Policy Note 21: Using the spending brake to reduce the tax rate

Austria has a very high tax ratio. According to the latest revision by Statistics Austria, it is still well above the EU28 or eurozone average at 42.9%. This places a burden on households and companies. "A reduction in the tax ratio can be achieved if public spending grows more slowly than GDP. As a result, the expenditure ratio decreases and this creates potential for reducing the tax ratio," says Tobias Thomas, Director of the economic research institute EcoAustria. An inflation-linked spending brake from 2018 would mean that government spending could continue to increase from around EUR 189 billion in 2017 to over EUR 206 billion in 2022. Taking current GDP growth and inflation forecasts into account, there would still be potential to reduce the tax ratio by 4.0 percentage points from 42.9% to 38.9% in 2022. Implementing such a spending brake would be quite challenging. Depending on the type of expenditure, for example, legislative changes, amendments to long-term contracts and negotiating strength would be required.

"To ensure that the level of public services is not affected by a reduction in the tax rate, the focus should primarily be on efficiency potential in public spending," emphasizes Thomas. According to the European Union's Social Protection Committee, for example, there is potential for efficiency gains of around EUR 4.3 billion in the area of social policy in Austria without having to reduce the current level of benefits. The same applies, for example, in the areas of administration, education or health: if you look at the World Bank's administration-related World Governance Index, the OECD's PISA test or the health status of the population, it is clear that other EU countries achieve the Austrian level of performance at significantly lower expenditure, according to the conclusion of an EcoAustria Policy Note published today.