## _cr1650

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### Recent economic developments and outlook
- Growth and unemployment:
  - Growth estimated at 0.7 percent (2015).
  - Staff projects growth of 1.4 percent (2016).
  - OeNB projects growth of 1.9 percent (2016).
  - IHS and WIFO project 1.6–1.7 percent (2016).
  - Unemployment projected to rise to 6½ percent (by 2017), then decline to some 6¼ percent in the medium term.
  - Potential growth: below 1 percent (staff estimate); should slightly exceed 1 percent by 2019–20.
  - Headline inflation expected to gradually rise to 2 percent in the medium term.
- Migration and fiscal impact:
  - Authorities expected asylum applications to reach 90,000 in 2015 (some 1 percent of Austria’s population).
  - Staff baseline includes estimated refugee-related expenditure of 0.3–0.5 percent of GDP in 2016–20.
  - Updated policy: authorities intend to cap applications at 37,500 in 2016 and a cumulative 1.5 percent of the population (about 128,000) in 2016-19; staff estimates this could lower cumulative fiscal costs by up to 1/3 and reduce potential GDP growth estimates by about 1/7 relative to earlier staff figures.
- External position:
  - Current account surplus: around 2½ percent of GDP (2015); projected to settle around 2½ percent of GDP (2015 and over the medium term).
  - Austria’s IIP is slightly positive.
  - IMF EBA: 2015 current account balance somewhat below the norm; EBA finds REER modestly overvalued in mid-2015 by 9 percent (with unexplained residual 6¾ percent).

### Fiscal position, risks, and policy recommendations
- Debt and fiscal trajectory:
  - General government debt: 86 percent of GDP (2015).
  - Staff baseline projects gross debt at 78 percent of GDP (2020).
  - DSA baseline: debt will gradually fall from around 86 percent of GDP at end-2015 to 77 percent of GDP by end-2021.
  - Staff projects gross debt under baseline: 78 percent of GDP (2020).
- Fiscal rules and recommended path:
  - Aim for a broadly neutral fiscal stance in 2016–17 (relative to 2015 structural target).
  - Continue modest structural adjustment of ⅓ percentage points of GDP per year in 2018–20 (staff recommendation).
  - Staff recommendation implies a 1¼ percent of GDP higher headline fiscal balance than the baseline by 2020 and reaching a structural surplus of ½ percent of GDP by 2020, to be maintained until debt falls below 60 percent of GDP (projected for 2026).
  - Once debt falls below 60 percent of GDP (projected 2026), revert to MTO target of a structural deficit of ½ percent of GDP; when debt is well below 60 percent and ageing costs decline (projected for 2040), relax to a deficit of 1 percent of GDP.
- Fiscal risks and one-offs:
  - One-offs excluded from the structural balance (as percent of GDP): capital transfers to banks: 0.2 (2011); 0.5 (2012); 0.5 (2013); 1.6 (2014); 0.6 (2015); 0.2 (2016); 0.1 (2017–19).
  - Flood related expenditure: 0.1 (2013).
  - Revenues from sale of mobile telecommunication licenses: 0.6 (2013).
  - Tax revenues from treaties with Switzerland and Luxembourg: 0.1 (2012); 0.2 (2013); 0.1 (2014).
  - Revenue from adjustment in EU contributions: 0.1 (2014).
  - Absent additional measures, staff projects authorities’ headline deficit targets for 2016–20 will be exceeded by 0.4 percent of GDP a year on average.
- Expenditure efficiency and consolidation scope:
  - Public expenditure: 52.7 percent of GDP (2014) versus OECD ACA 45.8 percent.
  - Social protection: 42 percent of expenditure (5 percentage points above OECD ACA).
  - Education spending per student: about 30 percent higher than OECD ACA.
  - Health spending per capita: about 20 percent higher than OECD ACA (after demographic adjustment).
  - Spending on general public services and economic affairs exceeds OECD ACA by around one-fifth of GDP.
  - Staff indicates feasible expenditure savings of about 4 percentage points of GDP by 2020.
  - Potential expenditure savings by 2020 (staff calculations): Health care: 1/2.0; Education: 1/  2/1.0; Pensions and other social protection: 0.5; Subsidies: 0.5; Total Savings: 4.0.
    - Notes: 1/ By moving to the efficiency frontier of OECD Advanced Countries. 2/ After setting aside funds to improve outcomes.
- Staff-recommended revenue and efficiency measures:
  - Health care: align spending to OECD ACA; shift care from hospitals to outpatient services; better match number of doctors to needs; reduce underutilized hospital beds (currently 60 percent above the OECD ACA per 1,000 residents).
  - Education: align spending per student to OECD ACA to save up to 2 percentage points of GDP, while setting aside funds to improve outcomes in early childhood and tertiary education.
  - Pensions: index statutory retirement age to longevity to lower total public pension expenditures by 1 percentage point of GDP by 2060; raise effective retirement age via incentives, control disability retirement, and bring forward increase in women’s retirement age (planned for 2024–2033), with grandfathering for those close to retirement.
  - Subsidies and tax breaks: reduce subsidies and tax breaks in transport and fossil-fuel industries; avoid duplication across federal and state levels.
  - Fiscal federalism: strengthen link between revenue and expenditure at province and municipal level; benchmark spending targets and link tax transfers to performance.
- Long-run ageing pressures:
  - European Commission’s 2015 Ageing Report implies expenditure increase of 1.6 percentage points of GDP by 2030 and over 3 percentage points by 2060 (2½ percentage points in healthcare and long term care; ½ percentage points in pensions).
  - Staff simulations project debt-to-GDP could reach about 130 percent by 2060 in absence of reforms.
- Rationale and benefits of recommended consolidation:
  - Increase space for countercyclical fiscal response to shocks over the next ten years.
  - Staff estimates the recommended fiscal adjustment path would reduce the GDP level in 2020 by 0.4 percentage points in real terms relative to the baseline, with expected offsetting higher growth after 2020.
  - Allow absorbing potential materialization of tail risks in Austria’s large banking sector and other contingent liabilities (e.g., export guarantees over 12 percent of GDP).
  - Help Austria regain AAA rating and keep borrowing costs low.
  - Improve structural fiscal position ahead of ageing costs starting mid-2020s; foster higher consumer and investor confidence.

### Migration, labor market integration, and potential growth
- Migration impacts and projections:
  - Baseline macro projections reflect increased immigrant inflows of about 1 percent of the working-age population on average in 2014–20.
  - By 2020, relative to pre-2014 trends: potential GDP growth higher by 0.2 percentage points; net pension spending lower by 0.3 percent of GDP; net health-care spending lower by 0.1 percent of GDP.
  - Overall net fiscal effect of increased immigration inflows: negative 0.2–0.3 percent of GDP in 2016–20 and turns positive in 2023.
  - Expected impact on wages and employment of native-born Austrians: small and positive under most plausible parameterization.
- Policy recommendations for integration:
  - Reduce legal obstacles to swift employment (e.g., allow asylum seekers to work while cases processed).
  - Target active labor market policies: training, apprenticeship contracts, work placement programs, skill-bridging courses.
  - Work with employers to boost refugees’ employment chances.
  - Modify labor taxation of lower-wage workers to make work more financially attractive than social benefits and prevent “inactivity traps”.
  - Provide affordable housing where labor demand is highest.
- Authorities’ actions:
  - Implemented language training, certification of job skills, temporary accommodation and healthcare.
  - €70 million set aside for active labor market policies in 2016.
  - “Fifty Action Points” agenda: language courses, skills assessment, enabling education and apprenticeship programs targeted to refugees.
  - Initiative to secure EIB funding for construction of 30,000 additional dwellings to increase affordable housing supply.
- Potential growth and productivity:
  - Staff estimates potential growth dropped below 1 percent in 2010–15 compared with 2.5 percent in 1990–2005.
  - Drivers: limited investment, stagnant labor input (hours worked), lack of productivity growth (TFP flat despite rising capital-to-labor ratio).
  - Staff policy recommendations to raise TFP and labor input: enhance IT penetration; improve access to financing for start-ups; reduce administrative and entry barriers in network industries; ease regulations in professional services and retail trade; further labor tax cuts (especially social security contributions); integrate migrants; raise effective retirement age; provide more child care; retain older workers.
  - Authorities’ measure: part-time retirement allowing people age 62 and higher to reduce working hours by half instead of early retirement and receive 75 percent of previous wages, including 25 percent as social assistance.

### Financial sector resilience, restructuring, and macroprudential policy
- Banking sector metrics and risks:
  - CET-1 ratio of the top three banks: currently hovers around 11 percent, below European peers.
  - CET-1 target example: Raiffeisen Bank International (RBI) plans to bring its CET-1 ratio to 12 percent of RWA by end-2017 mainly by selling subsidiaries and scaling down assets.
  - Profitability: turned positive in 2015 but remains subdued.
  - Corporate and household debt: below the euro area average.
  - Share of Swiss franc loans in household mortgage loans: remains around 20 percent.
  - OeNB estimates average “repayment gap” for Swiss franc loans increased to some 23 percent (€6 billion, some 1½ percent of banks’ risk-weighted assets) following Swiss franc appreciation in 2015.
  - More than 4/5 of households with foreign-currency loans earn above median income and almost all have above median wealth; 4 percent of all Austrian households have foreign-currency-denominated debt.
  - Real estate: annual price increases have dropped below 5 percent recently; OeNB fundamentals-based indicator suggests overvaluation of about 20 percent in Vienna.
- Resolution progress:
  - Apex of cooperative Volksbanken transformed into wind-down unit with bad assets around €6 billion (1.8 percent of GDP).
  - Part of Kommunalkredit re-privatized; remaining part €6.3 billion (1.9 percent of GDP) merged with government-owned “bad bank” KA Finanz of similar size.
  - Sale of CEE network of Hypo Alpe Adria completed in July 2015 to Advent and EBRD; wind-down entity “HETA” established in 2014.
  - HETA moratorium (March 2015 to May 2016) on debt service for €13 billion of HETA debt (€11 billion guaranteed by province of Carinthia).
  - Carinthia offer to buy back HETA-guaranteed senior bonds of €10.1 billion with a haircut of 25 percent and subordinated debt of €900 million with a haircut of 70 percent; deadline for creditor decisions March 11, 2016.
- Policy recommendations on banks and macroprudential toolkit:
  - Strengthen capital and profitability of major banks further; continuously re-assess banks’ capital adequacy.
  - Authorities should press for alternative measures if banks’ capital-building plans falter and be ready to tighten capital requirements, including adjusting systemic risk buffer phasing/size.
  - Encourage banks to mitigate Swiss franc mortgage risks (conversion to euro-denominated mortgages with gradual amortization; loan reduction via early repayment; higher contributions to repayment vehicles).
  - Expand macroprudential toolkit with sector-specific caps on LTV and DTI/DSTI ratios, possibly regionally differentiated.
  - Balance quick resolution of HETA with reputational and financial risks from retroactive contract changes.
- Institutional and macroprudential arrangements:
  - Austrian Financial Market Stability Board (FMSB) created in 2014; FMA implements macroprudential measures under “comply or explain”; OeNB conducts operational supervision and macroprudential analysis.
  - Toolkit currently limited to CRDIV instruments: counter-cyclical and systemic risk buffers; ability to change risk weights on mortgage exposures.
  - FMSB recommended activation of systemic risk buffer phased in over 2016–19, applies to twelve large and medium-size banks, ranges from 1 to 2 percent of RWA; three major CESEE-active banks to face 2 percent of RWA.
  - 2012 “Sustainability Package” introduced Basel III CET-1 rules as of 2013 and guidance including Loan-to-Local-Stable-Funding-Ratio (LLSFR).
  - Initiatives to reduce foreign-currency lending: domestic restrictions on new FX loans since 2008; banks encouraged to offer conversion options for existing Swiss franc loans; Austrian banks committed in 2010 to refrain from riskiest FX lending in CESEE; ESRB recommendations implemented in 2013.

### Debt sustainability analysis (Annex II) and stress tests
- Baseline DSA figures (nominal gross public debt, percent of GDP): 75.0 (2014); 84.2 (2015); 86.2 (2016); 85.4 (2017); 83.7 (2018); 81.9 (2019); 80.1 (2020); 78.3 (2021); 77.0 (final year in table).
- Public gross financing needs (percent of GDP): 14.2 (2014); 9.7 (2015); 9.7 (2016); 8.8 (2017); 9.6 (2018); 9.8 (2019); 11.2 (2020); 10.1 (2021).
- Macro assumptions (selected): real GDP growth: 1.4 (2014); 0.4 (2015); 0.7 (2016); 1.4 (2017); 1.4 (2018); 1.3 (2019); 1.1 (2020); 1.1 (2021). Effective interest rate: 4.3 (2014); 3.1 (2015); 2.9 (2016); 2.7 (2017); 2.4 (2018); 2.3 (2019); 2.4 (2020); 2.5 (2021).
- Identified debt-creating flows (percent of GDP): 2.4 (2014); 3.9 (2015); 2.4 (2016); -0.3 (2017); -1.3 (2018); -1.3 (2019); -1.4 (2020); -0.9 (2021); cumulative -6.7.
- Stress test results and scenarios:
  - Low-growth (standardized) scenario: growth reduced by one historical standard deviation (negative ¾ of a percent in 2017–18); inflation reduced by some ½ percentage points; interest rates fall by 1/3 percentage point. Debt-to-GDP would increase by 6 percentage points to a peak of 91 percentage points in 2018 and decline to 87 percentage points in 2021.
  - Contingent liability shock: illustrative shock of 10 percentage points of GDP (about 40 percent of overall government-guaranteed debt) would raise debt-to-GDP to some 97 percent before gradual reduction to some 93 percent towards the end of the decade.
  - Other standardized shocks (primary balance shock, real exchange rate shock, real interest rate shock) do not lead to significant deviations from baseline except combined/lower-growth which resembles low-growth scenario.
- Assessment:
  - "Debt is sustainable within the DSA medium-term projection horizon, but ageing cost pressures are looming in the longer term."
  - Main vulnerabilities: elevated debt level (above 85 percent of GDP) and potential impact of growth and contingent liability shocks; high share of public debt held by non-residents flagged as a potential vulnerability.

### Authorities’ views, updates, and implementation status
- Authorities’ short-term fiscal stance:
  - Agreed that a broadly neutral stance was appropriate in the short run.
  - Believed state institutions and local governments would reduce spending as needed to meet allocations.
  - Stability Program (April 2015) targeted a structural deficit just below 0.5 percent of GDP throughout the medium term; next update will review targets and measures.
  - Authorities maintain further labor tax cuts depend on ability to reduce expenditure in parallel; no plans to impose new taxes or raise property or consumption taxes at present.
- Implementation and responses:
  - Authorities welcome systemic risk buffer and further macroprudential measures; favor voluntary solutions for HETA but acknowledge trade-offs.
  - Authorities implemented measures on migration integration and set aside €70 million for active labor market policies in 2016.
  - Authorities report banks strengthened capital and reduced risk-weighted assets; FMSB activated SRB up to 2 percent phased in 2016–19.
- Recent data updates:
  - Flash GDP growth estimate for 2015: 0.9 percent (slightly above staff’s projection of 0.7 percent).
  - Carinthia HETA buyback offer: affects senior bonds of €10.1 billion with haircut of 25 percent and subordinated debt of €900 million with haircut of 70 percent; federal liquidity support to Carinthia; creditor decision deadline March 11, 2016.
  - EBA update: current account gap for 2015 narrowed from 2 to 1.4 percentage points of GDP; REER overvaluation gap remains about 9 percent.

### Key statistics and charts (selected exact figures)
- General government debt: 86 percent of GDP (2015).
- Growth series (Table 1 GDP growth): 2.8 (2011); 0.8 (2012); 0.3 (2013); 0.4 (2014); 0.7 (2015); 1.4 (2016).
- CPI (period average): 3.6 (2011); 2.6 (2012); 2.1 (2013); 1.5 (2014); 0.8 (2015); 1.4 (2016).
- Output gap (percent of potential GDP): 0.2 (2011); -0.1 (2012); -0.8 (2013); -1.6 (2014); -1.4 (2015); -0.9 (2016).
- Unemployment (Eurostat definition): 4.6 (2011); 4.9 (2012); 5.3 (2013); 5.6 (2014); 5.8 (2015); 6.2 (2016).
- Public expenditure: 52.7 percent of GDP (2014) versus OECD ACA 45.8 percent.
- Personal income tax reform: entry tax rate reduced from 36½ percent to 25 percent; tax cut equals over 1 percent of GDP (2016) and 1½ percent of GDP from 2017 onwards.
- REER overvaluation (mid-2015): 9 percent (with unexplained residual 6¾ percent).
- Swiss franc loan repayment gap: some 23 percent (€6 billion, some 1½ percent of banks’ risk-weighted assets).
- Banking capital metrics (FSI): Regulatory Tier I capital to RWA: 11.7 (2010); 12.0 (2011); 12.9 (2012); 13.7 (2013); 12.3 (2014); 12.6 (2015Q3). Regulatory capital to RWA: 15.4 (2010); 15.8 (2011); 17.0 (2012); 18.0 (2013); 16.3 (2014); 16.4 (2015Q3).
- Feasible expenditure savings indicated by staff: about 4 percentage points of GDP.
- Long-run ageing-based expenditure increase (EC 2015 Ageing Report): 1.6 percentage points of GDP by 2030 and over 3 percentage points by 2060 (2½ percentage points in healthcare and long term care; ½ percentage points in pensions).

*Source: IMF staff report excerpt and informational updates (Selected sections from the IMF staff report and subsequent staff statement, as provided).*

### 1. Recent Economic Developments ______________________________________________________________ 20

### _cr1650 - 1. Recent Economic Developments

### Context
- Austria has recovered from the global financial crisis in terms of output and employment, but bank and public sector balance sheets still reflect the crisis legacy.
- General government debt rose by almost one third to 86 percent of GDP between 2007 and 2015.
- Most CESEE–active Austria-based banks needed government support; three mid-sized banks were fully or partly nationalized and subsequently resolved.
- Major banks have thin capital cushions relative to peers and profitability is recovering only slowly.
- Credit growth has been stable but low, moving in line with domestic demand.
- Potential growth has dropped below 1 percent (staff estimate) due to limited investment, stagnant labor input (hours worked), and lack of productivity growth.
- Output gap never exceeded 1½ percent; unemployment remained below 6 percent; core inflation was nearly 2 percent in December 2015; headline inflation was 1.1 percent.

### Recent economic developments, outlook, and risks
- Growth and unemployment:
  - Growth estimated at 0.7 percent in 2015.
  - Staff projects growth of 1.4 percent in 2016.
  - Unemployment projected to rise to 6½ percent by 2017, then decline to some 6¼ percent in the medium term.
  - Potential growth expected to slightly exceed 1 percent by 2019–20.
  - Headline inflation expected to gradually rise to 2 percent in the medium term.
- Migration:
  - Authorities expected asylum applications to reach 90,000 in 2015, some 1 percent of Austria’s population.
  - Surge of asylum seekers places short-term pressure on public spending but could boost productive potential and public finances in the medium term if integrated.
- External position:
  - Current account surplus expected to settle around 2½ percent of GDP in 2015 and over the medium term.
  - Austria’s IIP is slightly positive.
  - IMF EBA finds the 2015 current account balance somewhat below the norm; policy gap—mainly too high health expenditures as a proxy for social benefits—explains about half the difference.
  - EBA finds the REER modestly overvalued in mid-2015 by 9 percent, mainly due to an unexplained residual of 6¾ percent.
- Projection differences:
  - Ministry of Finance macro framework aligns with staff: growth 1.4 percent, unemployment 6 percent, consumer price inflation 1.7 percent for 2016.
  - OeNB predicts growth of 1.9 percent in 2016.
  - Two research institutes (IHS and WIFO) revised 2016 growth forecasts to 1.6–1.7 percent.
- Key risks (Risk Assessment Matrix highlights):
  - Global financial volatility or a sharp asset price decline: likelihood Medium; expected impact Medium; policy response includes increasing bank capital buffers and monitoring balance sheet effects.
  - Sharper-than-expected global growth slowdown (China, other EMs, weak demand in euro area/Japan): likelihood Low/Medium to High/Medium depending on source; expected impact Medium/High; policy responses include structural reforms, migrant integration, careful fiscal consolidation, strengthened bank monitoring and stress tests.
  - Dislocation in capital and labor flows / geopolitical fragmentation: likelihood High; expected impact Medium; policy responses include strengthened integration policies and decreased oil consumption through environmentally friendly taxation.
  - On the upside, stronger ECB easing could support growth via exchange rate and confidence channels; prolonged low oil prices could boost disposable income and private consumption while lowering headline inflation.

### Policy discussions and recommendations
- Overarching objectives:
  - Restore fiscal buffers via structural fiscal reforms.
  - Foster rapid integration of immigrants and implement structural reforms to boost potential growth.
  - Further strengthen financial sector resilience and resolve remaining crisis legacy issues.
- Fiscal policy recommendations:
  - Aim for a broadly neutral fiscal stance in 2016–17 (relative to 2015 structural target) to accommodate refugee-related spending while output gap remains open.
  - Continue with a modest structural adjustment of ⅓ percentage points of GDP per year in 2018–20 (staff recommendation).
  - Staff recommendation implies a 1¼ percent of GDP higher headline fiscal balance than the baseline by 2020 and reaching a structural surplus of ½ percent of GDP by 2020, to be maintained until debt falls below 60 percent of GDP (projected for 2026).
  - Once debt falls below 60 percent of GDP (projected 2026), revert to MTO target of a structural deficit of ½ percent of GDP; when debt is well below 60 percent and ageing costs decline (projected for 2040), relax to a deficit of 1 percent of GDP.
- Fiscal risks and specific notes:
  - General government debt exceeds 86 percent of GDP and is expected to decline only slowly; staff baseline projects gross debt at 78 percent of GDP in 2020.
  - Ageing pressures: European Commission’s 2015 Ageing Report implies an expenditure increase of 1.6 percentage points of GDP by 2030 and over 3 percentage points by 2060 (2½ percentage points in healthcare and long term care; ½ percentage points in pensions).
  - Staff simulations project debt-to-GDP could reach about 130 percent by 2060 in absence of reforms.
  - The 2016 personal income tax reform cuts the entry tax rate from 36½ percent to 25 percent; the tax cut amounts to over 1 percent of GDP in 2016 and 1½ percent of GDP from 2017 onwards, with about half of financing relying on anti-fraud tax administration measures with uncertain yield.
  - Financing of envisaged cuts in social security contributions in 2017–18 is yet to be specified.
  - Absent additional measures, staff projects authorities’ headline deficit targets for 2016–20 will be exceeded by 0.4 percent of GDP a year on average.
  - Staff baseline includes estimated refugee-related expenditure of 0.3–0.5 percent of GDP in 2016–20; high uncertainty around these estimates is a risk to deficit projections.
- Expenditure efficiency and tax scope for consolidation:
  - Public expenditure was 52.7 percent of GDP in 2014 versus OECD ACA of 45.8 percent.
  - Social protection comprises 42 percent of expenditure (5 percentage points above OECD ACA).
  - Education spending per student exceeds OECD ACA by about 30 percent.
  - Health spending per capita is about 20 percent higher than OECD ACA after demographic adjustment.
  - Spending on general public services and economic affairs exceeds OECD ACA by around one-fifth of GDP.
  - Staff indicates feasible expenditure savings of about 4 percentage points of GDP.
- Structural reforms to raise potential growth:
  - Reduce labor tax wedge by further cuts in labor taxes, especially social security contributions, to support employment and growth.
  - Rapid integration of migrants to strengthen domestic demand and potential growth.
- Financial sector recommendations:
  - Strengthen capital and profitability of major banks further.
  - Complete resolution of banks nationalized during the crisis.
  - Authorities and some staff support expanding the macroprudential toolkit to mitigate risks from low interest rates and potential misallocation of capital.

### Key statistics and projections (preserve source figures exactly)
- General government debt: 86 percent of GDP (2015).
- Growth: 0.7 percent (2015 estimate); 1.4 percent (staff projection for 2016); OeNB projects 1.9 percent (2016); IHS and WIFO 1.6–1.7 percent (2016).
- Potential growth: below 1 percent (staff estimate); should slightly exceed 1 percent by 2019–20.
- Current account surplus: around 2½ percent of GDP (2015).
- REER overvaluation (mid-2015): 9 percent (with unexplained residual 6¾ percent).
- Asylum applications expected: 90,000 in 2015 (some 1 percent of Austria’s population).
- Public expenditure: 52.7 percent of GDP (2014) versus OECD ACA 45.8 percent.
- Social protection share of expenditure: 42 percent (5 percentage points above OECD ACA).
- Education spending per student: about 30 percent higher than OECD ACA.
- Health spending per capita: about 20 percent higher than OECD ACA (after demographic adjustment).
- Personal income tax reform: entry rate reduced from 36½ percent to 25 percent; tax cut equals over 1 percent of GDP in 2016 and 1½ percent of GDP from 2017 onwards.
- Staff projected gross debt under baseline: 78 percent of GDP in 2020.
- Long-run ageing-based expenditure increase: 1.6 percentage points of GDP by 2030 and over 3 percentage points by 2060 (2½ percentage points in healthcare and long term care; ½ percentage points in pensions).
- Staff recommended structural adjustment: ⅓ percentage points of GDP per year in 2018–20 (implying a 1¼ percent of GDP higher headline balance than baseline by 2020).
- Staff estimate of refugee-related expenditure included in baseline: 0.3–0.5 percent of GDP in 2016–20.
- Feasible expenditure savings indicated by staff: about 4 percentage points of GDP.

*Source: IMF staff report, "Recent Economic Developments" (excerpt).*

### 19.      This policy would deliver several benefits:

### _cr1650 - 19.      This policy would deliver several benefits:

### Policy benefits and fiscal rationale
- It would increase the space for countercyclical fiscal response to any large growth shocks in the next ten years.
- Staff estimates that its recommended fiscal adjustment path would reduce the GDP level in 2020 by 0.4 percentage points in real terms relative to the baseline. As this is a demand shock that should not affect potential output (as long as public investment is unaffected by the expenditure cuts and the currently low unemployment does not succumb to hysteresis effects), this loss should be offset by higher growth in a few years after 2020.
- It would allow absorbing potential materialization of tail risks in Austria’s large banking sector while the European Resolution Fund is still being created, as well as other contingent liabilities (e.g., from the sizable export guarantees (over 12 percent of GDP)).
- It would help Austria regain its AAA rating, and thus keep borrowing costs low in the long term.
- It would improve Austria’s structural fiscal position ahead of rising ageing costs starting in the mid-2020s.
- By ensuring that fiscal sustainability is firmly entrenched for the long run, it may foster higher consumer and investor confidence and thus support growth.

### Authorities’ views and short-term fiscal stance (¶20–24)
- Authorities agreed that in the short run a broadly neutral stance was appropriate.
- Authorities acknowledged risks to the budget but believed state institutions and local governments would reduce spending as needed to meet allocations.
- Some authorities saw merit in further consolidation as recommended by staff; others noted the Stability Program from April 2015 targeted a structural deficit just below 0.5 percent of GDP throughout the medium term. The next update of the Program will review these targets and the measures to achieve them.
- Staff welcomed planned modest social security contributions cuts in 2017–18, while suggesting larger cuts would better support employment and growth. Lost revenue could be offset by a combination of expenditure cuts and hikes in consumption and property taxes (e.g., by bringing the property taxes to the OECD ACA level and raising the reduced VAT rates from 10–13 percent to the main rate of 20 percent over time).
- Authorities maintained that further labor tax cuts would depend mainly on the ability to reduce expenditure in parallel; at present there were no plans to impose new taxes or raise property or consumption taxes.
- Staff argued that efficiency-boosting reforms in health care, education, pensions, and subsidies could create room for further consolidation and tax cuts.

### Potential expenditure savings by 2020 (staff calculations)
- Health care: 1/2.0
- Education: 1/  2/1.0
- Pensions and other social protection: 0.5
- Subsidies: 0.5
- Total Savings: 4.0
- Notes in source:
  - 1/ By moving to the efficiency frontier of OECD Advanced Countries.
  - 2/ After setting aside funds to improve outcomes.

### Staff's recommended efficiency and spending measures (¶23)
- Health care:
  - Align spending to the OECD ACA could save about a quarter of current health expenditure.
  - Shift care from hospitals to outpatient services.
  - Better match over time the number of doctors to population healthcare needs in line with best practices in advanced countries.
  - Reduce number of hospital beds (currently 60 percent above the OECD ACA per 1,000 residents) where underutilized.
- Education:
  - Align spending per student to the OECD ACA could save up to 2 percentage points of GDP.
  - Part of the savings should be spent to improve outcomes in early childhood and tertiary education.
- Pensions:
  - Index the statutory retirement age to longevity to lower total public pension expenditures by 1 percentage point of GDP by 2060.
  - In the shorter run, raise the effective retirement age by (i) enhancing incentives to work longer, (ii) better controlling disability retirement, and (iii) bringing forward the increase in women’s retirement age (planned for 2024–2033), while grandfathering employees close to retirement.
- Subsidies and tax breaks:
  - Continue to reduce subsidies and tax breaks in the transport sector and fossil-fuel industries.
  - Avoid duplication of subsidies at the federal and state level by introducing more transparency and better targeting.
- Fiscal federalism:
  - Strengthen the link between revenue and expenditure at province and municipal level.
  - Benchmark spending targets for subnational governments to best domestic and international practices and link tax transfers to performance.

### Migration and integration: impacts and policy recommendations (¶25–31)
- Migration impacts (staff analysis and projections):
  - Baseline macroeconomic projections reflect increased immigrant inflows of about 1 percent of the working-age population on average in 2014–20.
  - By 2020, relative to pre-2014 migration trends:
    - Potential GDP growth would be higher by 0.2 percentage points.
    - Net pension spending would be lower by 0.3 percent of GDP.
    - Net health-care spending would be lower by 0.1 percent of GDP.
  - The overall net fiscal effect of increased immigration inflows will remain a negative 0.2–0.3 percent of GDP in 2016–20 and turn positive in 2023.
  - Expected impact on wages and employment of native-born Austrians is small and positive under the most plausible parameterization.
- Context on labor force and education:
  - Immigrants are younger than native-born Austrians.
  - In secondary education immigrants lag behind native population; share with tertiary education is comparable to native-borns.
  - Austria receives more high-skilled migrants than the average for EU labor recipient countries.
- Staff recommendations to strengthen integration and boost potential growth:
  - Reduce legal obstacles to finding jobs swiftly (e.g., restrictions on asylum seekers working while cases processed).
  - Target active labor market policies: training, apprenticeship contracts, work placement programs, skill-bridging courses.
  - Work actively with employers to boost refugees’ employment chances.
  - Modify labor taxation of lower-wage workers to make work more financially attractive than social benefits and prevent “inactivity traps”.
  - Provide affordable housing in areas where labor demand is highest.
- Authorities’ actions and initiatives:
  - Authorities implemented measures including language training, certification of job skills, temporary accommodation and healthcare.
  - €70 million set aside for active labor market policies in 2016.
  - “Fifty Action Points” agenda focuses on language courses, skills assessment, enabling education and apprenticeship programs targeted to refugees.
  - Government initiative to secure long-term funding from the European Investment Bank for construction of 30,000 additional dwellings to increase affordable housing supply.

### Productivity, potential growth, and labor supply (¶27, 31–32)
- Staff estimates:
  - Potential growth dropped below 1 percent in 2010–15 compared with 2.5 percent in 1990–2005.
  - Slower accumulation of physical and human capital, declining labor input, and flat total factor productivity (TFP) despite a steady increase in the capital-to-labor ratio.
- Staff policy recommendations to boost TFP and labor input:
  - Enhance IT penetration.
  - Improve access to financing for start-ups.
  - Reduce administrative barriers for new business, lower entry barriers in network industries, ease regulations in professional services and retail trade.
  - Further cuts in labor taxation to support recovery of hours worked by reducing high marginal effective tax rate between part-time and full-time work.
  - Integrate migrant workers, raise the effective retirement age, provide more child care facilities, and strengthen incentives to retain older workers.
- Authorities’ responses:
  - Acknowledge stagnant TFP growth and financing conditions for startups as problems.
  - Introduced part-time retirement allowing people age 62 and higher to reduce working hours by half instead of early retirement and receive 75 percent of previous wages, including 25 percent as social assistance.

### Financial sector resilience and bank restructuring (¶33–38)
- Capital and profitability:
  - CET-1 ratio of the top three banks currently hovers around 11 percent, below European peers.
  - Profitability turned positive in 2015 but remains subdued.
- Household and corporate debt:
  - Corporate and household debt below the euro area average.
  - Share of Swiss franc loans in total household mortgage loans remains around 20 percent.
  - OeNB estimates the average “repayment gap” for Swiss franc loans has increased to some 23 percent (€6 billion, some 1½ percent of banks’ risk-weighted assets) following Swiss franc appreciation in 2015.
  - More than 4/5 of households with foreign-currency loans earn above median income and almost all have above median wealth; 4 percent of all Austrian households have foreign-currency-denominated debt.
- Real estate:
  - Annual price increases have dropped below 5 percent recently.
  - OeNB’s fundamentals-based indicator suggests an overvaluation of about 20 percent in Vienna.
- Bank business-model adjustments and restructuring:
  - Top banks refocusing international presence on core markets and activities to rebuild capital buffers.
  - Raiffeisen Bank International (RBI) plans to bring its CET-1 ratio to 12 percent of RWA by end-2017 mainly by selling subsidiaries and scaling down assets in Asia and the US.
  - Cost-cutting strategies being implemented domestically and in CESEE.
  - Current developments have not materially hampered credit supply in Austria or CESEE, but prolonged asset reduction could constrain credit growth in host countries if other banks do not fill the void.
- Regulatory and macroprudential progress:
  - EU Banking Union elements in place including SSM framework, BRRD, and a pre-funded deposit guarantee scheme.
  - Austrian Financial Market Stability Board (FMSB) created in 2014.
  - Financial Market Authority introduced a systemic risk buffer of up to 2 percent of RWA to be phased in over 2016–19.
  - Macroprudential toolkit still lacks sector-specific instruments such as caps on loan-to-value (LTV), debt-to-income (DTI), and debt-service-to-income (DSTI) ratios for mortgage loans.

*Source: INTERNATIONAL MONETARY FUND — provided content.*

### 39.      The resolution of the banks nationalized during the crisis has progressed significantly.

### 39.      The resolution of the banks nationalized during the crisis has progressed significantly.

### Resolution progress and key transactions
- The apex institution of the cooperative Volksbanken association was transformed into a wind-down unit with bad assets of around €6 billion (1.8 percent of GDP).
- Part of Kommunalkredit has been re-privatized.
- The remaining part of Kommunalkredit of €6.3 billion (1.9 percent of GDP) was merged with the government-owned “bad bank” KA Finanz of similar size.
- The sale of the CEE network of Hypo Alpe Adria to the U.S. equity fund Advent and the EBRD was completed in July 2015.
- A government-owned wind-down entity (“HETA”) for the remaining assets had already been established in 2014.

### HETA: resolution options and trade-offs
- In March 2015, the Financial Market Authority issued a moratorium until May 2016 on the debt service on €13 billion of HETA debt, €11 billion of which is guaranteed by the Austrian province of Carinthia.
- The moratorium is the first step of a resolution procedure based on the Austrian transposition law of the European Bank Recovery and Resolution Directive (BRRD).
- Authorities intend to:
  - Seek agreement on a debt buyback with at least two-thirds of the HETA creditors, and
  - Impose the negotiated haircut on the rest through a retroactive collective action clause (CAC).
- A retroactive CAC-based solution would effectively imply the retroactive voidance of part of Carinthia’s guarantees underlying the debt.
- Staff note difficult trade-offs between:
  - The benefits of a quick resolution, and
  - The reputational and financial risks associated with a retroactive change of contracts, which could call into question the credibility of guarantees issued by some subnational bodies and raise funding costs for some banks.

### Policy discussions and recommendations on the banking sector
- Staff commended progress in revamping the regulatory and supervisory framework and bank resolution, and emphasized:
  - The systemic capital surcharge is welcome, but banks’ capital adequacy will need to be continuously re-assessed.
    - Authorities should swiftly press for alternative measures if banks’ capital-building plans falter.
    - Authorities should stand ready to tighten capital requirements, including by modifying the size and phasing-in the systemic risk buffer, if early warning indicators or stress tests flag intensified future risks.
  - Banks should be further encouraged to pro-actively mitigate risks from domestic Swiss franc mortgage loans by measures such as:
    - Promoting conversion to euro-denominated mortgages with gradual amortization,
    - Loan reduction through early repayment, or
    - Higher contributions to existing repayment vehicles.
  - The macroprudential toolkit should be further strengthened by introducing sector-specific caps on LTV and DTI/DSTI ratios, possibly regionally differentiated.
    - While not binding at present, such caps would be useful if house prices pick up strongly in parts of the country.
  - Regarding HETA, the authorities need to judiciously balance the obvious benefits of a quick resolution with the reputational and financial risks associated with a retroactive change of contracts.

### Authorities’ response
- The authorities broadly agreed with the staff assessment:
  - Acknowledged the need for some banks to strengthen their capital position and plan to carefully monitor implementation of capital-building plans, standing ready to ask for additional measures if objectives are not met.
  - Favored further risk-mitigating measures by banks related to Swiss franc loans but noted debtors would need to agree voluntarily.
  - Welcomed the proposal of sector-specific macroprudential instruments and reported that discussions on the design of such tools have started.
  - Confirmed their preferred solution for HETA is a voluntary agreement with creditors, while acknowledging associated trade-offs.

### Staff appraisal: context and broader financial policy implications
- Austria is described as stable and affluent, with high income per capita and relatively low unemployment.
- Growth and public finances:
  - Growth has stalled and public debt has risen to 86 percent of GDP.
  - With the ongoing surge of asylum seekers, unemployment is expected to rise.
- Reform priorities to preserve living standards include:
  - (i) A gradual but sustained fiscal consolidation that rebuilds fiscal buffers by cutting inefficient expenditure;
  - (ii) Rapid integration of immigrants and other measures to raise productivity and labor force participation;
  - (iii) Vigilance regarding risks in the large financial sector, and efficient asset disposal by wind-down units of resolved banks.
- Fiscal stance guidance:
  - Until the output gap closes, a broadly neutral fiscal stance is needed, as envisaged in the 2016 budget.
  - Moving gradually to a structural surplus of ½ percent of GDP by 2020 and keeping it until the debt-to-GDP ratio reaches 60 percent of GDP is recommended.
- Fiscal consolidation delivery and savings potential:
  - Needed consolidation should come from broad reform-based cuts in large expenditure areas where Austria spends more than peers.
  - Staff estimates potential savings at 4 percentage points of GDP by 2020.
  - Crucial areas: health care, education, subsidies, and pensions.
- Additional policy notes:
  - A national strategy to reduce costs, fully coordinated across government levels, is essential, including benchmarking spending targets and avoiding duplication.
  - Decisive expenditure reforms would make room for further reduction of the labor tax wedge, including larger reductions in social security contributions beyond modest cuts envisaged for 2017–18.
  - Cuts could be financed in a revenue-neutral way by hikes in consumption, wealth, and environment-friendly taxes.
  - Early, intensive, and sustained policies to integrate immigrants could raise potential growth by ¼ of a percentage point by 2020 and produce steady fiscal gains in the long term.
- Financial sector resilience:
  - Authorities have made significant progress in revamping the regulatory and supervisory framework of the banking sector.
  - Key elements of the EU Banking Union have been put in place.
  - The Austrian Financial Market Stability Board is operational and, upon its proposal, a systemic risk buffer will be phased in during 2016–19.
  - Nevertheless, banks’ capital adequacy will need continuous monitoring and re-assessment.
  - Authorities should press for alternative measures if banks’ capital-building plans falter and stand ready to tighten capital requirements if early warning indicators or stress tests flag intensified future risks.
  - Banks should be further encouraged to proactively mitigate risks related to Swiss franc mortgage loans.
  - Macroprudential preparedness should be strengthened by introducing instruments such as caps on loan-to-value, debt-to-income, and debt-service-to-income ratios for mortgage loans, possibly regionally differentiated.

*Source: IMF staff report excerpt.*

### 54.      It is recommended that the next Article IV consultation with Austria be held on the standard

### _cr1650 - 54.      It is recommended that the next Article IV consultation with Austria be held on the standard 12–month cycle.

### Recent Economic Developments
- Real GDP growth (qoq, percent change): series shown for Austria, France, Euro area, Germany (chart).
- Output gap (percent of potential GDP): 0.2 (2011), -0.1 (2012), -0.8 (2013), -1.6 (2014), -1.4 (2015), -0.9 (2016).
- Harmonized CPI (annual percent change): Austria - Headline and Core series; core close to 2 percent while headline remains well below the ECB's objective.
- Unemployment (Eurostat definition): 4.6 (2011), 4.9 (2012), 5.3 (2013), 5.6 (2014), 5.8 (2015), 6.2 (2016).
- Growth contributions (qoq, in percent): Total domestic demand, Net exports and Real GDP growth plotted (chart note: contributions detailed in Table 1 and Table 2).

### Financial Market Indicators
- Equities indices (1/1/07 = 100): Erste Bank, Raiffeisen, Euro area banks, ATX (chart).
- Credit Default Swaps, 5-year (basis points, 30-day moving average): Deutsche Bank, Erste Bank, Raiffeisen, Unicredit (chart).
- Sovereign CDS, 5-year (basis points): Austria, Netherlands, France (chart).
- 10-year Sovereign Spread with Germany Bund (basis points): Austria, Netherlands, France (chart).
- Austrian Government Interest Rates (percent): 10 year and 2 year series (chart).
- Austrian Bank Bond Yield (percent, bond maturity in 2016/17): Raiffeisen, Erste Bank, Unicredit (chart).
- Key observations: Sovereign spreads have narrowed. Bank spreads have narrowed. Bank equity valuations are mixed. Sovereign and bank bond yields remain low.

### External Sector
- Current account balance (percent of GDP): 1.6 (2011), 1.5 (2012), 2.0 (2013), 1.9 (2014), 2.6 (2015), 2.6 (2016).
- Components plotted: Transfers, Income, Services, Goods, Total (chart).
- Austria has a moderate current account surplus which reflects strong revenue from tourism.
- Real Effective Exchange Rates (Euro area indices, 1999 = 100): HCPI Deflated, PPI Deflated, ULC Deflated, GDP Deflated series (chart).
- Share of World Exports (percent): Austria, Germany, Italy (chart shows stability).
- International Investment Position (percent of GDP): Reserves, Derivatives, Other, Portfolio, FDIIIP (chart) — Austria's net international investment position is near zero.

### Banking Sector
- Selected Large European Banks: Tier I Ratio 2011–2014 (percent) — Austrian banks highlighted (chart).
- Price to Book Ratio of Austrian Banks: Austria 2011 vs 2015 (chart) — market valuations low.
- Return on Assets of selected large European banks, 2007–14 (percent) (chart) — returns have come down.
- Nonperforming loans ratio, 2011–14 (percent) (chart) — NPLs remain high.
- CESEE Exposures (percent of 2013 GDP): 2008 vs 2015 series — Austrian banks have high CESEE exposure.
- Share of Foreign Currency Loans in lending of Austrian banks’ subsidiaries: series for multiple CESEE countries (chart) — legacy foreign currency lending remains.
- Key observation: Bank capitalization remains low relative to peers.

### Corporate and Household Indebtedness and House Prices
- Household foreign currency loans (percent of total loans): Austria vs Euro area (chart) — high Swiss franc share for households.
- Corporate Debt (percent of GDP) — Austria vs Euro area (2000–2014 series).
- Household Debt (percent of GDP) — Austria vs Euro area (2000–2014 series).
- Change in House Prices Index, 2008–14 (percent): cross-country chart with AUT among others.
- Credit growth (y-o-y percent change, exchange rate-adjusted): Corporate and Household series (2007M1–2015M7) — credit growth remains stable but low.
- Interest rates (percent): HH lending rate (up-to-one-year fixed for house purchase loans to household), NFC lending rate (up-to-one-year fixed for new loans over 1 million euros to non-financial corporations), HH deposit rate (household time deposits up to one year) — interest rates low.
- House price growth was strong over recent years but has moderated recently.

### Fiscal Developments and Outlook
- General government deficit (EDP-definition, percent of GDP): -2.6 (2011), -2.2 (2012), -1.3 (2013), -2.7 (2014), -1.6 (2015), -1.8 (2016).
- Structural Balance 1/ (percent of GDP): -2.5 (2011), -1.7 (2012), -1.0 (2013), -0.3 (2014), -0.2 (2015), -1.0 (2016).
- Gross debt (end of period, percent of GDP): 82.1 (2011), 81.6 (2012), 80.8 (2013), 84.2 (2014), 86.2 (2015), 85.4 (2016).
- Revenue (percent of GDP): 48.3 (2011), 48.9 (2012), 49.7 (2013), 50.0 (2014), 50.3 (2015), 49.4 (2016).
- Expenditure (percent of GDP): 50.8 (2011), 51.1 (2012), 50.9 (2013), 52.7 (2014), 51.9 (2015), 51.2 (2016).
- Key observations: Debt has increased substantially, driven by bank restructuring expenses. Current fiscal plans leave Austria's debt above peers. The structural deficit has narrowed. Standard DSA growth and contingent liability shocks would increase debt significantly (DSA Debt Stress Tests chart shows Baseline, Real GDP Growth Shock, Contingent Liability Shock).

### Migrants Integration Policies and Economic Impact of Immigrants
- MIPEX Index: Austria's position improved since 2007 but still modestly lagging the EU average on some integration policies (chart comparing 2007 and 2014).
- Potential impact scenarios on public finances (2015–60):
  - Baseline scenario reflects migrant inflows of 1 percent of the working-age population (WAP) a year.
  - High inflow scenario assumes 1.7 percent of the WAP.
  - Low inflow scenario corresponds to pre 2014 migration trends.
- Reduction in Net Pension Spending Relative to Pre 2014 Migration Trends, 2015-60 (chart): Baseline and High migration scenario — successful integration could reduce net pension cost relative to GDP.
- Reduction in Net Health Care Spending Relative to Pre 2014 Migration Trends, 2015-60 (chart): Baseline and High migration scenario — smaller reductions than for pensions.
- Distribution of Potential Output, 1995–2015: Natives vs Immigrants (chart) — share of potential output generated by immigrants has been increasing.
- Potential Growth Projections, 2015–2020 (chart): Baseline, High migration inflow scenario, Low migration inflow scenario — successful integration can raise Austria's potential growth.

### Tax Revenue, PIT and Social Security Contributions
- Total tax revenue (Percent of GDP), Total Tax Revenue, 2013: Austria listed among high tax-intake countries (chart).
- Personal income tax (Percent of GDP), Personal Income Tax, 2013: Austria shown relative to peers (chart) — personal income tax cut in 2016 noted.
- Social security contributions (Percent of GDP), Social Security Contributions, 2013: Austria among countries with large social security contributions.
- Key observations: Austria's tax intake remains high, even after the personal income tax cut in 2016. Large social security contributions weigh on demand for labor.

### Potential Growth and Productivity
- Potential growth decomposition, 1990–2015 (percent): Capital, Human capital, Labor, TFP contributions depicted; potential growth decelerated driven by slower accumulation of physical and human capital, negative contribution from the labor force, and lackluster productivity growth.
- GDP per person employed (2007=100): series shows stagnation since 2007.
- Net capital stock per person employed (2007=100): steady increase in stock of capital.
- Total Factor Productivity (2007 = 100): sluggish growth.
- Average hours worked (2007=100): declining average hours worked.
- Key observation: GDP per person employed has stagnated since 2007 despite steady increase in stock of capital; TFP growth sluggish and average hours worked declining.

### Structural Indicators
- Product Market Regulations, 2013: Austria not restrictive (chart).
- Spending on R&D, 2000–13 average (percent of GDP): Austria spends more on R&D than the OECD average but less than frontrunners.
- Tax Wedge, 2014 (percent of labor cost): Austria among highest labor taxation compared with peers.
- Labor force with tertiary education, 2014 (percent of labor force): Austria among countries with relatively low share.
- ICT Investment, 2000–2010 average (percent of total investment): Austria invests less in ICT than peers.
- Employment of ICT Specialists across the economy, 2014 (share of total employment): Austria employs fewer ICT specialists.
- Key observations: Austria invests less in ICT and employs fewer ICT specialists; product market regulations not restrictive; high labor taxation; R&D spending above OECD average but below frontrunners; relatively low share of labor force with tertiary education.

### Key Quantitative Tables and Projections (Selected figures)
- Table 1: Selected Economic Indicators, 2011–16
  - GDP growth: 2.8 (2011), 0.8 (2012), 0.3 (2013), 0.4 (2014), 0.7 (2015), 1.4 (2016).
  - Total domestic demand: 2.9 (2011), 0.3 (2012), -0.4 (2013), -0.2 (2014), 0.5 (2015), 1.1 (2016).
  - Exports of goods and nonfactor services: 6.0 (2011), 1.7 (2012), 0.8 (2013), 2.1 (2014), 1.1 (2015), 3.2 (2016).
  - CPI (period average): 3.6 (2011), 2.6 (2012), 2.1 (2013), 1.5 (2014), 0.8 (2015), 1.4 (2016).
  - General government revenue: 48.3 (2011), 48.9 (2012), 49.7 (2013), 50.0 (2014), 50.3 (2015), 49.4 (2016).
  - General government expenditure: 50.8 (2011), 51.1 (2012), 50.9 (2013), 52.7 (2014), 51.9 (2015), 51.2 (2016).
  - Gross debt (end of period): 82.1 (2011), 81.6 (2012), 80.8 (2013), 84.2 (2014), 86.2 (2015), 85.4 (2016).
  - Current account (percent of GDP): 1.6 (2011), 1.5 (2012), 2.0 (2013), 1.9 (2014), 2.6 (2015), 2.6 (2016).

- Table 2: Medium-Term Macroeconomic Framework, 2011–21 (selected series)
  - GDP growth (percent): 2.8 (2011), 0.8 (2012), 0.3 (2013), 0.4 (2014), 0.7 (2015), 1.4 (2016), 1.4 (2017), 1.3 (2018), 1.1 (2019), 1.1 (2020), 1.1 (2021).
  - CPI inflation (pa; annual percent change): 3.6 (2011), 2.6 (2012), 2.1 (2013), 1.5 (2014), 0.8 (2015), 1.4 (2016), 1.8 (2017), 1.9 (2018), 2.0 (2019), 2.0 (2020), 2.0 (2021).
  - Unemployment rate (percent): 4.6 (2011), 4.9 (2012), 5.3 (2013), 5.6 (2014), 5.8 (2015), 6.2 (2016), 6.4 (2017), 6.3 (2018), 6.2 (2019), 6.2 (2020), 6.2 (2021).
  - Current account balance (percent of GDP): 1.6 (2011), 1.5 (2012), 2.0 (2013), 1.9 (2014), 2.6 (2015), 2.6 (2016), 2.7 (2017), 2.6 (2018), 2.5 (2019), 2.4 (2020), 2.4 (2021).
  - General government revenue (percent of GDP): 48.3 (2011) … 49.3 (2021) (see full table for annual series).
  - General government expenditure (percent of GDP): 50.8 (2011) … 50.4 (2021) (see full table for annual series).
  - Balance (percent of GDP): -2.6 (2011), -2.2 (2012), -1.3 (2013), -2.7 (2014), -1.6 (2015), -1.8 (2016), -1.4 (2017), -1.3 (2018), -1.0 (2019), -1.0 (2020), -1.1 (2021).
  - Gross debt (percent of GDP): 82.1 (2011), 81.6 (2012), 80.8 (2013), 84.2 (2014), 86.2 (2015), 85.4 (2016), 83.7 (2017), 81.9 (2018), 80.1 (2019), 78.3 (2020), 77.0 (2021).
  - Potential output (growth in percent): 0.8 (2011), 1.1 (2012), 1.0 (2013), 1.1 (2014), 0.6 (2015), 0.8 (2016), 0.9 (2017), 0.9 (2018), 1.1 (2019), 1.1 (2020), 1.1 (2021).
  - Output gap (percent of potential output): 0.2 (2011), -0.1 (2012), -0.8 (2013), -1.6 (2014), -1.4 (2015), -0.9 (2016), -0.4 (2017), 0.0 (2018–2021).

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

### 1.6 in 2014; 0.6 in 2015; 0.2 in 2016; and 0.1 in the years 2017-19; (b) flood related expenditure: 0.1 in 2013; (c) rev

### _cr1650 - 1.6 in 2014; 0.6 in 2015; 0.2 in 2016; and 0.1 in the years 2017-19; (b) flood related expenditure: 0.1 in 2013; (c) rev

### One-offs excluded from the structural balance (as percent of GDP)
- (a) capital transfers to banks: 0.2 in 2011; 0.5 in 2012; 0.5 in 2013; 1.6 in 2014; 0.6 in 2015; 0.2 in 2016; and 0.1 in the years 2017-19.
- (b) flood related expenditure: 0.1 in 2013.
- (c) revenues from the sale of mobile telecommunication licenses: 0.6 in 2013.
- (d) tax revenues from treaties with Switzerland and Luxembourg: 0.1 in 2012; 0.2 in 2013; 0.1 in 2014.
- (e) revenue from the adjustment in EU contributions: 0.1 in 2014.

### Balance of Payments, 2011–21 (selected indicators, in percent of GDP)
- Balance on current account: 1.6 (2011); 1.5 (2012); 2.0 (2013); 1.9 (2014); 2.6 (2015); 2.6 (2016); 2.7 (2017); 2.6 (2018); 2.5 (2019); 2.4 (2020); 2.4 (2021).
- Balance on goods and services: 2.2 (2011); 2.4 (2012); 2.8 (2013); 3.7 (2014); 3.4 (2015); 3.5 (2016); 3.6 (2017); 3.5 (2018); 3.5 (2019); 3.4 (2020); 3.3 (2021).
- Exports of goods and services: 53.4 (2011); 53.5 (2012); 53.4 (2013); 53.3 (2014); 53.0 (2015); 53.4 (2016); 54.1 (2017); 54.8 (2018); 55.8 (2019); 56.8 (2020); 57.8 (2021).
- Imports of goods and services: 51.2 (2011); 51.1 (2012); 50.5 (2013); 49.7 (2014); 49.5 (2015); 49.9 (2016); 50.5 (2017); 51.4 (2018); 52.3 (2019); 53.4 (2020); 54.5 (2021).
- Income, net: -0.7 (2011); -0.9 (2012); -0.9 (2013); -1.7 (2014); -0.9 (2015); -0.9 (2016); -0.9 (2017); -0.9 (2018); -0.9 (2019); -0.9 (2020); -0.9 (2021).
- Balance on capital account: -0.1 (2011) through -0.1 (2021) each year.
- Balance on financial account: 1.4 (2011); 1.6 (2012); 3.4 (2013); 1.1 (2014); 2.5 (2015); 2.5 (2016); 2.6 (2017); 2.6 (2018); 2.6 (2019); 2.7 (2020); 3.0 (2021).
- Direct Investment, net: 3.5 (2011); 3.2 (2012); 2.5 (2013); -0.2 (2014) through -0.2 (2021) each year.
- Portfolio investment, net: -5.2 (2011); -1.8 (2012); -0.6 (2013); 3.3 (2014) through 3.3 (2021) each year.
- Errors and omissions: -0.1 (2011); 0.2 (2012); 1.6 (2013); -0.7 (2014); 0.0 (2015) through 0.0 (2021) each year.

Sources for BOP: Austrian National Bank; WIFO; and IMF staff projections.

### General Government Operations, 2011–21 (in percent of GDP; selected rows)
- Revenue: 48.3 (2011); 48.9 (2012); 49.7 (2013); 50.0 (2014); 50.3 (2015); 49.4 (2016); 49.2 (2017); 49.1 (2018); 49.1 (2019); 49.2 (2020); 49.3 (2021).
- Taxes: 26.9 (2011); 27.4 (2012); 27.7 (2013); 28.1 (2014); 28.6 (2015); 27.6 (2016); 27.6 (2017); 27.9 (2018); 28.0 (2019); 28.1 (2020); 28.2 (2021).
  - Indirect taxes: 14.3 (2011) through 14.7 (2021) constant in later years.
    - o/w VAT: 7.6 (2011); 7.7 (2012); 7.7 (2013); 7.8 (2014); 7.8 (2015); 7.9 (2016); 8.1 (2017); 8.1 (2018); 8.1 (2019); 8.1 (2020); 8.1 (2021).
    - Excises: 3.4 (2011) through 3.3 (2021) (constant).
  - Direct taxes: 12.6 (2011); 12.9 (2012); 13.3 (2013); 13.7 (2014); 14.1 (2015); 13.1 (2016); 13.1 (2017); 13.2 (2018); 13.3 (2019); 13.4 (2020); 13.5 (2021).
    - o/w Personal income tax: 9.7 (2011); 10.0 (2012); 10.2 (2013); 10.6 (2014); 10.9 (2015); 9.9 (2016); 10.0 (2017); 10.1 (2018); 10.2 (2019); 10.3 (2020); 10.4 (2021).
    - Corporate income tax: 2.1 (2011) through 2.2 (2021) constant.
- Social contributions: 14.9 (2011); 14.9 (2012); 15.2 (2013); 15.4 (2014); 15.5 (2015); 15.5 (2016); 15.3 (2017); 15.1 (2018); 15.1 (2019); 15.1 (2020); 15.1 (2021).
- Expense: 47.8 (2011); 48.2 (2012); 48.6 (2013); 49.8 (2014); 49.0 (2015); 48.3 (2016); 47.7 (2017); 47.6 (2018); 47.3 (2019); 47.4 (2020); 47.6 (2021).
  - Compensation of employees: 10.7 (2011); 10.7 (2012); 10.6 (2013); 10.6 (2014); 10.6 (2015); 10.5 (2016); 10.4 (2017) through 10.4 (2021).
  - Interest: 2.8 (2011); 2.7 (2012); 2.6 (2013); 2.5 (2014); 2.4 (2015); 2.2 (2016); 2.0 (2017); 1.9 (2018); 1.9 (2019); 2.1 (2020); 2.0 (2021).
  - Social benefits: 22.3 (2011); 22.6 (2012); 23.0 (2013); 23.3 (2014); 23.4 (2015); 23.6 (2016); 23.7 (2017); 23.8 (2018); 23.8 (2019); 23.8 (2020); 23.8 (2021).
- Gross operating balance: 0.4 (2011); 0.7 (2012); 1.1 (2013); 0.2 (2014); 1.4 (2015); 1.1 (2016); 1.5 (2017); 1.5 (2018); 1.7 (2019); 1.8 (2020); 1.7 (2021).
- Acquisition of non-financial assets: 3.0 (2011); 2.9 (2012); 2.4 (2013); 2.9 (2014); 3.0 (2015); 2.9 (2016); 2.8 (2017); 2.8 (2018); 2.8 (2019); 2.8 (2020); 2.8 (2021).
- Net lending / Net borrowing: -2.6 (2011); -2.2 (2012); -1.3 (2013); -2.7 (2014); -1.6 (2015); -1.8 (2016); -1.4 (2017); -1.3 (2018); -1.0 (2019); -1.0 (2020); -1.1 (2021).
- Memorandum items:
  - Overall balance (EDP-definition): same as Net lending / Net borrowing series above.
  - Primary balance: 0.2 (2011); 0.6 (2012); 1.3 (2013); -0.2 (2014); 0.8 (2015); 0.5 (2016); 0.6 (2017); 0.6 (2018); 0.8 (2019); 0.9 (2020); 1.1 (2021).
  - Structural balance 1/: -2.5 (2011); -1.7 (2012); -1.0 (2013); -0.3 (2014); -0.2 (2015); -1.0 (2016); -1.0 (2017); -1.1 (2018); -1.0 (2019); -1.0 (2020); -1.1 (2021).
  - Change in structural balance: 0.7 (2011); 0.8 (2012); 0.7 (2013); 0.7 (2014); 0.1 (2015); -0.9 (2016); 0.0 (2017); -0.1 (2018); 0.1 (2019); 0.0 (2020); -0.1 (2021).
  - Structural primary balance 1/: 0.3 (2011); 1.1 (2012); 1.6 (2013); 2.2 (2014); 2.2 (2015); 1.2 (2016); 1.0 (2017); 0.8 (2018); 0.9 (2019); 1.0 (2020); 1.1 (2021).
  - Public debt: 82.1 (2011); 81.6 (2012); 80.8 (2013); 84.2 (2014); 86.2 (2015); 85.4 (2016); 83.7 (2017); 81.9 (2018); 80.1 (2019); 78.3 (2020); 77.0 (2021).
  - Net public debt: 49.5 (2011); 49.2 (2012); 47.7 (2013); 47.8 (2014); 47.4 (2015); 45.9 (2016); 44.5 (2017); 44.5 (2018); 42.9 (2019); 41.4 (2020); 40.4 (2021).

Sources for General Government: Authorities, Eurostat, and IMF staff projections.

### General Government Balance Sheet, 2007–14 (selected indicators, in percent of GDP)
- Net financial worth: -39.6 (2007); -43.7 (2008); -46.5 (2009); -49.1 (2010); -51.0 (2011); -58.6 (2012); -58.1 (2013); -61.6 (2014).
- Financial assets: 35.1 (2007); 36.1 (2008); 42.3 (2009); 44.7 (2010); 43.7 (2011); 49.8 (2012); 47.4 (2013); 52.5 (2014).
  - Currency & deposits: 4.4 (2007); 7.5 (2008); 5.4 (2009); 5.9 (2010); 6.9 (2011); 6.1 (2012); 6.2 (2013); 8.2 (2014).
  - Loans: 10.3 (2007); 10.2 (2008); 10.7 (2009); 10.9 (2010); 10.6 (2011); 11.0 (2012); 11.0 (2013); 13.7 (2014).
- Liabilities (at market value): 74.7 (2007); 79.9 (2008); 88.8 (2009); 93.8 (2010); 94.7 (2011); 108.4 (2012); 105.5 (2013); 114.1 (2014).
  - Securities other than shares: 54.4 (2007); 60.5 (2008); 68.2 (2009); 72.7 (2010); 73.3 (2011); 78.2 (2012); 75.2 (2013); 82.2 (2014).
  - Loans: 11.5 (2007); 10.5 (2008); 11.7 (2009); 12.5 (2010); 13.3 (2011); 13.3 (2012); 13.2 (2013); 14.7 (2014).

Sources: Statistical Office of Austria and Eurostat.

### Financial Soundness Indicators, 2010–2015Q3 (selected indicators, percent)
Capital adequacy and related:
- Regulatory capital to risk-weighted assets 1/: 15.4 (2010); 15.8 (2011); 17.0 (2012); 18.0 (2013); 16.3 (2014); 16.4 (2015Q3).
- Regulatory Tier I capital to risk-weighted assets 1/: 11.7 (2010); 12.0 (2011); 12.9 (2012); 13.7 (2013); 12.3 (2014); 12.6 (2015Q3).
- Capital to assets (percent) 2/: 7.5 (2010); 7.2 (2011); 7.8 (2012); 8.0 (2013); 6.8 (2014); 7.0 (2015Q3).

Asset quality:
- Nonperforming loans to total gross loans 2/4/: 2.8 (2010); 2.7 (2011); 2.8 (2012); 2.9 (2013); 3.5 (2014); 3.5 (2015Q3).
- Nonperforming loans net of loan-loss provisions to capital 2/4/: 8.2 (2010); 8.0 (2011); 6.9 (2012); 5.8 (2013); 13.8 (2014); 14.3 (2015Q3).

Liquidity:
- Liquid assets to total assets: 23.5 (2010); 24.5 (2011); 24.8 (2012); 24.5 (2013); 22.8 (2014); 24.9 (2015Q3).
- Liquid assets to short-term liabilities: 68.0 (2010); 71.6 (2011); 73.4 (2012); 68.9 (2013); 67.0 (2014); 71.3 (2015Q3).

Other:
- Foreign currency-denominated loans to total loans: 22.1 (2010); 21.4 (2011); 19.7 (2012); 18.8 (2013); 18.8 (2014); 17.7 (2015Q3).
- Foreign currency-denominated liabilities to total liabilities: 11.3 (2010); 12.0 (2011); 10.6 (2012); 10.0 (2013); 9.9 (2014); 10.5 (2015Q3).

Sources: IMF FSI.

### Authorities’ Response to Past IMF Policy Recommendations (IMF 2014 Article IV)
- Fiscal policy I: Authorities continue to implement health care and pension reforms designed in 2013–14. No additional reforms passed since September 2014.
- Fiscal policy II: Structural fiscal target remains a deficit of ½ percent of GDP (i.e., target not shifted to a surplus).
- Fiscal policy III: A sizable personal income tax cut is effective in 2016. Modest cuts in social security contributions envisaged for 2017–18.
- Financial sector policy I: Authorities introduced a systemic risk buffer of up to 2 percentage points of banks’ capital-risk weighted asset ratio, to be phased in over 2016–19.
- Financial sector policy II: Implementation of the banking union framework has progressed; the macroprudential toolkit has yet to be expanded.
- Financial sector policy III: Restructuring progress:
  - Volksbanken sector: main institution transformed into a wind-down unit; sector being streamlined.
  - Kommunalkredit/KA Finanz: part sold and rest transferred to KA Finanz, which maintains its banking license.
  - Hypo Alpe Adria: wind-down unit (“HETA”) established; SEE network sold; authorities seeking agreement with two thirds of HETA creditors on a voluntary debt buyback at a discount with retroactive collective action clauses.

### Macroprudential policies and institutional setup (Annex I)
- Institutional arrangements:
  - Austrian Financial Market Stability Board (FMSB) created in 2014 with consultative role; reports annually to parliament.
  - Financial Market Authority (FMA) is the implementing authority for macro-prudential measures; FMSB recommendations implemented by FMA under “comply or explain”.
  - Austrian National Bank (OeNB) conducts operational bank supervision and provides macro-prudential analysis; can propose risk warnings and recommendations to FMSB.
  - Ministry of Finance chairs FMSB; Board decisions by simple majority; reports must be agreed unanimously.
- Currently available tools:
  - Toolkit limited to instruments in CRDIV: counter-cyclical and systemic risk buffers; possibility to change risk weights on mortgage exposures.
  - Recommendation that additional sector-specific tools (LTV, DTI, DSTI caps) would be beneficial and legally feasible under national legislation.
- Forthcoming activation of systemic risk buffer:
  - FMSB recommended activation in September 2015.
  - Buffer targets structural systemic risks from bank size, ownership, interconnectedness, and CESEE exposure.
  - Phased in over 2016–19, applies to twelve large and medium-size banks, consists of CET-1 capital, ranges from 1 to 2 percent of risk-weighted assets.
  - Three major CESEE-active banks will face the maximum requirement of 2 percent of RWA additional capital.
- 2012 “Sustainability Package”:
  - Guidance to strengthen large internationally active banks’ resilience, promote stable local funding for foreign operations.
  - Basel III CET-1 capital rules introduced as of 2013 without transitional provisions (except for private and state participation capital under Austrian bank support package not yet repaid at that time).
  - Introduction of benchmark “Loan-to-Local-Stable-Funding-Ratio (LLSFR)”; objective: stock-LLSFR < 110 percent over time or agree exceptions with host supervisors.
  - Effectiveness: authorities report only 4 out of 35 subsidiaries still have stock LLSFR > 110 percent; three of them have flow LLSFR correcting the situation.
- Initiatives to reduce foreign-currency lending:
  - Domestically, new foreign-currency loans to households increasingly restrictive since 2008; only naturally hedged or high-wealth households eligible.
  - Banks encouraged to offer conversion options for existing Swiss franc loans to households.
  - In CESEE, Austrian banks committed in 2010 to refrain from the riskiest forms of foreign-currency lending; ESRB recommendations implemented in 2013.

*Sources: Austrian authorities; and IMF staff estimates and projections.*

### Annex II. Public Debt Sustainability Analysis (DSA)

### Annex II. Public Debt Sustainability Analysis (DSA)

### Baseline outlook
- Debt trajectory:
  - "Debt will gradually fall from around 86 percent of GDP at end-2015 to 77 percent of GDP by end-2021."
  - Nominal gross public debt (in percent of GDP): 75.0 (2014); 84.2 (2015); 86.2 (2016); 85.4 (2017); 83.7 (2018); 81.9 (2019); 80.1 (2020); 78.3 (2021); 77.0 (table series 2014–2021).
- Fiscal stance and financing:
  - Structural fiscal balance: "would widen to about 1 percent of GDP in 2016–21."
  - Public gross financing needs (in percent of GDP): 14.2 (2014); 9.7 (2015); 9.7 (2016); 8.8 (2017); 9.6 (2018); 9.8 (2019); 11.2 (2020); 10.1 (2021) (table series).
  - Change in gross public sector debt (cumulative, in percent of GDP): 1.8 (2014); 3.4 (2015); 1.9 (2016); -0.8 (2017); -1.7 (2018); -1.7 (2019); -1.8 (2020); -1.3 (2021); cumulative -9.2 (projection horizon).
- Macro parameters (table underlying assumptions):
  - Real GDP growth (in percent): 1.4 (2014); 0.4 (2015); 0.7 (2016); 1.4 (2017); 1.4 (2018); 1.3 (2019); 1.1 (2020); 1.1 (2021).
  - Inflation (GDP deflator, in percent): 1.9 (2014); 1.6 (2015); 1.6 (2016); 1.5 (2017); 1.7 (2018); 1.7 (2019); 1.7 (2020); 1.8 (2021).
  - Nominal GDP growth (in percent): 3.3 (2014); 2.0 (2015); 2.4 (2016); 2.9 (2017); 3.1 (2018); 3.0 (2019); 2.9 (2020); 2.9 (2021).
  - Effective interest rate (in percent): 4.3 (2014); 3.1 (2015); 2.9 (2016); 2.7 (2017); 2.4 (2018); 2.3 (2019); 2.4 (2020); 2.5 (2021); 2.8 (final year in table).
- Identified debt-creating flows and residuals (2014–2021, in percent of GDP):
  - Identified debt-creating flows: 2.4 (2014); 3.9 (2015); 2.4 (2016); -0.3 (2017); -1.3 (2018); -1.3 (2019); -1.4 (2020); -0.9 (2021); cumulative -6.7.
  - Primary deficit (contribution): 0.4 (2014); 0.7 (2015); -0.3 (2016); 0.0 (2017); -0.2 (2018); -0.2 (2019); -0.4 (2020); -0.6 (2021); cumulative -2.1.
  - Automatic debt dynamics contribution: 0.8 (2014); 0.9 (2015); 0.4 (2016); -0.2 (2017); -0.6 (2018); -0.5 (2019); -0.4 (2020); -0.3 (2021); cumulative -2.0.
  - Residual, including asset changes: -0.6 (2014); -0.5 (2015); -0.5 (2016); -0.4 (2017); -0.4 (2018); -0.4 (2019); -0.4 (2020); -0.4 (2021); cumulative -2.4.
- Qualitative assessment:
  - "Debt is sustainable within the DSA medium-term projection horizon, but ageing cost pressures are looming in the longer term."
  - "Gross financing needs are moderate in the period 2016–21."

### Stress tests and alternative scenarios
- Low-growth (standardized) scenario:
  - Assumes growth reduced by one historical standard deviation, "amounts to a negative ¾ of a percent in 2017–18."
  - Scenario also assumes inflation reduced by "some ½ percentage points" and interest rates fall by "1/3 percentage point."
  - Debt impact: "debt-to-GDP ratio would increase by 6 percentage points to a peak of 91 percentage points in 2018 and follow a downward trend to 87 percentage points in 2021."
- Contingent liability shock:
  - Illustrative shock: "10 percentage points of GDP, about 40 percent of the overall government-guaranteed debt."
  - Debt impact: "would prop up the debt-to-GDP to some 97 percent before a very gradual reduction to some 93 percent towards the end of the decade."
- Other standardized shocks:
  - Primary balance shock: deterioration in 2017–18 by half of the 10-year historical standard deviation (relative to baseline).
  - Real exchange rate shock: depreciation of 13.1 percent in 2017 (largest historical depreciation over last ten years).
  - Real interest rate shock: spread increase of 200 bps.
  - "The other standardized macro shocks will not lead to significant deviations from the baseline debt path."
- Combined shock:
  - Driven by assumed lower growth; "leads to a similar debt path as in the low-growth scenario."
- Alternative scenarios from tables:
  - Historical scenario assumptions: slightly lower real GDP growth in projection years (e.g., 1.4; 1.2; 1.2; 1.2; 1.2; 1.2) with primary balance at -0.4 (2017–2021) and slightly higher effective interest rates; results depicted in alternative debt paths (charts).

### Risk assessment and vulnerabilities
- Heat-map and vulnerabilities:
  - Main vulnerabilities identified: already elevated debt level (above 85 percent of GDP) and potential impact of shocks to growth and contingent liabilities on debt dynamics.
  - High share of public debt held by non-residents flagged as "a potential vulnerability" because it "could increase volatility in times of adverse external developments," though less of a concern while Austria is perceived as a safe-haven euro area core country.
- Market perception indicators (table/chart references):
  - Public debt held by non-residents: charted around the 70s (percent of total); benchmark upper warning values include 30 and 45 percent for public debt held by non-residents (heat-map context).
  - Bond spread metrics shown in charts and tables (EMBIG, 10Y CDS) and references to spread thresholds (400 and 600 basis points) used for heat-map signaling.
- Longer-term risks:
  - "In the longer term (starting in the mid-2020s) and barring additional policy measures, ageing cost pressures and higher interest rates would reverse the debt path."

### Composition of debt and projections by category
- Composition and maturity (charts and tables):
  - Charts depict gross nominal public debt and public gross financing needs by year, and composition by maturity (medium and long-term vs. short-term) and by currency (local vs. foreign).
  - The DSA includes scenarios (Baseline, Historical, Constant Primary Balance) with consistent reporting of underlying assumptions (real GDP growth, inflation, primary balance, effective interest rate) and their implications for debt composition and financing needs.

*Source: IMF staff (Annex II. Public Debt Sustainability Analysis (DSA), STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION — INFORMATIONAL ANNEX, Austria, as of January 04, 2016).*

### 1.      This statement provides information that has become available since the Staff

### _cr1650 - 1.      This statement provides information that has become available since the Staff

### Update since the Staff Report
- This statement provides information that has become available since the Staff Report was circulated to the Executive Board on January 20, 2016.
- The information does not alter the thrust of the staff appraisal.

### Migration and asylum policy
- Authorities intend to restrict the number of asylum applications:
  - After receiving about 90,000 asylum seekers in 2015, authorities intend to cap applications at 37,500 in 2016 and a cumulative 1.5 percent of the population (about 128,000) in 2016-19.
  - Authorities are ascertaining whether such limits are in line with Austria’s constitution and EU laws.
  - A draft law envisages that asylum cases will be reviewed after three years to determine whether the reason for granting asylum still exists, while providing incentives for the applicants to actively participate in integrating measures meanwhile.
- Implications for staff estimates:
  - The new policy, if implemented, implies significantly less applicants for 2016 than envisaged in the staff report and Selected Issues paper, with smaller differences in future years.
  - Because the reduced number of pre-screened applicants should normally lead to a higher acceptance rate, the economic effects of migration may differ only moderately from the estimates in the staff report.
  - Specifically, based on the acceptance rates for high-risk countries (Syria and Afghanistan) in 2015, staff estimates that under the new policy:
    - cumulative fiscal costs would be lower by up to 1/3 relative to the figures in the staff report and Selected Issues paper; and
    - potential GDP growth estimates would be lower by about 1/7 relative to the figures in the staff report and Selected Issues paper.

### Carinthia HETA debt offer
- The province of Carinthia has published an offer to buy back HETA debt covered by provincial guarantees:
  - The offer affects senior bonds of € 10.1 billion with a haircut of 25 percent.
  - The offer affects subordinated debt of € 900 million with a haircut of 70 percent.
  - These debt instruments are covered by a guarantee of the province of Carinthia, which would become effectively void in the amount of the haircut.
  - Carinthia would receive liquidity support from the federal level for making the buyback.
  - Initial creditor reactions to the offer are negative, though some creditors, while insisting on full repayment, indicate willingness to negotiate and hint at a possible prolongation of the repayment schedule.
  - The deadline for creditor decisions is March 11, 2016.

### External Balance Assessment (EBA) update
- The regular update of the IMF’s EBA confirms that Austria’s external position is broadly in line with fundamentals and desirable policies.
- Key EBA findings:
  - The current account gap for 2015 has narrowed from 2 to 1.4 percentage points of GDP.
  - The narrowed gap still indicates a norm somewhat higher than the expected surplus, with the high health expenditure now explaining almost the whole gap.
  - The estimated overvaluation gap in the REER (levels) remains at about 9 percent.

### GDP growth 2015
- The flash GDP growth estimate for 2015 came at 0.9 percent, slightly above staff’s projection of 0.7 percent.

### Statement by Mr. Christian Just, Alternate Executive Director for Austria (February 10, 2016) — Summary
- Authorities' overall view:
  - Welcome consultations and broadly agree with the assessment and recommendations on economic and financial policies.
  - Agree that economic growth is set to pick up after a period of rather sluggish activity with an average growth rate of approximately 0.6 percent between 2012 and 2015.
  - Note the European Commission’s Winter 2016 forecast indicates the economy passed its cyclical trough in 2015 with the output gap expected to close by around 2019.
  - No major domestic imbalances have emerged despite moderate growth and fiscal consolidation: credit growth and private consumption remained low, investment cautious, and public consumption conservative; external sector contributed to a persistent increase in the positive international investment position.

- Integration and labor market:
  - Authorities agree swift integration of asylum seekers, once status is cleared, into the labour market will be crucial.
  - Expect unemployment rate to rise slightly despite relatively robust employment growth due to continued inflow of foreign labour supply.

- Inflation and competitiveness:
  - Authorities consider it important to further analyse the persistent positive inflation differential vis-à-vis euro area peers, particularly in services, noting it has not translated into a loss of external price competitiveness so far.

### Productivity growth
- Total factor productivity growth in Austria has been on a secular downward trend and flattened after the crisis, similar to most peer economies.
- Policy actions to reverse weaker productivity growth mentioned by staff and authorities include:
  - enhanced IT penetration;
  - improved access to risk financing for start-ups;
  - increased efficiency in certain areas of the public sector.
- Room to raise potential output by increasing labour supply participation and longer working:
  - Government initiatives include fostering broadband connections with significant earmarked amounts.
  - Other measures: part-time work for the elderly, enhanced crowd-funding possibilities, and some tax relief.

### Fiscal Policy
- Despite lower-than-forecast growth, government revenues remained relatively stable and the structural balance has been improving continuously since 2011 according to IMF calculations.
- Authorities intend to strike a balance between supporting activity and rebuilding buffers, particularly after public debt rose following bank rescue measures.
- Authorities agree public spending on health care and education provides room for efficiency improvements but caution against over-reliance on a narrow set of studies due to methodological limitations.
- Authorities acknowledge high level of subsidies but note their objectives and spill-overs must be weighed against prospective revenue savings.
- Spending reviews are under consideration.

### Financial Sector
- Banks have stepped up efforts to address structural weaknesses:
  - Several banks announced or started consolidation plans to improve efficiency, focus on higher-return markets, and reduce risk-weighted assets to increase capital.
  - Profitability improved considerably in the first half of 2015 compared to the previous year, supported by lower credit risk provisioning and reduced write-offs and impairments.
  - Low interest rate and low growth environment pose challenges for longer-term sustainability of recovery.
- Risks and supervision:
  - Rising emerging market risks could affect Austrian banks via slower growth in core markets, potentially dragging on asset quality and profitability.
  - Supervisors advise banks to adequately provision for risks and have policies to deal with credit quality issues.
- Capitalization and macroprudential measures:
  - Authorities concur loss-absorbing capacity of banks must be further strengthened via continuous build-up of additional capital.
  - Banks have strengthened capital through higher capital and reduced risk-weighted assets; micro- and macroprudential measures will contribute further.
  - Compared to peers, larger Austrian banks still have relatively low capitalization and need to build capital further.
  - In 2015, the Financial Market Stability Board (FMSB) decided to activate a systemic risk buffer (SRB) of up to 2 percent to address systemic risks from: the large size of the banking sector relative to the economy, high exposure to emerging markets, below-average capitalization, and high share of non-listed banks and leveraged owners.
- Foreign currency lending:
  - Systemic risks from foreign currency lending to domestic borrowers have declined but remain significant.
  - Outstanding volumes and number of foreign currency (FX) borrowers have declined substantially.
  - 75 percent of foreign currency loans are designed as repayment vehicle loans and exhibit a non-negligible aggregate borrowers’ funding gap.
  - The Austrian National Bank (OeNB) and Financial Market Authority have stepped up efforts to encourage banks and debtors to engage in bilateral negotiations aimed at sustainable tailor-made solutions.
- Macroprudential toolkit:
  - Authorities agree the macroprudential toolkit needs expansion with respect to real estate-specific instruments.
  - As real estate price increases have not been accompanied by excessive mortgage lending growth so far, the FMSB concluded there is no immediate reason to activate macroprudential instruments regarding real estate funding.
  - FMSB considers it necessary to extend its macroprudential toolkit to align with international best practice.

*Source: _cr1650 - 1.      This statement provides information that has become available since the Staff Report (February 10, 2016).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1650.pdf_