## _cr07145

## Source details

**Canonical URL:** [_cr07145](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07145.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07145.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07145.pdf.json)

---

### Executive summary — macro performance and outlook
- Growth: "3.2 percent in 2006"; growth "exceeded 3 percent in 2006" and expected to slow somewhat in 2007 to "close to 3 percent".
- Inflation: average "1.7 percent in 2006"; forecast "to remain below 2 percent in 2007" and period-average CPI for 2007 "1.6 percent".
- Labor market: unemployment "4.4 percent in February"; unemployment expected to come down with employment growth but reduction limited by increased labor supply.
- External sector: real export growth "over 8 percent annually during 2004-06"; current account in surplus since 2004; real effective exchange rate (ULC-based REER) "stabilized" and "close to long-run equilibrium".
- Productivity and competitiveness: "robust productivity growth"; Austria "gained market share" within EU-15 in 2004–05 despite slight decline in world market export share.

### Short-term outlook and risks
- Near-term projection: growth expected to slow for 2007–08 but remain strong at "close to 3 percent".
- Key external risks: developments in trading partners, the euro-dollar exchange rate, and the oil price.
- Exchange-rate impact: direct effect of euro appreciation vis-à-vis the dollar judged "quite small"; indirect effect through weaker trading-partner demand could be substantial.
- Wage and inflation dynamics: recent wage negotiations "moderate"; with productivity growth and moderate wage increases, inflation forecast "to remain comfortably below 2 percent in 2007 and 2008".
- Timetable: budgets for 2007–08 to be presented on March 29 and discussed in parliament during April.

### Fiscal policy and public finances
- Objective: government aim "to balance the budget over the cycle"; target date shifted back to "2009–10".
- Near-term consolidation: program delivers limited near-term consolidation; cumulating adjustment during 2007–08 of "1/3 percent of GDP".
- Mission assessment: reaching balance by 2008 would be feasible and appropriate; would require structural adjustment of about "½ percent of GDP per year for 2007–08".
- 2006 fiscal outturns: fiscal deficit narrowed; 2006 deficit initially projected at "1.8 percent of GDP", now estimated at "1.2 percent"; general government deficit in 2006 reported elsewhere as "1.1 percent of GDP".
- Structural balance: structural deficit showed a "small worsening compared with previous years".
- Debt: public debt ratio "came down in 2006" but remains above Maastricht reference value of "60 percent"; public debt: 2005 "63.4 percent of GDP", 2006 "62.0", 2007 proj.: "61.0".
- Revenue surprises: corporate income taxes and sales taxes performed above expectations in 2006.
- Policy guidance:
  - Adjustment should come mainly from the expenditure side.
  - Rapid identification and implementation of concrete expenditure savings urged.
  - Any unexpected windfalls should be used for deficit and debt reduction, not additional expenditures or tax cuts.
  - Tax cuts should await implementation of expenditure measures; authorities see major tax reform largely in 2009–10.

### Fiscal institutions and budgeting
- Medium-term budgetary framework (MTEF): government intends to present an MTEF covering four years, binding for budget decisions and execution, with a rolling revision each year.
- Ministry of Finance reforms: medium-term expenditure framework, more performance-based budgeting, improved accounting and information systems in preparation.
- Intergovernmental fiscal relations: complex revenue-sharing system limits incentives for subnational expenditure control; constitutional reform process to be restarted (expert group to present proposals by June 30, 2007; aim to adopt necessary constitutional reform by end-2007).

### Long-term fiscal sustainability, ageing, and scenarios
- Demographics: old-age dependency ratio expected to increase from "24½ percent in 2006 to 53¼ percent in 2050".
- Pension projections:
  - Authorities’ projection: pension expenditure projected at "12¼ percent" of GDP by 2050 (authorities’ projection referenced).
  - Staff worst-case projection (no policy response): pension expenditures could rise to "18 percent of GDP by 2050".
  - Eurostat population variants: dependency ratio could vary between "44 percent and 66 percent by 2050".
- Health and long-term care spending: estimated increase in annual public health and long-term care spending by 2050 "in the range of 2 to 6 percent of GDP".
- Baseline ageing impact: baseline projections indicate ageing will raise annual fiscal expenditures by "¾ percentage point of GDP" by 2050.
- Uncertainty range: staff projects fiscal expenditures could decline by "2 percentage points of GDP" in the best case or increase by "9 percentage points" in the worst case.
- Public debt trajectories:
  - Baseline (fiscal stance unchanged from 2006): public debt declines from "63.4 percent of GDP in 2005 to 44.6 percent of GDP by 2025", then rises to "65.3 percent of GDP by 2050".
  - Best case: public debt falls below zero in 2044.
  - Worst case: public debt jumps to "more than 300 percent of GDP towards 2050".
- Policy implication: fiscal consolidation needed, including full implementation of 2003 and 2005 pension reforms and health sector reforms.

### Financial sector — condition, risks, and supervisory measures
- Banking sector condition: "well capitalized and profitable, with limited nonperforming loans"; expanding rapidly with CESE activities as a main profit driver.
- Credit growth and foreign-currency exposure:
  - Credit to nonbanks grew "around 5 percent in 2006".
  - Loans to households increased at a similar pace.
  - Loans in foreign exchange (mainly Swiss francs) represent "about 20 percent of total domestic credit to nonbanks and 32 percent of loans to households".
- Notable event: deposit run at Bawag in early May 2006; authorities issued a "€900 million guarantee" and secured "€450 million in fresh capital"; bank "has now been sold, with closing expected in April–May 2007".
- Supervisory responses:
  - Enhanced monitoring of Austrian banks’ activities in CESE, including foreign-currency lending: more frequent on-site inspections, intensified off-site analysis, issuance of supervisory guidelines.
  - Stress tests covering credit and market risks indicated satisfactory shock absorption capacity.
  - Consumer education on foreign-currency lending risks.
  - Increased collaboration with host supervisors; signing of MoUs welcomed though gaps remain.
  - Recommended further measures: forceful implementation of corporate governance strengthening, enhanced fit-and-proper tests (including for supervisory board members of larger institutions), mandatory corporate governance code, rotation of external audit firms at certain intervals, and consideration of a cross-border crisis simulation exercise.
  - Authorities interested in an FSAP update in the second half of 2007.

### Structural policies and competitiveness
- Reform agenda (government program 2007–10 highlights):
  - Promote growth and full employment by 2010; Lisbon-agenda measures (including R&D) expected to boost real GDP growth by "about 0.1 percentage point per year during 2007–10".
  - Improve education quality and reduce maximum class size to "25".
  - Expand and modernize infrastructure; enhance competition in liberal professions; further liberalize shop opening hours in 2007.
  - Social policies: minimum monthly wage of "€1,000" (to be agreed by social partners); pension reforms envisaged.
  - Administrative/constitutional reform: expert group to report by June 30, 2007; aim to adopt constitutional reform by end-2007.
  - Financial market proposals: evaluate FMA functioning; rotation of external auditors; measures to fight insider trading; separation of auditing and consulting services; strengthen corporate governance standards.
- Priorities emphasized by staff:
  - Further deregulation of the services sector and liberalization of free professions.
  - Enhance competition (including electricity market competition and network access).
  - Improve labor market participation of younger and older workers via targeted active labor market programs.
  - Complete privatization agenda and strengthen investigative powers of the Federal Competition Authority.
- Fiscal consistency: mission stressed that initiatives to increase spending on R&D, infrastructure, active labor market programs, education, and reductions in nonwage labor costs could have a significant fiscal impact and should be implemented consistent with maintaining a sound fiscal position.

### Monetary and asset market developments
- Monetary conditions: remained "relatively accommodative" despite recent interest-rate increases.
- Interest rates: short- and long-term interest rates "have started to rise"; three-month interbank rate 2006 "3.1"; 2007 (Feb) "3.8"; 10-year government bond 2006 "3.8"; 2007 (Feb) "4.1".
- Credit growth: decelerating credit growth overall.
- Asset prices:
  - Stock market boom of 2004–05 "moderated in 2006".
  - Real house prices "practically flat" in recent years after an earlier decline.

### Mission, data, and outreach
- Mission composition: Messrs. Hilbers (head), Kanda, Lundback (all EUR), and Tieman (MCM); Mr. Prader, Alternate Executive Director for Austria, attended meetings.
- Meetings with: incoming Chancellor; Vice-Chancellor and Minister of Finance; Governor of OeNB; CEOs of FMA; senior federal, OeNB, and FMA officials; parliamentary budget committee; economic research institutes; employers’ organizations; federation of trade unions; private sector.
- Exchange system and Fund membership: Austria uses the euro as of January 1, 1999; accepted Article VIII obligations; joined August 27, 1948; Article VIII status as from August 1, 1962.
- IMF financial position (General Resources Account and SDR Department):
  - Quota: "1,872.30" (SDR Million; 100.00 percent quota)
  - Fund holdings of currency: "1,731.33" (92.47)
  - Reserve position in Fund: "140.98" (7.53)
  - Net cumulative SDR allocation: "179.05" (100.00)
  - Holdings: "140.19" (78.30)
- Projected payments to the Fund (SDR Million):
  - 2007: Charges/Interest "1.25"; Total "1.25"
  - 2008: Charges/Interest "1.67"; Total "1.67"
  - 2009: Charges/Interest "1.66"; Total "1.66"
  - 2010: Charges/Interest "1.67"; Total "1.67"
- Data and dissemination:
  - Austria subscribes to SDDS since September 1996; availing of SDDS flexibility on timeliness of industrial production index.
  - Transition to ESA 1995 complicates national accounts analysis; ESA 1995 national accounts do not provide household disposable income except as economy-wide aggregate.
  - BoP/IIP system redesigned effective 2005-06.
  - Data in the 2007 Article IV staff report reflect information received by "February 28, 2007".

### Staff appraisal and Executive Board highlights
- Overall assessment: Austria’s economy "has been doing well" and is expected to continue to do so; 2006 growth "the highest since 2000".
- Key recommendations reiterated:
  - Continued wage moderation essential to maintain competitiveness.
  - More ambitious fiscal consolidation warranted in a period of high growth; reaching balance sooner would reduce debt and debt service and create space for future tax cuts and automatic stabilizers.
  - Rapidly identify and implement expenditure savings focused on public administration, subsidies and transfers, pensions, and health care.
  - Save unexpected windfalls and avoid premature tax cuts.
  - Forcefully implement banking corporate governance and supervisory improvements; consider FSAP update.
  - Intensify structural reforms: deregulation, competition, labor participation, and health/pension reforms.
- Executive Board welcomed Austria’s strong performance and endorsed recommendations summarized above.

*Source: _cr07145 - Executive Summary*

### Executive Summary

### _cr07145 - Executive Summary

### Background
- The Austrian economy "continues to do well": growth above the euro area average in recent years, low inflation, and a strong external position.
- Recent drivers cited: stability-oriented macropolicies, structural reforms, social partnership enabling wage moderation, and orientation toward Central, Eastern, and Southeastern Europe (CESE).

### Short-term outlook and labor market
- Economy gathered speed in 2004–05; growth "exceeded 3 percent in 2006".
- Staff projects some slowdown for 2007–08, with unemployment forecast to come down and inflation "to remain below 2 percent in 2007".
- Positive outlook conditional on "continued wage moderation needed to maintain international competitiveness".
- Labor market indicators and exact figures:
  - Unemployment rate: "4.4 percent in February".
  - Employment: accelerated employment growth has put unemployment on a downward trend, though reduction is limited by increased labor supply.
  - Inflation: average inflation in 2006 was "1.7 percent".
  - Negotiated wage increases described as "moderate" and unit labor costs (ULCs) "have been contained".
  - Exports: estimated real export growth "over 8 percent annually during 2004-06".
  - GDP growth estimate: "3.2 percent in 2006".
  - Output gap: growth in 2006 "closes the estimated output gap from previous weaker years".

### Fiscal policy and public finances
- Government objective: "to balance the budget over the cycle", but the target date for reaching balance has been shifted back to "2009–10".
- Limited consolidation planned for 2007–08; staff recommends "a stronger focus on consolidation in good economic times".
- Fiscal performance and figures:
  - The fiscal deficit narrowed in 2006 aided by cyclical developments.
  - 2006 deficit initially projected at "1.8 percent of GDP", now estimated at "1.2 percent".
  - Structural deficit showed a "small worsening compared with previous years".
  - Public debt ratio "came down in 2006" but remains above the Maastricht reference value of "60 percent".
  - Revenue surprises in 2006: corporate income taxes and sales taxes performed above expectations.
- Policy recommendations and institutional points:
  - Further streamlining of functions across levels of government is "essential to expenditure control".
  - Tax cuts are planned toward the end of the government period (government program).
  - Authorities advised to take advantage of the cyclical upturn to intensify reform efforts.

### Financial sector issues and vulnerabilities
- Banking sector characterized as "well capitalized and profitable, with limited nonperforming loans".
- Key challenges:
  - Manage rapid expansion of Austrian financial institutions' activities abroad, including in foreign exchange lending.
  - Continued growth of foreign currency loans highlighted as an area requiring close monitoring.
- Supervisory responses:
  - Supervisors will focus on banks' use of appropriate risk management techniques.
  - Plans to increase collaboration with host supervisors.
  - Measures to further strengthen corporate governance "need to be implemented forcefully".
- Credit and foreign-exchange exposure figures:
  - Credit to nonbanks grew at a moderate annual pace "around 5 percent in 2006".
  - Loans to households increased at a similar pace.
  - Loans in foreign exchange (mainly Swiss francs) represent "about 20 percent of total domestic credit to nonbanks and 32 percent of loans to households".
- Notable banking event:
  - Deposit run at Bawag in early May 2006; authorities issued a "€900 million guarantee" and secured "€450 million in fresh capital" from other banks and insurers. The bank "has now been sold, with closing expected in April–May 2007".

### Structural policies and competitiveness
- Competitiveness remains strong: ULC-based real effective exchange rate stabilized; REER close to long-run equilibrium per CGER calculations.
- Austria's world market export share "has declined slightly", but Austria has "gained market share" within EU-15, particularly in 2004–05.
- Productivity performance: "robust productivity growth" contributing to competitiveness vis-à-vis the EU-15.
- Government program and reform agenda:
  - New government program includes a range of further structural reforms for 2007–10.
  - Authorities are advised to intensify reform efforts during the cyclical upturn, with particular emphasis on:
    - Deregulating the services sector.
    - Enhancing competition.
    - Focusing labor market programs on encouraging participation.

### Monetary and asset market developments
- Monetary conditions "remained relatively accommodative" despite recent interest rate increases.
- Interest rates: short- and long-term interest rates "have started to rise".
- Credit growth: decelerating credit growth overall.
- Asset prices:
  - Stock market: the stock market boom of 2004–05 "moderated in 2006".
  - Real house prices: "practically flat" in recent years after an earlier decline.

*Source: _cr07145 - Executive Summary*

### 12.      The authorities noted that there will be no fundamental change in the overall

### _cr07145 - 12.      The authorities noted that there will be no fundamental change in the overall

### A. Short-Term Outlook and Risks
- Near-term outlook: economic growth expected to slow somewhat in 2007, but remain strong at close to 3 percent.
- Key external risks: economic developments in trading partners, the euro-dollar exchange rate, and the oil price.
- Exchange rate effects: direct effect of a euro appreciation vis-à-vis the dollar judged "quite small" given large share of exports to countries tied to the euro; indirect effect through weaker trading partner demand could be substantial.
- Labor cost and inflation outlook:
  - Recent wage negotiations produced relatively modest wage increases paired with healthy productivity growth, supporting competitiveness.
  - With moderate wage increases, inflation is forecast to remain comfortably below 2 percent in 2007 and 2008.
- Timetable: budgets for 2007–08 to be presented on March 29 and discussed in parliament during April.

### Box 2 — Main Economic Policy Elements of the Government Program for 2007–10
- Growth and employment:
  - Promote economic growth and full employment by 2010; policies in line with the Lisbon agenda, including on R&D, expected to boost real GDP growth by about 0.1 percentage point per year during 2007–10.
  - Improve quality of education and reduce maximum class size to 25.
  - Expand and modernize infrastructure; enhance competition in liberal professions; further liberalize shop opening hours in 2007.
- Fiscal policy:
  - Aim: balance the budget over the cycle.
  - Medium-term budget path (in Maastricht terms): improvement from a 1.2 percent of GDP deficit in 2006 to a 0.2 percent deficit in 2009 and a 0.4 percent surplus in 2010.
  - Additional expenditures on R&D, education, and social security; expected budget improvements from increased social contributions, higher taxes on oil and minerals, savings on nonentitlement spending, and continued administrative reforms.
  - Tax reform planned to create a more efficient tax system that promotes growth and employment.
- Social policies:
  - Further develop welfare and health system; harmonize income support by the states.
  - Minimum monthly wage of €1,000 (to be agreed by social partners based on a collective agreement).
  - Reforms of the pension system envisaged.
- Administrative and constitutional reform:
  - Constitutional reform in preparation; expert group to present proposals by June 30, 2007, with aim of adopting necessary constitutional reform by end-2007.
- Financial sector supervision and capital markets:
  - Evaluate functioning of the Financial Market Authority (FMA); establish working group on oversight issues.
  - Proposals to strengthen capital markets: rotation of external auditors, measures to fight insider trading and insider abuse, separation of auditing and consulting services, and strengthening legal force of corporate governance standards.
- Source: “Regierungsprogramm für die XXII Gesetzgebungsperiode”, January 9, 2007.

### B. Fiscal Near-Term
- Mission stance: supported objective of balancing the budget over the cycle; noted current program delivers limited near-term consolidation.
- Near-term adjustment and timing:
  - Cumulating adjustment during 2007–08 of 1/3 percent of GDP.
  - Target for balancing shifted from 2008 to 2009–10.
  - Mission assessment: reaching balance by 2008 would be feasible and appropriate given current strength; would require a structural adjustment of about ½ percent of GDP per year for 2007–08.
  - Authorities: project balance reached one to two years later; possibility of positive surprises.
- Composition of adjustment: agreement that adjustment should come mainly from the expenditure side because "despite recent declines, taxes in Austria are not low."
- Mission concerns:
  - Skepticism that proposed measures suffice to reach a surplus in 2010; projected rapid decline in deficits in 2009–10 rests on optimistic assumptions.
  - Measures are not well identified; assumed growth rates seem optimistic, risking overestimation of revenues and underestimation of expenditures.
- Administrative reform and savings:
  - Authorities point to significant room for savings from administrative reforms.
  - Mission stressed need for rapid identification and implementation of concrete expenditure measures; delays in identification will slow their impact.
- Principles for additional spending and windfalls:
  - Mission recommended careful discussion of expenditure increases (notably R&D and labor market policies) to ensure cost-effectiveness and avoid inefficiencies.
  - Recommendation: any unexpected windfalls should be used for deficit and debt reduction, not additional expenditures or tax cuts.
  - Authorities agreed to consider additional spending carefully and not use windfalls to finance additional spending.
- Tax reform timing:
  - Authorities see further major tax reforms largely in 2009–10.
  - Mission emphasized tax cuts should follow, not precede, expenditure measures and must be consistent with achieving and maintaining budget balance; introducing cuts now without compensating expenditure measures will increase the deficit at the height of the cycle.

### C. Structural Fiscal Issues
- Intergovernmental fiscal relations:
  - Agreement that grand coalition should reform fiscal relations among various government levels; current complex revenue-sharing system provides limited incentives for sub-national expenditure control and structural reforms.
  - New grand coalition (more than two-thirds majority in parliament) well positioned to agree on reform, but constitutional reform will face political resistance.
- Pension system:
  - Authorities: recent pension reforms make Austria relatively well prepared for aging population implications.
  - Mission: urged continued vigilance; uncertainty whether recent reforms are enough to contain pension expenditure over the long run.
  - Specific concerns: loopholes allowing relatively easy access to early retirement (including through disability scheme); population projections are subject to considerable uncertainty; recent plans to ease access to early retirement could reflect political difficulties in implementing reforms.
  - Mission recommendations: refrain from measures that increase pension spending pressures, control loopholes, extend reforms to subnational government civil service pensions, and be ready to take further measures if pension spending development is less favorable than projected.
- Health sector:
  - Reform more crucial here; substantial uncertainty about health spending evolution with aging, but a significant increase is likely.
  - Estimates of increase in annual public health and long-term care spending by 2050: in the range of 2-6 percentage points of GDP.
  - Health care infrastructure is complex; decision making and financing spread across government levels, causing duplication and inefficiencies; room for efficiency improvements, particularly in hospitals.
- Budgeting framework:
  - Authorities on track to establish a medium-term budgeting framework.
  - Ministry of Finance prepared reform of federal budgeting system including a medium-term expenditure framework, more performance-based budgeting, and improved accounting and information systems.
  - Broad political support exists and reforms "could be adopted by parliament relatively soon."

### D. Financial Sector
- Banking sector condition:
  - Expanding rapidly while remaining strong, well capitalized, and highly profitable overall.
  - Main profit drivers: domestic cost cutting and rapidly expanding activities in CESE.
- Supervisory actions and monitoring:
  - Authorities increasing monitoring of Austrian banks’ activities in CESE, including foreign currency lending: more frequent on-site inspections (including follow-ups), intensified off-site analysis of systemically important banks, and issuance of supervisory guidelines.
  - Recent stress tests covered credit and market risks, including shocks to default probabilities, interest, and exchange rates; indicated satisfactory shock absorption capacity of Austrian banking system.
  - Steps taken to educate consumers on risks associated with foreign currency lending.
  - Mission commended measures and encouraged further progress on implementation and stronger risk management and measurement techniques by banks.
- Cross-border supervision:
  - Collaboration between Austrian and host supervisors in CESE has intensified, improving supervision of cross-border banking groups.
  - Enlargement of the EU has facilitated cross-border supervisory cooperation with new member states.
  - Signing of memoranda of understanding (MoUs) between home and host supervisors welcomed, though some gaps remain.
  - Mission suggested staging a cross-border crisis simulation exercise focused on cooperation with authorities from CESE.
- Governance and supervisory review:
  - Governance strengthened to avoid repeat problems; proposed actions include enhanced fit-and-proper tests and stricter requirements for external auditors.
  - Mission supported going further for larger institutions: subject all supervisory board members to fit-and-proper tests, make the Austrian corporate governance code mandatory, and require rotation of the external audit firm at certain intervals.
  - Functioning of supervision to be reviewed, including responsibilities of the Ministry of Finance and parliamentary oversight; mission noted independence and accountability aspects would benefit from review.
  - Authorities expressed interest in an FSAP update during the second half of 2007.

### E. Structural Issues
- Remaining reform needs:
  - Further deregulation of the services sector required to foster entry and competition.
  - Implementation lag in provinces for more flexible shop opening hours.
  - Labor market: relatively flexible, but participation of younger and older workers remains low; active labor market programs could be more effective.
  - Privatization agenda not fully complete.
  - Investigative powers and resources of the independent Federal Competition Authority (FCA) could be enhanced.
  - Competition and network access in the electricity market should be further improved to ensure cost-effective and stable energy supply.
- Government program initiatives:
  - Regulatory initiatives include further liberalization of free professions, employment opportunities for foreign workers, working and shop opening hours reforms, strengthening the FCA, and modernization of capital market regulations.
  - Program includes initiatives to increase spending on R&D, infrastructure, active labor market programs, and education, and to reduce nonwage labor costs — these could have a significant fiscal impact.
  - Mission stressed implementation of initiatives should be consistent with maintaining a sound fiscal position.

### IV. Staff Appraisal
- Economic performance and outlook:
  - Austria’s economy has been doing well and is expected to continue to do so.
  - Economic growth in 2006 was the highest since 2000.
  - Unemployment is relatively low and declining, though reduction pace is more limited than employment growth due to an increase in the labor force.
  - Near-term prospects favorable based on strong international competitiveness, robust underlying productivity growth, and positive outlook for Europe.
  - Risks: uncertainty regarding the euro exchange rate, the oil price, and economic developments in trading partners.
- Wage moderation:
  - Continued wage moderation essential to maintain competitiveness.
  - Wages have been increasing modestly despite higher labor demand; unit labor costs contained.
  - Recent social partner agreements for 2007 show continuation of modest wage increases.
- Fiscal assessment:
  - Given the strong economy, the government’s fiscal program could have been more ambitious.
  - A balanced budget over the cycle will help ensure fiscal sustainability in face of aging-related pressures on health and pension expenditures.
  - Government program plans only a limited decline in the deficit during a period of high growth; target for balancing shifted from 2008 to 2009–10.
  - Staff view: reaching balance sooner would reduce debt and debt service and create more room for future tax cuts and for automatic stabilizers to work.

*Source: IMF staff report content (chapter/section provided).*

### 33.      Spending increases should be considered carefully and windfalls saved.

### 33.      Spending increases should be considered carefully and windfalls saved.

### Fiscal policy guidance and budgetary framework
- Expenditure increases, in particular on R&D and labor market policies, should be evaluated in terms of their effectiveness, and considered only when offsetting measures have been clearly identified.
- Unexpected windfalls should not be used for additional expenditures or tax cuts, but for deficit and debt reduction.
- To strengthen budget discipline, efficiency, and transparency, broad-based budgeting reforms are recommended, including the adoption of a formal medium-term budgetary framework that sets explicit expenditure targets consistent with the fiscal objectives.
- It is proposed that the next Article IV consultation be conducted on the standard 12-month cycle.

### Expenditure savings and public administration reform
- There is a need for the rapid identification and implementation of expenditure savings.
- Key areas for potential efficiency gains:
  - Public administration (progress at the federal level; efforts lagging at local levels).
  - Subsidies and transfers (better targeting could generate savings).
  - Pensions (harmonization has not reached the subnational level; eligibility for disability pensions should not provide a loophole for early retirement).
  - Health care (reform at an early stage; significant duplication in provision).
- Further streamlining of the functions of the various levels of government will be essential to expenditure control; federal authorities have found it difficult to ensure local governments’ contributions to reform efforts.
- The parties should use the opportunity of the grand coalition to agree on a restart of the necessary constitutional reform process.

### Tax policy
- Tax cuts should await the implementation of expenditure measures.
- There is no need or room for tax cuts in the short-term, neither for cyclical reasons nor in light of the necessary consolidation process.
- Future tax cuts, which should be focused on reducing the burden on labor, should not be considered before the expenditure side is fully in order.

### Financial sector monitoring and supervision
- The rapidly expanding activities of the financial sector require close monitoring and effective risk management.
- Expansion into CESE has been profitable and helped financial deepening in host countries, but has increased risks, including for the region.
- The rapid growth of foreign currency lending by Austrian banks requires close monitoring.
- Supervisory and bank measures in Austria have included consumer education on foreign-exchange borrowing risks; such efforts appear less advanced in CESE.
- Supervisors need to continue ensuring banks use adequate risk management techniques, including in preparation for Basel II.
- Good collaboration between Austrian and host supervisors in CESE is key; enlargement of the EU has facilitated cross-border supervisory cooperation, but deepening cooperation (including negotiation of MoUs) with supervisors in EU and non-EU markets where the Austrian financial sector has significant market share remains important.
- Staff welcomes measures to strengthen corporate governance in the banking sector and the authorities’ interest in an FSAP update in late 2007.
- Actions proposed and partly implemented to avoid a repeat of recent problems at two Austrian banks include:
  - Higher frequency of on-site inspections.
  - Intensified off-site examinations.
  - Measures to improve banks’ corporate governance.
- Staff recommends forceful implementation of these actions and consideration of further measures, including a review of the autonomy of the supervisory process in the FSAP update.

### Structural reform priorities
- Authorities are encouraged to take advantage of the current cyclical upturn to intensify structural reform efforts.
- The government program’s renewed impetus for structural reform is welcome.
- Reforms still needed in a wide range of areas to foster competition and growth.
- Initiatives for further deregulation, improved competition, and labor market reforms should be vigorously implemented, while maintaining a sound fiscal position.

### Official development assistance
- Staff commends Austria for its official development assistance reaching about 0.5 percent of GNP in 2006 and encourages a further increase toward the UN target of 0.7 percent of GNP.

### Debt sustainability and ageing: projections and scenario risks
- Demographic pressure:
  - Old-age dependency ratio expected to increase from 24½ percent in 2006 to 53¼ percent in 2050.
- Pension projections and risks:
  - Authorities’ projections indicate rising dependency will be offset by declines in eligibility and benefits ratios (from the 2003 and 2005 pension reforms) and an increase in the employment rate by 2035; from then on pension expenditure as a percentage of GDP declines.
  - Projections subject to significant uncertainty; Eurostat population variants indicate dependency ratio could vary between 44 percent and 66 percent by 2050.
  - Loopholes appear to allow early retirement, including through disability pensions; recent government program reduces penalties for early retirement, which could raise risks.
  - In a worst case scenario (assuming no policy response), staff projections suggest pension expenditures could rise to 18 percent of GDP by 2050, compared to the authorities’ projected 12¼ percent.
- Health and long-term care spending:
  - Ageing will raise annual public health and long term care spending; estimates of the increase are in the range of 2 to 6 percent of GDP.
  - Baseline projections indicate that by 2050 ageing will raise annual fiscal expenditures by ¾ percentage point of GDP.
  - Uncertainty margin: staff projections indicate fiscal expenditures could decline by 2 percentage points of GDP in the best case, or increase by 9 percentage points in the worst case.
- Public debt trajectories (baseline and scenarios):
  - Assuming the fiscal stance remains unchanged from 2006 onward, under the baseline ageing scenario public debt initially declines from 63.4 percent of GDP in 2005 to 44.6 percent of GDP by 2025, but thereafter rises, reaching 65.3 percent of GDP by 2050.
  - Under the best case scenario, public debt falls below zero in 2044.
  - Under the worst case scenario, public debt jumps to more than 300 percent of GDP towards 2050.
- Policy implication: With public debt on a rising path under the baseline and wide uncertainty in scenarios, fiscal consolidation is needed, including fully implementing the measures envisaged in the 2003 and 2005 pension reforms and undertaking health sector reforms to contain fiscal pressures.

*IMF staff report (selection of paragraphs and data from the chapter).*

### 2007. The mission comprised Messrs. Hilbers (head), Kanda, Lundback (all EUR), and

### _cr07145 - 2007. The mission comprised Messrs. Hilbers (head), Kanda, Lundback (all EUR), and

### Mission composition and meetings
- Mission members: Messrs. Hilbers (head), Kanda, Lundback (all EUR), and Tieman (MCM).
- Attendee: Mr. Prader, Alternate Executive Director for Austria, attended the meetings.
- Meetings held with:
  - Incoming Chancellor; the Vice-Chancellor and Minister of Finance;
  - Governor of the Austrian National Bank (OeNB);
  - Chief Executive Officers of the Financial Market Authority (FMA);
  - Senior officials of the federal government, the OeNB, and the FMA.

### Outreach
- The mission met with:
  - The parliamentary budget committee;
  - Representatives of economic research institutes, employers’ organizations, the federation of trade unions, and the private sector.
- The authorities released the mission’s concluding statement (available at the URL provided in the original text) and a press conference was held at the end of the mission.

### Exchange system and membership status
- Currency: As of January 1, 1999, Austria uses the euro.
- Article VIII obligations: Austria has accepted the obligations of Article VIII and maintains an exchange system free of restrictions on payments and transfers for current international transactions.
- Exchange restrictions: Austria maintains exchange restrictions for security reasons, in accordance with UN Security Council Resolutions and measures by the Council of the European Union, notified to the Fund under Executive Board Decision No. 144-(52/51).
- Membership status:
  - Joined: August 27, 1948
  - Status: Article VIII, as from August 1, 1962

### IMF financial position (General Resources Account and SDR Department)
- General Resources Account (SDR Million; Percent Quota):
  - Quota: 1,872.30    100.00
  - Fund holdings of currency: 1,731.33    92.47
  - Reserve position in Fund: 140.98    7.53
- SDR Department (SDR Million; Percent Allocation):
  - Net cumulative allocation: 179.05    100.00
  - Holdings: 140.19    78.30
- Outstanding Purchases and Loans: None
- Latest Financial Arrangements: None

### Projected payments to the Fund (SDR Million; based on existing use of resources and present holdings of SDRs)
- Forthcoming years and amounts:
  - 2007: Charges/Interest 1.25; Total 1.25
  - 2008: Charges/Interest 1.67; Total 1.67
  - 2009: Charges/Interest 1.66; Total 1.66
  - 2010: Charges/Interest 1.67; Total 1.67
- Principal: -- for 2007, 2008, 2009, 2010

### Statistical issues and data dissemination
- Statistics quality: Statistics are adequate for surveillance.
- SDDS subscription: Since September 1996, Austria has subscribed to the Fund’s Special Data Dissemination Standard (SDDS); metadata are available on the Fund’s Dissemination Standards Bulletin Board.
- SDDS flexibility: Austria is availing itself of the SDDS flexibility option on the timeliness of the industrial production index.
- National accounts transition:
  - Transition to ESA 1995 has complicated analysis of national accounts and fiscal data.
  - ESA 1995 national accounts do not provide household disposable income except as an economy-wide aggregate, precluding calculation of a household savings ratio.
  - Reclassification of public hospitals in 1997 introduced a break in national account series on public and private consumption.
  - Fiscal data for 1995 onward—compiled in accordance with ESA 1995—are not complete.
- BoP/IIP system: Austria redesigned the BoP/IIP system with effect from 2005-06.
- Government Finance Statistics Yearbook (GFSY):
  - Authorities resumed reporting total outlays of general government by major functional categories for 2000-04, in accordance with the Government Finance Statistics Manual 2001.
  - Resumed reporting financing and debt data for inclusion in the GFSY, but without providing a breakdown between domestic and foreign debt.
- Data vintage: Data in the 2007 Article IV staff report reflect information received by February 28, 2007.
- Data sources listed in original text (names preserved as in source).

### Table of common indicators (as of March 16, 2007) — latest observations and reporting frequencies (selected)
- Exchange rates:
  - Date of latest observation: 03/15/07; Date received: 03/15/07; Frequency of data: Daily; Frequency of reporting: Daily; Frequency of publication: Daily
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities:
  - Date of latest observation: Jan. 2007; Date received: 02/28/07; Frequency: Monthly (data, reporting, publication)
- Reserve/Base Money:
  - Date of latest observation: Feb. 2007; Date received: 03/14/07; Frequency: Monthly (data, reporting, publication)
- Broad Money:
  - Date of latest observation: Jan. 2007; Date received: 02/27/07; Frequency: Monthly (data, reporting, publication)
- Consolidated Balance Sheet of the Banking System:
  - Date of latest observation: Jan. 2007; Date received: 02/27/07; Frequency: Monthly (data, reporting, publication)
- Interest Rates:
  - Date of latest observation: 03/15/07; Date received: 03/15/07; Frequency: Daily (data, reporting, publication)
- Consumer Price Index:
  - Date of latest observation: Feb. 2007; Date received: 03/15/07; Frequency: Monthly (data, reporting, publication)
- Revenue, Expenditure, Balance and Composition of Financing – General Government:
  - Date of latest observation: Q3 2006; Date received: 1/15/07; Frequency: Quarterly (data, reporting, publication)
- External Current Account Balance:
  - Date of latest observation: Q3 2006; Date received: 12/29/06; Frequency: Quarterly (data, reporting, publication)
- GDP/GNP:
  - Date of latest observation: Q4 2006; Date received: 2/13/07; Frequency: Quarterly (data, reporting, publication)
- Gross External Debt:
  - Date of latest observation: Q3 2006; Date received: 12/29/06; Frequency: Quarterly (data, reporting, publication)
- Notes from original table preserved: definitions and scope footnotes as presented in source.

### Statement by the IMF Staff Representative (April 23, 2007)
- Purpose: Provides information available since issuance of the Staff Report for the 2007 Article IV Consultation; new information does not change the thrust of the staff appraisal.
- Budget proposals (presented to Parliament on March 29):
  - Resulting general government deficits (Maastricht terms):
    - 2007: -0.9 percent instead of -1.1 percent of GDP
    - 2008: -0.7 percent instead of -0.9 percent of GDP
  - Debt-to-GDP ratio: expected to drop below 60 percent in 2008.
  - Staff has not had an opportunity to discuss the budget proposals in detail with the authorities.
- Austrian Stability Program (2006–2010): Submitted to the European Commission; general government balances for 2007 and 2008 coincide with the presented budgets; targets for 2009 and 2010 remain unchanged from the government program.

### Statement by Johann Prader, Alternate Executive Director for Austria (April 23, 2007)
- Authorities’ view:
  - Broad agreement with staff's assessment of Austria's economic situation and general recommendations on economic and financial policies.
  - Appreciation for the high quality of the Staff Report and the Selected Issues studies.
  - Staff Report highlights Austria's good economic performance relative to European peers in GDP growth, unemployment, competitiveness and public finances.
- Short-term outlook and recent performance:
  - Unemployment: declining since March 2006 and expected to drop to 4.2 percent by the end of 2007.
  - Inflation: at 1 ¾ percent, supported by moderate wage rounds despite signs of a tightening labour supply in 2007.
  - 2006 performance:
    - Real GDP grew by 3.2 percent.
    - Exports of goods increased by 8.5 percent in real terms.
    - Net exports contributed one percentage point to GDP.
    - Austria’s real effective exchange rate has depreciated by more than 10 percent vis-à-vis the other member states since 1995.
    - Current account: swung from an average deficit of about 1 percent of GDP before 1995 into surplus in 2004 and has shown a solid surplus since.
  - 2007 start: Employment expanded at more than 2 ½ percent in the first quarter, the highest rate since (text ends).

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

### 1974. Growth is broad-based, and is again expected to reach 3 percent. Investment is

### _cr07145 - 1974. Growth is broad-based, and is again expected to reach 3 percent. Investment is

### Growth and outlook
- Growth in 2006 is estimated at 3.2 percent - the highest since 2000.
- Growth in 2007 is expected to slow somewhat but remain strong at close to 3 percent.
- Investment is expected to continue to grow at a brisk pace in the face of very high capacity utilization and very favorable business survey results.
- Consumption is increasingly gaining strength given record employment growth and favorable disposable income developments.
- Inflation in 2006: 1.7 percent; expected 2007 CPI (period average): 1.6 percent.
- Wages have been increasing modestly despite higher labor demand; unit labor costs kept in check.

### Fiscal policy and public finances
- New government took office on 11 January 2007; broad contours of fiscal policy maintained, aiming at a balanced budget over the cycle.
- General government deficit in 2006: 1.1 percent of GDP.
- In 2007, the deficit is forecast to decline to 0.9 percent.
- Debt-to-GDP ratio declined in 2006 and is expected in 2008 to drop below 60 percent for the first time since 1993.
- Compared to previous government policy, less emphasis on reducing the tax burden; tax reductions contingent on expenditure-side savings.
- Government plans:
  - Lower administrative costs for business by 25 percent by 2010.
  - Further streamline administrative processes (e.g., one-stop-shops).
  - Continue reform of public administration at national and regional levels.
  - Commission expected by mid-year to make proposals for a reform of the constitution.
- Central government pays attention to joint budgetary responsibility of regional authorities within the Austrian internal stability pact.
- For the fiscal revenue-sharing agreement after 2008 it is planned to put special emphasis on the expenditure side.

### Medium-Term Budgetary Framework (MTEF)
- Current status: Austria has a non-binding multi-year budget program highlighting major political aims.
- Government intends to present to Parliament a proposal for a medium-term expenditure framework (MTEF) this year.
- MTEF features:
  - Cover a period of four years and be revised on a rolling basis each year.
  - Binding for both budget decision and budget implementation in each fiscal year.
  - Instrument for setting strategic priorities on the expenditure side.
  - Divided into five broad categories with expenditure limits binding for the entire 4-year period.
  - Accompanied by a Strategy Report detailing political priorities, targets, and more detailed information on economic assumptions and expected revenues during the MTEF period (estimates for tax revenue, gross national product, gross debt etc.).
- Authorities concur with staff that an MTEF by itself will not deliver fiscal discipline—commitment and longer-term planning is also necessary.

### Long-run fiscal challenges and risk analysis
- Staff’s long-term projections are basically those made at the EU level; sensitivity tests are based on the IMF’s own assumptions and calculations.
- Current government discussions on adjustments of the pensions system would affect orders of magnitude significantly below those indicated in the Selected Issues Paper.
- Staff undertakes comprehensive risk testing of fiscal sustainability in Austria, focusing more on downside than upside risks.
- Large difference in debt developments between the worst-case scenario (described as a “worst-worst-worst”-case) and the best-case scenario.
- Staff approach centered on long-term risk analysis appears to be a good one and should be applied to other countries in future.

### Cross-border banking issues and supervision
- Activities of banks and financial institutions in the CESE have been a clear success story, benefiting legal services, real estate, construction, retail trade and green field investment in the CESE.
- Challenges and supervision issues noted, consistent with EU-wide discussion.
- Authorities are taking action to further improve monitoring of Austrian banks’ activities in CESE, including foreign currency lending, and stepping up collaboration with host supervisors.
- Directors emphasized importance of domestic and cross-border supervision and welcomed agreements between Austrian and foreign supervisors on information exchange and cooperation.
- Growth of foreign currency lending by banks warrants special attention; efforts to increase consumer awareness of risks associated with foreign-currency borrowing welcomed.
- Directors urged continued use of adequate risk management techniques, including preparation for Basel II.
- Directors recommended forceful implementation of corporate governance strengthening measures in the banking sector, including more frequent on-site inspections and intensified off-site examinations.

### Executive Board assessment and policy recommendations
- Directors welcomed Austria’s strong economic performance and recommended:
  - Continued wage moderation to maintain competitiveness; recent social partner agreements for 2007 support this trend.
  - A more ambitious fiscal consolidation given high growth; earlier return to balance based on fiscal adjustment rather than relying largely on automatic stabilizers.
  - Saving unexpected windfalls.
  - Expeditious identification and implementation of expenditure savings, with key areas: public administration, subsidies and transfers, pensions, and health care.
  - Support increased spending on research and development, infrastructure, and education.
  - Further streamline functions across levels of government and restart constitutional reform to enable such reforms.
  - Consider tax cuts only towards the end of the government period, once expenditure measures have been implemented; future tax cuts should be focused on reducing the burden on labor.
  - Continue strengthening corporate governance in the banking sector and consider a Financial Sector Assessment Program update.
  - Continue structural reform: deregulation, strengthening competition, enhancing labor participation.
  - Further pension reform efforts to close loopholes encouraging early retirement, extend reform to the sub-national level, and reform the health sector.
  - Commended Austria for official development assistance of about 0.5 percent of GNP in 2006 and encouraged further increase toward the UN target.

### Selected economic indicators (as presented)
- Real GDP (change in percent): 2002: 0.9; 2003: 1.1; 2004: 2.4; 2005: 2.0; 2006: 3.2; 2007 proj.: 2.8
- Domestic demand (change in percent): 2002: -0.2; 2003: -1.2; 2004: 2.4; 2005: 1.5; 2006: 1.3; 2007 proj.: 2.2
- CPI (period average, percent change): 2002: 1.7; 2003: 1.3; 2004: 2.0; 2005: 2.1; 2006: 1.7; 2007 proj.: 1.6
- Unemployment rate (in percent): 2002: 4.2; 2003: 4.3; 2004: 4.8; 2005: 5.2; 2006: 4.8; 2007 proj.: 4.5
- Gross national saving (percent of GDP): 2002: 21.1; 2003: 21.5; 2004: 21.4; 2005: 22.0; 2006: 22.8; 2007 proj.: 23.2
- Gross domestic investment (percent of GDP): 2002: 20.7; 2003: 21.7; 2004: 21.3; 2005: 20.8; 2006: 21.1; 2007 proj.: 21.4

Public finance (in percent of GDP):
- Central government balance: 2002: -1.3; 2003: -2.0; 2004: -1.5; 2005: -1.9; 2006: -1.6; 2007 proj.: -1.6
- General government balance: 2002: -0.7; 2003: -1.8; 2004: -1.3; 2005: -1.6; 2006: -1.2; 2007 proj.: -1.2
- General government balance (EDP definition)1/: 2002: -0.5; 2003: -1.6; 2004: -1.2; 2005: -1.5; 2006: -1.1; 2007 proj.: -1.1
- General government debt: 2002: 65.8; 2003: 64.6; 2004: 63.8; 2005: 63.4; 2006: 62.0; 2007 proj.: 61.0

Interest rates (in percent)2/:
- Three-month interbank rate: 2002: 3.3; 2003: 2.3; 2004: 2.1; 2005: 2.2; 2006: 3.1; 2007 (Feb): 3.8
- 10-year government bond: 2002: 5.0; 2003: 4.2; 2004: 4.2; 2005: 3.4; 2006: 3.8; 2007 (Feb): 4.1

Balance of payments (percent of GDP):
- Trade balance: 2002: 1.7; 2003: 0.4; 2004: 1.1; 2005: 1.1; 2006: 2.5; 2007 proj.: 3.2
- Current account balance: 2002: 0.3; 2003: -0.2; 2004: 0.2; 2005: 1.2; 2006: 1.8; 2007 proj.: 1.9

Fund position (as of February 28, 2007):
- Holdings of currency (percent of quota): 92.5
- Holdings of SDRs (percent of allocation): 78.3
- Quota (millions of SDRs): 1872.3

Exchange rates and indices:
- Exchange rate regime: EMU Member
- Euro per U.S. dollar: 2002: 1.06; 2003: 0.88; 2004: 0.80; 2005: 0.80; 2006: 0.80
- Nominal effective rate (2000=100): 2002: 100.5; 2003: 104.0; 2004: 105.5; 2005: 105.3; 2006: 105.5
- Real effective rate (1990=100)3/: 2002: 98.1; 2003: 101.2; 2004: 94.5; 2005: 95.5; 2006: 96.5

*Public Information Notice (PIN) No. 07/48, IMF Executive Board Concludes Article IV Consultation with Austria, May 2, 2007.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07145.pdf_