Austria’s Finance Minister discusses the country’s fluctuating budget deficit amid crises like the COVID-19 pandemic and the war in Ukraine. With new EU fiscal regulations in place, Austria faces pressure to reduce its deficit below 3% to avoid sanctions. The minister highlights the need for spending cuts and mentions potential savings from measures like the climate bonus. Despite criticism over tax reforms, he argues that the country’s tax structure ensures significant contributions from higher earners.
Understanding Austria’s Budget Deficit
Finance Minister, can you clarify the current state of Austria’s budget deficit? It seems like the figures are constantly changing.
Indeed, my role involves shedding light on these matters. However, it’s essential to consider the context. We’ve faced several crises, including the COVID-19 pandemic, the ongoing war in Ukraine, and rising inflation. Despite these challenges, we’ve made significant strides, particularly in tax legislation with the elimination of cold progression, a landmark reform in Austrian tax law. Regarding the budget, our estimates are based on forecasts from WIFO, which have fluctuated considerably. Notably, the European Commission projected Austria’s deficits at 3.6% for this year and 3.7% for the next year, as of mid-November.
Challenges and Future Projections
So, what is the actual deficit amount?
Austria finds itself in a unique situation. This year, due to the National Council elections, no new budget was prepared. Additionally, new EU fiscal regulations were introduced in April, which are crucial for us. According to these rules, if an EU member state has a debt ratio exceeding 60% or a deficit above 3%, a specific target path is imposed for four to seven years, ultimately requiring a deficit of less than 1% at the end of that period.
What does this translate to in billions of euros?
With a gross domestic product of approximately 500 billion euros, one could estimate the deficit. However, I prefer not to quote a specific figure at this moment, as too many numbers are already circulating. My academic background encourages me to focus on verified data, and once we receive the European Commission’s figures, we’ll have a clear understanding.
Why has it been challenging for coalition negotiators to evaluate the situation?
Given that the European Commission anticipates our deficit will exceed 3% next year, it is vital for us to bring it below that threshold to avoid an EU deficit procedure. This urgency led me to Brussels shortly after my inauguration to present Austria’s situation. The Commission acknowledges that exceeding 3% due to unforeseen circumstances is acceptable, but we must revert to compliance the following year. The EU has granted us a deferral until mid-January to submit our proposed measures.
How can we convincingly argue that the deficit will be reduced to below 3%? Will this require cuts in spending, or will we also need to consider revenue measures?
The Federal Chancellor, Karl Nehammer, mentioned the necessity of an expenditure brake. Analyzing our spending structure reveals that we are approximately 3 billion euros above the European average in funding rates. Our current funding rate, which includes direct and indirect funding, stands at 6.7%, totaling over 30 billion euros. There is certainly room for improvement in our expenditure.
What specific areas could be targeted for savings?
The climate bonus is one notable measure mentioned, which carries significant financial implications.
What is the estimated cost of that?
It amounts to around two billion euros, and this year, the complexity of the climate bonus has increased as it becomes taxable above certain income levels.
You previously mentioned the abolition of cold progression. Critics argue this was enacted without sufficient counter-financing.
While it’s true that the abolition of cold progression didn’t involve counter-financing, it was aimed at automatically adjusting tax rates to account for annual inflation. I believe the argument for counter-financing in this context is not valid.
There’s ongoing debate about wealth and inheritance taxes for the affluent. Why is this such a contentious issue?
From a technical standpoint, wealth taxes and inheritance taxes are considered substance taxes, meaning they are levied on assets rather than income. Unlike income tax or capital gains tax, which are based on realized profits, substance taxes are charged against the underlying assets. This creates administrative complexities and could encompass various assets, not just real estate.
Shouldn’t those with greater means contribute more?
In Austria, income tax and value-added tax are the main revenue sources, generating about 40 billion euros. The top 10% of income earners contribute nearly 60% of the total income and wage tax revenue, indicating that those with broader shoulders are already bearing a significant share of the tax burden.
What about super millionaires solely relying on capital gains?
Capital gains are taxed at a rate of 27.5%.
Returning to the main question: Is it feasible to rehabilitate the budget solely through spending cuts? Investments in certain sectors are also necessary.
Absolutely, it’s essential to create a framework for critical investments. I believe Austria primarily has a spending issue rather than a revenue problem. With a high tax burden already in place, we should meticulously review each budget item to identify potential savings.
If Chancellor Karl Nehammer were to ask you to continue as Finance Minister, would you accept?
I have been honored to serve as Finance Minister during these challenging times. However, I look forward to returning to my previous role as head of the tax section.
Thank you for this insightful conversation.