Federal Budget Drafts for 1996-97 Marked by Consolidation Efforts

The Federal Government budget drafts for 1996 and 1997 show a clear commitment to fiscal consolidation. The central government deficit is to be reduced to around ATS 68 billion, equivalent to 2.7 percent of GDP. Thereby, a crucial condition for Austria's participation in the future European Monetary Union will be fulfilled. Fiscal consolidation will extend not only to the Federation (Bund), but also to the Federal States (Länder) and the municipalities which have agreed to limit their net borrowing to 0.3 percent of GDP by 1997. Thus, general government borrowing in 1997 would not exceed 3 percent, as stipulated by the Maastricht convergence criteria. Deficit reduction will be achieved to about two-thirds by public expenditure restraint, and to one-third by raising additional revenues, mostly from taxes. Expenditure cuts relate to the public sector wage bill (with savings projected at ATS 16 billion), social transfers (some 23 billion), and to subsidies, public investment and other outlays (22 billion). Measures on the revenue side will mainly concern direct taxes although tax rates will remain unchanged, with one exception: the tax on interest income from capital will be raised from 22 to 25 percent. The bulk of additional revenues will come from a lowering (or abolition) of the general tax credit, (temporary) changes in the rules concerning the deductibility of income losses, and from a broadening of the tax base. In addition, a new tax on electrical energy and natural gas will be introduced. In all, measures related to taxation are expected to yield around ATS 46 billion in 1997, of which 11 billion will go to the Länder and local communities enabling them to reduce their budget deficits. The weakening of the business cycle complicates the task of public deficit reduction, and consolidation as envisaged may exert notable restrictive effects. Faced with the potential conflict between fiscal consolidation and cyclical stabilization, policy has opted for restoring financial balance in public households. The measures adopted should also allow government borrowing to stabilize over the medium term. In order to be successful in this respect, the different levels of government should cooperate more closely, thereby also enhancing efficiency in the provision of public services.