Council opinion

of 20 January 2004

on the Updated Stability Programme of Austria 2003 to 2007

(2004/C 29/02)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies(1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 20 January 2004 the Council examined the updated stability programme for Austria which covers the period 2003 to 2007. The programme was submitted on 18 November 2003 and largely complies with the revised "code of conduct on the content and format of stability and convergence programmes". However, more quantitative information, as contained in the twin budget 2003/2004, with detailed estimates for individual budgetary measures, would have proved useful and should have been included.

The budgetary strategy of the updated programme remains unchanged, with a distinct long-term focus. Substantial structural savings combined with sizeable tax cuts, while causing a temporary widening of the cyclically-adjusted deficit in 2005, should entail a steady decline in expenditure and revenue ratios and in the debt ratio.

By and large, the macro-economic scenario in the update appears realistic. However, the acceleration in employment growth to 0,6 % (ESA95 definition) in 2004 could lean towards the optimistic side, given the usual time-lag of labour demand to a cyclical upturn of activity. Moreover, real GDP growth in 2006 and 2007 would remain above potential. The implicit closing of the output gap, however, would not seem implausible after a period of sluggish growth, due to the positive impact of recent and ongoing structural reforms and enlargement, given that macroeconomic imbalances are absent in the Austrian economy.

The update maintains the budgetary targets set in the previous programme. The cyclically-adjusted balance, based on Commission calculations according to the commonly agreed methodology, is set to deteriorate by 0,9 percentage points to 1,0 % of GDP in 2003 and, after a temporary improvement, by 1,0 percentage point to 1,4 % of GDP in 2005 due to tax cuts. Despite narrowing thereafter, the cyclically-adjusted deficit will decline to 0,5 % of GDP only in 2007. Thus, the cyclically-adjusted deficit is close to balance only in the years 2004 and 2007.

Under plausible macroeconomic and budgetary assumptions, the Stability and Growth Pact medium-term objective of a budgetary position of close to balance or in surplus may not be achieved over the programme period. Although downside macroeconomic risks seem to balance with the better-than-targeted budgetary outcome in 2003 with knock-on effects on subsequent years, risks regarding expected savings and surpluses from lower government levels are non-negligible. Moreover, if the announced expenditure savings were only partly implemented or did not materialize as intended, the planned temporary departure from the medium-term target might turn out to be persistent. The budgetary stance in the updated programme provides a sufficient safety margin against breaching the 3 % of GDP deficit ceiling with normal macroeconomic fluctuations.

The government gross debt is expected to decrease steadily from 66,7 % of GDP in 2002 to just below 60 % in 2007. This forecast hinges crucially on the nominal GDP growth assumptions and sizeable proceeds from planned privatisations. Should any of these factors fall short of expectations, even if only by a small margin, the debt-to-GDP-ratio would not fall below the 60 % reference value also in 2007.

After the 2003 pension reform, Austria appears to be in a considerably better position than before to meet the budgetary costs of an ageing population. This evaluation, however, needs to be confirmed by actual developments. First, projections assume a reform-induced strong increase in participation rates. Second, the 10 percent cap on benefit losses compared with the status quo ante renders long-term budgetary effects rather uncertain. Moreover, exonerating effects on government finances are delayed due to a long transition period for abolishing early retirement until 2017.

Economic policies as reflected in the update are only partly consistent with the recommendations in the Broad Economic Policy Guidelines, specifically those with budgetary implications. Specifically, "a cyclically-adjusted budgetary position close to balance" is only partly respected. Moreover, in 2005 the general guideline to "avoid pro-cyclical policies" may not be observed. Although the planned reduction of the high tax burden is in principle an appropriate step to render supply side conditions more growth-friendly, revenue reductions should be accompanied by corresponding expenditure restraint. As concerns Länder and communities, the update is silent on "structural expenditure savings, (also) at lower levels of government", which are required to attain permanent surpluses, an obligation enshrined in a national stability pact.

(1) OJ L 209, 2.8.1997.