Fiscal Consolidation in View of the Completion of EMU. Medium-Term Projections for the Austrian Economy

The Austrian economy has been struck by the most recent business cycle downturn in Europe. At the same time, a two-year program of fiscal consolidation has been launched comprising all levels of government, with the aim of bringing down public sector borrowing to 3 percent of GDP by 1997. In the short run, lackluster demand from abroad and real income losses of private households will considerably dampen the pace of activity. As from 1998, demand and output should rebound strongly and advance by nearly 3 percent p.a. until the year 2000. On average for the period 1995-2000, real GDP may rise by only 1.8 percent p.a., thereby falling somewhat behind the pace in the EU (projected at 2.1 percent). A more competitive environment adds to the pressure for rationalization and efforts to save labor as input for production. The public sector is unlikely to expand its personnel capacities in the foreseeable future. Therefore, the number of jobs may not increase over the projection period, leading to a marked increase in unemployment. In 1998, the jobless rate may attain 8 percent (of the dependent labor force, as conventionally measured), before abating to 7½ percent by 2000. Labor market and wage developments are closely interrelated. Real wages are expected to increase at a markedly slower pace than labor productivity. Inflation should remain firmly under control, as neither import prices nor wage costs are likely to exert significant upward pressure. The new setting of fiscal policy and the projected international scenario will allow government borrowing to decline to a ratio of 3 percent of GDP by 1997, thereby meeting the relevant convergence criterion for participation in the European Monetary Union. Thereafter, with economic growth accelerating and public authorities maintaining tight control over expenditure, the deficit/GDP ratio may continue falling to 2 percent by the year 2000.