Federal Budget in 1994 and 1995 Shaped by Tax Reform and Austria's Accession to the EU

In 1994 the federal budget stimulated the cyclical upturn. The main factors shaping the budget proposal for 1995 are the accession to the EU, which increases the net deficit by some Sch 27.5 billion, and the austerity package, which reduces the shortfall by about Sch 17 to 18 billion. The budget of 1994 was shaped primarily by changes introduced in the second stage of the tax reform. The elimination of the tax on industry and trade, the property tax, the capital death duty, the special tax on banks, as well as the increase in the general income tax credit from Sch 5,000 to 8,840 per year reduced the gross tax revenue ratio (in relation to GDP) from 24.2 percent in 1993 to 23.4 percent in 1994; this corresponds to a drop in revenues of close to Sch 19 billion. (The elimination of the tax on industry and trade was compensated by the rise in the general municipal charge on wages from 2 percent to 3 percent and the widening of the tax base. Thus, the municipalities did not experience a revenue loss.) To these effects must be added the stimulating effects of the increase in the business investment allowance (from 20 percent to 30 percent) for the period from February 1, 1993 to March 31, 1994. The revenue loss due to this measure will be felt in the budget only after some time. As far as the budget proposal for 1995 is concerned, Austria's accession to the EU is producing additional expenditures (payments to agriculture) and reduced revenues (payments to the EU budget and lower revenues from the value added tax), increasing the net deficit by Sch 27.5 billion. Only a small part of this increase, however, will affect domestic demand, because the drop in the value added tax revenues has only liquidity effects and the payments to the EU budget are equivalent to transfer payments to foreign countries. The austerity package will cut expenditures in 1995 by more than Sch 10 billion, or about 1.5 percent of GDP. Moreover, the increase in revenues from the hike in the mineral oil tax and in the pension contributions by civil servants totals about Sch 6 billion. In sum, the austerity budget proposed by the federal government will relieve the budget by some Sch 16 to 17 billion (0.7 percent of GDP). Government expenditures on wages and salaries (including those of teachers employed by the provinces) will rise by 3.6 percent in 1995; this rate is below the rate expected for the whole economy. If the increase in pension contributions is taken into account, civil servants cannot count on a rise in real income. The austerity package not only dampens the growth in wages and salaries, but also the growth in investment outlays and in expenditures on goods. The consolidation drive will have a particularly strong impact on transfer payments; family allowances are being reduced by Sch 100 per child and month, so that expenditures on this item are expected to fall by 9.4 percent to Sch 37.1 billion. The cyclical upswing as well as consolidation measures will reduce growth in expenditures on unemployment insurance to 1.6 percent. Interest payments (excluding swap interest payments which are offset by corresponding revenues) are expected to rise by 11.6 percent to Sch 84.9 billion; this upward trend impedes fiscal consolidation. Moreover, it turns out that payments to other public law entities are on the rise. This phenomenon points to a widening gap between production and financing, a factor also rendering the consolidation of the budget more difficult. A better coordination of fiscal policy between the various public law entities, especially the territorial authorities, will be an important precondition for fulfilling those Maastricht criteria which relate to the fiscal position of the whole public sector.