Austria’s new coalition government faces significant budget challenges, projecting a 3.9% deficit for 2024. Composed of the People’s Party, Social Democrats, and Neos, the coalition aims to consolidate the budget by cutting costs by 15 billion euros over two years. Key measures include reducing climate subsidies and increasing bank levies. While focusing on competitiveness and pension reform, uncertainties remain regarding the effectiveness of these strategies and their potential impact on low earners.
Austrian Government Faces Budget Challenges Ahead
Just a few years back, Austria proudly identified itself among the “frugal four,” advocating for strict adherence to EU fiscal regulations. However, the nation’s budgetary policies have not aligned well with its past assertions, and in recent years, Vienna has resorted to extensive subsidies to navigate various crises. As a result, projections for 2024 indicate a budget deficit of 3.9% of the country’s economic output, putting Austria at risk of a deficit procedure unless significant countermeasures are implemented.
New Coalition Government’s Focus on Budget Consolidation
The newly appointed government, set to be sworn in next week, will prioritize budget consolidation as a critical task. The conservative People’s Party, Social Democrats, and the Liberals (Neos) have formed the first-ever three-party coalition in Austria’s history, committing to a strategy aimed at avoiding an EU procedure. Their program, unveiled recently, outlines a plan to cut costs by a substantial 15 billion euros over the next two years.
As Neos leader Beate Meinl-Reisinger noted, “Hard years are ahead,” acknowledging the uncertainty surrounding whether these savings will suffice. The Economic Research Institute Wifo forecasts a modest GDP growth of 0.6% this year, but this optimistic outlook may soon require a downward revision.
The government still needs to finalize a concrete budget proposal, leaving many savings plans ambiguous. For instance, over one billion euros is slated for cuts across various ministries, but the specifics remain unclear. Additionally, substantial reductions in climate protection subsidies are anticipated, including the elimination of the climate bonus, initially intended to offset the CO2 tax introduced in 2022, which could effectively translate into a hidden tax increase.
On the revenue side, proposals are more defined. Although the Social Democrats’ call for taxing inheritances or large fortunes will not materialize, the bank levy will see a significant increase for 2025 and 2026. Furthermore, one of the ÖVP’s signature initiatives, the abolition of cold progression, is set to be partially reversed. Currently, inflation adjustments occur automatically for two-thirds of the applicable cases, while the remaining third, previously allocated for specific relief measures, will now be withheld.
Christoph Badelt, head of the Fiscal Council, cautions that the proposed measures may not be adequate, although he considers the overall program balanced. Conversely, Markus Marterbauer, chief economist of the social partnership workers’ representation, criticized the agreed savings as reliant on earlier plans submitted by the ÖVP and FPÖ, which he believes disproportionately affect low earners compared to the wealthy.
Interestingly, Marterbauer will assume the role of finance minister in the new government, marking the first time in 25 years that a Social Democrat heads this department. His election reflects a triumph for the party’s left wing, led by Andreas Babler, following a notable power struggle. As a Keynesian, Marterbauer may encounter resistance from his coalition partners, the ÖVP and Neos.
In addition to budget consolidation, enhancing Austria’s competitiveness will be a significant focus for the government. High labor costs, bureaucratic red tape, and expensive energy have all contributed to the current crisis. The coalition recognizes these challenges and aims to address them, with commitments to reduce energy prices and alleviate high non-wage labor costs—an ongoing demand from the business sector. However, these remain as aspirational statements in the government program, contingent upon economic and budgetary developments, leaving concrete actions uncertain.
A dedicated state secretary for deregulation will oversee these initiatives, lending the task greater importance. Sepp Schellhorn from Neos, known for his experience in local bureaucracy, will lead this charge, although he will report to the Ministry of Foreign Affairs rather than the Ministry of Economy due to ÖVP resistance, leaving his potential impact unclear.
The forthcoming government will also tackle pension expenditures by incentivizing longer working periods and gradually increasing the effective retirement age. While these measures are essential, they appear to be the minimum required, and more ambitious reforms seem politically unfeasible.
Wifo chief Gabriel Felbermayr views this initiative as a highlight in the coalition pact, while the economically liberal think tank Agenda Austria perceives it as a superficial adjustment, characterizing the overall government program as timid.