GDP growth weakened at the turn of the year, due to shrinking domestic demand. A gradual, export driven recovery is expected later in 2003. Meanwhile, rising unemployment will continue to depress household confidence while investment plans are held back by international uncertainty. Growth can be expected to pick up later this year and into 2004 as high growth in neighbouring accession countries impacts positively on growth in Austria and fiscal policy offers some support.

By allowing the structural deficit to deteriorate by ½ per cent of GDP in 2003 the new Austrian government is giving less priority than its predecessor to maintaining a balanced budget. The scheduled tax reductions for 2004 and 2005 will be partly debt financed and may act pro-cyclically. Returning to a balanced budget in later years, as intended, requires coherent measures on the expenditure side, linking fiscal consolidation with structural reform.