Cover and table of contents
Assessment and recommendations
Austria’s economic expansion came to a halt with the global financial crisis which erupted in the summer of 2007 and intensified in the autumn of 2008. However, till end–2008, the downturn proved less abrupt than in most other high-income euro area countries. Private consumption and investment held up better, as did exports, notably to Central and Eastern Europe (CEE). International contagion first took the form of general tensions in the financing of banks and a tightening of economy-wide credit conditions. In response, the authorities put in place measures to bolster banks’ liquidity and capital, and the confidence of depositors and creditors. The ongoing slump in world trade is the second channel through which global weakness is affecting Austria, where exports amount to some 60% of GDP. Coupled with the financial-sector uncertainties, and with the expectation of shrinking domestic employment, this foreshadows subdued spending by households and enterprises. Against this backdrop, and despite significant policy action, Austria is projected to experience its deepest and most protracted recession since the mid– 1950s, with unemployment rising sharply, albeit with a lag.
Facing the financial crisis
The global financial crisis put an end to Austria’s economic expansion. By late 2008, Austria had entered recession, albeit less abruptly than some of the euro area countries, and the economy is set to contract markedly in 2009, experiencing the deepest and most protracted recession since the mid-1950s. Its strong economic links with a number of countries in Central and Eastern Europe pose risks to financial and fiscal stability. However, compared with many other OECD economies, the build-up of domestic imbalances, in the form of over-extended credit and asset prices, has been very limited in Austria. In the face of the financial crisis and deteriorating outlook, action has been taken to stabilise financial markets, boost confidence and support activity.
Lifting growth potential through further product and labour market reforms
Austria has one of the higher GDP per capita levels in Europe, but owes this position to a strong pace of convergence until the early 1990s. Over the past decade and a half, it has lost some ground vis-à-vis the best-performing OECD countries. While aggregate productivity growth has picked up in recent years, the employment rate has remained below potential. The most globally-oriented parts of the business sector have intensified their innovation efforts and achieved greater productivity gains. In contrast, the more sheltered services have displayed less dynamism and the participation rate of the low-skilled remains unsatisfactory. Further structural reforms in product and labour markets would help boost potential output, trend growth and average per capita income levels, and reinforce social cohesion. This chapter suggests that there is room for stimulating competition, innovation and investment in services and for labour market reforms to foster the employment of low-skilled workers.
Medium-term fiscal policy challenges
During the economic expansion, Austria made progress with fiscal reform, notably on pensions and with respect to the spending framework, although there was also some backtracking. However, much remained to be done even before the global financial crisis, which is now compounding the challenges. With the recession, the fiscal position is set to deteriorate sharply, as in other OECD countries. Significant fiscal consolidation will therefore be needed once the economic situation improves, all the more so as the fiscal stimulus imparted to cushion the downturn has mainly involved permanent measures. Unlike in many other OECD countries, projected agerelated fiscal pressures seem to be relatively small, primarily thanks to past pension reforms. In these circumstances, the authorities should focus on changes in the spending and tax structure conducive to economic growth, alongside further reforms of the fiscal framework and improvements in the efficiency of public spending, especially on health care and education. Genuine progress in these areas, however, is difficult to achieve without fiscal federalism reforms.
Re-inventing the education system
Austria’s growth performance hinges inter alia on the quality of its education system. While the latter has long equipped the Austrian labour force with good vocational skills, it now faces major challenges. It has to provide youth with new, higher and more generic skills called for by technological change, international competition, and aspirations for a more equitable distribution of human capital. The education sector faces difficulties in responding to these demands. The new government has an ambitious education reform agenda. This chapter suggests that the authorities should emphasise: i) increasing the participation of all children in pre-school education from age three onwards, with a particular focus on pupils with weak socioeconomic and immigration backgrounds; ii) overcoming the excessively early streaming of students in compulsory education, by encouraging the development of the recently introduced new secondary schools (Neue Mittelschule); iii) rationalising the present school infrastructure, class sizes and teaching personnel, and re-investing the freed resources into improving teaching quality; and iv) allowing universities to select their students and charge tuition fees, while avoiding socioeconomic segregation with the help of a comprehensive grant and income-contingent loan system.
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