Austria: Staff Concluding Statement of the 2016 Article IV Mission
IMF News, December 13, 2016
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- Published: December 13, 2016
Overview and recent performance
- Austria is characterized as "stable and prosperous" but can improve economic performance to raise incomes and employment within a stable macroeconomic environment.
- 2016 growth projected at 1.4 percent, an improvement over the average growth of 0.6 percent in 2012-15.
- Growth drivers in 2016: private consumption (supported by income tax reductions), recovery in investment, and higher public consumption due to spending on refugees.
- Inflation: 1.4 percent y/y in October 2016; above the Euro Area average (0.5 percent).
- Employment growth picked up in 2016, absorbing rising labor supply from migration and higher labor force participation; unemployment stabilized but remains elevated relative to historical levels.
Near-term outlook and medium-term projection
- 2017 projection: growth to slow marginally to 1.3 percent as 2016 fiscal stimulus tapers off.
- Medium-term without reforms: growth reverts to potential rate estimated at just above 1 percent.
- With the output gap turning positive, inflation is expected to run somewhat above 2 percent in the medium term.
- Reform scenario: a comprehensive reform package could permanently boost potential GDP by some 3 percent over the medium term.
External sector
- Current account surplus expected to rise to close to 2½ percent of GDP in 2016.
- Medium-term projection: current account surplus to gradually decline to about 2 percent of GDP, broadly in line with the average over 2012–15.
- 70 percent of Austria’s exports go to the European Single Market.
- International investment position has strengthened further.
Financial sector assessment
- Banking system as a whole is well capitalized, but large banks’ capital buffers remain low compared to peers (gap reduced recently).
- Bank profits increased in 2015/16, largely due to lower risk provisioning and higher profits in a few Central and Eastern European markets; operational costs are being cut only slowly.
- Credit dynamics:
- Business credit demand remains subdued.
- Household borrowing (largely mortgages) has picked up amid rising house prices.
- Median loan-to-value ratio for mortgage loans was about 65 percent by 2016:Q2.
- Household debt-to-income ratio about 90 percent by 2016:Q2, significantly below the Euro Area average.
- HETA settlement paves the way for closure on legacy of the global financial crisis.
- Phasing in of a systemic risk buffer for bank capital of up to 2 percent over 2016-19 remains appropriate.
Risks to the outlook
- Main risks are external: increasingly inward-oriented policies by trading partners, structurally weak growth in advanced economies, slowdown in emerging markets, or increase in risk premia in global interest rates.
- Potential mitigating factors: European Single Market stability and declining bank exposure to risks in Central and Eastern Europe due to subsidiary divestments.
- Rising house prices warrant attention, though current real estate-related financial risks are assessed as limited.
Fiscal sustainability and public finances
- Fiscal structural balance projected to turn to a deficit of some ¾ percent of GDP in 2016 due to the tax reform.
- Authorities’ fiscal plan: gradual reduction of the structural deficit to ½ percent of GDP (Austria’s medium-term objective, MTO) by 2020.
- Debt projections:
- Public debt expected to fall to some 71 percent of GDP by 2022, aided by the HETA deal and bank restructurings.
- Without additional measures, ageing would increase expenditure by some 3 percentage points of GDP and push public debt above 100 percent of GDP by 2060.
- To keep reducing debt toward 60 percent of GDP over the long term, additional measures are required to counteract ageing-related spending pressures.
Key policy recommendations (comprehensive, coordinated package)
- Structural reforms:
- Lower barriers to entrepreneurship and competition in professional services and other heavily regulated professions.
- Reduce administrative burdens on companies, including start-ups.
- Lower barriers to investment in network sectors.
- Note: start-up promotion package and increased support for R&D in 2016 are steps in the right direction.
- Public investment:
- Increase public investment focused on infrastructure bottlenecks.
- 2015: gross budget investment (including capital transfers) was 3.7 percent of GDP, resulting in net investment below ½ percent of GDP.
- Offset increased investment by efficiency-improving savings in government consumption.
- Shift the tax mix:
- Revenue-neutral shift away from labor taxation (including social security contributions) toward property, pollution, and consumption to raise employment and output.
- Protect low-income households via the social assistance system if adversely affected.
- Raise labor force participation (LFP) of the elderly and women:
- Bring forward increases in pension age for women, tighten early retirement options, and index pension age to life expectancy.
- Make full-time work more attractive for women (including extension of kindergarten and school hours where needed).
- Introduce incentives to work beyond the official pension age.
- Continue integrating accepted asylum seekers (language training, skills recognition).
- Ensure fiscal sustainability:
- Maintain path toward a structural fiscal balance target of -0.5 percent of GDP by 2020.
- Achieve significant savings in health and (to a lesser extent) education sectors, and in subsidies, without compromising quality.
- Combined expenditure savings in these areas could amount to 2½-3 percent of GDP, allowing debt reduction below 60 percent of GDP over the long term and financing additional growth-enhancing policies.
- Adjust fiscal relations between federal, state, and municipal governments to improve incentives and efficiency; implement detailed action plans and efficiency targets following recent framework agreement between federal government and states.
- Raise banks’ capital:
- Authorities should enforce capital strengthening along the envisaged path, using full range of tools available.
- This would bolster financial stability and position banks to finance private investment if credit demand recovers.
- Strengthen macroprudential tools:
- Pass draft law giving the Financial Market Authority expanded responsibilities for development and application of real estate-specific macroprudential tools as soon as possible.
- Implement measures to stimulate housing supply response in major cities (review zoning regulations and other restrictions on construction).
- Improve the AML/CFT framework:
- Strengthen the framework in line with recommendations of the 2016 FATF Mutual Evaluation Report: enhance AML/CFT supervision effectiveness, improve investigation and prosecution of money laundering, and strengthen use of financial intelligence.
- Mission welcomes the authorities’ action plan and encourages rapid implementation.
Source: IMF, "Austria: Staff Concluding Statement of the 2016 Article IV Mission", December 13, 2016, IMF Communications Department.