Austria: Concluding Statement of the 2025 Article IV Mission
IMF News, April 8, 2025
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Bibliographic details
- Published: April 8, 2025
Mission details
- Mission led by Kevin Fletcher; team comprised Adil Mohommad, Magali Pinat, and Mustafa Saiyid.
- Visit dates: March 26-April 8, 2025.
- Purpose: Conduct discussions on the 2025 Article IV consultation.
Overall assessment
- Austria is in a challenging economic situation after two years of recession and now possibly another year of no growth.
- Adverse shocks: high energy prices and the rapid rise in interest rates to curtail subsequent inflation have dragged down domestic and external demand.
- Complicating factors: heightened global economic uncertainty and the need for significant fiscal adjustment to reduce high deficit levels in compliance with EU fiscal rules.
- Strengths: strong institutions and policy frameworks, healthy financial system, high innovation capacity, and a strong social safety net.
- Policy priorities: (i) adopt gradual, high-quality fiscal adjustment measures to rebuild buffers and offset rising spending pressures from population aging and other needs; (ii) advance pro-growth reforms to boost labor supply, reduce red tape, and strengthen productivity, including by supporting a deepening of the EU Single Market; (iii) maintain prudent macroprudential policy settings and strong financial-sector supervision.
Recent economic developments and outlook
- Downturn: Protracted downturn since end-2022 driven by the energy-price shock and subsequent monetary tightening.
- Fiscal outcome drivers: Fiscal deficits and debt increased, in part due to the weak economy and policy support to cushion the energy-price and COVID shocks.
- Near-term growth projection:
- Real GDP growth is projected to remain around zero in 2025.
- Stronger growth expected from 2026 onwards driven by: pickup in investment due to recent monetary policy easing; more solid private consumption growth supported by recovery in real wages and a decline in the household savings rate from its current elevated level; positive impulse from German fiscal expansion.
- Medium-term constraints: population aging and sluggish productivity growth unless significant reforms are implemented.
- Inflation and competitiveness:
- Inflation: 3.1 percent (y/y HICP), well above the euro-area average of 2.2 percent.
- Risk: Austria’s competitiveness could be gradually undermined if convergence of inflation to the euro-area average does not occur, particularly if productivity-adjusted wage growth remains persistently above the euro-area average.
- Risks:
- Downside: persistent weakness in economic sentiment; further increases in trade barriers and trade policy uncertainty; further weakness in financial market sentiment.
- Upside: faster-than-expected recovery in investor and consumer sentiment; easing of global trade tensions.
Fiscal policy — findings and recommendations
- Recent fiscal outcomes:
- Deficit widened by 2.1 percentage points in 2024 to 4.7 percent of GDP.
- Debt-to-GDP ratio rose to over 81 percent of GDP.
- Medium-term target:
- Authorities should aim to cut the deficit to below 2 percent of GDP to put the debt ratio on a declining path.
- Fiscal pressures:
- Population aging alone is expected to add about 2 percent of GDP in budgetary costs by 2030.
- Need to offset rising interest payments and defense spending while stabilizing public debt.
- Additional fiscal savings required to boost public investment for green transition commitments.
- Recommended consolidation approach:
- Adopt a bold and well-designed package of expenditure cuts and revenue measures to achieve necessary consolidation while minimizing distortions.
- Spending-side options:
- Restrain public pension costs (Austrian pensions relative to incomes are among the highest in the EU).
- Improve healthcare efficiency, including increased use of outpatient, telemedicine, and primary healthcare rather than more expensive hospital services.
- Reduce subsidies, especially environmentally harmful ones.
- Limit public-sector wages increases.
- Revenue-side options:
- Increase land property taxes, inheritance and gift taxes, and excise taxes, noted as somewhat low in Austria relative to most other advanced economies.
- Potential fiscal savings:
- Together, such measures could generate fiscal savings of 3-4 percent of GDP.
- Carbon tax:
- Gradually increasing the carbon tax would generate additional budgetary resources for green transition investment needs and strengthen incentives to reduce carbon emissions in line with Austria’s climate mitigation goals.
- Intergovernmental arrangements:
- Establish mechanisms to ensure that all levels of government contribute equitably to fiscal adjustment.
- Near-term measures:
- Government’s announced fiscal measures for 2025 are expected to lower the deficit to around 4 percent of GDP this year.
- Guidance: This amount of structural adjustment is sufficient for 2025 given the weak economy; if near-term downside risks materialize, allow automatic stabilizers to operate freely and deploy measures to protect the most vulnerable in the event of a severe downturn.
Pro-growth structural reforms
- Importance of EU Single Market deepening:
- Reducing trade barriers and deepening the EU Single Market (including reforms such as Capital Markets Union and harmonized rules for businesses operating in different jurisdictions — i.e., creating a common 28th corporate regime) would allow firms to better leverage economies of scale and catalyze financing for innovative ideas.
- Further energy market integration within the EU would help reduce the level and variability of energy costs.
- Domestic regulatory reforms:
- Productivity has been weak; output per hour worked fell over the last 2 years.
- Austria performs well on incentives for research and development but lags with higher barriers to entry in certain services and relatively high administrative burdens on businesses.
- Recommended measures:
- Cut red tape (e.g., review reporting requirements).
- Lower barriers to entry in specific sectors.
- Reduce regulatory bottlenecks in housing (e.g., ease land-use regulations) to improve housing supply and affordability.
- Streamline and accelerate permitting for renewable energy production to lower energy costs and improve energy security.
- Strengthen collaboration ecosystems between academia and industry and promote capital market finance for firms, especially equity financing for young firms at different stages of growth.
- Labor-supply measures to offset demographic headwinds:
- Working-age population projected to shrink over the medium term; drag larger under lower migration.
- Austria has relatively high levels of part-time work among women and low levels of labor-force participation among elderly workers compared to other EU countries.
- Closing gender and elderly labor-supply gaps relative to the EU average could offset more than 20 years of demographic aging in terms of the effect on GDP.
- Recommended actions:
- Further expand childcare and eldercare.
- Undertake pension reforms that incentivize longer working lives.
- Continue efforts to better integrate immigrants into the workforce.
- Ongoing increase in the retirement age for women noted as helpful to narrow gaps.
Financial sector policies — findings and recommendations
- Financial system health:
- Banks and insurers are stable, liquid, and profitable.
- Banks experienced record profits over the last two years due to high net interest margins and profits from operations in Central and Eastern Europe, despite higher provisioning charges against rising non-performing loans (NPLs) on commercial real estate (CRE) exposures, particularly in Austria.
- Near-term dynamics and risks:
- CRE-related NPL dynamics are expected to moderate, aided by monetary policy easing and improved demand for multi-family residential real estate.
- Net interest margins expected to decline somewhat to more normal levels.
- Increased trade barriers could hurt profits of non-financial corporates with substantial cross-border operations, weakening some firms’ ability to service bank debt.
- Bank policy guidance:
- Banks should be prudent in profit distributions.
- Ensure adequate risk provisions and conservative collateral valuation.
- Use current elevated profits to invest adequately in information technology to insure against cybersecurity risks.
- Macroprudential framework:
- Borrower-based measures for residential real estate (RRE) lending (KIM-V regulation), introduced in August 2022, were not overly restrictive by international standards and helped improve the quality of RRE loans.
- Supervisors must ensure banks adhere closely to proposed RRE lending guidelines that will replace borrower-based measures as of July this year.
- The new government should consider legislation to adopt borrower-based measures as a permanent, structural instrument to guard against reemergence of risks.
- CRE measures:
- Introduction of the sectoral systemic risk capital buffer set at 1 percent of CRE assets is welcome.
- Authorities should continue efforts to close CRE data gaps to assist macroprudential risk assessment.
- Countercyclical capital buffer:
- Current setting at zero remains appropriate given weak credit growth.
- Regulatory and oversight recommendations:
- Implement key recommendations from IMF staff’s 2020 Financial System Stability Assessment, notably:
- Adopt legislation to strengthen the resolution and bankruptcy regimes.
- Strengthen the statutory independence of financial-sector supervision and regulation.
Closing remarks
- The mission thanks the authorities and counterparts for candid and constructive policy dialogue and for the warmth of welcome during the visit.
International Monetary Fund — Concluding Statement of the 2025 Article IV Mission to Austria (April 8, 2025)