Policy Note 58: Effects of possible consolidation measures on the economy and long-term value creation
With a tax and contribution ratio of 43.6% - measured against economic output - Austria is one of the top performers in Europe. Nevertheless, the economic challenges of recent years, from the pandemic to the energy crisis, have placed a heavy burden on the national budget. Growing interest burdens, demographic challenges and a recessionary economic trend are further exacerbating the situation. Against this backdrop, EcoAustria has analyzed consolidation options and their impact on the Austrian economy and competitiveness in a new policy note. The aim was to identify a suitable consolidation path in order to achieve a sustainable consolidation of public finances in the face of high budget deficits and the threat of deficit proceedings.
Previous research results show that expenditure-side consolidations are significantly more successful than revenue-side approaches when it comes to reducing government debt. From EcoAustria's point of view, consolidation measures should be designed in such a way that they have as little impact as possible on economic growth. Measures such as cuts in public investment, higher corporate taxes or increases in income tax should be avoided, as they impair growth and competitiveness in the long term.
Instead, there are spending measures that are expected to have only a minor or potentially even positive economic impact. These include the abolition of educational leave and partial retirement, the suspension of indexation of family allowances and childcare benefits, the abolition of overcompensation for the climate bonus, the abolition of climate ticket subsidies and strict budget implementation. In addition, there is potential in the area of pensions, which may have a moderate dampening effect in the short term, but will strengthen the supply of labor and value creation in the long term.
Regardless of whether the consolidation takes place on the expenditure or revenue side, negative economic effects are to be expected in the short term. For this reason, the specific consolidation measures must be reviewed, particularly with regard to their long-term impact.
The analysis shows that spending measures are not only effective, but also economically justifiable. Savings of EUR 2.3 billion in 2025 and EUR 2.4 billion in 2026 could be implemented with little or even positive effects on the economy. In addition, reforms to the pension system, which strengthen the supply of labour and value creation in the long term, offer potential savings of EUR 700 million in 2025 and EUR 2.5 billion in 2026. These two areas together amount to a volume of EUR 3 billion in 2025 and EUR 4.9 billion in 2026. Revenue-side measures could generate a further EUR 1.4 billion (2025) and EUR 1.5 billion (2026). However, given their lower chances of success for lasting consolidation, they should only be seen as a last resort.
EcoAustria therefore recommends focusing on growth-friendly, expenditure-based approaches. What is urgently needed is a credible and clearly communicated consolidation path that also takes into account future challenges such as age-related burdens. Such measures can strengthen confidence in fiscal policy and mitigate the negative effects.
