The New Federal Government's Economic Policy Measures

The new Austrian Federal Government has agreed upon a set of measures in the area of fiscal policy which ought to reduce the Federal deficit in 1996 and 1997 by around ATS 100 billion. This amount should be sufficient as to ensure that Austria will fulfill the deficit criterion for participation in the European Monetary Union (EMU). For the first time, the Austrian Parliament will vote simultaneously on budget drafts for two calendar (and fiscal) years. Almost two-thirds of the consolidation requirement will be met by cuts in public expenditure, the rest by additional tax revenues. Tax measures will take relatively shorter time to be implemented – around 60 percent of them in the current year, while expenditure restraint only to a share of 40 percent. A crucial requirement for the consolidation strategy to be successful is, however, that the Federal States (Länder) and the municipalities lower their budget deficits pari passu with the Federation (Bund). Closer coordination of budget policies between the Bund and other public authorities appears to be called for, not only with regard to the fiscal criteria for EMU. Apart from the immediate requirements, further standards and criteria have to be applied for an evaluation of fiscal policy, particularly that of sustainability. Most of the measures now adopted will certainly have an effect beyond 1997. Yet, the "package" also includes temporary provisions which may complicate eventually the task of drafting a budget for 1998. This would be even more the case, if the now agreed-upon restraint in public sector wages and some social transfers in 1996 and 1997 would give rise to "catching-up" effects thereafter. Fiscal consolidation is associated with a drag on private purchasing power. The latter may not fully translate into lower output and employment if at the same time the demand propensity of enterprises and households rises or if external competitiveness is strengthened. Other measures may be helpful which would reduce frictions and bottlenecks in the economy or raise the efficiency of public services without violating the constraints of consolidation. The new government has announced a number of measures in this respect whose effects should, however, be expected only over the longer term.