## _cr14278 ## Source details **Canonical URL:** [_cr14278](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14278.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14278.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14278.pdf.json) --- ### INTRODUCTION — overview and outlook - Austria did not experience a severe boom-bust cycle; the main impact of the global crisis was on the banking sector and public debt. - Public debt increased from 60 percent of GDP in 2007 to around 80 percent of GDP in this year. - Pre-crisis domestic imbalances were limited: - Household and corporate debt levels remained moderate. - Household saving rate increased pre-crisis and provided buffers. - Government spending growth remained modest prior to the crisis. - Growth and outlook: - GDP resumed growth in the second half of 2013 after about a year of stagnation. - Staff projects growth of 1½ percent in 2014 and 1¾ percent in 2015, compared with 0.3 percent in 2013. - Recovery is driven by a pickup in exports, with investment and consumption expected to follow. - Inflation and labor market: - CPI inflation fell from near 4 percent y/y in late 2011 to 1.5 percent in May. - Staff projects 2014 full-year inflation of 1.7 percent, compared with the euro area projection of 0.7 percent for 2014. - Austria’s unemployment rate is currently around 5 percent. - External balances: - Current account surplus last year was 2.7 percent of GDP. - EBA indicators: cyclically adjusted current account was 3.4 percent of GDP in 2013; cyclically adjusted current account norm was 1.5 percent; unexplained residual 2.4 percentage points. - Austria’s IIP is near zero. ### Risk Assessment (selected risks and policy responses) - Sharp increase in geopolitical tensions surrounding Russia/Ukraine and the Middle East: - Likelihood: Medium; Expected impact: High. - Effects: lower profits and higher NPL ratios for Austria-based internationally active banks with subsidiaries in Ukraine, Russia, and Hungary; spillovers to sovereign spreads and growth via lower exports or disrupted commodity supply. - Policy response: encourage banks to increase capital buffers and follow adequate risk provisioning policies; explore alternatives to commodity supply from Russia. - Protracted slower growth in advanced economies and key emerging markets: - Likelihood: High; Expected impact: Medium. - Effects: lower exports and growth; higher NPLs and lower profits for internationally active banks. - Policy response: growth-enhancing structural reforms and diversification of export markets; increased capital buffers and adequate risk provisioning for banks. - Unanticipated outcomes from the ECB comprehensive assessment and stress tests: - Likelihood: Medium; Expected impact: Medium. - Policy response: encourage banks to increase capital buffers; proper communication about process and results. - Significantly more expensive or limited funding for Austrian banks: - Likelihood: Low; Expected impact: Medium. - Policy response: encourage banks to increase capital buffers; strengthen stability of local funding of subsidiaries. - Higher-than-anticipated cost of bank restructuring and residual fiscal risks from banks’ CESEE exposure: - Likelihood: Medium; Expected impact: Medium. - Policy response: accelerated public debt reduction and more ambitious fiscal balance target. - Unsustainable rise in real estate prices: - Likelihood: Medium; Expected impact: Medium. - Policy response: monitoring of risk indicators; make new macroprudential instruments available (LTV, DTI, etc.). - Surges in global financial market volatility: - Likelihood: High; Expected impact: Low. - Bond market stress from re-assessment of sovereign risk in the euro area: - Likelihood: Low; Expected impact: Low. ### Policy priorities highlighted by staff - Complete bank restructuring and strengthen macro-financial stability. - Implement structural public expenditure reforms to accelerate debt reduction and reduce the high tax burden on labor. - Raise potential output and productivity growth to bring Austria closer to the technological frontier. --- ### Banking sector — background, vulnerabilities, and restructuring progress - Pre-crisis expansion and funding model: - Austrian banks expanded aggressively in CESEE, funded mainly through bond issuance and Western European borrowing rather than domestic deposits. - This created vulnerabilities when external funding dried up and CESEE asset quality deteriorated after Lehman. - Funding model shift: - Banks are shifting CESEE subsidiaries’ credit funding toward local deposits. - Supervisory guidance introduced in 2012 (“sustainability package”) established a benchmark of 110 percent for the “loan-to-local-stable-funding ratio” on net new lending. - Capital and market perception: - After a recent rights issue by RBI, the three large banks now have fully-loaded Basel III CET1 ratios of around 10 percent. - Capital remains below peers; market concerns persist about ECB balance sheet assessment revelations on CESEE asset quality and collateral valuation. - Leverage ratios comparatively favorable due to focus on traditional loan business. - Restructuring of nationalized or partly nationalized banks: - Hypo Alpe Adria (HAA): - Authorities decided to sell SEE subsidiaries and wind down remaining assets in a government-owned “bad bank” (defeasance structure without a banking license). - Legislative package passed Parliament in July. - Restructuring includes a bail-in of €890 million in subordinated debt guaranteed by the state of Carinthia and an effective wipe-out of the guarantee. - Law also bails in €800 million non-guaranteed funding from former HAA-owner Bavarian Landesbank; World Bank holds €150 million of subordinated Hypo debt and will be affected. - Under an EU state aid decision, SEE subsidiaries need to be re-privatized by mid-2015. - Volksbanken AG: - Substantially downsized balance sheet but faces disposal challenges; ECB balance sheet assessment may lead to higher capital needs affecting lower-tier banks and the association. - Kommunalkredit and KA Finanz: wind-downs proceeding; further public capital needs cannot be excluded. - Transition effects and risks: - Increased local deposits have substituted for decline in external funding; level of credit has not declined in most CESEE countries so far. - Mission cautioned supervisory guidance should be applied judiciously and coordinated with host countries to avoid unduly restraining credit growth. - Bank profitability affected by low interest rates and, in CESEE, rising NPLs, risk costs, and write-offs. - Russia was a major profit contributor: in 2013 RBI and Bank Austria derived around 75 and 60 percent of their profits from Russia, respectively. - Events in Ukraine and Russia put profitability and internal capital generation at risk. - Policy actions in Hungary regarding foreign-exchange denominated loans expected to cause further losses. --- ### Housing, leverage, and macroprudential framework - Leverage and housing market findings: - Non-financial corporate debt around the euro area median; increased much less pre-crisis than in other countries. - Household debt lower than euro area average; little pressure to deleverage. - Considerable share of household borrowing consists of Swiss-franc denominated bullet loans and variable-interest housing loans. - Housing price increases strong in recent years, concentrated in Vienna and some tourist hotspots; purchases largely cash-financed. - Household saving rate has declined since 2009. - Share of foreign currency loans declining after authorities restricted new FX lending. - Macroprudential arrangements and supervision: - Single Supervisory Mechanism (SSM) preparations on track. - For Single Resolution Mechanism (SRM), no decision on designation of national resolution agency at time of mission discussions. - Revamping deposit insurance schemes (DGS) discussion had not progressed since last Article IV. - FATF recognized Austria had made significant progress on AML/CFT in February 2014. - Creation of macroprudential framework lagging: - Legal basis for Financial Market Stability Board created; appointment of members still required parliamentary process (members appointed in July 2014). - Envisaged toolkit limited to capital buffers and ability to change risk weights on mortgage exposures under CRR/CRD. - Toolkit did not include sector-specific instruments such as LTV or DTI ratios. - Authorities explained agenda dominated by Hypo Alpe Adria resolution; attention to macroprudential tools to follow. --- ### Hypo Alpe Adria resolution — mission views and priorities - Mission welcomed decision to avoid Hypo’s bankruptcy given systemic importance in some SEE countries. - Divergent views on retroactive voidance of Carinthia’s €890 million guarantee: - Authorities: voidance intended as isolated case and aligned with new European resolution framework coming into effect in 2016. - Mission: voiding the guarantee could undermine credibility of similar guarantees issued by other sub-national bodies. - Mission recommendations: - Rapidly complete bank restructuring agenda and accelerate asset disposal. - Governance of Hypo “bad bank”/AMC must ensure efficient asset disposal over a limited timeframe. - Sale of Hypo SEE subsidiaries should be completed promptly while avoiding disruptive effects in host countries. - For Volksbanken AG, speedy asset disposal, including its Romanian subsidiary, is essential. - Restructuring of the Volksbanken association should account for structurally low domestic banking profitability. --- ### Fiscal position, spending drivers, and reform recommendations - Spending drivers and fiscal outlook: - Spending levels boosted by complex intra-governmental financing and lack of subnational tax autonomy, providing little incentive to contain sub-national spending. - 2013: structural and headline deficit were lower than expected at respectively 1 and 1½ percent of GDP due to unbudgeted windfalls from auctioning of telecom licenses that over-compensated higher-than-anticipated capital transfers to restructuring banks. - Debt projections assume the HAA defeasance structure will recover about 2 percentage points of the transferred asset in the amount of some 5½ percent of GDP until 2020. - Projections do not yet take forthcoming revisions to GDP and general government perimeter into account from ESA2010. - Latest official projections foresee old-age related spending rising from 23.8 percent of GDP in 2015 to 28.3 percent of GDP in 2050. - Tax burden on labor and reform options: - Mission and authorities agreed tax burden on labor is too high and should be reduced. - Domestic debate focuses on reducing income taxes (e.g., lowest income tax bracket from 36 to 25 percent); mission also recommended lowering social security contributions. - Social security contributions start below threshold for income taxation, so cuts could benefit lower-income earners. - Views on financing a tax cut differ: Social Democrats favor revenue-neutral reform financed by higher net wealth and inheritance/gift taxes; Austrian People’s Party favors expenditure cuts. - Current expenditure plans leave no room for cutting taxes. - Mission recommendations on expenditure and fiscal targets: - Meaningful reduction in tax burden on labor requires addressing expenditures. - Some scope to finance labor tax reductions by abolishing tax exemptions and increasing real estate and environmental taxes; real estate tax example: - Basic federal rate: 0.2 percent, multiplied by a municipal coefficient (up to 500 percent), generally meaning a tax rate of 1 percent on the tax values. - Yields of such measures should not be overestimated; revenue-neutral reforms tend to be rare. - Specific illustrative recommendation: - Expenditure cuts totaling about 1 percent of GDP over the next four years would help put debt on a steeper downward path. - Resulting structural surplus of ½ percent of GDP should be maintained until pre-crisis debt level of 60 percent is reached in the first years of the next decade. - This would create buffers for aging cost, potential additional bank restructuring outlays, and other contingent liabilities from CESEE exposure. - Additional expenditure cuts would create room for reducing social contributions and labor taxes; cuts should be financed and phased in together with well-specified expenditure reductions while ensuring the more ambitious fiscal balance target will be met. - Streamline tax system via selective abolition of exemptions and increases in environmental and real estate taxes to create room to lower labor burden. - Political economy and constraints: - Interlocutors agreed aggregate spending too high but cited political obstacles to specific expenditure reductions across coalition and federal/state levels. - Interlocutors not strongly in favor of a more ambitious longer-term fiscal deficit target than currently pursued; focus was on achieving 2016 structural deficit objective of ½ percent of GDP. - Mission noted extra consolidation would only be required after 2016 when recovery is established. --- ### Fiscal federalism, expenditure composition, and efficiency opportunities - Scope for fiscal expenditure rationalization: - Expenditure-to-GDP ratio was 51.7 percent in 2012, 1.6 percentage points higher than the euro area-12 average and 7 percentage points higher than Germany in 2012. - Austria’s expenditure particularly high for pensions, capital transfers and subsidies (including transport sector and OeBB); potential efficiency gains in health care. - After subtracting subsidies for hospital services and capital transfers due to bank rescues, subsidies still 3.9 percent of GDP in 2012 and 2.3 percentage points higher than Germany. - Health care: OECD assessment suggests health care spending could be reduced by 2 percentage points of GDP without adversely affecting outcomes if operating at frontier-level efficiency. - Health care reform 2013 plans to limit nominal health expenditure growth to nominal GDP growth by 2016 and keep it at 3½ percent beyond 2016, but reform lacks concrete measures; suggested measures include shifting from inpatient to outpatient care and reinforcing preventive care. - Pension projections and reform context: - EC 2012 Ageing Report projects old-age dependency ratio to increase by about 23 percentage points between 2015 and 2050. - Official projections foresee public pension spending rising from 13.9 percent of GDP in 2015 to 16.4 percent in 2035. - 2012 pension reform (in force April 1, 2012) includes: - Extend contributory years for certain pensions from 37.5 to 40 years; - Restrict disability pension access; - Increase deductions for early retirement from 4.2 to 5.1 percent; - Moderate pension benefit adjustments (1 percentage point and 0.8 percentage points lower than CPI in 2013 and 2014, respectively). - Statutory retirement age: 65 years for men and 60 for women, with convergence of women’s retirement age to men’s by 2033. - OECD suggests further adjustments may be needed (e.g., raise early retirement deduction above 6 percent; more rapid increase in women’s statutory retirement age). --- ### Growth, productivity, and labor market reforms - Background facts: - High labor utilization made Austria’s per capita GDP one of the highest in Europe: per capita GDP is 12 percent higher than in Germany. - Labor productivity almost 20 percent lower than in the US. - Productivity stopped catching up with the US in mid-1990s; decline in potential growth began in late 1990s, reflecting reduction in labor productivity growth. - Productivity of capital has fallen steadily in past decades. - Contributing factors discussed: - Lower adaptation of IT, cultural attitudes toward risk, limited bankruptcy “second chances,” lack of private financing for start-ups, red tape and administrative barriers, barriers to inward FDI, production structure focused on medium-tech sectors. - Policy implication: - Raising effective retirement age would raise potential output by increasing labor supply and limiting workforce shrinkage as population ages. - Policy measures to expand production frontier: - Enhance IT adaptation. - Expand access to financing for start-ups. - Reduce administrative barriers for new businesses. - Reduce tax burden on labor and raise effective retirement age to boost labor force participation. --- ### Debt sustainability analysis (DSA), projections, and stress tests - Baseline and projections: - Debt projected to peak at almost 80 percent of GDP in 2014 and gradually fall to slightly above 70 percent of GDP by 2019 under baseline DSA. - Public debt (selected projections, percent of GDP): - Gross debt (end of period): 2010: 72.5; 2011: 73.1; 2012: 74.4; 2013: 74.5; 2014 (proj): 79.4; 2015 (proj): 77.9. - Medium-term projections: 2016: 76.2; 2017: 74.4; 2018: 72.7; 2019: 71.1 (alternate). - Selected baseline macro indicators (historical and projected): - Real GDP growth (annual): 2010: 1.8; 2011: 2.8; 2012: 0.9; 2013: 0.3; 2014 (proj): 1.5; 2015 (proj): 1.7. - Output gap (percent of potential GDP): 2010: -1.5; 2011: 0.0; 2012: -0.4; 2013: -1.3; 2014 (proj): -1.1; 2015 (proj): -0.7. - Unemployment (Eurostat definition): 2010: 4.4; 2011: 4.2; 2012: 4.4; 2013: 4.9; 2014 (proj): 5.0; 2015 (proj): 4.9. - CPI inflation (period average): 2010: 1.7; 2011: 3.6; 2012: 2.6; 2013: 2.1; 2014 (proj): 1.7; 2015 (proj): 1.7. - Current account balance (percent of GDP): 2010: 3.4; 2011: 1.6; 2012: 2.4; 2013: 2.7; 2014 (proj): 3.4; 2015 (proj): 3.5. - Stress-test scenarios (selected): - Low-growth scenario: - Assumes 2015–2016 growth reduced to negative ½ percent (one standard deviation shock). - Debt-to-GDP would increase by 5 percentage points to a peak of 84 percentage points in 2016 and decline to 79 percentage points in 2019. - Contingent liability shock: - Illustrative 10 percentage points of GDP shock would raise debt-to-GDP to about 90 percent before gradual reduction to some 86 percent towards the end of the decade. - Other standardized shocks (primary balance, real exchange rate, real interest rate) do not lead to significant deviations from baseline debt path. - DSA heat map: flags a relatively high share of public debt held by non-residents as a main vulnerability. --- ### Financial sector indicators (selected) - Regulatory capital to risk-weighted assets: 2009: 15.0; 2010: 15.4; 2011: 15.8; 2012: 17.0; 2013: 18.0. - Regulatory Tier I capital to risk-weighted assets: 2009: 11.1; 2010: 11.7; 2011: 12.0; 2012: 12.9; 2013: 13.7. - Nonperforming loans to total gross loans: 2009: 2.3; 2010: 2.8; 2011: 2.7; 2012: 2.8; 2013: 2.9. - Return on assets: 2009: 0.1; 2010: 0.5; 2011: 0.1; 2012: 0.3; 2013: 0.1. - Foreign currency-denominated loans to total loans: 2009: 22.4; 2010: 22.1; 2011: 21.4; 2012: 19.7; 2013: 18.8. --- ### Recent data updates, outlook revisions, and political developments (supplement) - Q1 and Q2 2014 revisions: - Q1 growth revised down from 0.2 to 0.1 percent (qoq); Q2 flash points to 0.2 percent (qoq). - Private consumption in Q2 grew 0.1 percent (qoq). - Gross fixed capital formation in Q2 declined by 0.3 percent (qoq). - Staff projections revised: - Staff now expects annual GDP growth in 2014 to be about ½ percentage points lower. - New baseline: growth of 1.0 percent in 2014 (versus 1.5 percent in staff report). - Projected strengthening in 2015: growth rate 1.9 percent (versus 1.7 percent in staff report); about 40 percent of 2014 shortfall expected to be made up in 2015. - Downside risks remain significant from euro area recovery strength and geopolitical turmoil. - Fiscal implications: - Weaker growth not expected to have much impact on structural deficit in 2014. - Headline deficit likely to be ¼ percentage points higher than expected in the staff report. - Political developments: - Michael Spindelegger resigned as Finance Minister on August 26; Hans Joerg Schelling appointed on September 1. - Schelling’s appointment and party changes make agreement on tax reform more likely; coalition expected to continue until 2018. - Tax reform debate: Social Democrats favor revenue-neutral reform financed by higher property and inheritance/gift taxes; OeVP favors expenditure-funded tax reductions. --- ### Executive Board conclusions and recommended priorities - Recommended next Article IV consultation on the standard 12-month cycle. - Key Board priorities: - Preserve financial stability: complete bank restructuring and strengthen macro-financial stability. - Address structural issues to reduce high debt and boost labor productivity and potential output growth. - Fiscal policy: welcome reduction in fiscal deficit and commitment to achieve structurally balanced budget by 2016; see scope for more decisive expenditure and fiscal federalism reforms to accelerate debt reduction and enable tax cuts (including social security contributions). - Public spending efficiency: pension and health care reforms, better targeting of subsidies, closer alignment of expenditure and revenue responsibilities in federal system. - Banking sector: complete sales of Hypo SEE subsidiaries while avoiding disruptive effects; caution on retroactive voiding of Carinthia guarantee; speed asset disposal in Volksbanken sector. - Strengthen banks’ capital buffers and accelerate EU banking union implementation; refine macroprudential framework. - Structural reforms: enhance IT adaptation, improve access to financing for start-ups, reduce administrative barriers, reduce tax burden on labor, and raise effective retirement age. --- ### Data dissemination and statistics - Austria subscribed to SDDS in 1996; metadata available on the Fund’s Dissemination Standards Bulletin Board. - Austria availing of SDDS flexibility on timeliness of industrial production index and merchandise trade data. - ECB reporting framework used for monetary statistics; data transmitted to IMF via ECB gateway. - Table of common indicators (as of July 30, 2014) — selected latest observations: - Exchange rates: 07/29/14; received 07/30/14; Daily. - International Reserve Assets and Reserve Liabilities: June 2014; received 07/20/14; Monthly. - Consumer Price Index: June 2014; received 07/14/14; Monthly. - GDP/GNP: 2014:Q1; received 06/06/14; Quarterly. - International Investment Position: 2014:Q1; received 06/30/14; Quarterly. *Source: IMF staff report and informational annex prepared for the 2014 Article IV consultation with Austria (mission: June 20–July 1, 2014; excerpts from _cr14278).* ### INTRODUCTION _________________________________________________________________________________ 4 ### INTRODUCTION ### Overview and key legacies - Austria did not experience a severe boom-bust cycle; the main impact of the global crisis was on the banking sector and public debt. - Public debt increased from 60 percent of GDP in 2007 to around 80 percent of GDP in this year. - Pre-crisis domestic imbalances were limited: - Household and corporate debt levels remained moderate. - Household saving rate increased pre-crisis and provided buffers. - Government spending growth remained modest prior to the crisis. - Crisis transmission concentrated through internationally active banks that had expanded rapidly in CESEE and relied on Western European funding. ### Recent economic developments, outlook, and risks - Growth and outlook: - GDP resumed growth in the second half of 2013 after about a year of stagnation. - Staff projects growth of 1½ percent in 2014 and 1¾ percent in 2015, compared with 0.3 percent in 2013. - Recovery is driven by a pickup in exports, with investment and consumption expected to follow. - Inflation and labor market: - CPI inflation fell from near 4 percent y/y in late 2011 to 1.5 percent in May. - Staff projects 2014 full-year inflation of 1.7 percent, compared with the euro area projection of 0.7 percent for 2014. - Austria’s unemployment rate is currently around 5 percent, the lowest in the euro area; wage cost increases since 2008 have been among the highest in the euro area. - External balances: - Current account surplus last year was 2.7 percent of GDP, equal to its ten-year average. - EBA indicators: cyclically adjusted current account was 3.4 percent of GDP in 2013, cyclically adjusted current account norm was 1.5 percent, with an unexplained residual of 2.4 percentage points. - Austria’s IIP is near zero. - Risks (selected items from the Risk Assessment Matrix): - Sharp increase in geopolitical tensions surrounding Russia/Ukraine and the Middle East: likelihood Medium; expected impact High. Potential effects include lower profits and higher NPL ratios for internationally active Austria-based banks with subsidiaries in Ukraine, Russia, and Hungary; potential spillovers to sovereign spreads and growth via lower exports or disrupted commodity supply. Recommended policy response: encourage banks to increase capital buffers and follow adequate risk provisioning policies; explore alternatives to commodity supply from Russia. - Protracted slower growth in advanced economies and key emerging markets: likelihood High; expected impact Medium. Effects: lower exports and growth; higher NPLs and lower profits for internationally active banks. Recommended policy response: growth-enhancing structural reforms and diversification of export markets; increased capital buffers and adequate risk provisioning for banks. - Unanticipated outcomes from the ECB comprehensive assessment and stress tests: likelihood Medium; expected impact Medium. Effects: higher bank capital needs could elevate bank and sovereign spreads. Recommended policy response: encourage banks to increase capital buffers; proper communication about process and results. - Significantly more expensive or limited funding for Austrian banks: likelihood Low; expected impact Medium. Effects: cutback in parent funding to CESEE subsidiaries, constraining credit growth in CESEE. Recommended policy response: encourage banks to increase capital buffers; strengthen stability of local funding of subsidiaries. - Higher-than-anticipated cost of bank restructuring and residual fiscal risks from banks’ CESEE exposure: likelihood Medium; expected impact Medium. Effects: unfavorable debt dynamics and higher sovereign spreads. Recommended policy response: accelerated public debt reduction and more ambitious fiscal balance target. - Unsustainable rise in real estate prices: likelihood Medium; expected impact Medium. Effects: higher domestic NPLs if unsustainable mortgage lending emerges. Recommended policy response: monitoring of risk indicators; make new macroprudential instruments available (LTV, DTI, etc.). - Surges in global financial market volatility: likelihood High; expected impact Low. Effects: potential safe-haven inflows and lower spreads. - Bond market stress from re-assessment of sovereign risk in the euro area: likelihood Low; expected impact Low. Effects: potential safe-haven inflows and lower spreads. ### Policy priorities highlighted by staff - Complete bank restructuring and strengthen macro-financial stability. - Implement structural public expenditure reforms to accelerate debt reduction and reduce the high tax burden on labor. - Raise potential output and productivity growth to bring Austria closer to the technological frontier. ### Banking sector: background and restructuring progress - Pre-crisis expansion: - Austrian banks expanded aggressively in CESEE, funded mainly through bond issuance and Western European borrowing rather than domestic deposits. - That expansion created vulnerabilities when external funding dried up and CESEE asset quality deteriorated after Lehman. - Funding model shift: - Banks are shifting CESEE subsidiaries’ credit funding toward local deposits. - Supervisory guidance introduced in 2012 (“sustainability package”) established a benchmark of 110 percent for the “loan-to-local-stable-funding ratio” on net new lending. - Capital positions and market perceptions: - After a recent rights issue by RBI, the three large banks now have fully-loaded Basel III CET1 ratios of around 10 percent. - Capital remains below peers, and market concerns persist about the ECB balance sheet assessment’s revelations on CESEE asset quality and collateral valuation. - Leverage ratios are comparatively favorable due to a focus on traditional loan business. - Restructuring of nationalized or partly nationalized banks: - Hypo Alpe Adria: authorities decided to sell SEE subsidiaries and wind down remaining assets in a government-owned “bad bank” (defeasance structure without a banking license). The legislative package passed Parliament in July. The restructuring includes a bail-in of €890 million in subordinated debt guaranteed by the state of Carinthia and an effective wipe-out of the guarantee. Negotiations with potential buyers for SEE subsidiaries are ongoing; under an EU state aid decision, they need to be re-privatized by mid-2015. - Volksbanken AG (partly nationalized apex institution of the cooperative “Volksbanken” association): has substantially downsized its balance sheet but faces difficult further disposal challenges; ongoing ECB balance sheet assessment may lead to higher capital needs affecting lower-tier banks and the association. - Kommunalkredit and KA Finanz: wind-downs proceeding in line with authorities’ plans, but further public capital needs cannot be excluded. ### Fiscal and structural issues (summarized points from introduction) - Debt dynamics and fiscal buffers: - Debt reduction under current plans leaves debt above AAA peer levels and does not build sufficient buffers against aging cost pressures, potential further bank restructuring costs, and residual CESEE-related contingent liabilities. - Recommendation: more ambitious structural public expenditure reforms to bring down debt faster. - Labor taxation and potential growth: - High social security contributions and income tax rates discourage labor supply and hamper potential growth. - Austria’s productivity per hour is 20 percent lower than in the US, and the gap is widening; factors include weaknesses in IT adaptation, education, and availability of private venture capital. - Political context: - In September 2013 the governing coalition (Social Democrats and Austrian People’s Party) was re-elected with a slimmer majority. - Previous legislative period included structural expenditure reforms in pensions and health care; these measures were confirmed in the coalition agreement. - The coalition agreement and fiscal framework 2015–18 contain no major additional structural expenditure measures, reflecting divergence among coalition partners. *Source: IMF staff report (INTRODUCTION section).* ### 18. Neither the non-financial corporate sector nor the household sector is overleveraged, ### 18. Neither the non-financial corporate sector nor the household sector is overleveraged, but housing prices warrant monitoring ### Leverage and housing market findings - Non-financial corporate debt hovers around the euro area median and increased much less in the pre-crisis years than in other countries. - Household debt is lower than the euro area average, and there has been little pressure to deleverage. - A considerable share of household borrowing consists of Swiss-franc denominated bullet loans and variable-interest housing loans. - Housing price increases have been strong in recent years, but purchases have been to a large extent cash-financed and the strongest growth has been predominantly limited to Vienna and some tourist hotspots. - The household saving rate has declined since 2009. - The share of foreign currency loans has been declining in recent years, as the Austrian authorities have taken steps to rein in new foreign currency loans. ### Banking sector transition, vulnerabilities, and policy discussions - Strengthening of capital positions and the transition toward a new funding model have reduced vulnerabilities of internationally active banks. - The ongoing shift to a new funding model for subsidiaries in CESEE has: - helped reduce external debt of Austrian banks, - made both the parent banks and their subsidiaries less vulnerable to funding shocks, - diminished the likelihood of future boom-bust cycles in CESEE countries. - Increased local deposits have substituted for a decline in external funding, and the level of credit has not declined in most CESEE countries so far. - The mission cautioned that the 2012 supervisory guidance for the largest three banks should continue to be applied judiciously, in close coordination with host countries, to avoid unduly restraining credit growth in still nascent recoveries. - Risks remain elevated; further strengthening of the capital position of large banks would create stronger buffers to absorb them. - Bank profitability suffers from the continued low interest rate environment and, specifically in CESEE, from rising NPLs, risk costs, and write-offs. - Russia had been a major profit contributor; in 2013, RBI and Bank Austria derived respectively around 75 and 60 percent of their profits from Russia. - Current events in Ukraine and Russia put this important source of profitability and internal capital generation increasingly at risk. - Further losses can also be expected from policy actions in Hungary regarding foreign-exchange denominated loans. Hungary’s parliament recently passed a law requiring banks to compensate borrowers for unfair lending practices; the law applies to both foreign-exchange and Hungarian Forint-denominated loans. ### Hypo Alpe Adria resolution and related issues - The mission welcomed the decision on the resolution of Hypo Alpe Adria and appreciated the attention given to the bank’s systemic importance for some SEE countries by avoiding Hypo’s bankruptcy. - Views differed on the retroactive voidance of the state of Carinthia’s guarantee of €890 million of HAA subordinated debt: - The authorities explained the voidance was designed and intended as an isolated case and saw the bail-in as in line with the new European resolution framework coming into effect in 2016. - The mission argued that voiding the state guarantee was a separate issue and that such a move could undermine the credibility of similar guarantees issued by other sub-national bodies, potentially damaging the Austrian "brand" in the future. - The law also bails in €800 million non-guaranteed funding from the former HAA-owner Bavarian Landesbank. - The World Bank, which holds €150 million of subordinated Hypo debt, will also be affected. - The mission argued the bank restructuring agenda should be rapidly completed and asset disposal accelerated: - Governance of the Hypo “bad bank”/AMC needs to ensure efficient asset disposal over a limited timeframe. - The sale of the Hypo SEE subsidiaries should be completed as rapidly as possible, while avoiding disruptive effects in host countries. - For Volksbanken AG, speedy asset disposal, including of its Romanian subsidiary, remains essential. - The restructuring of the Volksbanken association needs to take into account the structurally low profitability in the domestic banking market. ### European frameworks, macroprudential arrangements, and supervision - The Single Supervisory Mechanism (SSM) preparations are on track according to the authorities. - For the Single Resolution Mechanism (SRM), no decision on the designation of the national resolution agency had yet been made at the time of the mission discussions. - Discussion on revamping deposit insurance schemes (DGS) at the occasion of the introduction of EU-mandated DGS pre-funding had not progressed since last year’s Article IV consultation. - As regards AML/CFT, in February 2014, the FATF recognized that Austria had made significant progress and decided that the country should be removed from the regular follow-up process; FATF reports noted the number of suspicious transaction reports by real estate agents was 0 in both 2011 and 2012. - Given possible spillovers from events in Russia/Ukraine on the real estate sector, the authorities are encouraged to closely monitor this sector. - Creation of a workable macroprudential framework was lagging: - Legal basis for a Financial Market Stability Board has been created, but at the time of mission discussions, appointment of its members still needed to go through parliament; the members were appointed in July 2014. - The envisaged macroprudential toolkit was limited to various capital buffers and the possibility to change risk weights on exposures secured by mortgages on immovable property for financial stability considerations according to the CRR/CRD. - The set of instruments did not include sector-specific instruments such as LTV or DTI ratios targeted to housing market developments. - Authorities explained the agenda had been dominated by the resolution of Hypo Alpe Adria and that attention would be focused on these issues next. ### Comparative and structural observations (Box 1 and Box 2 highlights) - Austria’s better performance during the crisis likely reflects that few private sector imbalances were built up during the pre-crisis years: - Households did not go on an asset price and credit-fueled consumption boom; housing prices remained flat pre-crisis, household borrowing was modest, and saving rate increased. - The corporate sector did not over-borrow and corporate profitability did not deteriorate; the increase in corporate debt was modest, and profitability increased moderately. - In contrast to countries with pre-crisis imbalances, Austria’s private sector behaved counter-cyclically, mitigating the downturn: - Households reduced their saving rate, and consumption growth remained positive in 2009 (marginally faster than in 2007 and 2008). - Firms did not need to slash costs and employment remained relatively stable; firms absorbed costs of temporarily under-utilized workforce. - Austria’s banks have large gross foreign assets largely due to expansion in CESEE, but net foreign assets are close to zero because foreign liabilities are high as well. - By 2007, exposure to CESEE amounted to 70 percent of GDP. - External debt of Austrian banks stood at US$430 billion in 2007. - Net issuance of international debt securities rose from US$2 billion in 1997 to US$27 billion in 2007; the stock of outstanding bonds fell from US$173 billion to US$132 billion (post-2008 developments). ### Policy recommendations and priorities - Continue to apply the 2012 supervisory guidance for the largest three banks judiciously and coordinate closely with host countries to avoid unduly restraining credit growth in nascent recoveries. - Further strengthen the capital position of large banks to create stronger buffers against elevated risks. - Rapidly complete the bank restructuring agenda and accelerate asset disposal: - Ensure efficient governance of the Hypo “bad bank”/AMC and complete sale of Hypo SEE subsidiaries promptly while avoiding disruptive effects in host countries. - Speed asset disposal for Volksbanken AG, including its Romanian subsidiary, and account for structurally low domestic banking profitability in restructuring. - Closely monitor the real estate sector given potential spillovers from Russia/Ukraine events and recent housing price increases concentrated in Vienna and tourist hotspots. - Develop a more comprehensive macroprudential toolkit that can include sector-specific instruments (e.g., LTV and DTI ratios) targeted to housing market developments. - Coordinate decisions on national implementation of the Single Resolution Mechanism (SRM) and on revamping deposit insurance schemes (DGS) as part of European Banking Union implementation. *Source: IMF staff report excerpt (section 18 and related passages) from the provided PDF content.* ### 30. Spending levels are also boosted by complex intra-governmental financing ### _cr14278 - 30. Spending levels are also boosted by complex intra-governmental financing ### Spending drivers and fiscal outlook - Spending levels are boosted by complex intra-governmental financing arrangements and lack of subnational tax autonomy, providing little incentive to contain spending at the sub-national level. - 2013: the structural and headline deficit were lower than expected in 2013 at respectively 1 and 1½ percent of GDP, due to unbudgeted windfalls from the auctioning of telecom licenses that over-compensated higher-than-anticipated capital transfers to restructuring banks. - Debt projections assume that the Hypo Alpe Adria defeasance structure will recover about 2 percentage points of the transferred asset in the amount of some 5½ percent of GDP until 2020. - Projections do not yet take forthcoming revisions to GDP and the perimeter of general government into account in the context of the introduction of ESA2010. - Latest official projections foresee an increase in old-age related spending (pensions, health and long-term care) from 23.8 percent of GDP in 2015 to 28.3 percent of GDP in 2050. ### Tax burden on labor and tax reform options - Mission and authorities agreed the tax burden on labor was too high and should be reduced. - Domestic debate mainly focuses on reducing income taxes (notably reducing the lowest income tax bracket from 36 to 25 percent), while the mission recommended also considering lowering social security contributions. - Social security contributions start at a level well below the threshold for income taxation, so cuts in these contributions could benefit lower-income earners. - Views on financing a tax cut differed: - Social Democrats: favor revenue-neutral tax reform with lower income tax financed by higher net wealth and inheritance/gift taxes. - Austrian People’s Party: argue tax reductions should be funded through expenditure cuts. - Current expenditure plans leave no room for cutting taxes. ### Mission recommendations on expenditure and fiscal targets - The mission argued meaningful reduction in the tax burden on labor requires addressing expenditures. - Some scope exists to finance labor tax reductions by selectively abolishing tax exemptions and increasing real estate and environmental taxes; real estate taxes are particularly low. - Real estate tax: basic federal rate of 0.2 percent, multiplied by a municipal coefficient (up to 500 percent), which generally means a tax rate of 1 percent on the tax values. - The mission cautioned yields of such measures should not be overestimated and warned that revenue-neutral tax reforms tend to be rare. - More decisive expenditure cuts and fiscal federalism reforms would: - Help create room for reducing taxes. - Help bring debt down faster. - Specific illustrative recommendation: - Expenditure cuts totaling about 1 percent of GDP over the next four years would help put debt on a steeper downward path. - The resulting structural surplus of ½ percent of GDP should be maintained until the pre-crisis debt level of 60 percent is reached in the first years of the next decade. - This would create buffers for aging cost, potential additional bank restructuring outlays, and other contingent liabilities (including residual risks from Austrian banks’ CESEE exposure). - Additional expenditure cuts would create room for reducing social contributions and labor taxes; emphasis on reducing high social security contributions that affect incomes below the income taxation threshold. - Social security contribution and tax cuts should be financed and phased in together with well-specified expenditure reductions while ensuring the more ambitious fiscal balance target will be met. - Streamlining the tax system through selective abolition of tax exemptions and increases in environmental and real estate taxes could create additional room to lower the burden on labor. ### Political economy and implementation constraints - Interlocutors agreed aggregate spending is too high but pointed to political obstacles for specific expenditure reductions. - Counterparts agreed pensions, subsidies, and health care expenditure could be reduced in abstract, but cited political obstacles within the governing coalition and between federal and state levels when discussing specific reforms. - Interlocutors were not strongly in favor of a more ambitious longer-term fiscal deficit target than currently pursued; focus was on achieving the 2016 structural deficit objective of ½ percent of GDP. - The mission noted extra consolidation would only be required after 2016, when the recovery is hopefully well established. ### Scope for fiscal expenditure rationalization (Box 3 findings) - Austria’s government expenditure growth has been steady over the past decade, avoiding boom-bust patterns, but expenditure levels are relatively high. - Expenditure-to-GDP ratio was 51.7 percent in 2012, 1.6 percentage points higher than the euro area-12 (EA-12) average, and 7 percentage points higher than Germany in 2012; the difference with Germany has widened significantly over the past decade. - Austria’s expenditure is particularly high for pensions, capital transfers and subsidies, including in the transport sector; potential efficiency gains exist in health care spending. - After subtracting subsidies for hospital services and capital transfers due to bank rescues, Austria’s expenditure on subsidies in broad sense was still 3.9 percent of GDP in 2012 and 2.3 percentage points higher than in Germany; the biggest bulk goes into the transport sector (mainly railways, OeBB), both in subsidies and capital transfers. - Deficiencies in the subsidy system include insufficient targeting, unsatisfactory ex-post evaluation, and transparency gaps allowing for multiple funding. - Government plans include extending coverage of the transparency databank for public subsidies to incorporate states and municipalities and increasing efficiency of capital transfers to OeBB; effectiveness of these measures remains to be assessed. - Health care: OECD assessment suggests health care spending in Austria could be reduced by 2 percentage points of GDP without adversely affecting outcomes if operating at frontier-level efficiency. - Spending on hospital services is the main contributor to high health expenditure and suffers from efficiency concerns, including fragmentation between spending and funding responsibilities across government levels. - Health care reform 2013 plans to limit nominal health expenditure growth to nominal GDP growth by 2016 and keep it at the expected average nominal GDP growth (3½ percent) beyond 2016, but the reform lacks concrete measures to reach these targets and could be strengthened by shifting from inpatient to outpatient care and reinforcing preventive care. - Pension projections and reform context: - EC 2012 Ageing Report projects the old-age dependency ratio in Austria to increase by about 23 percentage points between 2015 and 2050. - Latest official projections foresee public pension spending rising from 13.9 percent of GDP in 2015 to 16.4 percent in 2035. - The 2012 pension reform (in force April 1, 2012) extends contributory years for certain pensions from 37.5 to 40 years, restricts disability pension access, increases deductions for early retirement from currently 4.2 to 5.1 percent, and includes moderate adjustments of pension benefits (by 1 percentage points and 0.8 percentage points lower than CPI in 2013 and 2014, respectively). - Statutory retirement age: 65 years for men and 60 for women, with convergence of women’s retirement age to men’s by 2033. - OECD suggests further adjustments may be needed, such as raising the deduction in case of early retirement from currently 5.1 to above 6 percent to achieve full actuarial neutrality and a more rapid increase of the statutory retirement age for women. ### Raising potential growth through higher labor productivity - Background facts: - High labor utilization has made Austria’s per capita GDP one of the highest in Europe: per capita GDP is 12 percent higher than in Germany. - Labor productivity is almost 20 percent lower than in the US, explaining why per capita GDP is 13 percent lower despite higher labor input. - Labor productivity stopped catching up with the US in the mid 1990s and has fallen behind since. - Decline in potential growth began in the late 1990s and largely reflects a reduction in labor productivity growth. - Productivity of capital has fallen steadily in past decades, unlike increases seen in the US, UK, Netherlands, and Scandinavian countries. - Contributing factors discussed: - Lower adaptation of IT, with large differences vs the US in manufacturing and IT. - Cultural attitudes towards risk taking and limited “second chances” for bankruptcy. - Lack of private financing for start-ups (bank-based system provides little venture capital). - Red tape, excessive regulation, high administrative costs for startups, and barriers to inward FDI. - Austria’s production structure focuses on medium-tech rather than high-tech sectors. - Policy implication: raising the effective retirement age would raise potential output by increasing labor supply and limiting workforce shrinkage as the population ages. ### Staff appraisal and macro-fiscal conclusions - Austria weathered the global crisis relatively well; employment and output recovered to well above 2008 levels and unemployment remained low by international standards; main impacts were on the banking sector and public debt. - With recovery taking hold, priorities are completing bank restructuring, strengthening macro-financial stability, expenditure reforms to bring down debt and taxes, and boosting potential growth by moving closer to the technology frontier and raising labor force participation. - Austria has a high tax burden, especially on labor, and an elevated public expenditure level; debt dynamics are not as favorable as the low structural deficit suggests: the debt ratio will decline only from 75 percent in 2013 to around 70 percent in 2020. - Aging costs will put upward pressure on the deficit in the next decade that, without further reforms, will reverse debt dynamics. *International Monetary Fund — _cr14278 - 30. Spending levels are also boosted by complex intra-governmental financing* ### 46. More decisive expenditure and fiscal federalism reforms would help create room for ### _cr14278 - 46. More decisive expenditure and fiscal federalism reforms would help create room for ### Fiscal stance and medium‑term objective - Expenditure cuts of about 1 percent of GDP by 2018 would lead to a structural surplus of ½ percent of GDP and bring down debt faster. - Achieving these cuts would create buffers for absorbing aging cost, potential additional bank restructuring outlays, and other contingent liabilities. - Additional expenditure cuts beyond this relatively modest amount would create scope to reduce the tax burden on labor, including from social security contributions. ### Key expenditure and fiscal federalism reforms (recommended) - Increase statutory retirement ages, including through faster unification of male and female statutory retirement. - Close the gap with effective retirement. - Implement deeper cuts and ultimately better targeting of subsidies, including through the re-evaluation of expensive infrastructure projects. - Pursue more ambitious health care reforms. - Introduce meaningful tax autonomy at the subnational level to create a closer link of expenditure and revenue responsibilities and to help prioritize expenditure. - Decide these reforms in conjunction with the next medium-term fiscal framework 2015–19. ### Banking sector restructuring and resolution - Progress has been made in restructuring fully or partly nationalized banks. - The sale of the Hypo SEE subsidiaries should be completed as rapidly as possible, while continuing to avoid disruptive effects in host countries. - Bailing in of subordinated debt is in line with the European frameworks and will help reduce resolution costs and moral hazard. - The retrospective effective voiding of the state of Carinthia’s guarantee on €890 million of such debt—while designed and intended as an isolated case—would undermine the credibility of similar guarantees issued by other sub-national bodies. - For the Volksbanken sector, priorities include: - Speedy asset disposal in the apex institution (OeVAG). - Rapid implementation of a streamlined association structure with a smaller number of institutions, given a domestic banking market with structurally low profitability. ### Financial stability and supervisory reforms - The transition toward a new funding model and the strengthening of capital positions have reduced vulnerabilities of internationally active banks, but risks remain. - Further transition steps to the new funding model should not be implemented abruptly so as to avoid unduly restraining credit growth in still nascent recoveries. - Capital positions of large internationally active banks have been strengthened, but further efforts are needed; risks remain, including from exposures to Russia and Ukraine. - National transposition of the European Banking Union framework should proceed swiftly, including: - Designation of a national resolution agency. - Pre-funding and streamlining the deposit guarantee schemes. - Further progress on the macroprudential front. ### Growth, productivity, and labor market reforms - Boosting potential output by raising labor productivity and increasing labor force participation would improve longer-term economic prospects and help mitigate the impact of aging. - Policy measures to expand the production frontier include: - Enhancing IT adaptation. - Expanding access to financing for start-ups. - Reducing administrative barriers for new businesses. - Increasing the labor force by reducing the tax burden on labor and raising the effective retirement age would further boost economic potential. *International Monetary Fund — Selected chapter content* ### 52. It is recommended that the next Article IV consultation with Austria be held on the standard ### _cr14278 - 52. It is recommended that the next Article IV consultation with Austria be held on the standard ### Executive summary - It is recommended that the next Article IV consultation with Austria be held on the standard 12-month cycle. - Austria's GDP and employment have held up relatively well versus peers, with the main crisis impact concentrated in the internationally active banking system and public finances. - Debt is high but projected to decline under the baseline: debt will peak at almost 80 percent of GDP in 2014 and gradually fall to slightly above 70 percent of GDP by 2019 in the baseline DSA. ### Recent economic developments and outlook - Real GDP growth (annual): - 2010: 1.8 - 2011: 2.8 - 2012: 0.9 - 2013: 0.3 - 2014 (proj): 1.5 - 2015 (proj): 1.7 - Output gap (percent of potential GDP): - 2010: -1.5 - 2011: 0.0 - 2012: -0.4 - 2013: -1.3 - 2014 (proj): -1.1 - 2015 (proj): -0.7 - Unemployment (Eurostat definition): - 2010: 4.4 - 2011: 4.2 - 2012: 4.4 - 2013: 4.9 - 2014 (proj): 5.0 - 2015 (proj): 4.9 - CPI inflation (period average): - 2010: 1.7 - 2011: 3.6 - 2012: 2.6 - 2013: 2.1 - 2014 (proj): 1.7 - 2015 (proj): 1.7 - Current account balance (percent of GDP): - 2010: 3.4 - 2011: 1.6 - 2012: 2.4 - 2013: 2.7 - 2014 (proj): 3.4 - 2015 (proj): 3.5 ### Financial sector and external linkages - The internationally active Austrian banking system is the primary channel of crisis impact; banks have significant exposure to CESEE (Central, Eastern and Southeastern Europe). - Banking sector indicators (selected): - Regulatory capital to risk-weighted assets: 2009: 15.0; 2010: 15.4; 2011: 15.8; 2012: 17.0; 2013: 18.0 - Regulatory Tier I capital to risk-weighted assets: 2009: 11.1; 2010: 11.7; 2011: 12.0; 2012: 12.9; 2013: 13.7 - Nonperforming loans to total gross loans: 2009: 2.3; 2010: 2.8; 2011: 2.7; 2012: 2.8; 2013: 2.9 - Return on assets: 2009: 0.1; 2010: 0.5; 2011: 0.1; 2012: 0.3; 2013: 0.1 - Foreign currency-denominated loans to total loans: 2009: 22.4; 2010: 22.1; 2011: 21.4; 2012: 19.7; 2013: 18.8 - External linkages: - Austria’s banking sector shows high foreign assets and liabilities (percent of GDP), and a low net IIP for MFIs. - The largest share of Austria's exports and imports is with Germany; Italian and German banks are major sources of funding to Austria. - Foreign claims of Austrian banks on CESEE (percent of Austria GDP) rose markedly in 1999-2007 and moderated in 2007-13. ### Fiscal developments, projections, and DSA findings - General government finances (percent of GDP, historical and projected): - Revenue: 2010: 48.3; 2011: 48.3; 2012: 49.1; 2013: 49.7; 2014 (proj): 49.7; 2015 (proj): 49.6 - Expenditure: 2010: 52.8; 2011: 50.8; 2012: 51.6; 2013: 51.3; 2014 (proj): 52.4; 2015 (proj): 50.9 - Balance (EDP-definition): 2010: -4.5; 2011: -2.5; 2012: -2.6; 2013: -1.5; 2014 (proj): -2.7; 2015 (proj): -1.3 - Structural Balance (excluding specified one-offs): 2010: -3.2; 2011: -2.2; 2012: -1.5; 2013: -1.0; 2014 (proj): -1.0; 2015 (proj): -0.7 - Gross debt (end of period): 2010: 72.5; 2011: 73.1; 2012: 74.4; 2013: 74.5; 2014 (proj): 79.4; 2015 (proj): 77.9 - Medium-term projections (Table 2 highlights): - GDP (growth in percent): 2016: 1.7; 2017: 1.5; 2018: 1.5; 2019: 1.4 - Public debt projected path: 2016: 76.2; 2017: 74.4; 2018: 72.7; 2019: 71.1 (percent of GDP) - Public DSA key points: - Baseline: debt peaks at almost 80 percent of GDP in 2014 and gradually falls to slightly above 70 percent of GDP by 2019 under the baseline. - The standard DSA heat map flags a relatively high share of public debt held by non-residents as a main vulnerability. - Stress-test scenarios: - Low-growth scenario: assumes 2015–2016 growth reduced to negative ½ percent (one standard deviation shock); debt-to-GDP would increase by 5 percentage points to a peak of 84 percentage points in 2016 and decline to 79 percentage points in 2019. - Contingent liability shock (illustrative 10 percent of GDP): would raise debt-to-GDP to about 90 percent before a gradual reduction to some 86 percent towards the end of the decade. - Other standardized shocks (primary balance, real exchange rate, real interest rate) do not lead to significant deviations from the baseline debt path. - DSA numerical table (baseline excerpt, nominal gross public debt and selected indicators): - Nominal gross public debt: 2012: 66.1; 2013: 74.4; 2014 (proj): 74.5; 2015 (proj): 79.4; 2016 (proj): 77.9; 2017 (proj): 76.2; 2018 (proj): 74.4; 2019 (proj): 72.7; 2019 (alt): 71.1 - Public gross financing needs (percent of GDP): 2012: 10.2; 2013: 9.4; 2014 (proj): 11.7; 2015 (proj): 7.7; 2016 (proj): 6.3; 2017 (proj): 11.3; 2018 (proj): 7.6; 2019 (proj): 9.5 - Real GDP growth (in percent): 2012: 0.3; 2013: 0.9; 2014 (proj): 0.3; 2015 (proj): 1.5; 2016 (proj): 1.7; 2017 (proj): 1.7; 2018 (proj): 1.5; 2019 (proj): 1.4 ### Composition of government spending and structural fiscal features - Austria's government spending highlights (2012, percent of GDP): - Social benefits and transfers in kind: Austria: 24.1 (various country comparisons shown) - Subsidies (in percent of GDP): Austria: 3.5 - Capital transfers (in percent of GDP): Austria: 4.7 (comparative list) - Subsidies and capital transfers in transport sector (in percent of GDP): Austria among higher values (panel lists Austria: 0.5 capital transfers; 0.5 subsidies in illustrative chart) - Long-term expenditure growth and volatility: - Average annual real government expenditure growth (2002–12, in percent): Austria approx. 2 percent (exact chart ranking indicates Austria around 2.0) - Austria did not have a public expenditure surge during pre-crisis years; procyclicality of expenditure has been much less than in many other countries. ### Structural issues, labor market, and productivity - Labor market: - Harmonized unemployment rates (2007–2013): Austria low relative to euro area peers; youth unemployment rates and female part-time employment are relatively high. - Labor force participation (2013): Austria compares favorably within Euro area, but participation of ages 60–64 is relatively low. - Taxation: - Total tax revenue (percent of GDP): Austria high (charts list Austria among higher countries). - Share of taxes on labor in total taxation (2011): Austria among highest; tax wedges across family types are high. - Productivity: - Austria's real GDP per capita (2013, Germany=100): Austria below top performers; labor productivity lower relative to the US. - Capital-output ratio: Austria shows higher capital intensity, but productivity has fallen behind over time. - Venture capital investment as a percentage of GDP is low relative to leaders, which may contribute to low productivity. ### Authorities’ response to prior IMF recommendations (IMF 2013 Article IV) - Fiscal policy recommendations and responses: - Recommendation: Compensate fiscal cost from medium-sized banks under restructuring with additional gradual fiscal adjustment to bring public debt down to pre-crisis level in early next decade. Authorities’ response: No gradual strengthening of fiscal adjustment beyond the 2016 structural deficit target in the fiscal planning for 2014–18. - Recommendation: Decide on further expenditure reforms to anchor medium- and long-run sustainability. Response: No further significant reform plans at the moment. - Recommendation: Streamline intergovernmental fiscal relations and create stronger nexus between spending and financing responsibilities at subnational level, introduce meaningful tax autonomy for states. Response: No significant progress. - Recommendation: Use expenditure savings to finance a comprehensive reform of labor taxation and social and family benefits to foster labor supply and potential growth. Response: No significant progress. - Financial sector recommendations and responses: - Recommendation: Dispose more efficiently of legacy assets in restructuring banks and downsize these banks faster to contain final fiscal cost. Response: Strategy for main problem bank decided; further progress in one banking group; one bad bank still has banking license. - Recommendation: Create a comprehensive framework for bank resolution. Response: Preparations for the transposition of the EU Bank Recovery and Resolution Directive are ongoing. - Recommendation: Strengthen macroprudential framework by enhancing OeNB role, broadening tools, improving statistical base. Response: Committee has not yet started to work; OeNB role could be stronger; macroprudential tools still need broadening. - Recommendation: Unify deposit insurance system and create bank resolution fund. Response: No progress. ### DSA scenarios and stress-test summaries - Baseline scenario: - Assumes overall structural adjustment of around ½ percentage point of GDP between 2014 and 2016. - Debt peak: almost 80 percent of GDP in 2014; gradual decline to slightly above 70 percent by 2019. - Low-growth stress test: - Assumes 2015–2016 growth reduced by one standard deviation to negative ½ percent. - Debt-to-GDP increases by 5 percentage points to peak of 84 percentage points in 2016; falls to 79 percentage points in 2019. - Contingent liability shock: - Illustrative 10 percentage points of GDP contingent liability shock would raise debt-to-GDP to about 90 percent, then gradual reduction to about 86 percent toward decade end. - Other standardized shocks (primary balance, real exchange rate, real interest rate) show limited deviation from baseline. - DSA heat-map vulnerability: public debt held by non-residents at high share (identified as main vulnerability for potential volatility). ### Selected tables and statistics (high-level) - Country basics: - Total area: 83,850 square kilometers - Total population (2013): 8.5 million - GDP per capita (2013): US$ 48,957 (36,851 Euro) - Table 1 (selected aggregates, 2010–15): - GDP: 2010: 1.8; 2011: 2.8; 2012: 0.9; 2013: 0.3; 2014 (proj): 1.5; 2015 (proj): 1.7 - Gross debt (end of period): 2014 (proj): 79.4; 2015 (proj): 77.9 - Current account (percent of GDP): 2014 (proj): 3.4; 2015 (proj): 3.5 - Fiscal structure (Table 4, selected lines, percent of GDP): - Taxes: roughly 27.3–28.8 across 2010–2019 projections; indirect taxes ~14.5–14.0; direct taxes ~12.8–15.0 - Social contributions: around 16.3–16.7 - Interest: around 2.7–2.5 - Subsidies: 2012: 3.5; declines to 2.9 by 2019 (proj) - Social benefits: around 24.7–25.3 across years *Source: IMF staff report and informational annex prepared for the 2014 Article IV consultation with Austria (mission: June 20–July 1, 2014); figures, tables, and projections are those presented in the document.* ### 1. Macroeconomic statistics are adequate for surveillance. Austria subscribed to the Fund’s ### _cr14278 - 1. Macroeconomic statistics are adequate for surveillance. Austria subscribed to the Fund’s ### Data dissemination and statistical arrangements - Austria subscribed to the Fund’s Special Data Dissemination Standard (SDDS) in 1996; metadata are 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. - The ECB reporting framework is used for monetary statistics; data are reported to the IMF through a “gateway” arrangement with the ECB to enable efficient transmission to the IMF and publication in the IFS and IFS Supplement. ### Table of common indicators (as of July 30, 2014) — latest observation, date received, and frequencies - Exchange rates: Date of latest observation 07/29/14; Date received 07/30/14; 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 2014; Date received 07/20/14; Frequency of data Monthly; Frequency of reporting Monthly; Frequency of publication Monthly. - Reserve/Base Money: June 2014; 07/30/14; Monthly; Monthly; Monthly. - Broad Money: June 2014; 07/30/14; Monthly; Monthly; Monthly. - Central Bank Balance Sheet: June 2014; 07/15/14; Monthly; Monthly; Monthly. - Consolidated Balance Sheet of the Banking System: June 2014; 07/30/14; Monthly; Monthly; Monthly. - Interest Rates: 07/29/14; 07/30/14; Daily; Daily; Daily. - Consumer Price Index: June 2014; 07/14/14; Monthly; Monthly; Monthly. - Revenue, Expenditure, Balance and Composition of Financing – General Government: 2014:Q1; 06/30/14; Quarterly; Quarterly; Quarterly. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: June 2014; 07/30/14; Monthly; Monthly; Monthly. - Stocks of Central Government and Central Government-Guaranteed Debt: June 2014; 07/30/14; Monthly; Monthly; Monthly. - External Current Account Balance: 2014:Q1; 06/30/14; Quarterly; Quarterly; Quarterly. - Exports and Imports of Goods and Services: 2014:Q1; 06/30/14; Quarterly; Quarterly; Quarterly. - GDP/GNP: 2014:Q1; 06/06/14; Quarterly; Quarterly; Quarterly. - Gross External Debt: 2014:Q1; 06/30/14; Quarterly; Quarterly; Quarterly. - International Investment Position: 2014:Q1; 06/30/14; Quarterly; Quarterly; Quarterly. ### Supplementary information — economic developments and prospects (updates since Staff Report circulated August 5, 2014) - Q1 and Q2 2014 growth revisions and composition: - Q1 growth revised down from 0.2 to 0.1 percent (qoq), mainly due to weaker exports. - Flash release for Q2 points to slight acceleration to 0.2 percent (qoq). - Private consumption in Q2 grew 0.1 percent (qoq). - Gross fixed capital formation in Q2 declined by 0.3 percent, compared with an expansion of 0.6 percent in Q1. - Forward-looking indicators have deteriorated; sentiment affected by geopolitical turmoil and weaker-than-expected euro area growth. - Staff growth projections and revisions: - Staff now expects annual GDP growth in 2014 to be about ½ percentage points lower. - New baseline: growth of 1.0 percent in 2014, compared with 1.5 percent in the staff report. - Projected strengthening in 2015: growth rate 1.9 percent (2015 projection) versus 1.7 percent in the staff report; about 40 percent of the 2014 shortfall would be made up in 2015. - Downside risks remain significant: strength of the euro area recovery and geopolitical turmoil are key uncertainties. - Fiscal implications: - Weaker growth is not expected to have much impact on the structural deficit in 2014. - Headline deficit likely to be ¼ percentage points higher than expected in the staff report. - Financial markets and inflation: - Sovereign bond yields decreased; spread versus German Bunds remained steady. - Stock market stabilized; bank equities fragile. Bank bond yields flat; banks’ CDS spreads retreated from a recent peak. - Inflation rose to 1.7 percent in both June and July (yoy), up from 1.5 percent in May; services sector a major driver. - This contrasts with euro area and Germany where inflation declined to 0.4 and 0.8 percent respectively. ### Political and policy developments - Change in Finance Minister: - Michael Spindelegger resigned on August 26, citing differences within his party on tax reform. - Hans Joerg Schelling appointed as new Finance Minister on September 1; he will not take positions of party chairman and vice-chancellor (these go to Economy Minister Reinhold Mitterlehner). - Schelling’s appointment and party changes make agreement on tax reform more likely; expectations that the coalition will continue until the next regular national elections in 2018. - Tax reform debate: - Social Democrats advocate a revenue-neutral tax reform with a lower income tax financed by higher property and inheritance/gift taxes. - OeVP previously argued tax reductions should be funded through expenditure cuts; internal party calls to compromise had been increasing. ### Press release summary — IMF Executive Board conclusion of 2014 Article IV Consultation (September 8 and Press Release No. 14/423, September 15, 2014) - Short summary of economic context and staff projections: - After a new slowdown in 2012 and 2013, recovery underway; GDP projected to grow about 1.5 percent in 2014 and 1.7 percent in 2015, compared with 0.3 percent in 2013. - Inflation fell from near 4 percent in late 2011 to 1.5 percent in May; risk of deflation remains low due to tight labor market supporting services inflation. - Austria’s current account and real effective exchange rate broadly in line with fundamentals. - Main risks: geopolitical (spillovers from Ukraine and Russia), ECB assessments, lower-than-expected growth in emerging markets and the euro area, and funding shocks to Austrian banks with potential CESEE spillovers. - Public finances and banking sector: - Public expenditure-to-GDP ratio is high; offset by a high tax burden, especially on labor. - Structural deficit in 2013 was 1 percent of GDP. - Public debt-to-GDP ratio projected to reach about 80 percent of GDP in 2014 and become higher than in any other European AAA country. - Bank restructuring progress noted; Hypo Alpe Adria restructuring includes a bail-in of €890 million in subordinated debt guaranteed by the state of Carinthia and effective wipe-out of the underlying guarantee. - Internationally active Austrian banks shifting funding of CESEE subsidiaries to local deposits; capital positions strengthened but capital gaps with peers remain. - Non-financial corporate and household sectors not overleveraged; housing prices warrant monitoring. ### Executive Board assessment and policy recommendations - Executive Directors’ main points: - Commended authorities for sound macroeconomic management; noted positive outlook but geopolitical risks, especially for financial sector exposure to CESEE. - Policy priorities: preserve financial stability by completing bank restructuring and strengthening macro-financial stability; address long-standing structural issues to reduce high debt and boost labor productivity and potential output growth. - Fiscal policy: welcomed reduction in fiscal deficit and commitment to achieve structurally balanced budget by 2016; saw scope for more decisive expenditure and fiscal federalism reforms to accelerate debt reduction and enable tax cuts (including from social security contributions). - Recommended greater public spending efficiency via pension and health care reforms, better targeting of subsidies, and closer alignment of expenditure and revenue responsibilities in the federal system. - Bank sector: welcomed progress on restructuring Hypo Alpe Adria and encouraged timely completion of sales of Southeastern European subsidiaries while avoiding disruptive effects in host countries; noted bail-in consistent with European framework but expressed concern that retroactive voiding of the Carinthia guarantee could undermine credibility of similar guarantees. - Volksbanken sector: emphasized need for speedy asset disposal in the apex institution and rapid implementation of a streamlined association structure. - Urged continued strengthening of banks’ capital buffers and acceleration of EU banking union framework implementation, and refinement of macroprudential framework. - Structural reforms to raise labor productivity and participation: enhance IT adaptation, improve access to financing for start-ups, reduce administrative barriers for new business, reduce tax burden on labor, and raise effective retirement age. ### Selected economic indicators, 2010–15 (change in percent unless indicated otherwise) - GDP: 2010 1.8; 2011 2.8; 2012 0.9; 2013 0.3; 2014 1.5; 2015 1.7. - Total domestic demand: 2010 1.4; 2011 3.2; 2012 0.1; 2013 -1.2; 2014 1.0; 2015 1.4. - Consumption: 2010 1.5; 2011 0.7; 2012 0.4; 2013 0.3; 2014 1.0; 2015 1.1. - Gross fixed capital formation: 2010 -1.4; 2011 8.5; 2012 1.6; 2013 -0.7; 2014 1.3; 2015 2.9. - Net exports (growth contribution in pp): 2010 0.6; 2011 -0.1; 2012 0.9; 2013 1.3; 2014 0.6; 2015 0.4. - Exports of goods and nonfactor services: 2010 9.4; 2011 6.6; 2012 1.2; 2013 2.7; 2014 4.4; 2015 5.3. - Imports of goods and nonfactor services: 2010 9.1; 2011 7.6; 2012 -0.3; 2013 0.5; 2014 3.9; 2015 5.3. - Output gap (percent of potential GDP): 2010 -1.5; 2011 0.0; 2012 -0.4; 2013 -1.3; 2014 -1.1; 2015 -0.7. - Unemployment (Eurostat definition): 2010 4.4; 2011 4.2; 2012 4.4; 2013 4.9; 2014 5.0; 2015 4.9. - Consumer price index (period average): 2010 1.7; 2011 3.6; 2012 2.6; 2013 2.1; 2014 1.7; 2015 1.7. - General government revenue (percent of GDP): 2010 48.3; 2011 48.3; 2012 49.1; 2013 49.7; 2014 49.7; 2015 49.6. - General government expenditure (percent of GDP): 2010 52.8; 2011 50.8; 2012 51.6; 2013 51.3; 2014 52.4; 2015 50.9. - Balance (EDP-definition): 2010 -4.5; 2011 -2.5; 2012 -2.6; 2013 -1.5; 2014 -2.7; 2015 -1.3. - Structural Balance1/ (percent of GDP): 2011 -3.2; 2012 -2.2; 2013 -1.5; 2014 -1.0; 2015 -0.7. - Gross debt (end of period, percent of GDP): 2010 72.5; 2011 73.1; 2012 74.4; 2013 74.5; 2014 79.4; 2015 77.9. - Current account (percent of GDP): 2010 3.4; 2011 1.6; 2012 2.4; 2013 2.7; 2014 3.4; 2015 3.5. Notes: - Structural balance excludes specified one-offs: capital transfers to banks (2010 0.6; 2011 0.2; 2012 0.9; 2013 0.7; 2014 1.4; 2015 0.3 percent of GDP), flood-related expenditure (0.1 percent of GDP in 2013 and 2014), revenue from recent tax treaties with Switzerland and Liechtenstein (0.2 percent of GDP in 2013 and 2014), and revenue from telecom licenses (0.6 percent of GDP in 2013). ### Authorities’ statement (Statement by Johann Prader, Executive Director for Austria, September 8, 2014) - Authorities broadly agree with staff assessment and recommendations. - Observations: - Austria weathered the crisis relatively well; current employment and GDP above pre-crisis levels; public expenditure ratio increase smaller than in most other euro area countries. - Recovery decelerating given hesitant investment, cautious consumption, and softer external demand. - Public debt rise primarily due to government support for the banking sector. - Policy priorities endorsed by authorities: - Reduce tax burden, particularly on labor. - Improve sustainability of public finances via prudent review of revenues and expenditures, including transfers and subsidies. - Take measures to increase potential long-term growth and strengthen the domestic banking sector. - Macroeconomic outlook (authorities’ view): - Austria embarked on a moderate recovery in H2 2013; real GDP expected to remain below potential for rest of 2014. - Investment expected to accelerate only moderately; enterprises postponing projects due to uncertain external environment. - Geopolitical situation in Ukraine and Russia seen as a substantial downward risk with possible ramifications for the financial sector and investment climate. - Consumer price inflation among highest in euro area recently due to housing, restaurants, and other services; no evident negative transmission to external price competitiveness so far. - Employment growth held up; wage pressure expected to remain subdued given labor supply increase coming substantially from abroad. - Authorities agree with staff that housing market needs close monitoring and macro-prudential toolkit to be applied if necessary. - On productivity deceleration, authorities note it is a euro area-wide phenomenon and request more empirical evidence for staff’s emphasis on lower IT penetration as a main reason. *Source: IMF staff report supplement and related materials (as contained in the provided content).* ### 2016. The government also remains committed to the additional fiscal measures as formulated in ### 2016. The government also remains committed to the additional fiscal measures as formulated in ### Fiscal stance and tax reform - The government remains committed to the additional fiscal measures as formulated in a letter to the European Commission of May 12, 2014 in order to avoid a significant deviation from the adjustment path to the Medium-Term Objective as defined by the rules of the European fiscal surveillance mechanism. - Authorities agree with staff that a large part of the recent increase of the public debt ratio has been due to government support for the financial sector in response to the economic and financial crisis and soon also to the ongoing revision of the ESA 2010 rules for national accounting. - Authorities concur with the assessment that the tax burden in general and on labor (including via social security contributions) in particular is very high. Staff’s recommendations for reform are considered useful. - Given limited room to raise other taxes to finance tax reform in the current context, greater focus is needed on reviewing the expenditure side. ### Expenditure review and pensions - The authorities welcome staff’s analysis of differences between the Austrian expenditure system and peer countries like Germany, particularly in health, subsidies and capital transfers, and pensions. - For the national public pension system, from an economic point of view the three main calibration areas are: - effective retirement age, - current and future contributions, - current and future benefits. - Putting the national public pension system on a sustainable footing may require addressing all three calibration elements. ### Financial sector performance and vulnerabilities - Austria’s relatively good performance in the global financial crisis was partly due to the absence of pre-crisis domestic financial imbalances. - Vulnerabilities from international exposure of Austrian banks in Central Eastern and Southeastern Europe (CESEE) materialized after 2008. - Recent years’ pillars of financial stability include the build-up of capital buffers, progress in bank restructuring, and a sound macroeconomic environment in Austria. - Authorities agree with staff that loss-absorbing capacity of Austrian banks must be further strengthened through continuous additional capital build-up. - Although banks have strengthened capital positions, these remain lower than international peers; leverage ratios are more favorable compared to the peer group, reflecting focus on traditional loan business. - A main challenge is persistent pressure on banks’ profitability in the domestic market; banks should address structural issues and improve cost efficiency. ### CESEE exposures, asset quality, and provisioning - In CESEE, asset quality remains a challenge for Austrian banks’ subsidiaries abroad. - A potential increase in geopolitical tensions around Russia and Ukraine could affect asset quality and profitability. - Authorities encourage risk-adequate provisioning and coverage policies to address credit quality issues. - The European Central Bank’s comprehensive assessment is viewed as useful to increase transparency, quantify known weaknesses, and support corrective actions. ### Funding, liquidity, and regional portfolio adjustments - Authorities’ assessment regarding funding pressures and credit supply to CESEE host economies: - First, the liquidity position of Austrian banks is comfortable with low dependence on wholesale funding. The funding mix of banks’ subsidiaries has changed towards more local stable sources of funding as acknowledged by the staff. This shift was guided by a set of macroprudential guidelines (“Sustainability Package” as of 2012). It was a decisive move to encourage banks to further improve their liquidity situation and strengthen their capital base. - Second, the Austrian authorities are closely monitoring the international exposure of Austrian banks, which has remained broadly stable during the past years, while the CESEE region has become increasingly heterogeneous. Banks have adjusted regional portfolios and reduced business in countries with macroeconomic and/or political vulnerabilities (e.g. Ukraine). Such shifts are standard business procedure in a changing market environment but warrant caution if they lead to higher concentration of profits and banks’ risk exposure to individual countries. - From a macroprudential perspective, a gradual reduction in leverage is welcome as it helps adapt banks’ balance sheets to the post-crisis environment. - In contrast, high loan growth at interest rates that do not cover credit, liquidity, and systemic risk costs is not sustainable; it leads to misallocation of capital and risk that are disruptive to financial stability and sustainable economic growth. ### Bank restructuring, institutional setup, and macroprudential governance - Completion of bank restructuring and a firm institutional setup are crucial for financial stability. - Implementation of the European Banking Union framework should proceed swiftly, including establishment of the national resolution agency and pre-funding of the deposit guarantee scheme. - The responsible macroprudential authority, the Financial Market Stability Board, has been established to foster cooperation among Austrian authorities and mitigate systemic and cyclical risks. - Since the IMF team’s visit end of June, the Board’s members have been appointed and first meetings are scheduled in autumn 2014. *Source: _cr14278 - 2016. The government also remains committed to the additional fiscal measures as formulated in* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14278.pdf_