Assessment and Recommendations
Overall, the Austrian economy is maintaining its position among the top performing European economies. Austria’s capacity to take advantage of positive external developments contributed to this outcome. Nevertheless important challenges remain. First, recurrent use of one-off consolidation measures with a relatively high level of public sector debt-to-GDP ratio suggest that there is the need to reform budgeting procedures, including fiscal federal relations – the in-depth structural theme of this Economic Survey – in order to make the government sector more efficient and deliver high quality public services at a lower cost to society. Second, relatively low labour force participation rates of older workers will increase the burden of ageing on the Austrian economy. Hence, further reforms are needed to boost labour force participation and employment while at the same time encouraging productivity growth, notably by fostering competition and providing a better environment for innovation activities...
Economic Issues and Policy Challenges
The Austrian economy was able to take advantage of various positive external developments, notably eastern enlargement of the European Union. Export competitiveness was strengthened, however mainly in areas with a traditional comparative advantage. While the labour market functions well overall, tensions become visible through high seasonal unemployment, high youth unemployment by historical standards and a growing, although still small incidence of long-term unemployment. Government debt is still relatively high and fiscal consolidation relies to some extent on one-off measures. Productivity growth is too much dependent on capital deepening and obstacles to labour force participation hold down trend growth. The key challenges for the Austrian economy to maintain its good economic performance include making the government sector more efficient, reforming federal fiscal relations, boosting productivity growth and removing obstacles to higher labour force participation.
Fiscal Policy Issues
Fiscal policy faces considerable challenges in the short and medium term. The Stability Programme envisages achieving budget balance by 2008, requiring 4% of GDP expenditure cuts, which are not yet fully specified. Government debt is relatively high and significant ageing-related spending pressures will remain ahead. A medium-term budgeting framework is missing and fiscal-sustainability calculations are not available. The tax system is complicated and rates are high. The government introduced a major pension reform in two steps and is streamlining public administration on many fronts. Tax reform reduced corporate tax rates and the tax burden for households. Further reforms should primarily aim for making the government sector more efficient and improve budgeting procedures, make public administration reform more effective, complete pension reform, start with disability benefit reforms and reduce distortions of the tax system.
Reforming Federal Fiscal Relations
Key areas of public sector activity are subject to complex fiscal relations across the layers of government. Revisiting the distribution of tasks and funding principles within the federation is likely to have a very significant potential to improve public sector efficiency. Fragmentation of decision-making in some spending programmes, such as hospital care and social assistance benefits, needs to be overcome, concentrating financing and spending responsibilities on one government level. Strengthening co-operation between municipalities as well as amalgamations of small municipalities would allow to take advantage of scale economies in the provision of local government services. Stronger tax-raising powers of the municipalities and the states, reform of tax sharing rules, as well as improved budgeting procedures would raise the ability of sub-national governments to match supply of services to local demand patters and improve accountability to voters. The Constitutional Convention (Österreich Konvent) has fostered debate on constitutional reform, providing inter alia an opportunity to improve fiscal federal relations along these lines.
Fostering Productivity Growth and Innovation
This chapter proposes reforms to raise productivity growth in Austria. The contribution of business start-ups to productivity growth could be raised, through reducing administrative burdens and improving the framework conditions for the provision of risk capital, notably venture capital. Steps should also be taken to raise competition in product markets, improving competition law enforcement, liberalising regulation of the services of the liberal professions and exposing incumbents in the electricity and telecoms industries to more competition. Obstacles to structural change originating in labour market regulation should be removed. Reforms in secondary and tertiary education can improve the skills base of the economy, strengthening its capacity to reap the productivity potential of new technologies, such as ICT. While R&D spending has increased in recent years, government support for R&D can become more effective.
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