4 February 2005 • Budget Proposal for 2005: Tax Reform Increases Public Deficit • Margit Schratzenstaller

The budget proposal for 2005 is mainly characterised by the tax cuts effected by the 2004-05 tax reform. Together with the budgetary effects of the stimulus packages, which were introduced as a counter-measure to the weak economic growth during the past three years, they will increase the overall budget deficit to 1.9 percent of GDP. At the federal level, the budget deficit will reach 2.4 percent. Overall, the expansionary effect of the federal budget will be larger in 2005 than it has been in the preceding four-year period.

While total revenues at the federal level will decline by 0.6 percent compared to the 2004 budget, total expenditures will rise by 2.1 percent. According to the budget proposal for 2005, the federal expenditure ratio will fall to 25.9 percent of GDP, and the revenue ratio will decrease to 23.8 percent of GDP. Federal transfer expenditures will gain in importance again: mainly because of surging family-related transfers, but also due to growing expenditure for old-age pensions.

The tax reform of 2004-05 will bring about a reduction of federal tax revenues as well as a further shift in the composition of total tax revenues: the share of direct taxes in total taxes will decline to 45.8 percent in 2005, while indirect taxes will rise to 52 percent of total tax revenues. The tax reform will also reduce the tax burden on mass income to 11.6 percent.

The government's long-term strategy to divest public enterprises and institutions is producing a long-term shift within federal expenditures, from expenditures for the provision of public services to financing expenditures. According to the budget proposal for 2005, financing expenditures will amount to about 57 percent of overall federal expenditures. Off-budget entities (spin-offs) are becoming more important at all levels of the state: their share in investment, employment and the national debt is continuously increasing.

For the first time, initial steps have been taken within the budget proposal for 2005 to introduce gender budgeting, i.e., to perform a gender-sensitive analysis of budget policy.

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