Brief analysis 21: Sustainability of public finances should come back into focus after the crisis

In a recent brief analysis, EcoAustria looked at the effects of the interest rate turnaround on public finances. Although the central banks' increase in interest rates is intended to counteract the inflationary trend, it also worsens the financing conditions for the public sector. In addition, we will also face increased budgetary burdens in the future in connection with the ageing of society.

While the long-term interest rate was still just over 7% in 1995, it was already slightly negative in 2020 and 2021. In the same period, net government spending on interest as a percentage of economic output also fell significantly. In 1995, net interest expenditure amounted to 4% of GDP, and in 2021 it was just over 1% of economic output. At around 83% of GDP, the debt level in 2021 was significantly higher than in 1995, when it was below 70%. According to forecasts, the secondary market yield is already rising again this year to 1.7 percent and is expected to grow to 4.1 percent next year. This would bring it back to a level comparable to that before the financial and economic crisis. With growth from -0.1 percent on average in 2021 to around 2 percent in September 2022, the issue yields of Austrian government bonds have already risen significantly over the course of the year. According to the Federal Ministry of Finance, general government interest expenditure is set to increase again to 1.5% of economic output by 2026.

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Brief analysis 21: Sustainability of public finances should come back into focus after the crisis

Press release: Brief analysis 21

It is difficult to predict to what extent the current rise in interest rates represents a longer-term turnaround towards interest rate levels before the financial and economic crisis or just a temporary increase. In any case, what is needed is a sound fiscal policy without fears of a loss of confidence on the financial markets, explains Ludwig Strohner, Head of Public Finance Research at EcoAustria: "Against the backdrop of future budgetary challenges - increasing social spending in the context of ageing, achieving climate neutrality and scope for cushioning potential crises - it is important to take the Stability and Growth Pact seriously and prioritize budgetary spending. In order to increase the effectiveness and efficiency of public spending, the increased use of spending reviews can provide important insights."