Budget hearing: the eco-social tax reform must be followed by further reform steps

Statement by Priv.-Doz. Dr. Monika Köppl-Turyna, Director of the economic research institute EcoAustria, on 5.11.2021 as part of the budget hearing in the National Council:

"The acute economic crisis in connection with the coronavirus pandemic is not quite behind us yet, but Austria is back on a stable growth path. Driven by the tax reform and generally strong consumption, growth is forecast to reach 4.4% and 5.0% next year and the year after. After that, the outlook will weaken and stabilize at an annual growth rate of around 2%. Although the recovery from the economic slump caused by the pandemic is boosting growth in the short term, a competitive location that promotes innovation is needed to have a long-term effect. However, this can only be secured through structural reforms.

The eco-social tax reform has made a contribution here. The introduction of CO2 pricing is a positive development. Even if the price initially seems rather low, it will rise to an above-average level in the EU at least until 2025, which means that a more significant steering effect can be expected. In this context, the relief for the labor factor and the redistribution of revenue from CO2 pricing to the population is to be welcomed. According to EcoAustria's calculations, all tax reform measures offer the opportunity of around 30,000 additional jobs and a medium-term increase in GDP of one percent. The tax ratio will be almost one percentage point lower by 2025 as a result of the tax reform.

Nevertheless, further steps must now follow.

Despite the tax reform, one of the core elements remains the high tax burden. This means that employees are left with too little from their work and companies are deprived of scope for more investment. The high tax and non-wage labor cost burden should therefore be further reduced. It is also important that the tax burden is not secretly increased again by finally abolishing cold progression. This has led to a situation in which the burden on labor has de facto not changed despite several reforms since 2000. In an even longer time comparison, for example, an employee with an income around the maximum contribution base in 1975 had to pay 44.5 percent of their gross income in income-related contributions. Today, a person earning the minimum wage pays 44.2 percent. Income in excess of this is taxed at a correspondingly higher rate. This situation is a considerable disadvantage in international competition, not least because digitalization means that workers are becoming more mobile internationally and may choose to live elsewhere in the future. An attractive location is crucial for employees in order to combat the shortage of skilled workers.

The reduction in the above-average international corporate taxation provided for in the tax reform is an important step towards ensuring the attractiveness of the location. Further steps should now follow, such as establishing the possibility of loss carry-back - at least until the health crisis is finally over - and introducing equal tax treatment of equity and debt capital. In order to revitalize the domestic start-up and scale-up scene, a reform of the taxation of employee shareholdings would be conceivable - namely taxation within the framework of capital gains tax instead of income tax. However, a country's ability to innovate is not just about creating the right framework conditions for companies - the steps need to be taken much earlier. Preferably as early as kindergarten. And here, too, Austria has a massive amount of catching up to do. Austria falls well short of the Barcelona target of a childcare rate of 33% for the under-3s, and we also spend around half of what is invested in this area in Denmark. But this is precisely where we need to invest in order to achieve long-term educational successes that increase the income and opportunities of the children concerned. This also strengthens productivity and the location.

In order to be able to permanently reduce taxes and make important investments without running the risk of running a deficit in public finances, expenditure-side reforms are needed above all. As justifiable as the increase in public debt is in the current crisis situation, it is also important to maintain budget discipline in "normal" times. Thanks to its solid budgetary policy in recent years, Austria has been able to act better during the crisis. The most important areas in need of reform include: the pension system, the efficiency of public spending and the federal structure.

Many areas in Austria do not function efficiently. For example, around 10,924 euros per pupil are spent on education in Austria each year. This gives Austria 491 points in the current OECD PISA test. With total expenditure of 8,942 euros per pupil, Finland achieves 516 PISA points and thus a top European result - 1,980 euros less per pupil. There is similar efficiency potential 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.

My colleagues have used our intergenerational account model to forecast that government spending on pensions, care and healthcare will increase by 4% of gross domestic product by 2060 as a result of demographic trends, which is an additional EUR 17 billion per year based on today's figures. 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 cumulatively be 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. And here it is important to emphasize that raising the de facto retirement age may ease the situation in the short term but will not solve the problem permanently.

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: demographics, climate change and digitalization. However, if a reliable roadmap for a sustainable reform with a lower tax and bureaucratic burden succeeds in strengthening the location and making public finances sustainable after overcoming the health crisis, then Austria will be in a better position than before and achieve the goals of economic and social sustainability."