Policy Note 26: Demographic development challenges financial policy

Despite the good economic situation and currently buoyant tax revenues, Austria's financial policy is facing major challenges. "Due to demographic trends, expenditure in the areas of pensions, healthcare and nursing care will rise sharply in relation to GDP by 2060. In addition, interest expenditure is expected to rise. As these increases in expenditure will not be matched by corresponding financing without far-reaching reforms, Austria's public finances must be regarded as unsustainable in their current state," says Tobias Thomas, Director of the economic research institute EcoAustria.

The analysis using EcoAustria's generation account model Debt Check shows that the debt ratio will fall below 60% in the coming years. Without reforms, however, it will rise again from the end of the 2020s and breach the Maastricht limit again in the mid-2030s. After that, the debt ratio will continue to rise. The extent of the challenge also becomes clear when future income and expenditure are taken into account in addition to the official debt ratio of 83.6% in 2016. "If future government income and expenditure are taken into account, Austria's effective national debt currently amounts to a total of 308%," says Thomas.

In terms of fiscal policy, this means that even a falling debt ratio in the coming years must not lead to a relaxation of fiscal discipline. However, this alone will not be enough to make public finances sustainable in times of demographic change. In addition to stable care financing that takes into account the burden on different generations, raising the retirement age is a particularly important reform option as the population ages. On the one hand, this can prevent pension contributions from continuing to rise or benefits from being further reduced," concludes an EcoAustria policy note published today.