Budget hearing: Austria faces challenges
Statement by Priv.-Doz. Dr. Monika Köppl-Turyna, Director of the economic research institute EcoAustria, on 6.11.2020 as part of the budget hearing in the National Council:
"The situation is unique, it is imperative to prevent a wave of insolvencies and unemployment. Nevertheless, it is just as important to work out a plan on how we can firstly get the economy back on a growth path and secondly restructure public finances after the crisis.
We are now in a second lockdown and there is great uncertainty about how much the economy will suffer from the pandemic in the coming months. Now is the time to put money in hand and secure the solvency of companies and jobs. Existing instruments such as short-time working, fixed cost subsidies and loss carry-backs have proven their worth so far, even if adjustments still need to be made in one area or another. Nevertheless, the budget is not infinite and we are also confronted with the question of which measures are more effective and actively support structural change in the economy. It would be sensible and appropriate to continuously evaluate adopted measures in terms of costs, benefits and accuracy.
As soon as the acute crisis is over, it will be important not to repeat the mistakes of the past and to make Austria's economy more modern and resilient through far-reaching reforms.
How can we emerge stronger from the crisis?
One of the core elements is and remains the reduction of the high tax burden. As a result, employees are left with too little of the fruits of their labor and companies are deprived of scope for more investment. The high burden of taxes and non-wage labor costs on labor should therefore be reduced. It is also important that the tax burden is not secretly increased again by finally abolishing cold progression. The corporation tax rate has been at 25 percent for almost 15 years. In the meantime, however, many countries have reduced corporation tax. This means that Austria is now well above the EU average of around 21 percent. This is a disadvantage for the business location. Other measures could also help to alleviate the tax burden on companies and trigger investment, while at the same time helping to strengthen the equity ratio of companies. This includes the equalization of equity and debt capital for tax purposes. Bureaucratic hurdles should finally be reduced so that new companies and new jobs can be created.
Tax cuts could nevertheless further exacerbate the already tight budget situation. In terms of economic and ecological sustainability, it would be appropriate in the longer term to finance part of the expenditure via an efficient instrument such as emissions trading or aCO2 levy.
Finally, more needs to be done in terms of education. Although Austrian schools are expensive internationally, they do not always deliver the desired results. This has long-term consequences for the labor market, investment and economic growth and therefore also for public finances. Every euro invested wisely in education pays for itself twice and three times over and comes back later in the form of tax revenue. If only one percent of graduates per year obtain a university degree instead of a medium-level qualification, GDP will increase by 0.3 percent and average incomes by 0.1 percent in the long term.
At this point, you ask "Yes, and where do we need to cut spending so that taxes can be reduced?" One thing is certain: many areas in Austria do not function efficiently. For example, Austria spends around 10,600 euros per pupil per year on education. This gives Austria 491 points in the current OECD PISA test. Finland, with total expenditure of EUR 8,600 per pupil, achieved a total of 516 PISA points and thus a top European result. Similar efficiency potential also exists in other areas of public spending, such as public administration. Improving efficiency means that the burden on citizens can be reduced without compromising the quality of public services.
These important measures will help to bring the country to a higher level of growth. At the same time, the development of public debt needs to be reversed. As justifiable as the increase in public debt is in the particular crisis situation, it is also important to maintain budget discipline in "normal" times. Thanks to its sound budgetary policy in recent years, Austria is in a better position to act during the crisis. It needs a concrete plan for rapid and sustainable consolidation as soon as the crisis is over.
This will not be possible without further structural reforms, as public finances were already unsustainable before the coronavirus crisis. As part of the debt check, my colleagues forecast that government spending will increase by 5% of GDP by 2060 due to demographic trends in the areas of pensions, care and healthcare, which is around EUR 20 billion more per year compared to today. However, demographics will have an impact much earlier, as the baby boomers are already retiring. This means that over the next 10 years, pension expenditure will be a cumulative EUR 19 billion higher. In fact, rising expenditure on pensions has already been a major driver of rising expenditure in recent years. The pension system will have to react to this. A decision must be made. If falling pensions or rising contributions, taxes or debts are to be prevented, there will be no way around adjusting the statutory retirement age to cushion the impact of rising life expectancy.
There is also an urgent need for reform in the area of federalism. The federal states and municipalities hardly have the opportunity to generate their own revenue, but are largely allowed to decide on expenditure. This leads to false incentives and considerable inefficiency. In other countries, such as Switzerland or the Scandinavian countries, this is more closely aligned with economic findings. Accordingly, a fundamental reform of financial equalization is necessary, combined with more transparency and a focus on tasks.
Austria is facing huge challenges. However, if we succeed in stabilizing expectations with a reliable roadmap for a sustainable reform with less tax and bureaucratic burdens and in making public finances sustainable once the crisis has been overcome, then Austria will be in a better position after the crisis than before and will be able to achieve the goals of economic and social sustainability together."
