## Selected Data, 2007–12

## Source details

**Canonical URL:** [Selected Data, 2007–12](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11275.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11275.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11275.pdf.json)

---

### Context and recent developments
- With economic growth back on track, policy discussions focused on addressing vulnerabilities in the public finances and the banking sector, and on strategies to strengthen long-term growth.
- Public finances worsened sharply during the crisis and face pressures from population aging and health care costs, as well as risks from the large cross-border financial sector exposure.
- Staff recommended bringing public debt down more rapidly than envisaged under current consolidation plans; the authorities considered current plans sufficient.
- Austria is a federation; the federal government is a coalition of the Social Democratic Party and the Austrian People’s Party (in office since 2008). Next federal elections are scheduled for 2013.
- Recovery: GDP growth reached 2.1 percent in 2010. The current account posted a surplus of 2.7 percent of GDP in 2010. Headline HICP inflation in June 2011: 3.7 percent; core inflation: 2.8 percent.

### Outlook and risks
- Growth projections:
  - Staff GDP growth for 2011: 3.3 percent.
  - Central bank: 3.2 percent.
  - Two leading research institutes: 3 percent each.
  - Agreement that growth will moderate to around 2 percent in 2012.
- First quarter 2011: GDP grew by 0.9 over the previous quarter.
- Staff view: potential output marginally affected by the crisis; output gap nearly closed next year.
- Inflation drivers: food and energy price shocks, higher excise taxes, and strong economy; staff noted commodity price reversals, euro-area monetary tightening, and mildly contractionary fiscal policy could help contain inflation if 2012 wage settlements remain moderate.
- Key downside risks:
  - Widening crisis in the euro area periphery and generalized financial instability in the euro area.
  - Direct exposures of Austrian banks to Greece, Ireland, and Portugal: 2.1 of GDP at end-2010.
  - Direct exposure of Austrian banks to Italy: 5.9 percent of GDP.
  - Further appreciation of the Swiss franc could hurt Swiss-franc-denominated loan portfolios.
  - Renewed euro-area downturn could curtail CESEE growth and cause second-round credit-quality effects.
- Upside risk: stronger-than-expected recovery of domestic demand in the euro area or the CESEE.

### Fiscal outlook, debt dynamics, and staff recommendations
- Crisis effect on public finances:
  - During 2007–10 the deficit widened from 0.9 percent to 4.6 percent of GDP; public debt rose by almost 12 percent of GDP.
- Authorities’ multi-year consolidation plan:
  - Would cut the deficit below 3 percent by 2013 and to around 2 percent in the medium term.
  - Even with full implementation, staff estimate general government debt at 72 percent of GDP by 2015 and only slightly below 70 percent by end of the decade.
  - Staff baseline (less optimistic on implementation) keeps debt above 70 percent of GDP throughout the period.
- Additional fiscal risks not in baseline:
  - Further debt additions from banking-sector rescues.
  - Roughly one third of public enterprise debt (currently some 12 percent of GDP) could be reclassified and added to general government debt in 2014 under revised national accounting rules.
  - Aging-related costs, particularly health care, might be higher than currently envisaged.
- Staff recommendation:
  - Stronger consolidation measures of at least ½ percent of GDP annually, starting with the 2012 budget, until the structural deficit reaches zero.
  - An even stronger consolidation in the 2012 budget would be justified given the rapid recovery and to contain persistent inflationary pressures.
- Authorities’ position:
  - Considered current consolidation plans adequate and further short-term efforts politically infeasible; expected stronger-than-envisaged growth to lead to better deficit outcomes.

### Authorities’ consolidation plan — selected measures and aggregated estimates (authorities’ presentation)
- Revenue increases (million euro): 1164, 1741, 1921, 2191, 2191 (in percent of authorities' GDP projections) 0.4, 0.6, 0.6, 0.7
- Expenditure reductions (million euro): 1496, 2210, 2696, 3226, 3226 (in percent of authorities' GDP projections) 0.5, 0.7, 0.8, 1.0
  - Family benefits (million euro): 246, 278, 278, 278
  - Pension benefits (million euro): 356, 400, 469, 549
  - Other social benefits (million euro): 132, 182, 223, 266
  - "State aid" (million euro): 190, 330, 404, 458
  - "Administrative burden" (million euro): 48, 67, 91, 86, 89, 63
  - Interest savings (million euro): 86, 22, 94, 54, 71, 12
- Expenditure increases ("Offensive measures") (million euro): 50, 256, 263, 470, 1 (in percent of authorities' GDP projections) 0.2, 0.2, 0.2, 0.2
- (1)+(2)-(3): Total (million euro): 2,158; 3,389; 3,983; 4,716 (in percent of authorities' GDP projections) 0.7, 1.1, 1.2, 1.4
- Subnational targets under renegotiated domestic stability pact (percent of GDP): 0.75 in 2011 (following 1.2 in 2010), 0.6 in 2012, and 0.5 in 2013–14.
- Authorities assume a balanced social security budget throughout the period (after a surplus of 0.2 percent of GDP in 2010).

### Expenditure rationalization — staff priority areas and recommendations
- Staff preference: consolidation should preferably take place through expenditure cuts rather than revenue-raising measures.
- Three main areas where spending exceeds peer-country levels and reform scope is ample:
  1. Pensions and early labor market exit:
     - Fully abolish the early retirement scheme for long-term insured (“Hacklerregelung”) in 2012.
     - Further reduce eligibility for disability pensions, including by broadening the scope of alternative occupations against which disability is assessed.
     - Close all other avenues to early inactivity for older workers without fair benefit reduction rapidly to avoid substitution across different avenues.
     - Improve job opportunities for older workers in parallel with benefit reforms.
  2. Health care:
     - Promptly reap large efficiency gains.
     - Enforce hospital planning on a nationwide scale to optimize size, degree of specialization, and distribution of hospitals.
     - Pool hospital financing at the federal level and link disbursements to clear performance criteria.
     - Strengthen and better integrate outpatient treatment and prevention.
  3. Subsidies and public enterprises:
     - Restructure and achieve cost savings at public enterprises, notably Austrian Railways (OeBB).
     - Develop a database on subsidies and transfers to enhance transparency, enable broad re-evaluation of spending, clarify priorities, and eliminate redundant subsidies.
- Authorities’ response: broad agreement with priorities; measures enacted in 2011 budget particularly on early pensions; working groups studying issues but timing/content of specific recommendations left open.

### Fiscal federalism and budgetary planning
- Staff view: current fiscal federalism is too complex and hampers expenditure rationalization due to disconnects between spending and financing responsibilities and fragmentation across government levels.
- Proposed comprehensive fiscal federalism reform to be agreed before negotiations on the next fiscal equalization law.
- Stability pact: sub-national deficit reduction from 1.2 percent of GDP in 2010 to 0.5 percent in 2014; staff noted subnational deficit objectives have consistently been missed.
- Suggested measures to improve compliance: more ex-ante budgetary coordination, harmonization of planning instruments, integrate medium- and long-term sustainability analysis into planning, derive long-term expenditure target paths.

### Banking sector: performance, risks, and policy recommendations
- Profitability and asset quality:
  - Profitability improving despite growing NPLs.
  - NPL ratios are high in CESEE subsidiaries; loans in Austria perform relatively well.
  - Authorities estimate that, as of end-2010, the top six Austrian banks had restructured loans corresponding to about 5 percent of their total risk exposure.
  - Ratio of provisions to NPLs: CESEE subsidiaries: 42.5 percent; Austrian operations: 70.8 percent.
- Foreign-currency (Swiss-franc) loans:
  - Austria has a sizable share of foreign-currency loans, mostly Swiss franc mortgages.
  - Swiss franc appreciated by over 20 percent vis-à-vis the euro following the financial crisis.
  - Outstanding Swiss franc loans by Austrian banks: approx. 70 billion EUR on a consolidated basis.
  - Supervisory stance: stop in new Swiss franc lending in Austria since October 2008; stop in CESEE since Spring 2010; supervisors push banks to develop strategies to reduce the stock.
- Restructuring and capitalization:
  - Restructuring among medium-sized banks ongoing; one medium-sized bank nationalized; another failed the EBA stress test and announced sale of most foreign subsidiaries.
  - OeNB spring 2011 stress test: Core Tier I capital ratio declined from 9.2 percent to 8.5 percent in the aggregate at the end of the two-year projection horizon; ratio remained above 7 percent in each of the three largest banks.
  - Staff priority: rapid progress toward higher bank capital standards and early exit from government support should take precedence over shareholder remuneration or further cross-border expansion.
  - Government guarantee program for bank liabilities has expired; capital injections not yet repaid though two banks intend to begin repayment soon.
- Macroprudential and supervisory recommendations:
  - Need for higher capital buffers for systemic banks; use flexibility in forthcoming EU-wide rules.
  - Suggested instruments: capital add-ons for systemic banks; limits on parents’ funding of subsidiaries calibrated to bind in periods of excessive intra-group funding.
  - Call for stronger early intervention powers for supervisors and review of institutional framework for bank supervision and regulation, including macro-prudential policy.
  - Creation at end of June 2011 of a cross-border financial stability group with authorities from most new EU member states welcomed.
- Anti-money laundering progress:
  - February 2011 FATF follow-up report very positive given legal measures enacted in June and July 2010.
  - Next steps: implement new legal provisions, draft/update FMA circulars, train reporting entities and supervisors, and conduct on-site inspections.

### Structural issues: labor utilization, education, and human capital
- Labor market:
  - Employment rate high by OECD standards but room for improvement; early labor market exit burdens pension system.
  - Staff recommendation: close avenues to early labor market exit and enact policies to encourage employment of older workers.
  - High social security contributions: staff recommend reducing social security contributions at the low end of the wage distribution (budget-neutral) to increase employment of low-skilled workers.
  - Immigrant unemployment: 8.5 percent compared to 3.1 percent for the native population.
- Education and human capital:
  - Immigrant and first-generation children are about 20 percent of the population; large school achievement gap noted.
  - Tertiary education attainment: Austria: 18 percent; High income OECD countries average: 26 percent.
  - Private spending on education in Austria: 0.1 percent of GDP; EU average: 1.1 percent of GDP.
  - Possible reforms: entrance admission tests, attract enrollment in engineering and natural sciences, obtain private funding for education, reduce overcrowding and drop-out rates.

### Macroeconomic projections and key indicators (selected)
- GDP growth (percent): 2007: 3.7; 2008: 2.2; 2009: -3.9; 2010: 2.1; 2011: 3.3; 2012: 2.0; 2013: 1.9; 2014: 1.8; 2015: 1.8; 2016: 1.8
- Output gap (percent of potential GDP): 2007: 2.9; 2008: 3.3; 2009: -2.4; 2010: -2.0; 2011: -0.4; 2012: -0.1
- Potential output growth (percent): 2007–2016: 1.9; 1.8; 1.8; 1.7; 1.7; 1.7; 1.8; 1.8; 1.8; 1.8
- GDP (current prices, billion euro): 2007: 272.0; 2008: 283.1; 2009: 274.3; 2010: 284.4; 2011: 301.0; 2012: 313.5; 2013: 325.4; 2014: 337.4; 2015: 349.8; 2016: 362.5
- CPI inflation (period average): 2007: 2.2; 2008: 3.2; 2009: 0.4; 2010: 1.7; 2011: 3.2; 2012: 2.2
- Unemployment (registered national definition, percent): 2007: 6.2; 2008: 5.8; 2009: 7.2; 2010: 6.9; 2011: 6.6; 2012: 6.6
- Current account (percent of GDP): 2007: 3.5; 2008: 4.9; 2009: 3.1; 2010: 2.7; 2011: 2.9; 2012: 3.0
- General government balance (EDP-definition, percent of GDP): 2007: -0.9; 2008: -0.9; 2009: -4.1; 2010: -4.6; 2011: -3.4; 2012: -3.0
- Structural balance (percent of GDP): 2007: -2.3; 2008: -2.4; 2009: -3.0; 2010: -3.7; 2011: -3.2; 2012: -2.9
- Gross debt (end of period, percent of GDP): 2007: 60.7; 2008: 63.8; 2009: 69.6; 2010: 72.2; 2011: 72.3; 2012: 73.4

### Executive Board conclusions and policy priorities
- Directors commended policies that supported a swift recovery but noted important challenges given a fragile global outlook and euro-area vulnerabilities.
- Priorities identified:
  - Reducing the debt burden via expenditure-focused consolidation, with savings in pension, health care, and subsidies.
  - Bolstering financial stability: upgrade capital bases, exit government support, restructure institutions to address overcapacity, monitor Swiss-franc lending closely, and reinforce macro-prudential measures for cross-border exposures.
  - Enacting structural reforms to boost long-term growth: increase labor market participation (especially low-skilled and older workers) and improve education outcomes for immigrant children.

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

### 1. Selected Data, 2007–12 ..............................................................................................

### _cr11275 - 1. Selected Data, 2007–12

### Context
- With economic growth back on track, policy discussions focused on addressing vulnerabilities in the public finances and the banking sector, and on strategies to strengthen long-term growth.
- Public finances worsened sharply during the crisis and face pressures from population aging and health care costs, as well as risks from the large cross-border financial sector exposure.
- Staff recommended bringing public debt down more rapidly than envisaged under current consolidation plans; the authorities considered current plans sufficient.
- Financial sector priorities: increase size and quality of private capital, improve liquidity management, address overcapacity in the Austrian market via bank restructuring, and reduce risks from future foreign expansion through supervisory and regulatory reforms.
- Austria is a federation; the federal government is a coalition of the Social Democratic Party and the Austrian People’s Party (in office since 2008). Considerable political power resides with the nine federal states. Next federal elections are scheduled for 2013.

### Background — Eastward Expansion, Crisis, and Recovery
- Integration with CESEE shifted Austria’s economic fulcrum eastward: trade, FDI flows, and bank entry into newly opened markets increased.
- Rapid credit expansion in many host CESEE countries fueled domestic demand booms and large current account deficits; credit was often foreign-currency denominated, creating vulnerability to currency depreciation.
- The Lehman bankruptcy and global money-market freeze halted the CESEE boom; Austrian banks faced liquidity squeezes and deteriorating credit portfolios. Government intervention was used to support aggregate demand and stabilize the banking system. The Vienna Initiative saw foreign banks commit to maintain exposures.
- Annex 1: As integration with relatively capital-poor CESEEs progressed, Austria’s pattern of output growth changed, becoming less reliant on capital deepening than in the past.

### Recent Developments and Recovery (2010)
- Austria experienced a relatively rapid recovery in 2010: GDP growth reached 2.1 percent in 2010.
- Private consumption and employment held up during the recession; recovery in external demand (especially from Germany) drove the rebound.
- The current account posted a surplus of 2.7 percent of GDP in 2010, reflecting strong performance in services (mainly tourism and business services).
- Outward FDI recovered somewhat in 2010 but remained well below pre-crisis levels.
- The real effective exchange rate remains broadly within CGER norms.
- Inflation: in June 2011, headline HICP inflation registered at 3.7 percent while core inflation was 2.8 percent (about one percent above the euro area indicators). Authorities estimated indirect tax increases accounted for 0.4 percentage points of the differential.

### Outlook and Risks
- Growth projections:
  - Staff GDP growth for 2011: 3.3 percent.
  - Central bank: 3.2 percent.
  - Two leading research institutes: 3 percent each.
  - Agreement that growth will moderate to around 2 percent in 2012.
- First quarter 2011: GDP grew by 0.9 over the previous quarter.
- Staff view: potential output marginally affected by the crisis; output gap nearly closed next year.
- Inflation drivers: food and energy price shocks, higher excise taxes, and strong economy; staff noted possible contribution from demand pressures and that commodity price reversals, euro-area monetary tightening, and mildly contractionary fiscal policy could help contain inflation if 2012 wage settlements remain moderate.
- Fiscal outlook:
  - During 2007–10 the deficit widened from 0.9 percent to 4.6 percent of GDP; public debt rose by almost 12 percent of GDP.
  - Government’s multi-year fiscal consolidation plan would cut the deficit below 3 percent by 2013 and to around 2 percent in the medium term.
  - Staff projects the deficit to decline to 3.4 percent of GDP in 2011 and the structural deficit to stabilize at about 2 percent of GDP in the medium term, with debt remaining above 70 percent of GDP.
- Banking sector:
  - Profitability improving despite growing NPLs.
  - NPL ratios are high in CESEE subsidiaries; loans in Austria perform relatively well.
  - Large and most medium-sized banks were profitable in 2010 despite provisioning costs.
  - Interbank interest rates normalized; share prices and CDS spreads recovered but not to pre-crisis levels.
  - Post-crisis banking challenges: reduce reliance on government capital; substantially strengthen quantity and quality of capital; build larger buffers to absorb shocks; adapt liquidity management; reduce excess capacity in the Austrian market; improve cross-jurisdiction supervision coordination.
- Key downside risks:
  - Widening crisis in the euro area periphery and generalized financial instability in the euro area.
  - Direct exposures of Austrian banks to Greece, Ireland, and Portugal amounted to only 2.1 of GDP at end-2010.
  - Direct exposure of Austrian banks to Italy amounts to 5.9 percent of GDP.
  - Further appreciation of the Swiss franc through safe-haven flows could hurt loan portfolios where Swiss-franc-denominated loans are widespread.
  - A renewed euro-area downturn could curtail CESEE growth and cause second-round credit-quality effects.
- Upside risk: stronger-than-expected recovery of domestic demand in the euro area or the CESEE.
- Staff econometric analysis indicated Austrian sovereign spreads were sensitive to generalized market dislocation (Annex 3).

### Fiscal Policy: Speeding up Debt Reduction by Increasing Expenditure Efficiency
- Staff view: current consolidation plans will not reduce debt significantly and considered this unsatisfactory given risks.
  - Even with higher growth and full implementation of authorities’ plans, general government debt would be at 72 percent of GDP by 2015 and only slightly below 70 percent by end of the decade.
  - Staff baseline (less optimistic on implementation) keeps debt above 70 percent of GDP throughout the period.
- Additional fiscal risks not in baseline:
  - Further debt additions from banking-sector rescues.
  - Roughly one third of public enterprise debt (currently some 12 percent of GDP) could be reclassified and added to general government debt in 2014 under revised national accounting rules.
  - Aging-related costs, particularly health care, might be higher than currently envisaged.
- Staff recommendation:
  - Stronger consolidation measures of at least ½ percent of GDP annually, starting with the 2012 budget, until the structural deficit reaches zero.
  - This would pare debt back to pre-crisis levels around the end of the decade, improve compliance with EU structural and debt adjustment requirements, and strengthen private sector confidence.
  - An even stronger consolidation in the 2012 budget would be justified given the rapid recovery and to contain persistent inflationary pressures.
- Authorities’ position:
  - Considered current consolidation plans adequate and further short-term efforts politically infeasible.
  - Expected stronger-than-envisaged growth to lead to significantly better deficit outcomes.
  - Cited protracted negotiations on the current multiyear package as a reason not to reopen the issue; not inclined to take additional consolidation steps in the 2012 budget or before the 2013 parliamentary election.

### The Authorities’ Consolidation Plan (Box 1) — Selected Measures and Estimates
- Federal 2011 budget measures included a bank levy and higher mineral oil taxes (revenues), and expenditure reductions across categories combined with increases in priority areas such as education and R&D.
- Authorities’ estimate of fiscal impact (In million euro, unless indicated otherwise) — aggregated presentation:
  - Revenue increases (1): 1164, 1741, 1921, 2191, 2191 (in percent of authorities' GDP projections) 0.4, 0.6, 0.6, 0.7
  - Expenditure reductions (2): 1496, 2210, 2696, 3226, 3226 (in percent of authorities' GDP projections) 0.5, 0.7, 0.8, 1.0
    - Family benefits: 246, 278, 278, 278
    - Pension benefits: 356, 400, 469, 549
    - Other social benefits: 132, 182, 223, 266
    - "State aid" 2/: 190, 330, 404, 458
    - "Administrative burden" 3/: 48, 67, 91, 86, 89, 63
    - Interest savings: 86, 22, 94, 54, 71, 12
  - Expenditure increases ("Offensive measures") (3): 50, 256, 263, 470, 1 (in percent of authorities' GDP projections) 0.2, 0.2, 0.2, 0.2
  - (1)+(2)-(3): Total 2,158; 3,389; 3,983; 4,716 (in percent of authorities' GDP projections) 0.7, 1.1, 1.2, 1.4
- Subnational targets under the renegotiated domestic stability pact (in percent of GDP): 0.75 in 2011 (following 1.2 in 2010), 0.6 in 2012, and 0.5 in 2013–14.
- Authorities assume a balanced social security budget throughout the period (after a surplus of 0.2 percent of GDP in 2010).

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

### 13.      Staff recommended expenditure rationalization in three main areas: early

### _cr11275 - 13.      Staff recommended expenditure rationalization in three main areas: early

### Expenditure rationalization: key recommendations
- Staff recommended consolidation should preferably take place through expenditure cuts rather than revenue-raising measures.
- Three main areas for expenditure rationalization where spending exceeds peer-country levels (Annex 4) and reform scope is ample:
  - Pensions and other benefits fostering widespread early labor market exit:
    - Fully abolish the early retirement scheme for long-term insured (“Hacklerregelung”) in 2012.
    - Further reduce eligibility for disability pensions, including by broadening the scope of alternative occupations against which disability is assessed.
    - Close all other avenues to early inactivity for older workers without fair benefit reduction rapidly to avoid substitution across different avenues.
    - Improve job opportunities for older workers in parallel with benefit reforms.
  - Health care:
    - Promptly reap large efficiency gains.
    - Enforce hospital planning on a nationwide scale to optimize size, degree of specialization, and distribution of hospitals across Austria’s territory.
    - Pool hospital financing at the federal level and link disbursements to clear performance criteria.
    - Strengthen and better integrate outpatient treatment and prevention.
  - Subsidies and public enterprises:
    - Restructure and achieve cost savings at public enterprises, notably Austrian Railways (OeBB) where operating costs, pensions, and infrastructure investments offer scope for rationalization.
    - Implement the authorities’ initiative to develop a database on subsidies and transfers to enhance transparency, enable a broad re-evaluation of spending, clarify priorities, and eliminate redundant subsidies.

- Authorities’ response:
  - Broad agreement with expenditure reform priorities.
  - Noted a number of measures already enacted with the 2011 budget, particularly regarding early pensions.
  - Pointed to working groups studying the issues but left open timing and content of specific recommendations and decisions.

### Fiscal federalism and budgetary planning
- Staff view:
  - Current fiscal federalism is too complex and hampers expenditure rationalization.
  - Problems: disconnect between spending and financing responsibilities in key areas (health, education) and excessive fragmentation of spending responsibilities across government levels.
  - Proposed comprehensive fiscal federalism reform to be agreed upon before negotiations on the next fiscal equalization law (preparatory work already far along).
  - Reform would further cement investor confidence in Austria’s consolidation drive.
- Authorities’ stance:
  - Lukewarm to a comprehensive revamping and ambitious timetable.
  - Commissioned studies but no concrete timetable for reforms decided.
- Stability pact and enhanced planning:
  - Domestic Austrian stability pact revised: reduction of the deficit of sub-national governments from 1.2 percent of GDP in 2010 to 0.5 percent in 2014.
  - Staff noted subnational deficit objectives have consistently been missed in the past.
  - Suggested measures to improve compliance:
    - More ex-ante budgetary coordination and harmonization of planning instruments across government levels.
    - Make medium- and long-term sustainability analysis an integral part of planning at all levels to strengthen awareness of debt dynamics and help control the costs of aging.
    - Use such analysis to derive long-term expenditure target paths for crucial expenditure categories.

### Financial sector: managing credit risk and strengthening stability
- Nonperforming loans (NPLs) in CESEEs:
  - Growth resumed in the region; NPL ratios expected to peak this year.
  - Banks have strengthened loan collection and restructuring departments in CESEE subsidiaries; some sales of NPL portfolios to local recovery specialists reported.
  - Authorities estimate that, as of end-2010, the top six Austrian banks had restructured loans corresponding to about 5 percent of their total risk exposure.
  - Ratio of provisions to NPLs:
    - CESEE subsidiaries: 42.5 percent.
    - Austrian operations: 70.8 percent.
  - Authorities expect provisioning to increase going forward as new flows of NPLs slow down.
  - Extent of ‘evergreening’ remains uncertain.
- Foreign-currency (Swiss-franc) loans:
  - Austria has a sizable share of loans denominated in foreign currency, mostly Swiss franc mortgages.
  - Swiss franc appreciated by over 20 percent vis-à-vis the euro following the financial crisis, increasing the value of obligations.
  - So far, these loans are performing well, in line with domestic currency loans.
  - Large mortgage vintages begin to mature in 2017; repayment problems may surface if exchange rate developments remain unfavorable.
  - Supervisory measures:
    - Since 2008, supervisors effectively prohibited new foreign currency lending to unhedged retail customers.
    - Supervisors are pushing banks to develop strategies to reduce the stock of such loans; staff agreed these measures were appropriate.
- Restructuring among medium-sized banks:
  - Crisis fostered restructuring; one medium-sized bank nationalized during the crisis (restructuring plan under examination by the European Commission).
  - Another medium-sized bank failed the EBA stress test but announced sale of most foreign subsidiaries and further deleveraging.
  - A smaller nationalized bank restructured with problem assets placed in a separate entity.
  - Hope expressed that restructuring will reduce chronic excess capacity in the market, where interest margins are among the lowest in the euro area.
- Stress test results:
  - OeNB spring 2011 stress test (more severe than 2011 EBA stress test):
    - Core Tier I capital ratio declined from 9.2 percent to 8.5 percent in the aggregate at the end of the two-year projection horizon.
    - Ratio remained above 7 percent in each of the three largest banks.
- Risk management and supervision improvements:
  - Increased attention to liquidity management; new system (late 2008) allows supervisors to perform weekly stress tests for liquidity and funding risk.
  - Implementation of Basel III liquidity regulation seen as instrumental.
  - Banks acknowledge internal models did not adequately reflect likelihood of host country authorities restricting intra-group liquidity and capital transfers, downward flexibility in nominal wages, and risk of political intervention in loan payments.
  - Newly-created colleges coordinate supervision of banking groups operating across multiple jurisdictions and will work towards joint risk assessments at the group level for the first time this year.
- Capital build-up and exit from government support:
  - Rapid progress toward higher bank capital standards and early exit from government support should take precedence over shareholder remuneration or further cross-border expansion.
  - Government guarantee program for bank liabilities has expired; capital injections have not been repaid yet, though two banks have declared intention to begin repayment soon.
  - Staff emphasized dividend suspension and cross-border expansion should follow capital build-up and exit from government support.
  - Authorities view: capital strengthening is a priority but dividend suspension was not a condition for receiving government aid; exit should be conditional on a strong capital position.
- Too-big-to-fail (TBTF) strategy:
  - Need for higher capital buffers for systemic banks, using flexibility in forthcoming EU-wide rules.
  - Specific vulnerabilities of Austrian systemic banks: large size relative to country GDP, significant cross-border exposure concentrated in a single region, high NPLs.
  - Suggested instruments:
    - Capital add-ons for systemic banks to provide additional loss-absorbing buffers.
    - Limits on parents’ funding of subsidiaries calibrated to bind in periods when intra-group loans fuel excessive credit growth in host countries (to be coordinated with host country supervisors).
  - Staff and authorities agreed that an EU-level bank resolution and burden-sharing mechanism would be the first-best solution in the medium-term.
  - Establishment at end of June 2011 of a cross-border financial stability group with authorities from most new EU member states where Austrian banks operate welcomed by staff.
- Supervisory powers and institutional framework:
  - Call for stronger early intervention powers for supervisors and revisiting the institutional framework for bank supervision and regulation, including macro-prudential policy.
  - In Austria: OeNB responsible for on-site and off-site supervision; Financial Market Authority (FMA) assigned enforcement powers.
  - Improved coordination reported, but benefits from division of labor remain unclear.
  - Review of supervisory architecture suggested for the next FSAP update requested by authorities for FY 2013.
  - OeNB and FMA indicate a proper legal framework for macro-prudential policy appears to be lacking.
- Anti-money laundering progress:
  - Significant progress since FATF identified strategic deficiencies in 2009.
  - February 2011 FATF follow-up report was very positive given legal measures enacted in June and July 2010.
  - Upcoming actions: effective implementation of new legal provisions, drafting new or updated FMA circulars, training of reporting entities and supervisors, and on-site inspections.

### Structural issues: labor utilization and human capital
- Labor market and education reforms highlighted as key to raise potential growth.
- Labor market:
  - Employment rate high by OECD standards but room for improvement.
  - Early labor market exit burdens public pension system and deprives economy of productive labor.
  - Recommendation: close avenues to early labor market exit and enact policies to encourage employment of older workers to increase long-run growth potential.
  - High “tax wedges” acknowledged by authorities; considered for comprehensive tax reform after next elections.
  - Social security contributions are high in international comparison and push labor costs beyond productivity of many low-skilled workers.
  - Staff recommendation: reduce social security contributions at the low end of the wage distribution (coupled with offsetting budget-neutral measures) to increase employment of low-skilled workers and potential output.
  - Employment among low-skilled workers modest; immigrant workers unemployment rate 8.5 percent compared to 3.1 percent for the native population.
- Education and human capital:
  - Large school achievement gap for immigrant and first generation children; immigrant and first generation children are about 20 percent of the population.
  - Poor outcomes increase future stock of low-skilled workers; closing the gap is important especially with potentially large new immigrant flows after elimination of remaining restrictions on labor movements with countries that joined the EU in 2004 (Annex 6).
  - Tertiary education:
    - Austria: 18 percent of the population has a tertiary degree or equivalent.
    - High income OECD countries average: 26 percent.
    - Low rates of return on tertiary education in Austria, particularly for women.
    - Issues: liberal admission policies causing overcrowding and high drop-out rates; lack of financial resources.
    - 2004 reform increased financial and hiring autonomy of universities and accountability, but admission policies remain liberal and enrollment exceeds capacity in several disciplines.
    - Possible policy options under discussion:
      - Introduction of entrance admission tests (example: medicine where drop-out rates fell sharply).
      - Policies to attract enrollment in engineering and natural sciences.
      - Measures to obtain private funding for education.
    - Private spending on education in Austria: 0.1 percent of GDP; EU average: 1.1 percent of GDP.

*Source: IMF staff report excerpt.*

### 29.      The crisis, though short-lived in Austria, has highlighted old challenges and

### _cr11275 - 29.      The crisis, though short-lived in Austria, has highlighted old challenges and

### Fiscal position and consolidation
- The crisis highlighted long-standing challenges and created new ones that must be addressed.
- Austria’s fiscal position compares favorably with other euro area countries, but the growth of public debt needs to be put into reverse to better face risks and cost pressures.
- Additional consolidation measures are needed starting with the 2012 budget.
- Total measures of at least ½ percent of GDP per year, until the fiscal accounts are structurally balanced, would bring the debt-to-GDP ratio on a clear downward trajectory in the medium term.
- An even stronger effort in the 2012 budget is warranted given: the excellent economic performance, rapidly disappearing slack in the economy, and inflationary pressures.
- Priority areas for consolidation and efficiency gains: pension, health care, and subsidy reform.

### Fiscal federalism
- A broad reform of fiscal federalism would underpin consolidation efforts.
- Current incentives for efficient use of public resources are weakened by a strong disconnect between spending and financing responsibilities and by the sharing of spending mandates among different levels of government.
- A comprehensive fiscal federalism reform to address these problems should usefully be agreed upon before the next negotiations on the fiscal equalization law.

### Banking sector: capital, restructuring, and exit from support
- The banking sector’s return to more normal levels of profitability creates conditions for further build-up of high-quality capital and exit from government support.
- Banks should move quickly to strengthen their capital base, increasing both the quantity and quality of their capital and exiting government support.
- Strengthening capital and exiting support should take priority over shareholder remuneration and further cross-border expansion.
- Ongoing restructuring of some banks is an opportunity to address overcapacity in the Austrian market.

### Bank resolution, systemic risk, and macroprudential policy
- During the transition to EU-level bank resolution mechanisms, measures should be taken to address the risk posed by systemic banks.
- Austria stands to benefit from an EU-wide bank resolution and burden-sharing mechanism for internationally active banks.
- Until a new EU framework is in place, the risk that systemic banks pose to Austrian taxpayers should be reduced through macro-prudential measures, including tighter capital requirements and, possibly, macro-prudential constraints on intra-group funding models to prevent future credit booms.
- Greater supervisory vigilance of lending activities, accompanied by pre-emptive action, is necessary wherever financial deepening can quickly turn into an unsustainable credit boom.
- The establishment of a cross-border financial stability group with authorities from most new EU member states is welcome.

### Labor market participation and human capital
- To foster medium-term growth, increasing employment of low-skilled and older workers and building up more human capital are key priorities.
- High social security contributions are an obstacle to the employment of the low-skilled and should be reduced (in a budget-neutral way).
- Some 20 percent of primary school pupils have an immigrant background; measures to close the large educational attainment gap of children with an immigrant background would improve average skill levels and productivity growth.
- Reform of the university system is needed: the system is burdened by low graduation rates and has low enrollment in engineering and the natural sciences.
- Potential university reforms could include stricter admission criteria to reduce overcrowding and drop-out rates, make better use of existing resources, and steer students toward disciplines complementary to R&D.

*International Monetary Fund — Selected chapter content from _cr11275*

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

### _cr11275 - 35. It is proposed that the next Article IV consultation be held on the standard 12-month cycle.

### Macroeconomic outlook and projections
- GDP (growth in percent):
  - 2007: 3.7
  - 2008: 2.2
  - 2009: -3.9
  - 2010: 2.1
  - 2011: 3.3
  - 2012: 2.0
  - 2013: 1.9
  - 2014: 1.8
  - 2015: 1.8
  - 2016: 1.8
- Demand and supply (growth contributions and components):
  - Total domestic demand: 2007: 2.5; 2008: 1.3; 2009: -2.3; 2010: 1.3; 2011: 2.0; 2012: 1.4
  - Consumption: 2007: 1.1; 2008: 1.4; 2009: 1.1; 2010: 0.7; 2011: 0.7; 2012: 1.1
    - Private consumption: 2007: 0.7; 2008: 0.5; 2009: 1.3; 2010: 1.1; 2011: 0.9; 2012: 1.2
  - Gross fixed capital formation: 2007: 3.9; 2008: 4.1; 2009: -8.8; 2010: -1.0; 2011: 3.7; 2012: 2.5
  - Exports of goods and nonfactor services: 2007: 8.6; 2008: 1.0; 2009: -16.1; 2010: 10.6; 2011: 8.8; 2012: 4.9
  - Imports of goods and nonfactor services: 2007: 7.0; 2008: -0.9; 2009: -14.4; 2010: 9.4; 2011: 7.0; 2012: 4.2
- Output gap (percent of potential GDP):
  - 2007: 2.9
  - 2008: 3.3
  - 2009: -2.4
  - 2010: -2.0
  - 2011: -0.4
  - 2012: -0.1
- Potential output (growth in percent): 2007–2016: 1.9; 1.8; 1.8; 1.7; 1.7; 1.7; 1.8; 1.8; 1.8; 1.8
- GDP (current prices, in billion euro):
  - 2007: 272.0
  - 2008: 283.1
  - 2009: 274.3
  - 2010: 284.4
  - 2011: 301.0
  - 2012: 313.5
  - 2013: 325.4
  - 2014: 337.4
  - 2015: 349.8
  - 2016: 362.5

### Prices, labor market, and external accounts
- CPI inflation (period average / annual percent change):
  - 2007: 2.2
  - 2008: 3.2
  - 2009: 0.4
  - 2010: 1.7
  - 2011: 3.2
  - 2012: 2.2
- Unemployment:
  - Employment growth: 2007: 1.9; 2008: 1.3; 2009: -1.5; 2010: 0.6; 2011: 1.5; 2012: 0.8
  - Registered (national definition) unemployment rate: 2007: 6.2; 2008: 5.8; 2009: 7.2; 2010: 6.9; 2011: 6.6; 2012: 6.6
  - Standardized (Eurostat) unemployment rate: 2007: 4.4; 2008: 3.8; 2009: 4.8; 2010: 4.4; 2011: 4.1; 2012: 4.1
- Current account (in billion euro and percent of GDP):
  - Current account (bn euro): 2007: 9.6; 2008: 13.8; 2009: 8.5; 2010: 7.8; 2011: 8.8; 2012: 9.3
  - Current account (percent of GDP): 2007: 3.5; 2008: 4.9; 2009: 3.1; 2010: 2.7; 2011: 2.9; 2012: 3.0
  - Goods and services balance (percent of GDP): 2007: 4.6; 2008: 4.8; 2009: 3.8; 2010: 3.6; 2011: 3.6; 2012: 3.6
- Trade (exports and imports as percent of GDP):
  - Exports: 2007: 58.2; 2008: 58.3; 2009: 49.7; 2010: 53.6; 2011: 56.1; 2012: 57.3
  - Imports: 2007: 53.6; 2008: 53.4; 2009: 45.9; 2010: 50.1; 2011: 52.5; 2012: 53.7

### Fiscal accounts and debt projections
- General government finances (percent of GDP unless indicated otherwise):
  - Revenue: 2007: 48.0; 2008: 48.3; 2009: 48.8; 2010: 48.3; 2011: 48.3; 2012: 48.3
  - Expenditure: 2007: 49.0; 2008: 49.3; 2009: 53.0; 2010: 52.9; 2011: 51.7; 2012: 51.3
  - Balance (EDP-definition): 2007: -0.9; 2008: -0.9; 2009: -4.1; 2010: -4.6; 2011: -3.4; 2012: -3.0
  - Structural Balance: 2007: -2.3; 2008: -2.4; 2009: -3.0; 2010: -3.7; 2011: -3.2; 2012: -2.9
  - Gross debt (end of period): 2007: 60.7; 2008: 63.8; 2009: 69.6; 2010: 72.2; 2011: 72.3; 2012: 73.4
- General government operations (selected lines, in percent of GDP):
  - Taxes (aggregate): 2007: 27.5; 2008: 28.1; 2009: 27.5; 2010: 27.3; 2011: 27.7; 2012: 28.0
    - Indirect taxes: 2007: 14.0; 2008: 14.1; 2009: 14.7; 2010: 14.6; 2011: 14.7; 2012: 14.6
    - Direct taxes: 2007: 13.4; 2008: 14.0; 2009: 12.8; 2010: 12.8; 2011: 13.0; 2012: 13.4
  - Social contributions: 2007: 15.8; 2008: 15.9; 2009: 16.6; 2010: 16.4; 2011: 16.2; 2012: 16.2
  - Compensation of employees: 2007: 9.1; 2008: 9.2; 2009: 9.9; 2010: 9.7; 2011: 9.5; 2012: 9.4
  - Social benefits: 2007: 23.4; 2008: 23.6; 2009: 25.6; 2010: 25.5; 2011: 25.1; 2012: 25.2
  - Net lending / Net borrowing (overall balance EDP-definition, percent of GDP): 2007: -1.0; 2008: -1.0; 2009: -4.1; 2010: -4.6; 2011: -3.4; 2012: -3.0
  - Primary balance: 2007: 1.9; 2008: 1.7; 2009: -1.3; 2010: -2.0; 2011: -0.7; 2012: -0.1

### Financial sector health and risks
- Banking sector indicators (selected):
  - Regulatory capital to risk-weighted assets (percent): 2006: 13.2; 2007: 12.7; 2008: 12.9; 2009: 15.0; 2010: 15.4
  - Regulatory Tier I capital to risk-weighted assets (percent): 2006: 8.0; 2007: 8.8; 2008: 9.3; 2009: 11.1; 2010: 11.7
  - Nonperforming loans to total gross loans (percent): 2006: 2.7; 2007: 2.2; 2008: 2.0; 2009: 2.3; 2010: 2.8
  - Loan loss provisions (as % of loans to non-banks, domestic and non-domestic): 2006: 2.9; 2007: 2.4; 2008: 2.2; 2009: 2.8; 2010: 3.2
  - Return on assets (percent): 2006: 0.7; 2007: 0.8; 2008: 0.1; 2009: 0.1; 2010: 0.5
  - Return on equity (percent): 2006: 16.9; 2007: 17.0; 2008: 2.6; 2009: 1.5; 2010: 7.9
  - Total assets (EUR billions): 2006: 797.8; 2007: 899.5; 2008: 1,069.1; 2009: 1,034.0; 2010: 978.6
  - Total loans (EUR billions): 2006: 589.4; 2007: 654.9; 2008: 797.5; 2009: 756.5; 2010: 714.0
  - Total deposits (EUR billions): 2006: 509.2; 2007: 563.2; 2008: 677.5; 2009: 636.0; 2010: 598.4
- Banking sector exposures and trends highlighted in figures:
  - Austrian banks' expansion to CESEE and the stock of foreign currency loans in CESEE are documented with notable shares of total and cross-border lending (figures provided).
  - Selected large European banks: Return on Assets, Nonperforming Loan ratios, and Tier I ratio comparisons are shown (figures indicate profitability compares favorably but NPL ratios rising and Tier I ratios slightly below peer median).
  - Customer funding gaps and loans-to-deposits ratios for large banks: highlighted as a concern (figures).

### Key balance of payments and capital flows
- Capital and financial accounts (in percent of GDP):
  - Capital and financial accounts: 2007: -4.2; 2008: -5.3; 2009: -3.3; 2010: -1.2; 2011: -2.9; 2012: -3.0
  - FDI, net: 2007: -2.0; 2008: -5.4; 2009: 0.2; 2010: -1.3; 2011: -1.2; 2012: -1.1
  - Portfolio investment, net: 2007: 8.3; 2008: 9.4; 2009: -2.5; 2010: -2.7; 2011: -2.3; 2012: -0.8
  - Reserve assets (change): 2007: -0.7; 2008: 0.2; 2009: 0.9; 2010: -0.4; 2011: 0.0; 2012: 0.0

### Observations, risks, and policy implications (as presented)
- Recovery and near-term growth:
  - "Helped by a revival in export demand, Austria quickly recovered from the sharp economic contraction of 2009, while unemployment, which increased only modestly, is back to historical levels."
  - "As capacity utilization is close to full, there are some signs that growth will slow down in the near term."
- External position:
  - "The external position is healthy owing to a large surplus in services."
  - "...although there are indications of falling competitiveness in goods trade."
- Fiscal consolidation and debt dynamics:
  - "Current consolidation plans leave structural deficits...."
  - "Reducing structural deficits by 1/2 percent of GDP per year down to 0 would cut debt back to pre-crisis levels..."
  - "Debt Dynamics: Authorities' Consolidation Plans" and "Staff baseline scenario (incl. implementation risks, esp. subnational)" are presented, with staff and authorities' scenarios compared in figures.
  - Policy focus recommended in figures: "and should focus on expenditure cuts in pension, health care, and subsidies."
- Banking sector vulnerabilities:
  - Bank profitability compares favorably with peers, but nonperforming loan ratios keep rising, especially in non-Russia CIS countries.
  - Tier I ratios are slightly below the peer group's median, and large banks have customer funding gaps.

*Sources: Austrian authorities; Datastream; IMF staff estimates and projections; Austrian National Bank; WIFO; and IMF staff calculations and projections.*

### Annex 1. Potential Output in Austria: Structural Shifts

### Annex 1. Potential Output in Austria: Structural Shifts

### Methodology
- Potential output estimated using a Cobb-Douglas production function with constant returns to scale:
  - Y = A K^α H^(1−α) (equation (1) format described in source).
  - α (share of GDP paid to capital) set at 0.3 for Austria.
- Total hours worked decomposed as product of:
  - WAP (working-age population) × LFPR (labor force participation rate) × ER (employment rate) × AHW (average hours worked per worker).
- TFP derived as a residual from the log-linearized production function (equation (3) in source).
- Trend components:
  - HP filter applied with a smoothing parameter of 100 for annual frequency data to smooth LFPR, ER, and AHW.
  - TFP also smoothed with an HP filter.
  - Sample period artificially prolonged through a path for TFP and factor inputs reflecting a recovery from the 2009 recession to mitigate end-point sensitivity.
- Potential (trend) GDP constructed by combining trend total hours, capital, and trend TFP (equation (5) in source).
- Breakdown of potential growth into components:
  - TFP growth, capital accumulation, and growth in worked hours (equation (6) in source).

### Key Results (Austria, 1991–2010)
- Average trend GDP growth:
  - 2.3 percent in 1991–2000.
  - 2.0 percent in 2001–2010.
- Impact of the global financial crisis:
  - "Did not have a sizable effect on the level of potential output or its growth rate in Austria."
- Capital accumulation:
  - Declined from 3 percent in the early 1990s to about 1.5 percent in recent years.
- Total factor productivity (TFP) trend growth:
  - 1.2 percent during 1991–2000.
  - 0.8 percent during 2001–2010.
- Trend growth in total hours worked:
  - Increased from 0.4 percent in 1991–2000 to 0.9 percent in 2001–2010, owing mainly to an increase in labor force participation.
- Real wage growth:
  - Average real wage growth decelerated from 3.7 percent in 1991–1999 to 0.7 percent in 2000–2010.

### Comparative Patterns with Selected Euro Area Countries
- Trend growth rate declined in Austria, France, Germany, and Italy over the sample, but Austria's trend growth remains the highest among them.
- Labor utilization improvements supported potential growth in all four countries; in Germany this process began only in 2006.
- Deceleration in capital accumulation observed in Austria is also visible in Germany and Italy, but not in France.
- France and Italy experienced a sharp slowdown in TFP growth.

### Interpretation and Structural Factors
- One possible interpretation advanced in the source:
  - Increased economic integration with relatively-capital poor CESEEs resulted in a reduction in the trend increase of the capital/labor ratio in Austria.
  - This interpretation is consistent with:
    - Observed deceleration in capital accumulation in Austria.
    - An increase in FDI toward CESEEs.
  - Slower growth in capital intensity would slow labor productivity growth and equilibrium real wage growth, consistent with the observed deceleration in average real wage growth.

*Prepared by Prachi Mishra; content as presented in the source document.*

### Annex 4. Options for Government Expenditure Rationalization in Austria

### Annex 4. Options for Government Expenditure Rationalization in Austria

### A. Early Labor Market Exit — findings and reforms
- Context and magnitudes:
  - Statutory retirement age: 65 years for men and 60 years for women (with stepwise equalization to 65 scheduled from 2024 onwards).
  - For members of the social security system, the average age at which either a disability or an old-age pension is drawn was 59.1 years for men and 57.1 years for women in 2010.
  - Average entry age for invalidity pensions: 53.5 years for men and 50.1 years for women.
  - Average entry age for old-age pensions: 62.6 years for men and 59.3 years for women.
  - Austria’s share of old-age expenditure in GDP is one of the highest in the euro area.

- Main measures enacted by the authorities:
  - Restrictions on the penalty-free early retirement of workers with long contribution periods (“Hacklerregelung”):
    - Effective in 2011, the price for the purchase of imputed contribution years needed to fulfill the minimum insurance period was increased.
    - Effective in 2014, the minimum qualifying age will be raised by two years (to 62 for men and 57 for women, with further stepwise increases to 62 thereafter).
    - By 2014, the purchase of imputed contribution times will be abolished.
  - Tightening of eligibility criteria for disability pensions:
    - Rehabilitation efforts before a pension can be drawn were strengthened.
    - Range of alternative occupations against which disability is assessed remains narrow.
    - Authorities are introducing workplace measures to gradually enhance prevention of disability cases.

- Other existing early-exit schemes and incentive issues:
  - “Regular” early retirement scheme (“corridor pensions”) with eligibility from age 62 (relevant for men).
  - Early retirement pensions for workers with particularly heavy working conditions, with eligibility from age 60.
  - Subsidized old-age part-time work arrangements accessible up to seven years before statutory retirement age; salary cut is less than proportional to work-time reduction and arrangements can be front-loaded.
  - Extension or increase of unemployment benefits for unemployed older workers intended to facilitate transition to early retirement.
  - Penalties/benefit discounts for early inactivity are generally too low to be actuarially fair.
  - Assessment: recently enacted restrictions may not fully achieve objectives because displaced claimants could divert to other early-exit avenues.

### B. Health Care — findings and reform options
- Key facts and metrics:
  - Total health expenditure and public health spending rank among the highest in the OECD.
  - Hospitals spending: 4.7 percent of GDP in 2009.
  - Austria has the highest per-capita number of hospital beds in the OECD (particularly acute care beds) and very high hospital case load.
  - OECD analysis (2011 survey on Austria): moving Austria to the “health care efficiency frontier” would either imply a life expectancy increase by two years and a half or spending that is 2 percent of GDP lower.

- Structural and incentive problems:
  - States are key decision makers in hospitals but bear only part of costs (costs shared with federal and municipal levels and health insurance funds), producing disconnected spending and financing responsibilities across the federal system.
  - Federal planning instruments are not adequately enforced to optimize hospital size and geographic distribution; hospital efficiency differs from state to state.
  - Outpatient care and prevention are underused:
    - Health insurance funds carry the full cost for out-patient care, creating asymmetric incentives versus in-patient care.
    - No gate-keeping function by general practitioners.
    - A promising initiative to facilitate polyvalent group practices was subsequently amended to only cover group practices of the same medical specialty.

- Reform directions under discussion:
  - Streamline hospital financing by bundling resources at the federal level (at a minimum between the federal government and health insurance funds) and link disbursements to strict performance criteria.
  - Strengthen enforcement of federal planning instruments to reap national specialization advantages and optimize hospital distribution and size.
  - Expand and better integrate outpatient and preventive services and introduce incentives to shift care from inpatient to outpatient settings.
  - Continue long-term care financing and benefit administration streamlining (noted as recently achieved).

### C. Subsidies — scope, composition, and rationalization options
- Aggregate magnitudes:
  - Austria spends around 6 percent of GDP on subsidies and capital transfers, about 3½ percent of GDP more than the euro area average.
  - Almost half of total subsidies and capital transfers are disbursed to hospitals and Austrian Railways (OeBB).

- Composition and OeBB-specific issues:
  - OeBB-related expenditures stem from:
    - Compensation for passenger and cargo services.
    - Pensions for employees hired as officials before 1995, reimbursed from the federal budget.
    - Capital transfers for railway infrastructure projects.
  - Identified rationalization potentials for OeBB:
    - Operational business: performance indicators (e.g., turnover per employee compared to Swiss Railways) suggest scope for rationalization to reduce budgetary compensation.
    - Pensions and workforce use: low average effective retirement age of OeBB employees (about 52) indicates potential savings from improved utilization of older workers (transferring to other posts with retraining) rather than early retirement; final statutory retirement age for OeBB employees hired before 1995 will be 61½, still 3½ years below the standard one.
    - Infrastructure investment: reassess cost/benefit and potential cost overruns of large projects approved in recent years to identify scope for downsizing.

- Broader subsidies shortcomings (Administrative Reform Working Group findings):
  - Lack of strategic long-term orientation, objectives, and priorities.
  - Unclear decision criteria and missing focus on results; insufficient targeting (e.g., housing subsidies).
  - Unsatisfactory ex-ante benefit analysis and ex-post evaluation.
  - Transparency gaps, duplication of benefits for same objective/recipient, and overlapping competences across government levels.
  - Conclusions: room for administrative efficiency gains and better coordination within and across government levels.

- Ongoing initiatives and next steps:
  - Creation of a “transparency databank” to improve stock-taking and evaluation of subsidies and benefits; important design issues remain under discussion (scope at different government levels).
  - If successfully designed and implemented, the databank could enable comprehensive evaluation, clearer priorities focused on growth enhancement, and elimination of redundant subsidies.

*Prepared by Siegfried Steinlein — Annex 4, Options for Government Expenditure Rationalization in Austria (excerpt).*

### Annex I. Austria: Fund Relations

### Annex I. Austria: Fund Relations (As of June 30, 2011)

### Mission and Staff
- Mission: Consultation discussions held in Vienna during June 3−June 14, 2011.  
  - Authorities released the mission’s concluding statement available at: http://www.imf.org/external/np/ms/2011/061411.htm
- Staff team: Ms Detragiache (head), Messrs. Steinlein and Vandenbussche (all EUR) and Ms. Mishra (RES). Mr. Prader, Alternate Executive Director for Austria, attended the meetings.

### Country Interlocutors
- Finance Minister Fekter, Austrian National Bank (OeNB) Governor Nowotny, other senior officials, members of Parliament, and representatives of the social partners, the financial sector, and economic research institutes.

### Fund Relations and FATF
- Austria is on a 12-month consultation cycle.  
  - Last consultations: June 18–30, 2010; staff report available at: http://www.imf.org/external/pubs/cat/longres.aspx?sk=24187.0
- FATF: IMF published its report on Observance of Standards and Codes—FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism in November 2009 (report available at http://www.imf.org/external/pubs/ft/scr/2009/cr09299.pdf).  
  - Based on its action plan and commitments, the FATF plenary removed Austria from the specific review list in June 2010.

### I. Membership Status
- (a) Joined: August 27, 1948  
- (b) Status: Article VIII, as from August 1, 1962

### II. General Resources Account (SDR Million and Percent Quota)
- Quota: 2,113.90 — 100.00 percent  
- Fund holdings of currency: 1,545.81 — 73.13 percent  
- Reserve position in Fund: 568.10 — 26.87 percent  
- Lending to the Fund: New Arrangements to Borrow 223.00

### III. SDR Department (SDR Million and Percent Allocation)
- Net cumulative allocation: 1,736.31 — 100.00 percent  
- Holdings: 1,688.18 — 97.23 percent

### IV. Outstanding Purchases and Loans
- None

### V. Latest Financial Arrangements
- None

### VI. Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs)
- Forthcoming principal: -- -- -- -- --  
- Charges/Interest:
  - 2011: 0.13
  - 2012: 0.29
  - 2013: 0.29
  - 2014: 0.29
  - 2015: 0.29
- Total:
  - 2011: 0.13
  - 2012: 0.29
  - 2013: 0.29
  - 2014: 0.29
  - 2015: 0.29

### VII. Implementation of HIPC Initiative
- Not Applicable

### VIII. Exchange System
- As of January 1, 1999, the currency of Austria is the euro.  
- Austria’s exchange system is free of restrictions on the making of payments and transfers for current international transactions with the exception of restrictions notified to the Fund in accordance with decision No.144-(52/51) resulting from UN Security Council Resolutions and EU Council Regulations, including:
  - implementation of the sanctions on Iran according to EU Council Resolution No. 961/210 as amended and on Libya according to EU Regulation 204/2011 as amended.
- National restrictions apply with respect to certain terror organizations and their activists within the EU, implementing decisions in the Common Foreign and Security Policy (CFSP) framework of the EU.

### Annex II. Austria: Statistical Issues
- Macroeconomic statistics are adequate for surveillance.
- Austria subscribed to the Fund’s Special Data Dissemination Standard (SDDS) in 1996; metadata available on the Fund’s electronic Dissemination Standards Bulletin Board.
- Austria is availing itself of the SDDS flexibility option on the timeliness of the industrial production index and the merchandise trade data.
- Transition to the new European System of Accounts 1995 (ESA 1995) has complicated analysis of national accounts and fiscal data.
  - Reclassification of public hospitals in 1997 introduced a break in national account series on public and private consumption.
  - Annual fiscal data for 1995 onward are derived from ESA 1995 data reported to Eurostat.
  - Data on outlays by function revised and available from 1995 onward on a comparable basis according to major functional categories.
  - Quarterly fiscal data reported through Eurostat are disseminated in the IFS.
- Monetary statistics:
  - ECB reporting framework is used for monetary statistics and data are reported to the IMF through a “gateway” arrangement with the ECB.
  - The arrangement provides efficient transmission of monetary statistics to the IMF and for publication in the IFS and IFS Supplement.

### Austria: Table of Common Indicators (as of July 30, 2011) — Selected items and reporting frequencies
- Exchange rates:
  - Date of latest observation: 07/29/11
  - Date received: 07/30/11
  - 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: June 2011
  - Date received: 07/20/11
  - Frequency of data/reporting/publication: Monthly
- Reserve/Base Money:
  - Date of latest observation: June 2011
  - Date received: 07/30/11
  - Frequency of data/reporting/publication: Monthly
- Broad Money:
  - Date of latest observation: June 2011
  - Date received: 07/30/11
  - Frequency of data/reporting/publication: Monthly
- Central Bank Balance Sheet:
  - Date of latest observation: June 2011
  - Date received: 07/15/11
  - Frequency of data/reporting/publication: Monthly
- Consolidated Balance Sheet of the Banking System:
  - Date of latest observation: June 2011
  - Date received: 07/30/11
  - Frequency of data/reporting/publication: Monthly
- Interest Rates:
  - Date of latest observation: 07/29/11
  - Date received: 07/30/11
  - Frequency of data/reporting/publication: Daily
- Consumer Price Index:
  - Date of latest observation: June 2011
  - Date received: 07/14/11
  - Frequency of data/reporting/publication: Monthly
- Revenue, Expenditure, Balance and Composition of Financing – General Government:
  - Date of latest observation: 2011:Q1
  - Date received: 06/30/11
  - Frequency of data/reporting/publication: Quarterly
- Revenue, Expenditure, Balance and Composition of Financing – Central Government:
  - Date of latest observation: June 2011
  - Date received: 07/30/11
  - Frequency of data/reporting/publication: Monthly
- Stocks of Central Government and Central Government-Guaranteed Debt:
  - Date of latest observation: June 2011
  - Date received: 07/30/11
  - Frequency of data/reporting/publication: Monthly
- External Current Account Balance:
  - Date of latest observation: 2011:Q1
  - Date received: 06/30/11
  - Frequency of data/reporting/publication: Quarterly
- Exports and Imports of Goods and Services:
  - Date of latest observation: 2011:Q1
  - Date received: 06/30/11
  - Frequency of data/reporting/publication: Quarterly
- GDP/GNP:
  - Date of latest observation: 2011:Q1
  - Date received: 06/11/11
  - Frequency of data/reporting/publication: Quarterly
- Gross External Debt:
  - Date of latest observation: 2011:Q1
  - Date received: 06/30/11
  - Frequency of data/reporting/publication: Quarterly

*Statement by the Staff Representative on Austria — September 2, 2011:  
- Information became available since the Staff Report circulated to the Executive Board on August 8, 2011; it does not alter the thrust of the staff appraisal.  
- GDP growth in the second quarter remained strong, but prospects for 2012 have dimmed.  
  - Second quarter growth: 1 percent (up from 0.8 percent in the first quarter); staff forecast had been 0.7 percent for the quarter.  
  - On balance, annual growth for this year likely to remain close to the 3.3 percent projected in the staff report.  
  - Outcome for 2012 expected to be less favorable: 1.6 percent rather than 1.9 percent.  
- Inflation in July remained elevated: 3.8 percent.  
  - Favorable commodity price developments and softening demand pressures should bring about the projected decline in price growth in the remainder of the year.*

*Annex I. Austria: Fund Relations (As of June 30, 2011) — IMF staff document content.*

### 3.      While the heightened financial market turbulence in recent weeks did not spare

### IMF Executive Board Concludes 2011 Article IV Consultation with Austria

### Financial market turbulence and sovereign risk
- Investors' perception of Austrian sovereign risk did not deteriorate significantly during recent heightened financial market turbulence.
- The 10-year sovereign spread over German bunds remained volatile around an average of 60 bps in August.
- CDS spreads rose about 30 bps during the month, broadly in line with changes in German and Dutch spreads.
- Stock prices and CDS spreads for the two largest Austrian-owned banks registered generalized stress in the European banking sector, though to a lesser degree than banks with large exposures to the euro area periphery.
- First half financial results at the three largest banks showed an improvement in banks' profitability owing to a decline in provisioning expenses while nonperforming loans ratios appeared to be stabilizing.

### Executive Board assessment — key findings and recommendations
- Directors commended policies that supported a swift recovery and laid foundations for sustained expansion.
- Important challenges remain given a fragile global outlook and heightened vulnerabilities in the euro area.
- Priorities identified:
  - Reducing the debt burden.
  - Bolstering financial stability.
  - Enacting structural reforms to boost long-term growth.
- Fiscal policy recommendations:
  - Current plans may not be sufficient to put the debt ratio on a firm downward path; a more ambitious fiscal adjustment is needed.
  - Expenditure measures should be the main element of consolidation given an already high tax burden.
  - Savings could be achieved through further reforms in the pension system, health care, and government subsidies.
  - Rationalization of fiscal relations among different levels of government could facilitate necessary budgetary adjustment.
- Financial sector recommendations:
  - Further strengthen the framework for financial stability.
  - Use improved bank profitability to upgrade capital bases and exit government support.
  - Restructure some financial institutions to address overcapacity.
  - Monitor closely risks related to foreign-currency lending, including mortgages.
  - Reinforce macro-prudential measures that address cross-border credit exposure.
  - Improve international coordination among supervisors and strengthen the bank resolution framework.
- Structural reform recommendations:
  - Persevere with structural policies to boost long-term growth, including labor market and education reforms.
  - Increase labor market participation and boost skills, including of the immigrant population.

### Macroeconomic outlook and projections
- Recovery and growth:
  - GDP growth reached 2.1 percent in 2010, with a marked acceleration in the second half of the year.
  - Strong growth performance is projected to continue in 2011, but decelerate after a strong first half as the cyclical recovery runs its course and external demand loses strength.
- Labor market:
  - Unemployment at only slightly over 4 percent is among the lowest in Europe.
- Inflation and external sector:
  - Following food and energy price shocks, inflation increased sharply in the first half of 2011, exceeding the euro area average by about one percentage point, in part owing to indirect tax increases at the beginning of the year.
  - The current account registered a surplus of 2.7 percent of GDP in 2010.
- Fiscal outlook:
  - The fiscal deficit widened from 0.9 percent in 2007 to 4.6 percent of GDP in 2010.
  - The cyclical recovery and consolidation measures—a combination of tax increases and expenditure cuts—are projected to bring the deficit down to some 3½ percent of GDP in 2011 and to around 2 percent in the medium term.
  - With the government’s current measures, and taking into account implementation risks, debt will likely remain above 70 percent of GDP even in the medium run.

### Banking system performance and risks
- Credit quality and profitability:
  - Negative effects of the crisis on credit quality are still evident in Central, Eastern, and Southeastern European (CESEE) subsidiaries, where the nonperforming loans ratio continued to grow in 2010.
  - Provisioning costs have fallen; profitability has recovered.
  - Improved macroeconomic prospects in the CESEE region should ease the situation further.
- Liquidity, capitalization, and support:
  - Banks have improved liquidity and capitalization, but have not exited government support yet.
  - Conditions in the medium-sized bank segment remain challenging, with one bank in the segment failing recent EU-wide stress tests.
- Stress testing and resilience:
  - The OeNB stress testing exercise of Spring 2011, based on the EBA stress test 2011 framework and an additional adverse scenario focusing on the CESEE and CIS region, shows a manageable decline in the core tier 1 ratio of the aggregate banking system with increased dispersion of results at the single bank level.
  - The Fund’s assessment of existing weaknesses in a few medium-sized banks is shared by the authorities, who are active in ongoing restructuring.
- CESEE engagement and funding:
  - Austrian banks played a strong role in maintaining financial stability in CESEE since end-2008; this supported successful implementation of EU/IMF programs in several CESEE countries.
  - Vulnerabilities identified pre-crisis include significant levels of foreign currency lending and unsustainable credit growth in some markets, and reliance on intra-group funding by many CESEE subsidiaries.
  - Recommendations include fostering local sources of funding in the CESEE region and further strengthening parent banks’ capital base.
  - The forthcoming implementation of the CRD IV/CRR in the EU supports the case for a quantitatively and qualitatively improved capital position of Austrian banks in the medium term.

### Swiss franc lending and supervisory stance
- The total volume of outstanding Swiss franc loans by Austrian banks amounts to approx. 70 billion EUR on a consolidated basis.
- Authorities maintained a long-standing skeptical view on Swiss franc-lending:
  - Stop in new Swiss franc lending in Austria since October 2008.
  - Stop in new Swiss franc lending in CESEE since Spring 2010.
- Authorities note the implications of Swiss franc appreciation on credit quality of outstanding Swiss franc-denominated loan portfolios and emphasize close monitoring and readiness to implement risk-mitigating measures.
- Authorities are repeating a review of Swiss franc loans and loans with repayment vehicles last undertaken in 2009.

*Public Information Notice (PIN) No. 11/117 — September 6, 2011*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11275.pdf_