Brief analysis 6: Trend reversal from the budget trend reversal necessary

The lax budget discipline in the "free play of forces", together with the flattening economy, has clear consequences for the national budget. The Federal Ministry of Finance recently reported to the EU Commission that, contrary to the stability program, a budget deficit must be expected again in 2020. "Austria was well on the way to falling below the Maastricht criterion of 60 percent national debt for several years soon. With the latest decisions, however, this will only be the case for a short time," says Tobias Thomas, Director of the economic research institute EcoAustria.

However, even without deviating from the stability program, government debt would have risen again if no further structural reforms were implemented. This is due to rising public spending as a result of demographic trends. For example, an analysis using EcoAustria's generation account model Debt Check, which projects all government revenue and expenditure into the future, taking into account demographic trends and reforms already adopted, shows that expenditure in the areas of healthcare, nursing care and pensions will increase by a total of 4.2 percent of GDP by 2060. Without further structural reforms, this will lead to an increase in public debt.

The current decisions, particularly in the area of pensions, have significantly exacerbated the lack of sustainability of public finances in Austria. In a recent analysis, EcoAustria used the debt check to examine the effects of a permanent deviation of the primary deficit from the stability program of 0.5 percent of GDP per year. The results show that in this case the debt ratio will rise again from 2027. This represents a significant burden on future generations and restricts the financial leeway of future governments. Decisions that result in only minor increases in expenditure in the short term, but have a considerable cost impact in the long term, should be viewed particularly critically. For example, the abolition of the one-year waiting period until the first pension increase will only have a budgetary impact of EUR 30 million in the first year. Each year, however, a further cohort of new pensioners is added. In 2050, the measure will already cost around 900 million euros. The new regulation on retirement without deductions after 45 years of work also works in this direction. In the medium term, this points to larger deficits beyond the current deviation from the stability program. "If one assumes that the members of parliament were aware of this cost effect, the decision is difficult to understand from a budgetary perspective," says Thomas.

The problem of the lack of sustainability of public finances in Austria is not fundamentally affected by lower interest rates in the longer term and a favorable labor market trend. In sensitivity analyses, EcoAustria examined the impact of a 1 percentage point lower unemployment rate and a 1 percentage point lower interest rate than in the base scenario on the development of public debt. The results show that even with an even more favorable situation on the labor market or permanently lower interest rates, the increase in government debt would only be slightly flatter (see Figure 2).

Various structural reforms are needed to ensure greater sustainability and an intergenerationally fair design of public finances: These include linking the retirement age to life expectancy. In Austria, life expectancy will rise from 82 years today to 88 years by 2060. The pension reforms of the past have already resulted in the global replacement rate, measured by the ratio of average pension to average income, falling from 56% today to 48% by 2060. If pensions are to be prevented from falling further or contributions or the federal subsidy from being increased, the statutory retirement age would have to be raised from 65 today to 67 in 2060. To ensure that individual deductions are not higher on average than today, employees would actually have to work until the age of 63 in 2060 instead of 61 today. By raising the retirement age beyond this, a higher level of pensions or, for example, greater consideration of child-raising periods could also be guaranteed in the long term. The financing of nursing care faces similar challenges. "If care continues to be financed in the pay-as-you-go system via taxes or social security contributions, this will lead to the tax burden or debts increasing from generation to generation. It would be different in a system in which each generation saves for its own care risks. With an appropriate solidarity-based equalization, this would be intergenerationally fair and financially sustainable," says Thomas.

"The lack of budget discipline makes a major tax reform more difficult, but it is still possible and necessary, as the tax burden on labor and companies is very high by international standards," says Thomas. A significant reduction in the tax burden would be 40-50% self-financing thanks to the stronger growth resulting from the reform. The rest should be financed through efficiency potential in public spending. EcoAustria's benchmarking of the federal states shows that in the areas of education, health, care, housing subsidies and public administration alone, there is an efficiency potential of EUR 6 billion per year in a comparison of the federal states, which could be leveraged without worsening public services for citizens. In an international comparison, the efficiency potential identified is even higher.