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Assessment and recommendations Austria’s growth and employment performance has been good over the past decade. Trend GDP growth, at 2.2%, has exceeded the EU average and the employment rate is one of the highest in Europe, at about 70%. Moreover, regional income and employment differences remain particularly low, as well as the risk of poverty. Unemployment remains low at about 5½ per cent, and the country ranks high in the EU in terms of GDP per capita. Recent economic performance has also exceeded the euro area average, with real GDP growth at 3.4% in 2006, and inflation remaining at 1.7%. Austria continues to operate as an efficient economy, which successfully draws on its favourable location in the centre of an enlarged Europe.
Challenges facing the Austrian economy Austria has a well-performing and wealthy economy. However, maintaining this leading position requires dealing with a number of emerging challenges: Firstly, even as a successful and open economy it has to cope with evolving competitive opportunities and pressures as a direct neighbour to the catching-up economies of Central Europe. Secondly, after having put in place highly flexible and inclusive labour market institutions, it suffers from a weakening performance in certain vulnerable labour market segments. These involve older, less-skilled and immigrant workers and arise from both intense competition from low cost countries and from shortcomings in the tax, benefit and education systems. Third, ambitious new innovation strategies seem to lack fully supportive framework conditions such as the competition environment in service sectors and in the education infrastructure, from pre-school to university ladders. Fourth, although the country enjoys a more sustainable long-term fiscal position than most other OECD countries, the level of public expenditures and taxes remain high and their quality and composition suffer from a number of distortions. This chapter provides an overview of short and longterm economic trends and highlights these challenges, which are investigated in more detail in the subsequent chapters.
Austria's deepening economic integration with Central and Eastern Europe The Austrian economy has benefited substantially from the expansion of economic ties with Central and Eastern Europe, which has provided a significant boost to growth, productivity, competitiveness, profits – and (more controversially) aggregate employment. Indeed, among the older EU member states, Austria has benefited the most from the transition of the Central and Eastern European countries from planned economies to market economies, and the subsequent entry into the EU of the ten new member states, mostly from Central and Eastern Europe, in 2004. However, important segments of the population in Austria, and in particular low-skilled and semi-skilled workers in the manufacturing sector, appear to have been adversely affected by these developments.There is thus a need for policy measures to help those segments of the workforce that have had difficulty coping with growing competition from Central and Eastern Europe. Furthermore, more can be done to make Austria a more attractive location for highly skilled and well qualified expatriate workers and to maintain Vienna’s position as a central hub for multinationals operating in the region. These include in particular the need to strengthen eastern transportation links and to reduce to a minimum bureaucratic hurdles and red tape for foreign enterprises seeking to operate out of Vienna.
Overcoming labour market segmentation Austria has an inclusive and well-performing labour market which has traditionally secured high aggregate employment rates and well-balanced and competitive wage levels. Success is also due to strong human capital formation in the education system, with a high share of graduates in the labour force with at least upper secondary education, notably through high quality vocational training, even if enrollment in tertiary education is lower than in other high-income OECD countries. This system continues to deliver good outcomes in the core labour market of primeage skilled workers, but has recently shown growing weaknesses in more marginal segments involving older, less-skilled, and less-well educated young and immigrant workers. Employment of mothers with small children is also traditionally low. This chapter describes the new challenges raised by the emerging segmentation in the labour market and authorities’ efforts to strengthen both labour supply and demand in the vulnerable segments. Against these policy objectives, measures which may lead to strong increases in minimum wages, in minimum social incomes, and in incentives for early retirement could prove counterproductive. The chapter offers further policy recommendations, including in the education system, in order to overcome any entrenchment in labour market segmentation.
Improving innovation Enhancing growth through more innovation has become a priority for Austrian policy makers in line with European policies as laid down in the Lisbon Agenda. The chapter discusses Austria’s innovation performance, its innovation policies, and general framework conditions for innovation and growth. Austria has increased its R&D spending as a share of GDP over the last ten years, largely reflecting more business R&D, and aims at increasing it further to 3% of GDP by 2010. Innovation activity as measured by output indicators has also improved in various fields, including the number of innovating SMEs. Furthermore, policy instruments and institutions have been improved and a culture of policy evaluation is developing. However, the chapter identifies some weaknesses, particularly in general economic framework conditions, which may limit the creation and diffusion of innovation and productivity growth. It suggests focusing more on these framework conditions, notably by strengthening competition in non-manufacturing product markets, such as retail and professional services, reducing the cost of firm creation and improving human capital. It also argues that focusing on a numerical target for R&D spending as an end in itself is very unlikely to be cost effective. With its university reform in 2002, Austria has made a major step in improving the efficiency of tertiary education but more needs to be done.
Rationalizing fiscal policy and strengthening public expenditure management On unchanged policies, and taking into account population ageing, Austria’s debt is projected to rise as a share of GDP in the period to 2050, according to OECD projections. Although this increase is less sharp than in most other OECD countries, it implies a need for additional measures aiming at fiscal consolidation. The government has made commendable efforts to contain pension costs and to improve cost-efficiency in public administration, has taken an important first step on health care reform, and aims at achieving a balanced budget over the economic cycle. This requires further fiscal consolidation efforts. The structure of taxation should also be improved to further promote growth and employment and to distribute the fruits of economic growth more equitably. The quality and cost-efficiency of public spending can be strengthened through budgetary reforms (including adoption of a mediumterm budgetary framework and of output-based budgeting). Reforming fiscal federal relations, in a manner that gives more responsibility and accountability to all public sector spending agencies and better harmonizes financing and spending responsibilities across all levels of government, can also promote better governance and sound public administration.
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