Austria: Staff Concluding Statement of the 2020 Article IV Mission
IMF News, March 3, 2020
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- Published: March 3, 2020
Economic Outlook
- Recent performance and 2019 snapshot
- Growth decelerated in 2019 due mainly to a weaker external environment.
- Preliminary figures suggest the economy grew by 1.6 percent, above the Euro area average.
- Inflation remained low.
- The decline in unemployment leveled-off and employment growth slowed.
- 2020 forecast and risks
- IMF staff expect GDP to increase around 1¼ percent in 2020, mainly supported by domestic demand.
- Inflation is expected to remain under 2 percent.
- The unemployment rate would remain roughly constant.
- Significant downside risks: weaker-than-expected growth in Germany or other European countries, trade disruptions (with the US and/or Brexit related), and the effects of COVID-19.
- Medium-term outlook
- Growth should settle at around 1½ percent in the medium term, but structural reforms and green investment could bolster that figure.
- The external current account surplus will stabilize at around 1.8 percent notwithstanding somewhat weaker export prospects to some partner countries.
Fiscal and Environmental Policy
- Fiscal position in 2019
- Preliminary data suggest the general government posted a surplus above ½ percent of GDP in 2019—up from +0.2 percent of GDP in 2018.
- The public debt-to-GDP ratio decreased by almost 4 percentage points to 70 percent.
- Drivers: lower interest payments, strong income tax revenues from rising wages, lower transfers to the pension system, and lower unemployment benefit outlays.
- Fiscal stance and policy guidance
- Austria should safeguard its strong fiscal position; further consolidation is not necessary.
- The current stance would bring the debt-to-GDP ratio below 60 percent in 2024.
- IMF staff support Austria’s medium-term objective of a structural deficit of 0.5 percent of GDP, implying an overall fiscal stance near balance, or at a slight deficit, in the coming years.
- If growth slows further, automatic stabilizers should be allowed to act; fiscal space could be used for active stimulus in the case of a sharp shock.
- Taxation and labor tax wedge
- Labor taxation in Austria remains well above the OECD average.
- Recent tax amendments lowered social security contributions and provided resources for low-income earners.
- Planned measures welcomed: increases of the annual tax break for families with children and reduction of income taxes for the bottom three income brackets.
- Recommendation: make labor tax cuts permanent by indexing personal income tax brackets to inflation to provide greater certainty and support external competitiveness.
- Planned reductions in the corporate income tax will boost competitiveness and bring Austria’s taxation level closer to the OECD average.
- Climate change and carbon neutrality by 2040
- The mission welcomes the government’s commitment to net carbon neutrality by 2040 but finds current measures insufficiently comprehensive or rapid.
- Staff-recommended strategy components:
- (i) significant increases in carbon taxation (by at least €25/mt per year) beginning in 2021;
- (ii) a strong push for electrification of the personal and commercial transport fleets;
- (iii) incentives for rapid thermal conversion in the housing and office sectors.
- Use of fiscal resources from higher carbon taxation: finance green incentives, compensate negatively affected households (particularly the poor in rural areas), and accelerate income tax reductions.
- Given Austria’s current fiscal space, IMF staff do not see a need for an increase in the overall tax burden.
- Carbon trading schemes are viewed as a second-best solution but could be used to achieve the needed carbon price increase.
Structural Reforms
- Productivity, innovation, and skills
- Austria’s productivity growth has slowed since the financial crisis.
- Public R&D spending is high by international standards, but Austrian firms invest less and have a lower share of intangible assets than other advanced economies.
- Firms cite the labor skill mix and access to financing as constraints.
- Scope exists to upgrade the efficiency of education spending and to promote life-long learning through incentives to firms and workers.
- Housing and affordability
- Cumulative real house price growth nationwide since 2010 was almost 40 percent; overvaluation in Vienna was estimated at about 22 percent.
- Housing construction has risen sharply over the past two years, but further efforts to promote increased housing supply are key to long-term access and affordability.
- Potential savings by strengthening targeting through periodic reviews of benefit eligibility while improving affordability for vulnerable households (young, old, and immigrants).
- Aging and long-term spending pressures
- Austria’s pension system is currently financially healthy, aided by past reforms.
- Some recent reforms were reversed in 2019 under the interim government.
- Effective retirement age and statutory retirement age are both still low by international standards.
- Labor force participation for those 55-64 is well below the EU and OECD averages.
- Future aging will increase pension and health care costs while contributions decline; early action is advisable.
- Migrant integration
- Integration of recent refugees into the labor force has progressively improved, with some 40 percent now participating.
- More can be done to increase inclusion and provide training (particularly German language).
- Lack of German fluency persists into the second generation in some communities and gaps in school qualifications persist.
Financial Sector
- System strength and emerging risks
- Private credit supported the cycle in 2019 while maintaining stable household and corporate indebtedness.
- The financial system remained sound and bank capitalization stood above the Euro area average.
- Profitability growth has weakened in recent months and private sector indebtedness is increasing marginally.
- Authorities should remain vigilant given the impending slowdown in employment growth and possible shocks to debt-servicing capacity.
- Financial Sector Stability Assessment (FSSA) findings
- Austria’s banking system is well-capitalized, but continued vigilance is needed to ensure calibration and size of buffers are sufficient to mitigate stability risks.
- Macrofinancial risks from rising property prices are a growing vulnerability requiring monitoring and possibly further regulatory actions if new-mortgage risk profiles contribute to systemic buildup.
- Recommendations included strengthening the institutional framework for financial oversight and enhancing stress testing by expanding data collection on foreign exposures, nonfinancial corporates and real estate and by incorporating second round effects and contagion.
- Implementation progress and next steps
- Progress made on FSSA recommendations in crisis management, banking supervision and macroprudential policy:
- An updated crisis management manual is expected to be adopted by mid-2020.
- An internal handbook with guidelines on supervisory practices was issued in February.
- Insurance stress testing will focus on business lines critical for future profitability.
- Oversight of spillover risks in the decentralized sector was intensified via greater supervisory engagement with banks and auditors and identification of weak risk management practices in less significant institutions.
- Going forward, authorities should ensure sufficient resources for enhanced stress testing (given complex interrelations and potential for contagion), anti-money laundering, and insurance supervision.
Mission closing
- The mission thanks counterparts in the OeNB, the government and the private sector for the organization and discussions during the visit to Austria.
Austria: Staff Concluding Statement of the 2020 Article IV Mission (March 3, 2020).