29 October 2003 • Federal Budget 2003-04: Postponing the Goal of a Balanced Budget • Margit Schratzenstaller

In view of the fact that extensive tax relief measures have been envisaged for the tax reform of 2004-05, and since the economy continues its modest growth rate, the federal government decided to postpone its goal of achieving a "zero deficit" beyond 2007. The budgets for 2003 and 2004 reflect the federal government's temporary deviation from its goal of balancing the budgets for all levels of government (including states, municipalities, funds and social insurance), the achievement of which has been postponed beyond 2007. Already in 2002, the effort to balance the budget failed due to the weak overall economic situation (which resulted in increased unemployment expenditure and loss of tax revenues) and the flood of the summer of 2002. The budgets for 2003 and 2004 project an overall deficit of 1.3 percent and 0.7 percent of GDP. These deficits are caused by the sluggish economy and tax cuts as a first step of the tax reform to be implemented in 2004.

Given the ongoing stagnation of the Austrian economy it is reasonable to tolerate the effects of automatic stabilisers and therefore to increase public deficits for as long as the economy continues to be weak. This line of thought characterised the budgets for 2002 and 2003 where no attempts were made to compensate shrinking tax revenues by tax increases and expenditure cuts that would have further dampened overall demand. The budget for 2004, on the other hand, must be expected to have a rather contractive effect.

With regard to federal expenditure and revenues, the budgets for 2003 and 2004 clearly indicate structural shifts. The rise in the share of transfers as a proportion of overall spending, a long-term trend, is to be stopped in 2004, as payments related to old-age pensions are reduced. Within the category of transfer payments, expenditure related to old-age pensions is losing its foremost position, owing to the pension reforms of 2000 and 2003. In contrast, spending on families is surging. Tax revenues as a percentage of overall federal income are once again up in 2004, while simultaneously overall tax revenues increasingly rely on indirect taxes.

For further information, please refer to Margit Schratzenstaller, phone (1) 798 26 01, ext. 204, e-mail-address Margit.Schratzenstaller@wifo.ac.at. For the full text of this article see the Internet under http://www.wifo.ac.at.