55 percent for Austria versus 49 percent average in EU-15 (OECD Social Indicators, 2005 edition).

### Statistics, Fund relations, and procedural notes
- Total area: 83,850 square kilometers.
- Total population (2004): 8.1 million.
- GDP per capita (2004): US$ 36,142 (€ 29,018).
- Fund membership: Joined the IMF: August 27, 1948; Status: Article VIII as from August 1, 1962.
- Quota: 1,872.30 SDR Million (100.00 percent).
- Fund holdings of currency: 1,345.80 (71.88 percent).
- Reserve position in Fund: 526.50 (28.12 percent).
- Net cumulative SDR allocation: 179.05 (100.00 percent); holdings 107.91 (60.27 percent).
- Outstanding purchases and loans: None.
- Projected payments to Fund (SDR million): Charges/Interest 2005: 0.91; 2006: 1.78; 2007: 1.78; 2008: 1.79; 2009: 1.78.
- Exchange system: euro as of January 1, 1999; exchange system free of restrictions on payments and transfers for international transactions except restrictions notified to the Fund pursuant to UN Security Council Resolutions and EU Council regulations.
- Austria is on a 12-month Article IV consultation cycle; last consultation completed on August 2, 2004 (EBM/04/76).

*Source: Executive Summary and excerpts from IMF staff report and appendices contained in the provided content unit.*

### Executive Summary ......................................................................................................

### Executive Summary

### Recent developments and macroeconomic performance
- Growth of real GDP accelerated to 2.2 percent in 2004, supported by strong exports.  
- Growth averaged 1¾ percent during 2000–04, comparable to the euro zone average.  
- Exports of goods surged over 12 percent in real terms in 2004.  
- Company profitability increased and the Vienna stock exchange rose "up more than 50 percent for the year" in 2004.  
- Nominal wage increases averaged 2 percent in 2004; industrial productivity rose 5½ percent in 2004.  
- Relative unit labor costs declined; Austria’s REER rose 1½ percent in ULC terms over the past 12 months.  
- HICP inflation: period average 2.0 percent in 2004; 12-month inflation was 2.0 percent in May 2005.  
- Underlying inflation rose more moderately; recent inflation drivers included rising energy prices, energy tax hikes, and increases in rents.  
- The unemployment rate has been about 4½ percent for over a year (a record high for Austria).  
- The output gap has begun to narrow.  
- Monetary conditions remained accommodative with declines in real interest rates.

### Short-term outlook
- Staff projects growth to average 1.9 percent in 2005 and 2.2 percent in 2006.  
- Consumer price inflation is expected to average 2 percent in 2005.  
- Sources of growth are expected to shift gradually from external to domestic demand:  
  - Private consumption is expected to strengthen, supported by further employment gains.  
  - Investment growth is expected to remain robust, aided by export prospects, increased corporate earnings, favorable financing conditions, and capacity utilization above long-run averages.  
  - Export growth is expected to slow due to a softening of external demand; with imports growing strongly, the external sector is expected to make virtually no contribution to growth in 2005–06.  
- Downside risks warrant close monitoring:  
  - Domestic demand has yet to take off decisively; the baseline hinges on a rebound in private consumption.  
  - Uncertainty associated with pension reforms may have raised savings and weighed on consumption.  
  - External risks include weaker activity in the euro area (particularly Germany), higher oil prices, and a large, disorderly appreciation of the euro.

### Fiscal policy and public finances
- Fiscal stance became more accommodative in 2004 due to discretionary fiscal measures and front-loading of tax measures.  
- General government deficit widened to 1.2 percent of GDP in 2004; the fiscal impulse was nearly ½ percent of GDP.  
- The authorities’ medium-term objectives: balance the budget over the cycle and reduce the tax burden to 40 percent of GDP by 2010.  
- The fiscal deficit is expected to widen in 2005–06 because of tax reform:  
  - Widening by an average of 0.7 percentage point of GDP in nominal terms in 2005–06.  
  - Worsening is about 1 percent of GDP in structural terms.  
- Staff view: temporary and limited widening does not threaten macroeconomic stability if followed by credible consolidation.  
- Key fiscal implementation challenge: identify areas for further expenditure savings and build consensus (including among subnational authorities) to return to budget balance in 2008 as planned.  
- Staff would have preferred more ambitious deficit targets for 2005–06, but acknowledged expenditure cuts take longer to design and implement given political economy constraints.

### Structural policies and reforms
- Since 2000 Austria has pursued fiscal consolidation and liberalization:  
  - Small fiscal surplus in 2001 and marked reduction in the size of government during 2000–04.  
  - Major pension reform in 2003 and harmonization of main pension systems effective 2005.  
  - Privatization and deregulation in product and labor markets during the past five years.  
  - Tax reform in 2004–05.  
- Progress has been impressive but additional tasks remain: further liberalization of labor, product, and services markets; full pension harmonization including regional governments; proper use of the disability pension system.  
- The authorities have political support for balancing the budget over the cycle, but there is risk of reform fatigue.

### Financial sector issues and supervision
- The 2004 FSAP found the financial system generally sound, well supervised, and resilient to shocks.  
- Financial conditions improved in 2004: companies issued equity to cover external financing needs; lower real interest rates helped firms.  
- Authorities have strengthened supervision and collaborate with local supervisors in CEECs.  
- Key supervisory priorities: remain vigilant regarding foreign exchange lending to households and banks’ rapidly expanding activities abroad; closely monitor Austrian banks’ risk exposures in Central and Eastern Europe.

### External linkages and diversification
- Austria’s economic links have been diversifying from Germany toward the CEECs and Southeastern Europe:  
  - In 1992 Germany accounted for 40 percent of Austria’s exports and CEECs 8 percent; by 2004 Germany’s share dropped to 32 percent while CEECs’ share doubled to 16 percent.  
  - German and Austrian business cycles are less synchronized than before, particularly the correlation between Austria’s real GDP and German domestic demand growth rates.  
- These evolving linkages have helped diversify and cushion Austria from some Western European weaknesses.

### Key policy implications and recommendations (summarized)
- Maintain fiscal consolidation momentum and ensure that the temporary deficit widening from tax reform is reversed through identified expenditure savings to meet the government’s objective of a balanced budget over the cycle.  
- Proceed expeditiously to mobilize consensus, including with regional governments, for expenditure restraint and pension harmonization to preserve the feasibility of returning to budget balance by 2008.  
- Continue to liberalize labor, product, and services markets to raise growth potential and avoid complacency.  
- Sustain proactive financial supervision, monitor foreign exchange lending and banks’ CEEC exposures, and cooperate with local supervisors to manage cross-border risks.

*Source: Executive Summary of IMF staff report (2015 consultation material provided).*

### 14.      The mission reiterated its support for the government’s objectives to balance the

### _cr05248 - 14.      The mission reiterated its support for the government’s objectives to balance the

### Fiscal policy, Stability Program, and consolidation targets
- The Stability Program sets an ambitious consolidation goal for 2007–08, aiming for an adjustment of about 1¾ percent of GDP in both nominal and structural terms.
- Further modest tax cuts are envisaged for 2007–08 that would allow the government to meet its target of a 40 percent of GDP tax burden as early as 2008, two years ahead of schedule.
- The mission welcomed broad political acceptance of a policy of a balanced budget over the cycle.
- The mission noted that policies to achieve 2007–08 objectives are not well defined; identified federal measures—chiefly further reform of public administration—are insufficient to deliver required expenditure savings.
- The mission recommended that further tax cuts be conditional upon the identification of durable expenditure savings that target the least productive areas of government spending.
- Risk to achieving targets: in view of the 2006 elections, it is conceivable that the budget for 2007 will become law only within calendar-year 2007, making it difficult to achieve the ambitious general government deficit target for that year set out in the Stability Program.

Key projections from the Austrian Stability Program (Official projections, November 2004)
- Receipts: 48.7 47.5 46.2 46.0 45.8 (In percent of GDP for 2004 2005 2006 2007 2008)
- of which: tax burden: 42.7 41.6 40.5 40.3 40.0 (In percent of GDP)
- Expenditures: 50.0 49.5 48.0 46.7 45.8 (In percent of GDP)
- Overall fiscal balance, EDP definition: -1.3 -1.9 -1.7 -0.8 0.0 (In percent of GDP)
- General government debt ratio: 64.2 63.6 63.1 61.6 59.1 (In percent of GDP)
- Note: 1/ Official projections, November 2004. 2/ Maastricht Excessive Deficit Procedure (EDP) definition, which differs from ESA95.

### Expenditure savings, intergovernmental fiscal relations, and efficiency measures
- Federal-level identified areas are insufficient to deliver required savings; subnational initiatives (public administration and health sector reforms) are expected to help meet Austrian Stability Pact targets but not to further improve the general government balance.
- The Finanzausgleich (revenue-sharing agreement) and the Austria Convention have potential to increase efficiency, streamline functions, generate savings, and realign spending responsibilities and revenue-raising powers, but neither has yet addressed subnational government efficiency sufficiently.
- The mission urged a modern, efficient constitutional framework for intergovernmental relations to be provided by broad political consensus.
- Areas with considerable scope for rationalization:
  - Size of public administration, especially at the subnational level.
  - Health sector: Finanzausgleich included measures, but additional savings possible through rationalization and cooperation of subnational governments while maintaining accessibility and quality.
  - Subsidies: staff recommended reexamining size and role of subsidies; the housing subsidy amounts to about 1 percent of GDP and is particularly costly and not well targeted.
  - Social transfers: more frequent means-testing of social transfers would be desirable.

Selected facts about intergovernmental fiscal system (as presented)
- The new Finanzausgleich covering 2005–08 was agreed in late 2004.
- In the latest Austrian Stability Pact for 2005–08, subnational governments agreed to raise their aggregate fiscal surplus from ½ percent of GDP in 2005 to ¾ percent of GDP by 2008.

### Medium-Term Expenditure Framework (MTEF) and budgetary reform
- The Ministry of Finance is preparing a comprehensive fiscal budgeting and accounting reform with three main components: (i) introduction of a Medium-Term Expenditure Framework (MTEF); (ii) more target-based budgeting; and (iii) improved accounting and information systems.
- There appears to be broad basic political support for an MTEF with the intention to have a law passed to take effect in 2007.
- MTEF design elements:
  - The MTEF would cover four years, to be revised and updated annually on a rolling basis with binding expenditure ceilings.
  - Ceilings on cyclical expenditures would be guided by prevailing economic conditions; ceilings on other expenditures would be set in nominal terms.
  - The MTEF is intended to set strategic expenditure priorities; expenditure ceilings would be broken down by broad categories and subsequently allocated among ministries, being binding only for the next annual budget.
  - The MTEF would only cover the federal government, although budgetary targets for provinces and municipalities are set in the Austrian Stability Pact.
- Early legislative approval is important to enable the framework to become operational by 2007.

### Tax reform and fiscal policy design
- The authorities emphasized the tax reform agenda is not yet completed; recent measures mainly targeted taxes on profits and capital.
- These measures are expected to attract business and boost employment, investment, and growth in the medium term and beyond.
- Little has been done to reduce the burden on labor, which remains high by international standards.
- Tax allowances and preferential tax treatments run counter to the need to widen the tax base.
- The mission emphasized tax reform should also simplify the system, increase transparency, and minimize distortions; further tax cuts should coincide with corresponding expenditure measures.

### Structural policies, labor market, and pensions
- Structural reforms—liberalization and deregulation of labor, product, and services markets and an enhanced focus on education—are key to strengthening growth and reducing unemployment; reforms need to be mutually reinforcing and will take time to materialize.
- Labor market issues:
  - Austria’s labor market is relatively flexible, but labor force participation of older workers remains among the lowest in the EU.
  - Pension reform is expected to help raise participation rates; additional labor market policies are needed to integrate older workers.
  - Deregulation of product markets is well advanced, but services (including free professions) remain heavily regulated.
  - Implementation of more flexible shop-opening hours by provinces has stalled.
  - Authorities should continue cutting red tape, strengthen the Federal Competition Authority, and proceed with remaining privatization plans.
  - Authorities emphasized the importance of bringing public and private R&D spending to internationally agreed levels.
- Pension reform and harmonization:
  - Effective January 1, 2005, most groups of workers were included in a unified pension system (applicable to those currently 50 years or younger).
  - Unified system guided by ASVG principles: (i) 45 years of contributions; (ii) a gradual rise in the retirement age to 65 by 2017; (iii) benefits amounting to 80 percent of lifetime earnings.
  - Special provisions: lower retirement age (60 years) for hard physical labor; lower contribution rates for farmers and the self-employed with the federal government covering the difference.
  - Pension increases will be based on changes in the cost of living.
  - The 10 percent cap on benefit losses under the 2003 ASVG reform has been reduced to 5 percent, to rise by 0.25 percentage point annually until it reaches 10 percent in 2024.
- The mission recommended completing harmonization (including pensions of most civil servants at the subnational level) and safeguarding proper use of disability pension schemes; staff noted the number of new disability pension claimants remains high.

### Financial sector soundness and household foreign-currency loans
- Following a favorable FSAP assessment, the financial system’s performance strengthened further; the system is generally sound and resilient.
- Banks: capital ratios are adequate and profitability has improved, owing largely to rapidly expanding activities in the CEECs; cost-cutting on the domestic front has continued slowly.
- Authorities have taken measures on supervision and regulation (expanded on-site inspections, additional supervisory guidelines and minimum standards), insurance (improved stress testing), and AML/CFT (new guidelines); staff encouraged further progress and noted authorities’ interest in an FSAP update preferably in 2007.

Selected banking sector indicators, 2000–2004 (as reported)
- Net interest income (in percent of total assets): 1.2 1.2 1.2 1.2 1.1
- Operating profit (before tax, in percent of total assets): 0.8 0.8 0.7 0.7 0.7
- Cost/income ratio (in percent): 66.6 67.4 69.3 68.2 67.2
- Loan-loss provisions (in percent of bank claims): 2.9 3.1 3.3 3.3 3.3
- Capital adequacy ratio (in percent): 13.3 13.7 13.3 14.5 14.7
- Return on equity (in percent): 9.4 9.8 5.4 6.3 9.3
- Total assets (billions of euros): 562.7 587.7 573.3 605.1 652.8

- Continuing growth of foreign currency loans to households (mainly in Swiss francs) remains a vulnerability:
  - By end-March 2005, about 30 percent of outstanding loans to households were in foreign currency.
  - Foreign currency loans account for about half the growth of total credit to households.
  - Staff study findings: rapid spread cannot be fully explained by economic determinants and seems to reflect herd behavior; supply factors (bank promotion, fee income) played a role; loans expose borrowers and lenders to exchange and interest rate risks and potential credit risk; policy measures so far have not had a significant impact on levels or growth rates of these loans.
- The staff supported public information campaigns and FMA measures to improve bank risk management, urged continued consumer information and protection, and close monitoring of developments.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05248.pdf*

### 27.      Supervision is being strengthened further and adapted to the changes in financial

### _cr05248 - 27.      Supervision is being strengthened further and adapted to the changes in financial

### Supervision and financial-market developments
- Recent developments in asset markets are being monitored closely, and the staff encouraged the financial sector authorities to remain vigilant.
- The expansion in the CEECs, while beneficial overall, has brought new risks, including with regard to lending in foreign exchange.
- The FMA has developed further its strategy to improve the supervision of Austrian financial institutions in the region.
- Amendments of the Banking Act and the Financial Market Authority Act adopted recently by parliament clarified that the state, not the supervisors, could be held liable for the performance of the supervisors' duties, but no state liability would arise from the activities of external auditors unless they performed examinations following a specific request by the FMA.
- Supervisors felt the amendments had not gone far enough:
  - They would have preferred the amendments regarding the external auditors to have been enacted as constitutional law.
  - They would have preferred the potential liability of supervisors in the performance of their supervisory duties to have been limited further.

### Staff appraisal — macroeconomic performance and outlook
- Austria’s economy is performing relatively well, reflecting continued structural reforms and sound macroeconomic policies.
- Growth and labor-market indicators:
  - Growth of real GDP has gathered speed in 2004 on the back of strong exports.
  - Inflation has been moderate.
  - Unemployment—although high by Austrian standards—has been one of the lowest in the EU.
  - Productivity has outpaced wage growth, and, as a result, relative unit labor costs have declined.
- Other developments:
  - Company profitability rebounded and the Vienna stock exchange staged an impressive rally.
  - Much of this favorable performance can be traced to balanced economic policies and a social partnership that has delivered wage moderation, thereby maintaining a strong competitiveness position.
- Short-term outlook:
  - The short-term growth outlook is relatively favorable, although the pace of expansion is likely to be more gradual.
  - Robust underlying growth in productivity and the fiscal stimulus in the 2005–06 budgets will provide ongoing support to economic activity.
  - Domestic demand has yet to take off decisively.
  - Higher oil prices and concerns about the strength of activity in the euro area—despite an increasing orientation toward Central and Eastern Europe—could weigh on short-term prospects.

### Fiscal policy and credibility
- A strong track record of policy implementation has placed Austria ahead of its peers.
  - A policy shift since 2000 has oriented Austria’s economic policies toward fiscal consolidation and liberalization.
  - Main objectives: balance the budget over the cycle, reduce the tax burden, and increase Austria’s growth potential.
  - Notable achievements: a marked reduction in the size of government; major pension reform and harmonization of the main pension systems; privatization and deregulation in product and labor markets; and tax reform in 2004–05.
- Risks and strategy:
  - Following a strong implementation record over the past five years, the credibility and success of Austria’s fiscal policies now face a critical test.
  - Reducing the tax burden is appropriate but, as a result, larger deficits will emerge in 2005–06.
  - The objective is to erase these deficits by 2008 as spending cuts required to return to a budget balance are to come on stream gradually.
  - The credibility of this strategy hinges on identifying the necessary expenditure reductions.
  - The accommodative fiscal program for 2005–06 should, in the current cyclical conditions, be seen as the maximum acceptable.
  - The widening of the deficit resulting from tax reforms in 2005–06 does not raise sustainability concerns as long as it is limited and temporary.
  - It will be essential for the authorities to resist any temptation to spend unanticipated windfalls or to introduce additional spending packages.
- Policy recommendations:
  - Design and set in motion now the expenditure cuts that would enable the next government to return to a budget balance by 2008.
  - Identify areas where expenditure savings can be implemented and proceed expeditiously to mobilize the necessary consensus.
  - There is scope for rationalizing public administration—especially at the subnational level—the health sector, and various subsidies.
  - Progress in designing a medium-term expenditure framework is welcome; it will be important for the framework to become operational by 2007 and contribute to meeting the fiscal objectives.
  - The failure to agree on substantial changes in the federal-provincial relations was a setback to fiscal reform.

### Structural reforms and labor market
- The pace of structural reforms in Austria has been impressive, including in comparison to its European peers, but there is no room for complacency.
- Recommended reforms to maintain momentum and raise growth potential:
  - Further measures to deregulate the services market.
  - Liberalization of shop-opening hours by local governments.
  - A more flexible work hours regime.
  - Continued emphasis on public and private R&D spending in the context of the Lisbon Agenda.

### Pensions and demographics
- Due to substantial pension reform in recent years, Austria is relatively well prepared to face demographic challenges.
- Pension reform and harmonization have been major steps in reducing inequities and achieving fiscal savings, although the recent lowering of the cap on pension benefit losses surrenders some of the gains.
- Follow-up measures:
  - Bring the pensions of civil servants at the subnational level under the unified pension system.
  - Closely monitor the disability scheme to ensure that access is restricted to those who qualify and that the system is not used as a safety valve for pension reform.

### Financial sector monitoring and cross-border risks
- 2004 was a good year for Austria’s financial sector, but developments in financial markets in Austria and abroad require close monitoring.
- Authorities implemented a variety of measures recommended during last year’s FSAP exercise.
- Remaining imbalances and risks:
  - Imbalance between Austria’s home market, where margins are tight and further consolidation can be expected, and the abundant growth abroad, in particular in the CEECs.
  - At home, the continuing growth of foreign currency loans to households remains an area of concern.
  - Abroad, supervisory authorities should remain vigilant with regard to risks associated with the rapidly expanding activities of Austrian financial institutions in Eastern and, more recently, Southeastern Europe.
    - This includes, but is not limited to, the rapid growth of lending to the private sector, including in foreign currency.
- Recommendations:
  - All relevant authorities should continue informing the public about the risks involved, including in the context of consumer protection.
  - Close cooperation and exchange of information with local supervisors, as already set in motion, are strongly recommended.

### Official development assistance
- Staff welcomes Austria’s official development assistance reaching about 0.4 percent of GNP in 2006 and encourages them to raise it further toward the U.N. target of 0.7 percent of GNP.

*IMF staff appraisal excerpt from the source content*

### 39.      It is proposed that the next Article IV consultation be held on the standard

### _cr05248 - 39.      It is proposed that the next Article IV consultation be held on the standard

### Basic data and summary indicators
- Total area: 83,850 square kilometers
- Total population (2004): 8.1 million
- GDP per capita (2004): US$ 36,142 (€ 29,018)

- Key prices and rates (period averages / specified dates):
  - GDP deflator (2000–2005): 1.8, 1.7, 1.3, 1.6, 1.9, 1.8
  - Consumer price index (2000–2005): 2.0, 2.3, 1.7, 1.3, 2.0, 2.0 6/
  - Three-month interbank rate (period averages 2000–2005): 4.4, 4.3, 3.3, 2.3, 2.1, 2.1 8/
  - 10-year government bond (period averages 2000–2005): 5.6, 5.1, 5.0, 4.1, 4.1, 3.2 8/
  - Euro per US $ (period averages 2000–2005): 1.09, 1.12, 1.06, 0.89, 0.81, 0.77 8/

- Employment/unemployment (period averages / specific):
  - Labor force (2000–2005): 0.0, 0.7, 0.4, 0.4, 0.8, 1.0
  - Employment (2000–2005): 0.9, 0.4, -0.5, 0.2, 0.7, 1.1
  - Employment rate (percent) 2000–2005: 63.3, 63.2, 62.5, 62.2, 62.5, 62.7
  - Registered unemployment rate (percent) 2000–2005: 5.3, 5.5, 6.2, 6.3, 6.4, 6.3
  - Standardized unemployment rate (percent) 2000–2005: 3.7, 3.6, 4.2, 4.3, 4.5, 4.6 5/

- External and exchange-rate indicators:
  - Official reserves (in billions of U.S. dollars): 14.3, 12.5, 9.7, 8.5, 7.9, 7.3 May-05
  - Official reserves in months of imports: 1.8, 1.5, 1.1, 0.8, 0.6, 0.5 May-05
  - Nominal effective exchange rate (2000=100) 2000–2005: 100.0, 100.2, 101.0, 104.1, 105.2, 104.2 9/
  - Real effective exchange rate (CPI based, 1990=100) 2000–2005: 100.4, 101.4, 102.5, 104.7, 106.0, 107.7 9/

### Macroeconomic performance and short-term outlook
- Recent growth and demand (percentage changes at 1995 prices):
  - GDP (2000–2005): 3.4, 0.7, 1.2, 0.8, 2.2, 1.9 (Proj. 2005)
  - Total domestic demand (2000–2005): 3.1, -0.2, -0.7, 2.3, 0.7, 1.9
  - Consumption (2000–2005): 3.0, 0.4, 0.2, 0.6, 1.4, 1.5
  - Gross investment (2000–2005): 3.7, -2.7, -4.2, 6.7, 1.7, 2.7
  - Exports of goods and nonfactor services (2000–2005): 10.5, 6.8, 3.8, 1.4, 8.9, 5.4
  - Imports of goods and nonfactor services (2000–2005): 10.1, 5.0, -0.2, 4.8, 6.4, 5.4

- Short-term outlook and staff projections (2003–10 highlights):
  - GDP (2003–2010): 0.8 (2003), 2.2 (2004), 1.9 (2005), 2.2 (2006), 2.1 (2007), 2.2 (2008), 2.2 (2009), 2.1 (2010)
  - CPI inflation (2003–2010): 1.3, 2.0, 2.0, 1.8, 1.7, 1.7, 1.7, 1.7
  - Unemployment rate (percent, 2003–2010): 4.3, 4.5, 4.5, 4.2, 4.0, 4.0, 3.9, 3.8
  - Current account balance (percent of GDP, 2003–2010): -0.5, 0.6, 0.1, 0.0, 0.3, 0.6, 0.5, 0.4

- Observations from figures and narrative:
  - "The Austrian economy has performed better than its euro-area partners in recent years...and the output gap has begun to close."
  - Growth of real GDP gathered speed in 2004, supported by the strong performance of the external sector.
  - Real interest rates have declined and competitiveness has broadly held up despite euro appreciation.

### Fiscal accounts and medium-term projections
- General government accounts (ESA95 basis; 2001–08):
  - Revenue (2001–2008): 51.0, 50.2, 49.5, 49.4, 47.9, 47.2, 45.8, 45.7
  - Expenditure (2001–2008): 50.9, 50.6, 50.8, 50.6, 49.9, 49.1, 46.7, 45.8
  - Overall balance (ESA95 basis, 2001–2008): 0.1, -0.4, -1.3, -1.2, -2.0, -1.8, -0.9, -0.1
  - Structural balance (ESA95 basis, 2001–2008): -0.6, -0.2, -0.2, -0.7, -1.6, -1.6, -0.7, 0.0
  - Fiscal impulse (2001–2008): -2.7, -0.4, 0.0, 0.5, 0.9, 0.0, -0.9, -0.7
  - Public debt (end-period, 2001–2008): 66.1, 65.7, 64.5, 63.6, 63.5, 62.9, 61.4, 59.2

- Debt sustainability (Table 5 / Appendix III summary):
  - General government debt (end-2004): 63.5 percent of GDP
  - Baseline medium-term scenario projects decline to 55.0 percent of GDP by end-2010 (drop of about 8½ percentage points from end-2004), reflecting planned return to balanced budgets by 2008 and balanced budgets assumed for 2009–2010.
  - Identified debt-creating flows, primary deficits, and automatic debt dynamics shown in detailed arithmetic (2000–2010), preserving year-by-year figures (e.g., primary deficit series, revenue, primary noninterest expenditure, contributions from interest rate/growth differential).
  - Alternative scenarios and stress tests (selected outcomes, general government debt percent of GDP):
    - A1 (key variables at historical averages in 2006–10): debt declines from 63.4 to 62.5
    - A2 (no policy change, constant primary balance in 2006–10): debt declines from 63.5 to 61.2
    - B1–B6 (bound tests): examples include B2 (real GDP growth at historical average minus two standard deviations in 2006–07) raising short-term debt trajectory and B6 (10 percent of GDP increase in other debt-creating flows in 2006) producing a sharp increase (e.g., debt up to 72.9 in 2006 in that scenario)
  - Debt-stabilizing primary balance indicated as 0.5 (baseline projection column, Table 5)

- Long-term fiscal outlook and aging:
  - Pension expenditures (percent of GDP, selected years 2005–2050): 14.2 (2005), 14.2 (2010), 14.2 (2015), 14.6 (2020), 14.8 (2025), 14.9 (2030), 15.1 (2035), 14.5 (2040), 14.1 (2045), 13.6 (2050)
  - Health and other care expenditures (percent of GDP): 5.8 (2005), 6.1 (2010), 6.3 (2015), 6.6 (2020), 6.8 (2025), 7.1 (2030), 7.3 (2035), 7.6 (2040), 7.8 (2045), 7.9 (2050)
  - Interest payments (percent of GDP): 3.1 (2005), 2.7 (2010), 2.6 (2015), 2.3 (2020), 2.1 (2025), 2.0 (2030), 2.0 (2035), 2.0 (2040), 1.9 (2045), 1.8 (2050)
  - Overall balance (percent of GDP) under long-term scenario: -2.0 (2005), -0.1 (2010), -0.2 (2015), -0.5 (2020), -0.8 (2025), -1.1 (2030), -1.4 (2035), -1.2 (2040), -0.8 (2045), -0.4 (2050)
  - Staff conclusion: medium-term fiscal position resilient to shocks; long-term pressures from aging manageable given recent pension reforms that are expected to improve projected expenditures by as much as 3 percentage points of GDP in the long term and limit pension expenditure increase to about 1 percentage point from 2005 to the peak in 2035. Austrian government estimates health and other care costs to increase by a little over 2 percentage points of GDP over the next 45 years.
  - Demographic note: projected share of population aged 65+ relative to population 16–64 by 2050 is 55 percent for Austria versus 49 percent average in EU-15 (OECD Social Indicators, 2005 edition).

### Financial sector indicators and vulnerability
- Selected financial indicators (2000–2005, period averages / specified dates):
  - Growth rate of credit to the private sector: 6.8, 3.5, 1.2, 2.0, 5.3, 6.0 May-05
  - Growth rate of credit to households (annual average): 11.6, 6.7, 6.1, 4.2, 8.5 ...
  - Stock market index (ATX; level end-period): 107.3, 114.0, 115.0, 154.5, 243.1, 294.8 Jun 15
  - Price-earnings ratio (ATX): 18.8, 15.3, 18.2, 15.2, 16.1, 16.0 Jun 15
  - Foreign exchange loans (loans to domestic nonbanks) and share in total loans (percent): foreign exchange loans 36.9, 37.4, 46.5, 55.5, 65.1 ...; share in total loans 17.5, 18.2, 18.8, 22.1, 24.7
  - Bank indicators (selected medians/ratios): net interest income ~1.2 percent of total assets; operating profit (before tax) ~0.8 percent; cost/income ratio series around mid-60s to high-60s; loan-loss provisions 2.9–3.3 percent of bank claims; nonperforming loans median ~2.4–2.2 percent; capital adequacy ratio 13.3–14.7 percent; return on equity 9.4, 9.8, 5.4, 6.3, 9.3
- Table/figure summary: indicators of financial vulnerability show resilience but note household foreign-exchange borrowing highlighted in a Selected Issues study.

### Statistical, data, and Fund relations
- Fund relations and membership:
  - Joined the IMF: August 27, 1948
  - Status: Article VIII as from August 1, 1962
  - Quota: 1,872.30 SDR Million (100.00 percent)
  - Fund holdings of currency: 1,345.80 (71.88 percent)
  - Reserve position in Fund: 526.50 (28.12 percent)
  - Net cumulative SDR allocation: 179.05 (100.00 percent); holdings 107.91 (60.27 percent)
  - Outstanding purchases and loans: None
  - Latest financial arrangements: None
  - Projected payments to Fund (SDR million): Charges/Interest 2005: 0.91; 2006: 1.78; 2007: 1.78; 2008: 1.79; 2009: 1.78

- Exchange system:
  - As of January 1, 1999, Austria's currency is the euro.
  - Exchange system: free of restrictions on payments and transfers for international transactions except restrictions notified to the Fund (EBD/03/116, 12/17/03) pursuant to UN Security Council Resolutions and EU Council regulations; national restrictions apply with respect to certain terror organizations and their activists within the EU (CFSP framework).

- Article IV consultation cycle:
  - Austria is on a 12-month consultation cycle.
  - Last consultation completed on August 2, 2004 (EBM/04/76).

- Statistical issues and data coverage:
  - Austria subscribes to the Fund's Special Data Dissemination Standard (SDDS); has taken an SDDS flexibility option for the timeliness of the industrial production index.
  - Timeliness of data could be improved for industrial production, the accrual-based current account, international investment position, and merchandise trade (publication lags about one month compared to Germany and France).
  - Transition to ESA 1995 complicates analysis: new national accounts data provide no household disposable income series; reclassification of public hospitals in 1997 introduces breaks in public/private consumption series; fiscal data from 1995 compiled under ESA 1995 are not complete.
  - Differences exist between goods-trade statistics from Statistics Austria and payments data recorded by the Austrian National Bank. Accrual-based data are available with long lag; BoP Manual 5th ed. basis available only back to 1992.

### Policy assessment and authorities' statement
- Staff assessment (synthesized from text):
  - The baseline medium-term fiscal path projects significant decline in public debt to 55.0 percent of GDP by end-2010, reflecting planned return to balanced budgets by 2008 and balanced budgets for 2009–2010.
  - Debt dynamics are resilient across alternative and stress scenarios except under extreme low-growth scenarios (real GDP growth at historical average minus two standard deviations in 2006–07).
  - Recent pension reforms materially improve long-term fiscal sustainability; aging pressures remain but are manageable under reform assumptions.

- Statement by Johann Prader, Alternate Executive Director for Austria (July 20, 2005):
  - Austrian authorities welcome the consultation and broadly agree with the staff's assessment and recommendations.
  - They welcome the Selected Issues study on household foreign-exchange borrowing.
  - Authorities note staff report highlights Austria's good performance relative to European peers on GDP growth, unemployment, competitiveness, and public finances.
  - Short-term outlook reference: "The most recent data show that real GDP grew by 2.4 percent in 2004, revised upward from the..." (text truncated in source).

*Source: IMF staff report and appendices as contained in the provided content unit.*

### 2.2 percent estimate quoted in the staff report.

### _cr05248 - 2.2 percent estimate quoted in the staff report.

### Growth performance and short-term outlook
- Real GDP growth: 2.2 percent in 2004; 0.7 percent (2001), 1.2 percent (2002), 0.8 percent (2003).
- In Q1 2005: GDP growth was 0.2 percent (quarter-on-quarter) and 2.1 percent year-on-year.
- IMF staff projections: economic growth expected to slow to slightly below 2 percent in 2005 with a slight increase projected for 2006.
- Drivers and constraints:
  - Export boom supported 2004 growth; exports of goods surged over 12 percent in real terms in 2004 but lost momentum towards year-end.
  - Q1 2005 weakness attributed to lagged effects of Euro appreciation on exports, low investment following expiration of a temporary tax allowance, and continued weak private consumption growth.
  - Positive indicators include dependent employment expanding at a rate of 1 percent in the first half of 2005 and increases in disposable income and after-tax profits from recent tax reform.
  - Risks: high oil prices, declining momentum of world trade, and uncertain consumption dynamics.

### Fiscal policy stance and projections
- Current fiscal strategy (adopted in 2003) aims at a balanced budget over the cycle and reducing the tax burden to 40 percent by 2010.
- Major tax reductions implemented in 2004/2005; short-run tax cuts not fully financed by expenditure cuts, causing a temporary cyclically-adjusted deviation in 2004-2007.
- Cumulative fiscal growth stimulus over 2003-2005: some 3/4 percentage points; contributed to containing the widening output-gap and to 2.4 percent GDP growth in 2004.
- 2005 budget dominated by tax reform; economic research institutes revised 2005 GDP forecast to around 1.9 percent.
- Authorities expect to keep overall budget balance at 1.9 percent of GDP in 2005 owing to better-than-expected tax revenues so far in the year.
- Estimated general government balance outcomes and related figures:
  - Central government balance (ESA95 basis): -0.7 (2001), -1.1 (2002), -2.0 (2003), -1.6 (2004), -2.5 (2005).
  - General government balance: 0.1 (2001), -0.4 (2002), -1.3 (2003), -1.2 (2004), -2.0 (2005).
  - General government balance (EDP basis): 0.3 (2001), -0.2 (2002), -1.1 (2003), -1.1 (2004), -1.9 (2005).
  - General government debt: 66.1 (2001), 65.7 (2002), 64.5 (2003), 63.6 (2004), 63.5 (2005) (percent of GDP).
- Authorities plan a gradual return to a balanced budget during 2007-2008 when expenditure measures come on stream; government strongly committed to achieve a balanced budget by 2008.
- Policy actions and institutional changes:
  - Phasing out previous investment incentives and phasing in reductions in public expenditure.
  - New fiscal revenue sharing scheme agreed in 2004; domestic stability pact re-instated until 2008.
  - Proposal for a medium-term expenditure framework finalized by the Ministry of Finance; due to be discussed in Parliament and expected to be implemented in 2007 (federal budget for 2006 already approved).

### Structural policies and labor/innovation measures
- Parliament adopted measures to support the Austrian National Action Plan under the EU Lisbon strategy:
  - Target to increase R&D expenditures to 3 percent of GDP by 2010 from 2.35 percent in 2005 through additional public spending and broadening a 25 percent income tax allowance to outsourced R&D and unincorporated companies.
  - Housing savings-promotion scheme ("Bausparen") to be extended to credits for education and nursing.
  - Infrastructure investment acceleration and streamlined project approval procedures.
  - Measures against moonlighting and tax fraud; labour market authority to provide a premium for additional apprenticeships.
- Employment impact estimate: package expected to create some 20,000 new jobs (0.6 percent of the work force).
- Fiscal impact of the package: measures will not significantly affect the general government budget balance for 2005/2006.

### Financial sector, household foreign-currency borrowing, and vulnerabilities
- Financial sector: favorable assessment in the context of the Financial Sector Assessment Program; improvements in capital adequacy and profitability; strengthened supervision.
- Noted vulnerabilities:
  - Continuing growth of foreign currency loans to households; authorities have run public-information campaigns to inform on risks.
  - Rapid expansion of Austrian financial institutions' activities abroad (Eastern and Southeastern Europe) and rapid growth of lending to the private sector in these countries, including in foreign currency.
- Policy recommendations from Directors:
  - Continue public information and consumer protection efforts regarding foreign-currency borrowing.
  - Supervisory authorities to remain vigilant and enhance cooperation and exchange of information with local supervisors.

### Linkages to Germany and Central and Eastern Europe (CEE)
- Austria’s historical strong business-cycle linkage with Germany has weakened due to significant foreign direct investment in Central and Eastern Europe by Austrian banks and manufacturing.
- Staff study on regional linkages supports a positive outlook for Austria; authorities view increased exposure to CEE as beneficial for risk diversification and expect continued benefits from this diversification.
- IMF Directors: Austria is one of the EU-15 countries that benefited most from transition and EU enlargement in Eastern Europe.

### Executive Board assessment and policy recommendations
- Directors commended recent economic performance: GDP growth strengthening, low inflation, low unemployment; attributed success to sound policies, structural reforms, and social partnership delivering wage moderation.
- Supported authorities’ objectives: balance the budget over the cycle, reduce the tax burden, and increase growth potential.
- Key recommendations and observations:
  - Identifying and setting in motion expenditure measures is critical to ensure credibility and achieve balanced budget by 2008.
  - Scope for rationalizing public administration (especially subnational), the health sector, and various subsidies.
  - Ensure medium-term expenditure framework becomes operational by 2007.
  - Complete outstanding reform agenda: further deregulation of services markets, liberalization of shop-opening hours by local governments, labor market reform (more flexible work hours, integrate older workers), and strengthen Federal Competition Authority.
  - Follow-up on pension reform: include pensions of civil servants at subnational level in the unified system and monitor disability scheme access.
  - Continue close monitoring of financial market developments and avoid spending unanticipated windfalls or introducing additional spending packages.
  - Encourage increase in official development assistance beyond 0.4 percent of GNP in 2006 toward the U.N. target of 0.7 percent.

### Key economic and financial indicators (selected)
- GDP growth: 0.7 (2001), 1.2 (2002), 0.8 (2003), 2.2 (2004), 1.9 (2005 IMF staff projection).
- Domestic demand: -0.2 (2001), -0.7 (2002), 2.3 (2003), 0.7 (2004), 1.9 (2005).
- CPI (year average): 2.3 (2001), 1.7 (2002), 1.3 (2003), 2.0 (2004), 2.0 (2005; refers to May).
- Unemployment rate (in percent): 3.6 (2001), 4.2 (2002), 4.3 (2003), 4.5 (2004), 4.6 (2005; refers to April).
- Gross national saving (percent of GDP): 20.5 (2001), 21.4 (2002), 21.4 (2003), 22.3 (2004), 22.5 (2005).
- Gross domestic investment (percent of GDP): 22.4 (2001), 21.0 (2002), 21.9 (2003), 21.7 (2004), 22.4 (2005).
- Three-month interbank rate: 4.3 (2001), 3.3 (2002), 2.3 (2003), 2.1 (2004), 2.1 (2005; refers to June 15).
- 10-year government bond yield: 5.1 (2001), 5.0 (2002), 4.1 (2003), 4.1 (2004), 3.2 (2005).
- Trade balance (percent of GDP): -0.7 (2001), 1.7 (2002), 0.4 (2003), 1.4 (2004), 1.0 (2005).
- Current account (percent of GDP): -1.9 (2001), 0.3 (2002), -0.5 (2003), 0.6 (2004), 0.1 (2005).
- Holdings of currency (percent of quota, as of May 31, 2005): 71.9.
- Holdings of SDRs (percent of allocation): 60.3.
- Quota (millions of SDRs): 1,872.3.
- Euro per US dollar: 1.12 (2001), 1.06 (2002), 0.89 (2003), 0.81 (2004), 0.77 (2005).
- Nominal effective rate (2000=100): 100.2 (2001), 101.0 (2002), 104.1 (2003), 105.2 (2004), 104.2 (2005; refers to March).
- Real effective rate (1990=100): 99.3 (2001), 100.2 (2002), 103.4 (2003), 104.6 (2004), 105.6 (2005).

*Source: IMF staff report and Public Information Notice (PIN) No. 05/94, July 22, 2005.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05248.pdf_