Moving towards sustainable public finances after the coronavirus crisis

Statement by Tobias Thomas, Director of the economic research institute EcoAustria, at today's budget hearing in the National Council:

"We are in an unprecedented situation in the midst of the global coronavirus crisis, with economic effects the likes of which we have not seen since the Second World War. This is associated with huge uncertainties regarding the further course of the crisis. Of course, as an expert, I would have liked to give an assessment of a budget with reliable figures. But now we have a budget hearing in the middle of the crisis, with all its imponderables. It therefore seems important to me today to discuss how Austria can be put back on a path of sustainable growth, prosperity and sound finances once the acute crisis has been overcome.

Phase 1: Short-term measures to contain the crisis

Austria has managed to contain the spread of the coronavirus pandemic with great determination and consistency. It is understandable that epidemiological and not economic issues played the central role in the lockdown. However, the measures to contain the virus also have a massive impact on all areas of the economy. In this situation, Austria has taken extensive measures with the aim of safeguarding companies and maintaining employment. Whether the package of measures with a volume of more than 10 percent of gross domestic product will ultimately be enough is an open question. Nevertheless, the economic consequences are enormous. Current forecasts predict a 5 to 10 percent slump in Austrian economic output this year. This is associated with a massive slump in employment.

Phase 2: Easing and economic stimulus measures

When easing the lockdown, the aim is to minimize the risks of a larger second wave. When the economy starts to recover, economic stimulus measures may also become relevant at a given point in time. Whether tax relief, incentives for private investment or public investment have the best effect depends on the further course of the crisis. Timing is particularly important here. For example, bringing forward the first stage of income tax reform can only make sense once the restrictions on consumption in retail, services and gastronomy have been lifted. In turn, investment incentives will only be fully effective if companies believe in their economic future in Austria. It is therefore particularly important to present a binding roadmap for an Austria Recovery Program as early as possible in order to stabilize the expectations of economic entities.

Phase 3: Austria Recovery Program - emerging stronger from the crisis

One of the core elements of an Austria Recovery Program is and remains the reduction of the high tax burden. This means that employees are left with too little of the fruits of their labor and companies are deprived of scope for more investment. Therefore, the high tax burden on labor and non-wage labor costs should be reduced. Following the first stage of income tax reform, a binding timetable should also be defined for the subsequent stages of income tax reform in order to stabilize expectations. This also applies to the planned reduction in corporation tax, as at 25 percent Austria is now well above the OECD or EU average. However, sustainably better business conditions also require that the tax burden does not increase again, be it through new taxes or cold progression. Other elements of an Austria Recovery Program include an improvement in the educational structure of the population and thus an improvement in income and employment opportunities as well as the removal of bureaucratic obstacles. However, Austria's recovery can also be hindered by wrong conclusions and lessons learned from the crisis:

Such a fallacy would be a departure from the principle of efficiency. During the coronavirus crisis, I also felt safer with the "reserve" of hospital beds. It may therefore make sense to evaluate the number of beds you want to keep in reserve for crises. On the other hand, there is no reason why public services should not be provided as cost-effectively as possible in order to save citizens' tax money. In Austria, Finland and Portugal, the population has an average life expectancy of around 82 years. Corona mortality rates are also similar, according to Johns Hopkins University. Nevertheless, adjusted for purchasing power, Finland spends around 750 euros less per year and per capita than Austria and Portugal even 1,560 euros less. This raises the question of whether every euro is really being spent efficiently in Austria.

Of course, combating climate change after the coronavirus crisis must play a central role in a sustainable Austria Recovery Program. The CO2 levy in Switzerland and European emissions certificate trading show that climate targets can be pursued much more efficiently with market-based instruments than with costly subsidy programs. For example, avoiding one tonne of CO2 through the Renewable Energy Sources Act (EEG) in Germany costs many times more than avoiding one tonne of CO2 through EU emissions certificate trading. As a result, electricity prices in Germany are the highest in Europe. If it is not possible to expand emissions trading at European level, market-based instruments for CO2 pricing can be introduced in Austria for those sectors that are not already included in European emissions trading. The revenues should be refunded to citizens and companies and the burden on labor should be reduced. In this way, the "double dividend" of climate policy, i.e. more climate protection and more growth and employment, can be realized and ecological and economic sustainability can be achieved together.

Phase 4: Return to budget consolidation and sustainable public finances

The coronavirus crisis is having a massive impact on the revenue and expenditure side of the budget. Current forecasts assume that the national debt ratio will rise to 80% in the current year. Whether it will stay that way is an open question. As justifiable as the increase in national debt is in the current 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. Thanks to economic growth and a solid budget policy, it has been possible to reduce the national debt ratio from 78% in 2017 to 70% last year. Without the coronavirus crisis, Austria's public debt would have fallen below the 60 percent mark in 2023, thus meeting the Maastricht criterion for the first time. Even after the coronavirus crisis, it will be possible to reduce public debt again with economic growth, efficiency and budgetary discipline. However, without further structural reforms, it will hardly be possible to get anywhere near the 60 percent mark. The reason for this is simple: Austria's public finances were already unsustainable before the coronavirus crisis and they will not be after the coronavirus crisis either.

Government spending on pensions, care and healthcare will increase by 4% of gross domestic product by 2060 due to demographic factors, which is around EUR 15 billion more per year than today. However, demographics will have an impact much earlier, as the baby boomers are already retiring. As a result, pension expenditure will cumulatively increase by EUR 19 billion over the next 10 years. The pension system will have to react to this. In principle, there are only a few options available: Either contributions or taxes will have to rise, which will put a strain on the labor factor and Austria as a business location. Or the national debt will rise even more, which will push consolidation further away. Or pensions will fall, which will worsen financial security in old age. The decision is of course a political one, but if falling pensions or rising contributions, taxes or debt are to be prevented, there will be no way around adjusting the statutory retirement age to life expectancy.

Austria is facing huge challenges. However, if we succeed in overcoming the acute economic consequences of the coronavirus crisis, stabilizing expectations with a reliable roadmap for an Austria Recovery Program with fewer taxes and bureaucratic burdens and 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 ecological, economic and social sustainability together!"