On February 10, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the 2015 Article IV consultation with Austria.
Austria is stable and affluent. It has weathered the global financial crisis well, and output and employment have recovered to pre-crisis levels. The budget deficit has been well contained in recent years. Nevertheless, as in other countries, budget support for bank restructuring and resolution has ratcheted up public debt, which stands now at about 86 percent of GDP. Crisis legacies also still weigh on the balance sheets of large Austrian banks, which must raise profitability and further improve capital cushions.
Following the lackluster growth in recent years, Austria’s economy is projected to expand by 1.4 percent in 2016, driven by a large personal income tax cut, recovering investment, and accelerating exports. Unemployment, although rising, is expected to remain moderate, while headline inflation will gradually reach 2 percent in the medium term. The main risks to the outlook stem from lower-than-expected growth in important trading and financial partners in the euro area and emerging markets.
The elevated public debt level leaves little fiscal room for absorbing increasing aging cost or further reducing high labor taxes. Broad reform-based expenditure cuts in areas with obvious inefficiencies, such as health care, education, and subsidies, as well as further pension reforms, would allow rapid debt reduction and additional cuts in labor taxation.
The surge in refugee inflows offers both risks and opportunities. Historically, Austria has always received a sizeable number of immigrants. The unrest in the Middle East, however, has propelled the estimated number of asylum seekers in 2015 to an exceptional 90,000, or about 1 percent of Austria’s population. While the influx of refugees is posing numerous challenges, their successful integration can help reignite potential growth and eventually reduce fiscal imbalances.
In the financial sector, large Austrian banks are changing their business models by focusing more on core markets and improving efficiency to raise profitability and capital ratios. This is necessary and timely as capital cushions, while improving, appear thin in comparison with peers. The authorities have been revamping the regulatory and supervisory framework in line with the implementation of the EU Banking Union. Considerable progress has also been made in the resolution of nationalized banks.
Executive Board Assessment
Executive Directors commended Austria for preserving macroeconomic and financial stability after the global financial crisis. While the outlook is positive, resolving post-crisis legacies and ensuring the successful integration of refugees requires further reforms. Directors encouraged the authorities to address these challenges over the medium term through fiscal consolidation, structural reforms to increase productivity growth and labor force participation, and measures to further strengthen the financial sector.
Directors noted that the high public debt to GDP ratio constrains the room for fiscal maneuver, especially in the context of the projected increase in age-related spending. While a neutral fiscal stance in the near term would support economic activity and facilitate the integration of refugees, over the medium term fiscal policy should target a structural surplus until public debt falls below 60 percent of GDP. Directors suggested that this fiscal consolidation be delivered through efficiency-boosting reforms in health care, education, and subsidies as well as further pension reforms. They recommended combining these reforms with tighter links between revenue and expenditure at the subnational level. Sufficient expenditure rationalization would also create room for further reducing the tax burden on labor.
Directors commended Austria’s efforts to absorb and integrate accepted asylum seekers. They noted that these flows create challenges but also provide opportunities to improve the fiscal position and raise growth over the medium term. Directors encouraged the authorities to sustain and strengthen their efforts to swiftly and effectively integrate immigrants into the labor force. More broadly, they recommended product and service market reforms to boost potential growth by raising total factor productivity and labor force participation.
Directors commended the significant progress made in revamping the regulatory and supervisory framework and in bank resolution. Nevertheless, banking sector resilience can be strengthened further, and Directors underlined the need to continue to monitor and reassess large banks’ capital cushions, which remain low relative to peers. In this context, they welcomed plans to phase in a systemic capital surcharge and recommended that the authorities implement additional measures, if needed, to ensure adequate capital buffers in the banks. Directors also underscored the need for banks to proactively mitigate risks from their cross-border exposures and domestic mortgage loans in foreign currency. They supported an expansion of the macroprudential toolkit with respect to real estate-specific instruments. Regarding the ongoing wind-down of a restructured bank, Directors stressed the importance of balancing the benefits of a quick resolution with risks associated with a retroactive change of contracts.
Compliments of the International Monetary Fund