EUROPEAN COMMISSION Brussels, 26.2.2020 SWD(2020) 519 final COMMISSION STAFF WORKING DOCUMENT Country Report Austria 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2020) 150 final}



Contents Executive summary 1.Economic situation and outlook 2.Progress with country-specific recommendations 3.Reform priorities 3.1.Public finances and taxation 3.2.Financial sector 3.3.Labour market, education and social policies 3.4. Competitiveness, Reforms and investment 3.5. Environmental sustainability Annex A: Overview Table Annex B: DSA statistical annex Annex C: Standard Tables Annex D: Investment guidance on Just Transition Fund 2021-2027 for Austria Annex E: Progress towards the Sustainable Development Goals (SDGs) References LIST OF Tables Table 1.1:Key economic and financial indicators - Austria

Table 2.1:Summary table on 2019 CSR assessment Table 3.1.1:Measures to reduce the tax wedge on labour Table 3.1.2:Recent pension-related fiscal measures Table C.1:Financial market indicators Table C.2:Headline Social Scoreboard indicators Table C.3:Labour market and education indicators Table C.4:Social inclusion and health indicators Table C.5:Product market performance and policy indicators Table C.6:Green growth LIST OF Graphs Graph 1.1: GDP growth and contributions [TO BE UPDATED] Graph 1.2: Labour productivity Graph 1.3: Contributions to potential growth Graph 1.4: Labour productivity (real GVA per worker), EU-28, Austria (NUTS-2 regions), 2000-2017 Graph 1.5: Benchmark for nominal compensation growth Graph 1.6: Key fiscal indicators Graph 2.1: Overall multiannual implementation of 2011-2019 CSRs to date Graph 3.1.1: Austria's tax mix and ITRs in EU comparison Graph 3.1.3: Composition of Austria’s labour tax wedge in EU comparison

Graph 3.1.2: Marginal effective tax rate of a single household without children Graph 3.1.4: Income relief provided by 2020 Tax Reform Act and 2020 Pension Adjustment Act Graph 3.1.5: Consumption tax mix in EU comparison Graph 3.1.6 Simulated CO₂ tax scenarios and compensatory measures Graph 3.1.7 Distributional and equity effects Graph 3.2.1: Credit to the private sector (y-o-y % change) Graph 3.2.2: Price developments and valuation gaps 30 Graph 3.2.3: Venture capital in Austria (million euro), 2007-2018 Graph 3.3.1: Rates of activity, unemployment and NEET (not in education, employment or training) Graph 3.3.2: Vacancies per registered unemployed and labour shortage by sector Graph 3.3.3: Main indicators of poverty, 2005-2018 Graph 3.3.4: Participation of children under 3 years of age in formal childcare, 2010-2017 37 Graph 3.4.1: Productivity levels and change in the share of employment for aggregated sectors 2009 - 2018 Graph 3.4.2: Austria’s innovation strengths and weaknesses Graph 3.5.1: Change in total GHG emissions 1990-2017 LIST OF Boxes Box 2.1: EU funds and programmes to address structural challenges and to foster growth and competitiveness in Austria Box 3.1.2: The distributional and equity effects of introducing an explicit price for CO₂ Box 3.3.3: Monitoring performance in light of the European Pillar of Social Rights

Box 3.4.4: Digitalisation as an opportunity for rural Austria Box 3.4.5: Investment challenges and reforms in Austria Executive summary In a context of growing uncertainty and rapid technological change, further structural reform and targeted investment could help Austria achieve more sustainable and inclusive growth. The Austrian economy has performed well in recent years, consistently recording one of the highest levels of per capita GDP in the EU. However, rapidly changing economic conditions underscore the need to tackle key outstanding challenges. Austria is still far away from reaching its greenhouse gas emissions targets and this will make it more difficult to achieve carbon neutrality by 2040. There is considerable scope for comprehensive reform of the tax system to foster environmental sustainability, fairness and inclusive growth. Over the medium term, population ageing and the untapped labour market potential of women, the low-skilled and people with a migrant background are expected to limit the extent to which labour contributes to economic growth and this will require further reform efforts. In addition, people’s educational success is still heavily influenced by their socio economic background. As a result, future productivity growth hinges on improving innovation outcomes, digitalisation, the business environment and human capital. At the same time, curbing public expenditure remains essential to ensuring long‑term fiscal sustainability. More comprehensive reform of the fiscal framework could make public spending more efficient, especially at subnational level. The broad-based, solid economic growth of recent years lost momentum in 2019 and is expected to remain moderate in 2020-2021. Austria had experienced fast growth (2.1-2.5%) from 2016, but this slowed down in 2019 (1.6%). In line with worsening sentiment indicators, growth is set to remain moderate in 2020-2021, mostly due to expected lower industrial production, export and investment growth. Private consumption is expected to remain the main contributor to growth. After peaking in 2016, the unemployment rate decreased strongly and reached 4.5% in 2019 (the lowest rate since the crisis) and is expected to only slightly increase (4.6%) in 2020-2021. Over the medium term, with labour contributing less, capital and total factor productivity will become more important for potential growth. Public finances are developing favourably. Having improved to 0.2% of GDP in 2018 on the back of the economic boom, the general government budget surplus is expected to have grown further to 0.4% in 2019 thanks to higher than expected revenues. The headline balance is expected to narrow to 0.2% of GDP in 2020, before expanding again to 0.4% in 2021, assuming no policy changes. The dip in 2020 is largely due to a series of discretionary fiscal measures that were adopted shortly before the snap elections in September 2019. Identifying investment needs in green technology and sustainable solutions, and securing adequate funding will be key to delivering on climate and energy objectives and shaping a new growth model. To remain competitive in international markets, Austria will need to focus investment on the ecological transition, research and (digital) innovation, and human capital. For the last decade, its investment ratio has been above the euro area average, but investment growth is expected to be less lively in the coming years. The high level of R&D expenditure is not translating sufficiently into innovation outcomes. Digital technologies are still not widely used, particularly among smaller businesses, and restrictive service sector regulation is hampering investment. Increasing energy efficiency and the share of renewables would strengthen Austria’s sustainable growth potential. Investment in skills, affordable full-time childcare and all-day schools would help to improve labour market outcomes, in particular for disadvantaged groups and women. Austria has made overall limited ( ) progress in addressing the 2019 country-specific recommendations. ( ) There has been some progress in the following areas: ·focusing investment on research and development, innovation and digitalisation; ·supporting productivity growth by stimulating digitalisation of businesses and company growth; ·reducing the tax wedge; ·ensuring the sustainability of the health care system and ·supporting full-time employment among women. There has been limited progress in the following areas: ·ensuring the sustainability of the pension and long-term care systems; ·simplifying fiscal relations; ·reducing regulatory barriers in the service sector, and ·raising the levels of basic skills for disadvantaged groups.

There has been no progress in the following areas: ·Labour market outcomes for the low skilled. Austria performs relatively well on the social scoreboard supporting the European pillar of social rights. Policies to reduce poverty and social exclusion are generally effective and income inequality is below the EU average. However, the relatively low availability of childcare compromises the labour market participation of women. As regards progress in its Europe 2020 targets, Austria is performing well on tertiary education and early school leaving. In addition, Austria is close to its national target for its share of renewable energy and the employment rate. However, despite the recently adopted climate package, it is unlikely to reach its national energy efficiency and climate targets by 2020. Austria performs well on the United Nations’ sustainable development goals (SDGs), ( ) particularly SDG 3 (good health and well-being). However, it scores below EU average for SDG 13 on climate action. Other key structural issues analysed in this report, which point to particular challenges for Austria’s economy, are the following: ·The fiscal framework is still overly complex and the tax mix relies too strongly on labour. Austria’s fiscal federalism provides weak incentives for efficient public spending at subnational level, due to a considerable mismatch of revenue-raising and spending responsibilities. Greater subnational tax autonomy paired with a more transparent allocation of competences across levels of government could improve political accountability and incentives to contain costs. The tax system has considerable scope for reform to foster fairness, inclusive growth and environmental sustainability. High labour taxes create significant disincentives for labour demand and supply. Relying more on wealth‑related and environmental taxes, including a consistent taxation of CO2 emissions would be more efficient gains, make climate-friendly energy sources more competitive and provide fiscal space to reduce more distortive taxes. ·The projections for pension, health and long-term care expenditure point to a challenge for long-term fiscal sustainability. While improving pension adequacy, the 2020 Pension Adjustment Act includes measures that thwart previous reform efforts to improve fiscal sustainability. Progress on reducing health care spending is slow and hospital and pharmaceutical expenditure is still well above the EU average. Despite recent measures, the long-term care system still relies on a comparatively large share of informal care and the sustainability challenges of public spending. ·Overall employment has grown, but the employment gender gap has widened since 2016. The gender gap in part-time employment is among the widest in the EU, driven largely by a lack of affordable high-quality full-time childcare. Supporting the full-time employment of women could alleviate labour shortages in some sectors and address the gender gaps in pay and pensions in the long term. People with migrant backgrounds, the low-skilled and older workers are other groups whose potential is underutilised. Meanwhile, the growing number of vacancies points to emerging labour shortages. ·While the overall social situation is improving, is the benefits are not spread evenly across social groups. The share of people at risk of poverty or social exclusion has continued to fall, reaching its lowest level since 2005. However, the risks remain high for vulnerable groups such as single‑parent households, foreign-born adults and families with three or more dependent children. Also, the risk of poverty varies significantly between regions, with people in cities generally more affected than those in towns, suburbs and rural areas. ·Prices and rents are growing strongly, but housing remains comparatively affordable; risks in the banking sector are contained. Despite rising housing prices and rents, Austria’s subsidy scheme and elaborate system of limited‑profit housing associations keep costs relatively low. Consequently, housing cost overburden is less of an issue than in the EU on average, but some groups remain vulnerable. Risks to the banking sector seem contained, despite dynamic mortgage lending, but they warrant close monitoring. ·Educational attainment remains strongly influenced by socio-economic or migrant background. According to the 2018 PISA survey, educational outcomes had not improved, with large share of students underperforming, a quarter in reading and a fifth in mathematics and science. While the early school leaving rate is below the EU average, it remains significantly higher among foreign-born pupils. Digital skills levels remain below the best‑performing countries. Teacher shortages are possible. ·Austria’s future competitiveness depends partly on additional efforts in research and innovation. Austria has been exceeding the European R&I investment target since 2014. However, its innovation outcomes do not fully reflect this. R&D intensity is very uneven due to a lack of coordination between federal states. Further challenges are the modest level of investment in basic research, low employment in fast‑growing innovative firms, the limited availability of venture capital (especially in scale-up stages), and the untapped potential of female researchers. ·Administrative burden and restrictive regulation continue to hold back the service sector. Despite efforts to cut red tape, administrative burdens remain heavy. Regulatory restrictiveness is high for professional services, such as accounting, architecture, engineering, real estate agents and in retail. Addressing this would also benefit the manufacturing sector, which relies on an innovative and competitive services sector. ·Challenges remain as regards the digitalisation of smaller firms and broadband coverage in rural areas. On key aspects of digitalisation, Austria’s smaller firms lag behind their peers in the best‑performing Member States. Public support for broadband deployment remains, but Austria is lagging behind, in particular on rural ultrafast broadband. The digitalisation strategy lacks monitoring and performance targets. ·Greenhouse gas emissions are still far above EU and national targets; without further measures carbon neutrality is unlikely to be realised by 2040. Reaching EU and national climate targets will require internalising the costs of CO2 emissions, e.g. through implementing an eco‑social tax reform. Reducing transport‑related emissions is essential for meeting air quality standards and climate goals. Austria is shifting transalpine transport to rail, but more effort is needed on urban mobility. Promoting reuse, recyclability and secondary raw materials markets could boost the circular economy and drive innovation. The transition to climate neutrality is a challenge for the regions with carbon-intensive industries. The Commission’s proposal for a Just Transition Mechanism under the next multi-annual financial framework for the period 2021-2027, includes a Just Transition Fund, a dedicated just transition scheme under InvestEU, and a new public sector loan facility with the EIB. It is designed to ensure that the transition towards EU climate neutrality is fair, by helping the most affected regions in Austria to address the social and economic consequences. Key priorities for support by the Just Transition Fund, set up as part of the Just Transition Mechanism, are identified in Annex D, building on the analysis of the transition challenges outlined in this report. 1. Economic situation and outlook GDP growth Austria’s strong economic growth of recent years, slowed in 2019 and is expected to remain moderate in 2020‑2021. Austria’s small open economy is well integrated in global value chains and its economic performance is closely linked to EU and global developments. From 2016, it experienced fast growth (2.1‑2.5%). After a still‑strong outturn in the first quarter of 2019, GDP growth slowed significantly in the second and third quarters. This is due to falls in exports and in equipment investment. The decrease in exports concerned various sectors, in particular chemicals and related products but also machinery and transport equipment and manufactured goods (affected inter alia by weaknesses in the German automotive sector). Looking ahead, persistent headwinds from the external environment and weak readings from business and sentiment indicators point to lower growth, of around 1.3% in 2020‑2021 (see Graph 1.1). Solid wage growth and fiscal measures are expected to stimulate private consumption and hence support growth, together with investment in the construction sector (see Section 3.2.2). Graph 1.1:GDP growth and contributions Source: European Commission, (2020)

Investment In line with the economic slowdown, investment decelerated in 2019. From 2015, Austria saw investments pick up significantly, thanks to high capacity utilisation, strong housing demand and overall low financing costs. However, in a context of high uncertainty and weakening industrial production, investment growth turned negative in Q2 and Q3 2019 and is set to remain less dynamic in 2020‑2021. On the other hand, excess demand for housing is likely to support investment in the construction sector (see below and Section 3.2.2). Public sector investment is also expected to be conducive to growth. Austria’s investment ratio has been consistently above the euro area average since 2009. It has been increasing again gradually since the crisis, reaching 24% of GDP in 2018. This is mostly due to an increase in the share of business investment (household and public investment have remained broadly stable). Potential and productivity growth Graph 1.2:Labour productivity Source: European Commission Potential growth is set to remain below pre‑crisis levels, as productivity growth remains moderate. Like that of most EU countries, Austria’s potential growth has been decelerating since before the crisis. Despite increasing again in recent years, it is expected to remain at around 1.7% in the coming years. This reflects the long‑term downward trend in total factor productivity (TFP) growth (see Graph 1.2 and Section 3.4.1; European Commission, 2019a) and a declining contribution from labour due to projected lower growth in the working‑age population. Since 2008, the contribution of capital accumulation to potential growth has been relatively stable, while hours worked contributed little until 2015 (see Graph 1.3). This was due inter alia to an increasing share of part‑time work. Over the medium term, population ageing is expected to depress the contribution of labour, increasing the importance of capital and TFP in sustaining potential growth (see Section 3.4.1). Graph 1.3:Contributions to potential growth Source: European Commission Regional disparities Economic disparities between Austrian regions are among the smallest in the EU and have narrowed steadily. In 2016, per capita GDP was highest in the urban NUTS 3 territories of Vienna, Sankt Pölten, Graz, Linz‑Wels, Salzburg, and Innsbruck. ( ) It was also high in more rural areas in West Austria (most territories in Tyrol and Vorarlberg), where it was 35 percentage points (pps) above the EU average. However, in rural parts of Burgenland, Weinviertel, Mühlviertel and Upper Carinthia it reached only about 77‑87% of the EU‑average. In 2017, per capita GDP in the regions of Salzburg and Vienna (NUTS 2 level, Länder) was 52 pps above the EU average, while it stood at only 91% in Austria’s least developed region, Burgenland. Disparities in labour productivity (real gross value added per worker) ranged from 100% of the EU average in Burgenland to 129% in Vienna in 2016. They are less pronounced than in Germany and Italy and decreased between 2010‑2017. This was mostly due to negative labour productivity developments in Vienna (-0.4% p.a.) and increases in all other Länder (see Graph 1.4). Graph 1.4:Labour productivity (real GVA per worker), EU-28, Austria (NUTS-2 regions), 2000-2017 Source: European Commission Inflation Inflation is expected to fall below 2%, but to remain above the euro area average. Inflation was above 2% in 2017 and 2018, but is expected to fall to 1.5%‑1.6% over 2019‑2021. The fluctuations are driven mainly by oil prices, rising in 2017‑2018 and falling in 2019. In the coming years, core inflation is set to exceed headline inflation, due to traditionally higher costs in services and price pressures linked to strong domestic demand and wage increases. Prices continue to increase in tourism‑related services such as hotels and restaurants, though this might be linked to rising input prices (Schnabel et al., 2015). This, together with continuously increasing costs for housing (see Section 3.2.2), water, electricity and fuels, is expected to keep inflation above euro area levels (1.2-1.4%) in 2019-2021. Labour market On the back of strong economic growth, the labour market improved markedly in 2018. Employment grew by 1.7% in 2018 and despite the parallel increase in the labour force, the unemployment rate decreased to 4.9%. In 2019, employment growth is expected to have slowed along with the economic cool down, while unemployment fell to 4.5%, the lowest rate since the crisis. It is expected to increase slightly to 4.6% in 2020-2021. Over the last five years, Austria has made progress towards reaching SDG 8 on decent work and economic growth. Wages and competitiveness In the past, structural factors had a dampening effect on wage growth, but wages picked up in 2018. Nominal compensation per employee increased by 2.9% in 2018 and is expected to have continued growing, at 2.8%, in 2019. As nominal wages grew faster than inflation, real wages saw a 1.2% increase in 2018, supporting employees’ purchasing power. For 2019, they are expected to have grown by 0.9%. In general, the main determinants of nominal wage growth are labour productivity and past inflation. However, rising participation rates and the increased openness of the economy have been found to reduce wage growth in past decades (Fenz et al., 2019). This might explain why wage growth was slower than what could have been expected on the basis of the historical relationship with inflation, productivity and unemployment (see Graph 1.5). ( ) Unit labour costs (ULC) growth remained contained, at 2.2%. Despite slowing somewhat between 2015 and 2017, nominal ULC growth has stayed relatively stable since 2012, fluctuating around 2% and reaching 2.2% in 2018 (see Graph 1.5). This, together with a nominal appreciation of the euro, contributed to real effective exchange rate appreciation (REER), in line with main euro area peers. While Austria’s cost competitiveness ( ) has declined recently, in 2019, it is expected to have been boosted by a modest depreciation of the REER. Graph 1.5:Benchmark for nominal compensation growth Source: European Commission Social developments While income inequality remains below the EU average, wealth inequality is high. In 2018, the disposable income of the richest 20% of households was about four times higher than that of the poorest 20%. This constitutes an improvement with respect to 2017 and is well below the EU average. Income inequality before transfers is also declining and below the EU average. However, GDP growth has outpaced the growth of household incomes from 2010 to 2018 and gross disposable household incomes were still below the pre-crisis levels in 2018, calling the inclusiveness of the economic recovery into question. In addition, Austria ranks high in terms of inequality based on net wealth, mainly due to low house-ownership rates at the bottom of the wealth distribution. The tax-benefit system continues to perform well in reducing income inequality and protecting people from social exclusion. The risk of poverty and social exclusion fell further below the EU average and pre-crisis levels, but the foreign-born population continues to be more exposed, including in work poverty. Moreover, despite improvements in 2018, inequality of opportunity remains high, especially for children of low-skilled parents. External position

The current account balance remained relatively stable, along with a slightly positive net international investment position. In the past years, Austria’s current account balance remained broadly stable, around 2%, driven mostly by a positive trade balance. GDP and aggregate demand grew strongly in 2018, leading to a small increase in the current account surplus from 1.7% in 2017 to 2.4%. This is due mostly to higher exports than imports in the services sectors, in particular in tourism‑related services, but exports in other business services have also increased. After strong growth in 2018, exports growth weakened in 2019, and is expected to remain moderate in 2020-2021. The net international investment position continued its gradual increase, reaching 3.7% of GDP in 2018, which is in line with fundamentals. The export market shares indicator (5-year cumulated change) improved further, to 4%, after its sharp decline in the early 2010s. Private sector debt Private sector debt continues to decline. On the back of rising GDP, private sector debt continued to decline in 2018, albeit slightly, reaching 121% of GDP. The fall was driven by a decline in households’ and non-financial corporations’ debt (to 49.6% and 71.4% respectively), despite an increase in credit flows to the latter in the past 3 years (by 2.3-2.5% in 2016-2018). Private debt and credit growth remain well below the macroeconomic scoreboard thresholds. Housing House prices have been growing strongly, driven mostly by developments in Vienna. In the past decade, Austria has seen repeated house price surges, leading to the strongest price rises in the euro area relative to a low pre-crisis levels. This can be mainly attributed to an accumulation of excess demand (higher demand than supply), also due to the low interest rate environment (see Section 3.2.2; Schneider, 2019). The rises were driven mostly by the capital, Vienna, where prices have doubled over the past decade. However, between 2015 and 2018, prices also grew strongly in other regions, reducing slightly the gap between Vienna and the rest of the country (European Commission, 2019a). Risks to the banking sector stemming from the increasing exposure of banks to the real estate sector seem contained so far (see Section 3.2.1), but parallel increases in rents put pressure on the affordability of housing (see Section 3.3.3). Public finances and fiscal sustainability Public finances have developed favourably. On the back of the economic boom, and for the first time in several decades, the general government budget reached a surplus position in 2018 (0.2% of GDP). This surplus is estimated to have grown further in 2019 (0.4% of GDP), thanks to higher than expected revenues. The headline balance is expected to narrow to 0.2% of GDP in 2020, before expanding again to 0.4% in 2021 (see Graph 1.6). The expected dip in 2020 is largely due to a series of discretionary fiscal measures such as increased tax credits, lower health contributions, and increased pensions. Given the positive development of general government net lending, the structural balance is projected to be above the medium-term objective of -0.5% of GDP, improving from -0.3% of GDP in 2018 to 0.3% in 2020. Public debt is expected to continue its downward path from 74.0% of GDP in 2018 to 69.9% and 67.2% in 2019 and 2020, respectively. Graph 1.6:Key fiscal indicators Source: European Commission, 2019 autumn forecast United Nations’ Sustainable Development Goals (SDG) Austria performs generally well with regard to the SDGs. In the context of this report, progress can be noted in relation to SDG 1 (no poverty) due to social transfers. For SDG 3 (good health and well-being) Austria performs very well due to a low level of unmet health care needs. In relation to SDG 4 (quality education) the overall performance is better than the EU average with the notable exception of the indicator on underachievement in reading. Strong industries in relation to water management and waste treatment lead to a very good performance for SDG 6 (clean water and sanitation). Also for SDG 7 (affordable and clean energy and SDG 8 (decent work and economic growth) a good performance can be noted. In relation to SDG 9 (industry, innovation and infrastructure), more innovation outcomes would improve the performance The performance for SDG 12 (responsible consumption and production) could improve through a more circular economy while for SDG 13 (climate action) the slight increase in greenhouse gas emissions lead to a below average result. Table 1.1:Key economic and financial indicators - Austria Source: Eurostat and ECB as of 4-2-2020, where available; European Commission for forecast figures (Winter forecast 2020 for real GDP and HICP, Autumn forecast 2019 otherwise). 2. Progress with country-specific recommendations Austria’s progress in implementing the recommendations addressed to it in 2019 ( ) has to be seen in a longer-term perspective since the introduction of the European Semester in 2011. Of all the Country Specific Recommendations (CSRs) addressed to it since 2011, Austria has made at least ‘some progress’ on 70%, and ‘limited’ or ‘no progress’ on 30% (see Graph 2.1). It has made substantial progress in consolidating public finances and stabilising the financial sector. Graph 2.1:Overall multiannual implementation of 2011-2019 CSRs to date Source: European Commission As regards the 2019 CSRs, Austria has made overall limited ( ) progress. ( ) Limited progress was made on CSR1 on the sustainability of the pension, health and long-term care systems, together with the alignment of financing and spending responsibilities. Overall, limited progress was also made on CSR 2. Some progress was made in shifting taxes away from labour to sources less detrimental to inclusive and sustainable growth, for supporting full-time employment for women, while limited progress was recorded for improving the educational achievements of disadvantaged young people. No progress was made in improving labour market outcomes for the low-skilled. Some progress was made on CSR 3 on investments in research and development, innovation and digitalisation, and supporting productivity growth by stimulating businesses’ digitalisation and company growth and reducing regulatory barriers in the service sector. Limited growth was recorded as regards investments in sustainability and reducing regulatory barriers in the service sector. Austria has taken positive steps to increase efficiency in the health care sector, but the savings potential is still unclear. Important reform measures to address the CSR (e.g. the introduction of a 'target-based governance' system and the 2017 Primary Health care Act have been adopted in recent years and are currently being implemented. The reform to merge the 21 social health insurance funds to 5 is also expected to improve efficiency. There is progress, but implementation is not fully on track for every reform and the savings potential of each of the reforms is still unclear. The overutilization of hospital and pharmaceutical care, the overlap of competencies in the health care sector, and the role of prevention remain to be addressed. Since 2014, action has been taken to increase the effective retirement age, but recent measures go partly in the opposite direction. The 2020 Pension Adjustment Act adopted in the run-up to the snap elections at the end of September 2019 not only fails to address sustainability challenges, but also includes measures that undermine previous reform efforts. While a targeted increase of low pension incomes may be justified by the objective of pension adequacy, the undiscounted pension after 45 contribution years thwarts previous efforts to increase the effective pensionable age and raises fairness issues. The measure is conflicting with recently observed labour market shortages. Austria has continued to implement initiatives to improve the fiscal framework, but subnational tax autonomy is still inadequate. The 2017 Intergovernmental Fiscal Relations Act helped to simplify financial relations between the various layers of government, but it cannot be considered a major step towards greater tax autonomy or a more transparent assignment of competence. The plan to introduce task-oriented allocation of shared taxes to municipalities in the fields of elementary education and compulsory schools was suspended having failed to produce results. The first spending reviews to assess the effectiveness and efficiency of subnational public spending in the areas of health care in schools and municipal water management are expected to be finalised in early 2020. A benchmarking model was established for comparative assessment of the efficiency and effectiveness of subnational spending and is being extended to other policy areas. Several measures have helped to reduce the labour tax wedge. The tax burden has been reduced for low-income earners, families with working parents and employers. However, the overall tax structure remains unchanged and there is still scope for shifting the tax burden to more growth-friendly sources of revenue. A future‑oriented strategy to support environmental sustainability, fairness and inclusiveness would require a more thorough reform of the tax mix. Several measures go in this direction, but more needs to be done to secure efficiency gains. Austria has partly improved labour market outcomes for women. While more women are in work than in 2011, most of the increase has been in part-time employment. Increased support for childcare facilities and all-day schools has improved opportunities for parents of young children, but coverage varies between Länder.

Austria has taken only limited steps to improve basic skills for disadvantaged young people and people with migrant backgrounds. While older measures to strengthen early childhood education and care could have long-term positive effects on educational outcomes, the direction of reform measures in general education is less promising; in fact, they undermine previous efforts. However, the new (January 2020) government programme contains a range of promising measures. Austria has made efforts to stimulate investment and productivity through simplification and support for company growth, but the service sector is still highly regulated. Austria has reduced regulatory compliance costs through administrative simplification measures and e‑government solutions. It has also reviewed the regulation of trades and opened the stock market to listings of SMEs, although venture capital remains an issue. It has not yet addressed the restrictions for key professions (as identified by the Commission), nor carried out a wider review of service sector regulation. Digitalisation has been a political priority for some time, but a more ambitious approach seems warranted. The caretaker government continued to implement useful initiatives in all areas of digitalisation, without providing the major political impetus expected in 2019 (previously announced as year of digitalisation). Overall coherence and thus the impact of digitalisation policy efforts would have benefited in particular from the adoption of specific, measurable targets. Gaps also remain in digital infrastructure. There is scope for increasing investments in the ecological transition and environmental sustainability. Public investments from the climate and energy fund fell in 2018, compared to the previous year. However, private investments in the ecological transition have increased, due to investors’ growing interest in sustainable financing and a wider range of green finance opportunities. At Member States’ request, the Commission provides tailor-made expertise via the structural reform support programme to help design and implement growth-enhancing reforms. Since 2018, it has supported 11 projects in Austria. In 2019, it helped the authorities inter alia to strengthen primary health care. In addition, work started on designing and implementing a comprehensive education monitoring system, building capacity in the Austrian Digitalisation Agency and reducing administrative burden. Table 2.1:Summary table on 2019 CSR assessment Source: European Commission Box 2.1: EU funds and programmes to address structural challenges and to foster growth and competitiveness in Austria Austria is benefiting from EU support. The financial allocation from the EU cohesion policy funds (1) for Austria, including national co-financing, amounts to €2.95 billion in the current multiannual financial framework, equivalent to around 0.1% of GDP annually. By the end of 2019, some €2.6 billion (around 88% of the total) were allocated to specific projects and €906 million were reported as having been spent by selected projects (2), showing a below average level of implementation. EU cohesion policy funding has brought many social and economic benefits. Funding from the European Regional Development Fund (ERDF) has enhanced research and innovation (R&I) infrastructure, promoted business investment in R&I and developed links and synergies between firms, R&D centres and the higher education sector. Funds have also improved SMEs’ regional competitiveness of SMEs; ERDF support to firms selected for support by the end of 2018 will trigger €918 million of private investment, and is expected to boost employment by over 1,800 full-time equivalents. ERDF funds contributed to the reduction of greenhouse gas emissions by 38,400 t CO2 eq with projects implemented by end 2018. The European Social Fund (ESF) helps to prevent and combat unemployment by extending the range of training on offer and improving the functioning of the labour market. So far, this has helped 22,996 people who had been long-term unemployed. The ESF has also promoted the social integration of disadvantaged people (34,225), people with a migrant background (90,734), young people/NEETs (20,929) and people with a disability (3,761). By the end of 2018, 167,123 had benefited from ESF-funded operations. Agricultural and fisheries funds and other EU programmes also help to address Austria’s investment needs. In particular, the European Agricultural Fund for Rural Development (EAFRD) provides significant support to Austria’s agricultural sector, amounting to €7.7 billion including national co-financing (3). Other EU programmes, such as the Connecting Europe Facility, allocated €894 million to specific projects that support the highly frequented Austrian transportation network. Horizon 2020, the EU’s framework R&I programme, allocated EU funding of €1.3 billion in Austria (including €263 million for more than 400 SMEs). EU funding helps to mobilise private investment. By the end of 2018, European Structural and Investment Funds (ESIF) (4) supported programmes mobilised additional capital by committing about €9 million in the form of loans, guarantees and equity (5), which is expected to leverage additional private investment. EU funds already invest in action to meet the UN Sustainable Development Goals (SDGs). In Austria, up to 97% of allocations under the ESI funds for 2014-2020 support 12 out of the 17 SDGs. 3. Reform priorities 3.1.Public finances and taxation 3.1.1.Fiscal framework Austria’s fiscal federalism continues to be characterised by a significant mismatch of financing and spending responsibilities at subnational level. The opaque system of tax sharing, intergovernmental transfers and cost bearing provides weak incentives for political accountability and cost containment at the subnational level as the link between tax revenues and public expenditure is largely blurred (European Commission, 2019a; Matzinger, 2015a, b). In 2018, subnational governments (Länder and local governments) raised about 9.0% of total tax revenues (2.4% of GDP), but were responsible for roughly 34.5% of total public expenditures (18.7% of GDP). As a step towards greater subnational tax autonomy, the housing subsidy contribution became an exclusive state government tax as of 2018, leading to a tripling of the own tax revenues of the Länder (BMF, 2018). However, the Länder have yet to use their new leeway to increase the relevant tax rates and have not yet agreed a common position on how to implement greater tax autonomy in practice. Implementation of several initiatives introduced by the Intergovernmental Fiscal Relations Act paints a mixed picture. ( ) While measures have been taken to simplify the allocation of funds in the fiscal equalisation, measures to improve the efficiency of public spending have been less successful. The plan to introduce a task-oriented allocation of shared taxes to municipalities in the fields of elementary education and compulsory schools was suspended having failed to produce results. Instead, the federal authorities agreed to provide earmarked grants in the relevant areas, in line with previous practices. Spending reviews to assess the effectiveness and efficiency of subnational public spending in the areas of health care in schools and municipal water management are expected to be finalised in early 2020. A spending review concerning general compulsory schools was finalized in August 2018. A benchmarking model was established for a comparative assessment of the efficiency and effectiveness of subnational spending and is being extended to other policy areas. Efficiency gains and potential savings exist also in the system of public subsidies (Grossmann, 2018). In 2010, a transparency database was set up to report on individual applications and to monitor the appropriate use of granted subsidies. However, recent studies (ibid.) and the Austrian Court of Audit (2017) criticise the design of the database as suffering from conceptual and accessibility problems and incomplete coverage of subsidised areas. The 2019 amendment of the law on the database aims to address these issues and improves inter alia, query rights for stakeholders (e.g. funding agencies). The new government has declared its intention to look into the possibility of fiscal sanctions for Länder that fail to submit input for the database. Increasing subnational tax autonomy remains on the political agenda. Linking discussions on subnational tax autonomy to findings on how to make the tax system more efficient could provide new insights for comprehensive reform strategies. Several studies analyse potential revenue and efficiency effects of greater subnational tax autonomy, which remains on the new government’s agenda (Pitlik et al., 2015; Bröthaler et al., 2011). According to the new government’s programme, the new Intergovernmental Fiscal Relations Act will focus on the alignment of financing and spending responsibilities and more transparent distribution of competence across layers of government. It will establish that the achievement of climate goals is a common task and a precondition for granting transfers. 3.1.2.Taxation There is considerable scope for comprehensive tax reform to foster fairness, inclusive growth and environmental sustainability. Despite a series of tax relief reforms (in 2005, 2010 and 2015), Austria remains a high-tax country with a tax-to-GDP ratio that constantly exceeds the EU average (AT: 41.8%, EU: 39.0% in 2017). ( ) However, rather than the absolute level of taxation, what matters for allocative efficiency (and ultimately economic growth) is the design of the tax system, i.e. the relative and effective burden on different tax bases. Empirical studies suggest that taxes on immovable property and consumption are less harmful to long-term growth than personal and corporate income taxes and social contributions (Arnold, 2008; Arnold et al., 2011; Acosta-Ormaechea and Yoo, 2012). Against this background, Austria’s tax mix appears to be relatively detrimental to growth in international terms (Köppl and Schratzenstaller, 2015a), which is also reflected in SDG 17. The share of labour taxes in total tax revenue is among the highest in the EU; this is also mirrored by a high implicit tax rate (ITR) on labour (Graph 3.1.1). ( ) On the other hand, revenue from taxes on consumption and capital are below the EU average. The ITR on consumption is slightly above the EU average, and that on capital slightly below. Also revenue from several specific taxes is low in comparison to EU averages, e.g. taxes on alcohol and tobacco, energy and pollution, property taxes and taxes on the capital stock. Austria’s high labour tax burden creates significant disincentives for labour demand and supply. Austria’s tax wedge on labour (a rough indicator for incentives to work and to recruit people) exceeds the EU average, in particular for low and medium income levels (Graph 3.1.2). ( ) For example, the overall tax wedge for a single person on an average wage is 47.6%, as compared to an EU average of 42.9%. ( ) Social security contributions represent by far the biggest component of the tax wedge, especially at lower income levels (AT: 90.5% vs EU-23: 80.7% for those on 50% of average earnings). The upper contribution limit for social contributions leads to a lower share in the tax wedge for those on 150% of average earnings (approx. €71,810 in 2018). Graph 3.1.2 also reveals a comparatively high burden on Austrian employers in terms of non-wage labour costs. Graph 3.1.1:Austria's tax mix (2018) and ITRs (2017) in EU comparison Source: European Commission Low-income earners, in particular, face high disincentives to work longer hours. The effective marginal tax rate (EMTR) shows the share of an additional euro of income that is ‘taxed away’, in the sense that taxes and social contributions accrue and cash social benefits are withdrawn. Therefore, it provides an insight into the financial disincentive to work longer hours. Graph 3.1.2 shows the EMTR for a hypothetical single-person household and eligible for the minimum income benefit (Mindestsicherung). ( ) Graph 3.1.2 shows that, for every euro of this person’s gross monthly earnings up to €970, the same amount is withdrawn from the minimum income benefit, leading to an EMTR of 100%. Earnings up to this amount do not affect the person’s disposable income.

Graph 3.1.3:Composition of Austria’s labour tax wedge in EU comparison in 2018 Source: OECD taxing wages database For monthly earnings exceeding the minor employment threshold (Geringfügigkeitsgrenze) of €530, social contributions payable by employees and employers kick in, well before the benefit withdrawal comes to an end. Benefits are entirely withdrawn at €970 per month but payments for social contributions mean that the EMTR stays at roughly 15%. Despite the traffic tax credit and the negative tax, the marginal effective rate jumps from 15% to over 30% for monthly gross earnings of €1,240‑1,280. ( ) The increase of the traffic tax credit and the negative tax under the reform change the EMTR only slightly. For monthly earnings between €960-1,000, the effective marginal burden decreases under 2020 policy rules, while it actually increases for monthly earnings of €1,090-1,600. For gross earnings above €1,610, the two lines roughly coincide again. Graph 3.1.2:Marginal effective tax rate of a single household without children Source: European Commission, based on the EUROMOD model. Since 2018, several measures have been taken to reduce the tax burden on low-income earners, families and employers. The overall budgetary impact of these measures (see Table 3.1.1) is roughly estimated at 0.5% of GDP. ( ) While the measures implemented in 2018 mainly aimed to relieve families with at least one working spouse, the 2020 Tax Reform Act focuses on low-income earners. Table 3.1.1:Measures to reduce the tax wedge on labour Source: Compilation by European Commission The 2020 Tax Reform Act and the 2020 Pension Adjustment Act increase the disposable income, especially at the lower end of the income distribution. Their distributional effects have recently been assessed in a microsimulation study by the Austrian Parliamentary Budget Office (2019a). Graph 3.1.4. shows the estimated change in annual disposable income for employees, pensioners, the self-employed and farmers. While the income relief for employees and pensioners is characterised by a phase-in, phase-out, and a plateau region providing maximum relief, the gain in disposable income for the self-employed and farmers increases in a linear fashion due to an across-the-board reduction of health insurance contributions. ( ) There remains scope for a future-oriented reform strategy in the area of labour taxation. Despite individual reform measures, the effective marginal burden on employees at the lower end of the income distribution remains very high, mainly due to social security contributions and a relatively high initial marginal tax rate. Lower initial tax rates and an expansion of measures that incentivise labour supply could be achieved by broadening the tax base. This could involve an overhaul of current tax expenditures, e.g. the preferential tax treatment of other earnings and the commuter subsidy. (Köppl and Schratzenstaller, 2015a,b; Bittschi and Kocher, 2018). The new government programme announces to further relief pensioners, employees, the self-employed and farmers with low and medium incomes. Specifically, the initial rates of the personal income tax and the corporate income tax rate shall be reduced, tax provisions for farmers shall be simplified and the capital income tax shall promote green or ethical investments. In addition, the government intends to inquire ways to tackle the cold progression, i.e. the additional tax burden that arises over time when the tax tariff is not adjusted for inflation. Graph 3.1.4:Income relief provided by 2020 Tax Reform Act and 2020 Pension Adjustment Act Source: Austrian Parliamentary Budget Office, based on the EUROMOD model. Austria’s revenue from consumption taxes is only slightly below the EU average, but there is room for efficiency improvements. Austria’s consumption taxes account for 27.6% of total tax revenues, slightly below the EU average of 28.3% (Graph 3.1.5). Value-added taxes (VAT) make up the biggest share of consumption taxes and are levied at a standard rate of 20% and two reduced rates of 13% and 10%. VAT accounts for 18.3% of total taxes, close to the EU average of 18.1%. The VAT gap (an indicator for the effectiveness of VAT enforcement and compliance) stood at 7.9% in 2017, well below the EU-wide gap of 11.2%. ( ) While the effectiveness of reduced rates as a distributional tool is questionable (OECD, 2014; Köppl and Schratzenstaller, 2015b; Bittschi and Kocher, 2018), recent empirical evidence supports the view that broadening the tax base is more supportive of growth than raising the standard rate (Acosta-Ormaechea and Morozumi 2019). Against this background, the re-introduction in 2018 of the 10% rate on overnight stays is questionable, while the removal of the VAT exemption for imports from third countries below a value €22 goes in the right direction. Austria appears to make insufficient use of taxes on tobacco and alcohol and environmental taxes. Taxes on alcohol and tobacco accounted for 1.5% of total tax revenue in 2017, as compared to an EU average of 2.0%. This points to unused revenue potential and steering effects. ( ) Similarly, Austria is among the countries with the lowest revenues from environmental taxes (5.7% of the total revenues, as compared to an EU average of 6.1%). ( ) Graph 3.1.5 shows that its mix of environmental taxes, in percentage of total tax collection, follows the EU average very closely, with energy taxes having the largest share, followed by transport taxes. In contrast, taxes on pollution and resource use appear underutilised. Increasing the level and efficiency of energy taxes is key to reducing emissions. According to the Austrian Environment Agency 37% of Austria’s greenhouse gas (GHG) emissions were covered by the European emissions trading system (ETS) in 2017. Private households produced about 18% of total CO2 emissions through heating and transport (Austrian Parliamentary Budget Office, 2019b). Non-ETS areas are subject to national taxes and excises, which differ substantially between energy products (e.g. diesel vs petrol) and usage (heating vs propellant). Furthermore, national taxes and excises do not generally reflect the carbon content of specific energy sources (Kettner-Marx and Kletzan-Slamanig, 2018). As regards the taxation of fuel (as a major source of GHG emissions), Austria has the third lowest tax rates on petrol and diesel in the EU in terms of purchasing power parity (Kettner-Marx and Kletzan-Slamanig, 2018). Moreover, circulation taxes on buses, coaches and heavy-duty trucks are relatively low and electric buses are subject to higher taxes than old, fuel-inefficient buses. Overall, the uneven and generally low levels of energy taxation undermine its efficiency and effectiveness as a policy tool to incentivise environmentally beneficial consumption. Rather, low fuel taxes attract consumers from outside Austria (Tanktourismus) (Köppl and Schratzenstaller, 2015b, Kettner-Marx and Kletzan-Slamanig, 2018). ( ) Consistent taxation of CO2 emissions would increase the competitiveness of climate-friendly energy sources, in addition to providing fiscal space to reduce more distortive taxes. Higher, CO2-related energy taxes would help to internalise the social costs of pollution, lead consumers to rely more on renewable energy sources (SDG 12) and encourage investors to seek for innovation in climate-friendly technology. Furthermore, additional revenues from higher energy taxes could be used to finance tax cuts in other areas (e.g. labour) or to fund environmentally beneficial R&D. Thus, the introduction of a CO2 tax could have a ‘double dividend’ in terms of reduced emissions and positive growth effects, recently shown in a simulation study by the Austrian Institute of Economic Research (Kettner-Marx and Kletzan-Slamanig, 2018; Kettner-Marx et al., 2018). Using a dynamic new Keynesian model, the study assesses the short-term environmental, macroeconomic and distributional effects of various CO2 tax scenarios and compensation mechanisms. The results suggest that significant reductions in CO2 emissions can be achieved together with positive (albeit small) effects on GDP and employment, if the additional revenue is used to finance a reduction in employers’ social contributions or VAT. However, as consumption taxes are known to be regressive, an in-depth analysis of the distributional impact of increased energy taxes including an assessment of different compensatory measures, seems warranted, with an eye to political feasibility and a ‘beyond GDP’ debate. Against this background, Box 3.1.1 investigates the distributional and equity effects of introducing a CO2 tax on energy consumed in the private household sector, considering various compensatory measures to mitigate undesired regressive effects. ( ) Graph 3.1.5:Austria’s consumption tax mix in EU comparison (2018) Source: European Commission, Taxation trends (GDP-weighted EU average). National tax list. Recent measures aim to incentivise climate-friendly consumption, but more needs to be done to counteract climate change. Recently adopted measures include a redesign of the car registration tax including a CO2 component, VAT reductions for e-bikes and e-publications and abolition of the electricity tax for self-produced electricity (from photovoltaics). The overall budgetary cost related to the hitherto greening of the tax system is estimated at €55 million (0.01% of GDP). While the new measures go in the right direction, more needs to be done to achieve effective climate protection. The new government programme announces an eco-social tax reform to counteract climate change while taking into account competitiveness aspects. In a first stage, the flight tax is to be increased (for short and middle distance flights) and the duty on vehicles based on fuel consumption and the truck toll are to be re-designed, among others. ( ) In a second step, CO2 emissions shall be priced. Greater use of wealth-related taxes could help to improve the fairness and efficiency of the tax system. The tax-benefit system effectively reduces income inequality (see Section 3.3.) but wealth inequality remains among the highest in the EU, as confirmed by the third wave of the ECB’s Household Finance and Consumption Survey (Fessler, Lindner and Schürz, 2019). The wealthiest 10% of the population own about 56.4% of total net wealth, while the bottom 50% own 3.4%. One main reason for this is that housing wealth, a key component of household net worth, is concentrated at the upper end of both the income and net wealth distribution (ibid.). At the same time, revenue from wealth-related taxes plays only a small role in Austria (0.8% of GDP versus an EU average of 2.6% of GDP in 2017). ( ) Especially the revenue potential from recurrent taxes on property, which are deemed relatively growth-friendly, remains largely untapped due to the use of outdated cadastral values as the tax base (European Commission, 2018b, 2019a). There is also a fairness issue, as the tax base does not reflect the current value of property, so taxable values have not kept up with real estate prices. In addition, inheritance and gift taxes, which are deemed relatively growth-friendly, were abolished in 2008. Box 3.1.2: The distributional and equity effects of introducing an explicit price for CO₂ Effective policy action on climate change requires, among others, efficient energy taxes, including an explicit price for CO₂. While Austria needs to take action to achieve the agreed reductions in greenhouse gas emissions, it currently makes little use of efficient energy taxation. However, the new government programme announces an eco-social tax reform to internalise the social costs of CO₂ emissions in sectors not covered by the European Emissions Trading System, by introducing either a price for CO₂ or a national emissions trading system. This microsimulation study contributes to the national debate by analysing the distributional effects of introducing a CO₂ tax on energy consumed by private households. Three CO₂ tax scenarios are simulated (Graph 1). In the low- and high-tax scenarios, prices of €60 and €120 per tonne of CO₂ are applied on top of existing excises, while in the pure CO₂ tax scenario, existing excises are abolished and a price of €350/t CO₂ is applied. (1) For the low-tax scenario, two types of compensations are considered: a lump-sum for all households and a targeted benefit for households that spend at least 15% of their disposable income on energy consumption. (2) Graph 3.1.6: Simulated CO₂ tax scenarios and compensatory measures Source: European Commission, Joint Research Centre, based on the EUROMOD model The EUROMOD indirect tax tool gauges the budgetary and equity effects of simultaneous reforms of direct and indirect tax policies. (3) In a first step, it imputes private household expenditures for 16 commodity groups into EUROMOD input data (based on EU-SILC) by means of Engel curves estimated using national Household Budget Surveys. (4) It then applies estimated implicit tax rates (relative to consumer prices) to compute households’ indirect tax liabilities for the different commodity groups. The tool assumes of full tax compliance and that changes in indirect taxes are passed on entirely to consumers. As the aim is to assess the ‘overnight’ distributional effect of introducing a CO₂ tax, the simulation assumes that households continue to consume the same quantities of all goods as before the tax hike. (5) Graph 3.1.7: Distributional and equity effects Source: European Commission, Joint Research Centre, based on the EUROMOD model Well-designed compensatory mechanisms help attenuate the regressive impact of increased energy taxes (Graph 2). While personal income taxes in Austria are highly progressive, indirect taxes have in general a regressive effect on the distribution of disposable income as poorer households spend a larger share of their income on consumption goods. The higher the CO₂-related price mark-up, the greater the effect: adjusted disposable income decreases by 0.5-1.1% in the 10th decile and by 1.5-3.2% in the bottom decile in the scenarios without compensation. The introduction of a cash benefit renders the reform progressive, leading to a gain in adjusted disposable income for households until the 6th decile. The net loss in adjusted disposable income for households as of the 7th decile is mainly due to higher absolute payments for consumption taxes. Compensatory measures reduce inequality and the ‘at-risk-of-poverty’ rate. Inequality, as measured by the Gini coefficient, increases in the scenarios without compensatory measures, but is reduced by the targeted cash benefit and a lump-sum compensation. The ‘at-risk-of-poverty’ rate is affected in a similar way. (6) 3.1.3.Pensions Austria’s public pension expenditure is comparatively high and projected to increase in the medium and long term. At 13.8% of GDP, public spending on pensions is among the highest in the EU (2016 EU average: 11.2%; European Commission, 2018c). Based on the projections of the 2018 Ageing Report, the expected increase is also above the EU average. Spending is projected to increase by 1.0 pp of GDP between 2019-2040, when most of the baby-boomer generation will be in retirement, and by 0.4 pps of GDP between 2019-2070 (the respective EU averages are 0.9 pps and -0.1 pps of GDP). Current pension costs are

reflected in relatively high social contribution rates, which account for most of the tax wedge on labour. The future increase in spending will either reduce the fiscal space for other policy areas or increase government debt. Past reform efforts aimed to strengthen the sustainability of the pension system, while recent measures go partly in the opposite direction. Under the pressure of the financial and sovereign debt crisis and tightened EU fiscal rules, the government implemented several reforms of the pension system between 2009 and 2014 that reduced access to early retirement schemes and invalidity pensions. As a result, the effective retirement age has risen by 9 months since 2014, reaching 60.4 years in 2018 (61.5 for men and 59.4 years for women) (BMASGK, 2019). Nonetheless, the gap between the effective and the statutory retirement age persists (3.5 for men and 0.5 years for women). Although the pension system is facing major challenges (fiscal sustainability, fairness, changing labour market conditions, etc.), there appears to be little political appetite to steer a public debate on how to make it fit for the future. Indeed, the new government programme envisages measures to further increase the effective retirement age without fundamentally reforming the pension system. While undermining previous reform efforts to strengthen fiscal sustainability, the Pension Adjustment Act includes measures that further improve pension adequacy. Table 3.1.2 provides an overview of measures adopted in 2019 that affect pension incomes. The 2020 Pension Adjustment Act provides for a staggered increase of low and medium pensions as of 2020 (see Graph 3.1.4). Taken together, the pension adjustment and the tax relief (grey line) provide pensioners with income relief exceeding that for employees throughout the distribution of disposable income. ( ) Moreover, pensioners benefit as of the first euro, while employees below the minor employment threshold are not affected by the reform. In addition, there is a larger means-tested equalisation supplement (Ausgleichszulage) for pensioners with monthly incomes below €933.06 (2019 reference value). Since 1 January 2020, the pension bonus further increases the incomes of individuals with 30 or 40 contribution years of gainful employment (including up to 5 years of child care) and up to 1 year of military or civil service. The 2020 Tax Reform Act further relieves pension incomes through an increase of the pensioners’ tax credit and the negative tax. The expected budgetary impact of these measures amounts to roughly 0.2% of GDP. While a targeted increase of low pension incomes may be justified by the objective of pension adequacy, the undiscounted pension after 45 contribution years ( ) clearly undermines previous efforts to increase the effective pensionable age and also raises fairness issues. Neither does it make sense in the light of recently observed labour market shortages (see Section 3.3). Table 3.1.2:Recent pension-related fiscal measures Source: Compilation by European Commission Austria’s pension system compares well in terms of overall pension adequacy, but income inequality in working life is mirrored in retirement. The gender gap in pension income is one of the highest in the EU (38.8% in 2018, as compared to the EU average of 35.2%), reflecting gender-related income inequalities in working life. The risk of poverty or social exclusion for women aged 65+ is almost twice as high as that for men (18.4% vs 9.5% in 2018). As of 2020, the pension adjustment and the increased minimum pension top-up will particularly benefit pensioners on lower incomes. However, while the pension bonus is intended to help reduce old-age poverty, the number of potential beneficiaries is limited as only about 19% of those eligible for the top-up are expected to fulfil the contribution requirement. The new government programme announces to address the problem of old age poverty with a series of measures, for instance pension splitting among spouses. 3.1.4.Health care Public health care spending continues to pose a challenge for fiscal sustainability. According to the 2018 Ageing Report, the share of GDP spent on public health care is projected to increase by 1.3 pps from 7% in 2016 to 8.3% in 2070, as compared to an EU average increase of 0.9 pps. The overutilisation of hospital care has been identified as the key driver of this growth. To contain public spending, an Art. 15a Agreement stipulates that expenditure growth in 2017-2021will be gradually reduced so that the annual increase in 2021 does not exceed 3.2%. According to the second comprehensive monitoring report for the period 2017-2021, expenditure remains beneath the ceilings in the years 2017 to 2019. Though expenditure growth has been below the target since its introduction, gains in cost-efficiency through structural reforms and initiatives have yet to materialise. The strengthening of primary health care is still ongoing and potential savings remain unclear. Until December 2019, 35 of the planned 75 multidisciplinary primary health care (PHC) units were set up or are currently being realised. ( ) The Austrian Medical Chamber and Social Health Insurance signed a collective contract on the establishment of the PHC units in April 2019. ( ) The savings potential hinges on using primary health care as the entry point into the health system and resource shifts away from inpatient care, which also relies on patient uptake. Hospital and pharmaceutical spending are still above the EU average. With €1,099.06 per capita purchasing power standard (PPS), public hospital spending measured as inpatient curative and rehabilitative care was well above the EU average of €556.01 in 2017. Similarly, pharmaceutical spending in the same year stood at €322.77 in per capita PPS, higher than the EU average of €225.18. The share of public current health spending going to inpatient care (28.36% in 2017) has only declined by 1.27 pps since 2010, despite ongoing reforms to strengthen primary and ambulatory care. The number of acute-care beds per 1,000 of population in 2017 was 46% higher than the EU average and the third highest in the EU. Activity-based reimbursement for outpatients is expected to support the shift to a less hospital-centric model. In 2016, generic medicine use had increased only slowly from 2005, to 53%. This is slightly above the EU average, but is still far below the top performers (OECD/European Observatory on Health Systems and Policies, 2019). The increasing number of physicians without contracts with the social health insurance and the expected wave of retirements may have an impact on accessibility. Gains in cost-efficiency could be achieved through better prevention. Austria has a low level of unmet health care needs and, in the five past years, achieved further progress on SDG 3 (Good health and well-being). However, healthy life years at birth are substantially below the EU average (AT: 57 years, EU average: 64 years in 2017), although per capita spending on prevention is only slightly below. Mortality from treatable causes is below the EU average, indicating the general effectiveness of the health system, but more than 12,000 deaths could have been avoided in 2016 through effective public health and prevention, and nearly 6,000 through more effective and timely health care. The new government commits to continue and step up ongoing reforms, in particular in primary and hospital care as well as preventive measures and the health care provision in rural areas. 3.1.5.Long-term care Despite recent measures, public expenditure on long-term care still feeds into fiscal sustainability challenges. With no substantial changes in the system of service delivery, the fiscal risks currently remain unchanged. The abolition of the recourse to assets (Pflegeregress) is compensated by transfers from central government. The authorities also introduced increases in the cash benefit allowances for each level of dependency, which will start with a 1.8% rise in January 2020. This is expected to cost €50 million in addition to the existing spending of €2.7 billion, which targets about 464,000 recipients. Other measures include an accreditation system to support the quality of home care provision. Overall, recent measures do not appear to help reduce costs. The long-term care system delivers comparatively high-quality services, but faces staffing challenges. The long-term care system relies comparatively heavy on informal care. The 24-hour care at home with privately hired or self-employed carers, is increasingly used and relies to a great extent on people from central and eastern European Member States. ( ) Women make up 85.2%() of formal long-term care staff and about two thirds of the employees who take leave to care for dependants are women. According to recent estimates, the nursing care staff requirement for the year 2030 (additional demand and replacement due to retirement) is approximately 76,000 persons. (Rappold and Juraszovich, 2019). Work on a masterplan for long-term care (Masterplan Pflege) had started with the aim of improving quality, staffing and financing. The work was curtailed by the early end of the previous government. The new government announced a fundamental reform of the long-term care system. 3.1.6.Debt sustainability analysis and fiscal risks While risks of fiscal stress appear to be contained in the short and medium term, Austria continues to have a medium fiscal sustainability risk in the long term. The values of the S0 and S1 indicators and the debt sustainability analysis are below the critical thresholds (see Annex B). However, the S2 indicator shows that, relative to the baseline no-policy-change scenario, an improvement of 2.3 pps of GDP in the structural primary balance will be needed to prevent the debt-to-GDP ratio increasing continuously over the long term. The S2 value is driven by the projected rise in age-related government expenditure, in particular long-term care (contribution of 1.4 pps of GDP to the S2 value), health care (1.0 pp) and pensions (0.6 pps) (see Annex B). 3.2. Financial sector 3.2.1.Banking sector and insurance sector The banking sector has continued to benefit from benign macroeconomic conditions in recent years. Supported by positive economic developments, the system-wide solvency ratio perked up to 18.7% at the end of June 2019, 0.3 pps higher than at the same point the year before. The common equity Tier 1 ratio increased to 15.5% at the end of June 2019, which is slightly higher than the euro area average. Nevertheless, there is still scope for the significant credit institutions under the supervision of the Single Supervisory Mechanism to catch up with their euro area peers. Asset quality has also strengthened further, with the non-performing loans (NPL) ratio declining to 2.3% at the end of June 2019, 1.1 pps below the euro area average. Asset quality has been supported by NPLs declining for both corporates and households, with NPLs for corporate exposures being by 2.9 pps lower than the euro area average of 6.1% at the end of June 2019. On the back of several macro-prudential measures adopted by supervisors, foreign currency (mainly Swiss franc) loans to Austrian households and non-financial corporations declined by 73% from October 2008. However, the vulnerabilities associated with the outstanding stock of bullet loans (denominated in foreign exchange) linked to repayment vehicles require close oversight. Green financing has also become a priority. The first green bond issuance by an Austrian bank was made in June 2018. Despite the low interest rates, banks made efforts to improve their profit generation capacity. The profitability of Austrian banks continued to be solid in the first half of 2019, despite low interest rates. The return on equity stood at 4.2% (ECB data, non-annualised), higher than the EU average of 3.4%, but slightly lower than the 4.5% registered in June 2018. The profitability of the significant Austrian credit institutions continues to display some pockets of vulnerability, with their net interest margins remaining under pressure, as in previous years. Some further progress has been made on improving operational efficiency, as banks’ cost-to-income-ratio declined from 65.5% at the end of June 2018 to 63.9% at the end of June 2019, marginally lower than the EU average of 64.7%. Nevertheless, further efforts appear warranted to adapt business models to the challenges posed by new IT and digitalisation and to tackle remaining structural cost issues.

Graph 3.2.1:Credit to the private sector (y-o-y% change) Source: ECB Developments linked to the buoyant residential real estate market have not posed challenges so far to banking sector stability. Lending to households expanded further in 2019, increasing by 4.3% y-o-y in September 2019 (see Graph 3.2.1). Meanwhile, mortgage lending remained dynamic and perked up by 5.3% y-o-y in September 2019. Despite the robust mortgage lending and continued house price increases (see Section 3.2.2), authorities have concluded that the counter-cyclical capital buffer can be kept at zero. To date, credit institutions have applied the Austrian Financial Stability Board’s September 2018 recommendation and quantitative guidance on sustainable real estate lending (European Commission, 2019a). While banks are broadly complying with the recommended quantitative thresholds, several outliers require close monitoring and supervisory dialogue. As from January 2020, enhanced reporting requirements on real estate exposures are mandatory and applicable for all credit institutions. In the event of more adverse developments, the supervisory authorities can activate the borrower-based macro-prudential instruments under the Austrian Banking Act. Central, eastern and south-eastern Europe has continued to play an important role for the activities and profitability of Austrian banks. The consolidated foreign claims of banks with Austrian majority ownership in central, eastern and south-eastern Europe (CESEE) stood at roughly €217 billion at the end of June 2019, up from €210 billion in 2018. The top three host countries for Austrian banks with international activities continue to be Czechia, Slovakia and Romania, which accounted for roughly 63% of the total assets of the CESEE subsidiaries at the end of June 2019. Meanwhile, Czechia, Russia and Slovakia were the most profitable markets at the end of June 2019, generating roughly 67% of Austrian banks’ total profit. Asset quality has improved further on the back of the benign macroeconomic conditions in the CESEE region coupled with the lower loan-loss provisioning needs. Since December 2010, foreign currency loans granted to clients in CESEE have gone down by roughly 67%. The prudential situation of Austrian subsidiaries has strengthened, but they remain exposed to developments in host countries. While the overall prudential situation of Austrian subsidiaries in the CESEE region has strengthened, they remain exposed to developments stemming from measures taken by host countries (additional tax burden due to bank taxes, measures targeting foreign exchange loans, in particular Swiss franc loans). Also, the issuance of debt instruments complying with the minimum requirement for own funds and eligible liabilities (MREL) may be challenging for the Austrian subsidiaries operating in host countries with less-developed capital markets. The winding-down of public vehicles for impaired assets does not pose risks to public finances. The disposal of the impaired assets of the three asset management companies – the financial defeasance vehicles HETA, Immigon and KA Finanz – has further proceeded without any adverse impact on public finances. At the end of 2018, HETA managed to divest roughly 90% of its total assets. Based on the recoveries so far, the Austrian Financial Market Authority (FMA) – the resolution authority – decided to increase the recovery ratio from 64.4% to 86.32%. Due to the cash reserves obtained from divestments, HETA made a third distribution of proceeds to creditors (€2.05 billion) in December 2019. Based on preliminary estimates, the bondholders subject to bail-in are expected to contribute roughly €3.6 billion to the orderly resolution of HETA. The resolution process of Immigon was formally finalised at the end of June 2019, following a decision by the FMA. Immigon opened the liquidation proceedings with a view to distributing its remaining capital and liquidity. Since some liabilities are not maturing until 2028, Immigon will be removed from the company register in 2029. The divestment of KA Finanz’s assets has also advanced, with total assets being reduced to €7.2 billion at the end of 2018. The winding-down process is on track to be completed by 2026, as envisaged. A much-debated reform of the institutional framework for banking supervision, announced in 2018, will not be further pursued. In November 2018, the previous government announced a reform introducing a new supervisory model based on the consolidation in the FMA of banking supervision activities (including on-site inspections and off-site analysis at micro level), which are currently shared between the Austrian National Bank (OeNB) and the FMA. The reform would carve out other competences from the OeNB, such as its operational role in the supervision of credit institutions and deposit guarantee schemes. However, the OeNB’s role in the area of financial stability and macro-prudential supervision would be further strengthened. The reform envisages also an enhanced role for the Ministry of Finance in regulatory issues in the area of competence of the FMA. In the announced format, several aspects of the reform raise concerns as to its impact on the governance as well as on the operational and financial independence of the FMA. Low interest rates continue to put a strain on the traditional business of life insurance undertakings. While the non-life and health insurance business in Austria continued to expand by 3.6% and 4.3% respectively, in 2018, the life insurance business remained under pressure, as gross written premiums went down by 3.8%. Overall, total gross written premiums of Austrian insurance undertakings increased by 1.2% in 2018. Traditional life insurance products continue to be those most affected by the current low interest environment. The maximum interest rate for life insurance contracts with interest rate guarantee was adjusted downwards by the supervisor and currently stands at 0.5% (as compared with 2.25% 10 years ago). Despite the headwinds in the life insurance sector, the Austrian insurance companies have continued to maintain sufficient solvency ratios. Activities in other countries continue to be important for its insurance sector, as five insurance groups with international activities (VIG, UNIQA, Grawe, Merkur and Wüstenrot) operate in 27 countries in western Europe and CESEE. These markets have contributed significantly to the total written premiums of Austrian insurers, with the foreign business accounting for 40.3% of total gross written premiums in 2018, marginally higher than in 2017. 3.2.2.Housing market and real estate financing House prices have risen strongly in the past decade, but recent data show opposing tendencies. House prices have gone up strongly, with nominal prices 82% above 2006 levels (see also Section 1). In the last 2 years, real house price growth has remained contained with 2.5% growth (4.7% nominally) in 2018, after 3.2% (5.3% nominally) in 2017 (Eurostat). By contrast, the OeNB nominal residential property price index shows a clear acceleration, with 6.9% nominal growth in 2018 after 3.8% in 2017. Both sources indicate high nominal year-on-year growth in Q3 2019 of 6.18% (Eurostat) and 5.2% (OeNB). In Vienna, prices increased by 9.8% in Q2, a development last seen in 2013, but growth decreased slightly in Q3 to 7.6%. In other Länder, prices grew moderately and have been decelerating for several successive quarters (OeNB, 2019). Excess demand for housing appears to have peaked in 2016, as building permits and construction picked up. After peaking in 2016, increased construction activity and weaker demand are expected to eliminate excess demand by 2020, though it may take longer in Vienna (Schneider, 2019; European Commission, 2019a). This is also visible in the strong increase in the number of building permits issued in 2016 (+16.9%) and 2017 (+10.2%). While growth in the demand for building permits fell strongly in 2018 (-16.9%), it was still high (70,000 permits). First estimates for 2019 show stable development. The fact that permit applications focused on multi-family homes suggests that the dwelling stock in cities (in particular Vienna) may grow faster than in past years (IIBW, 2019). Construction of dwellings increased by 6.2% in 2017 and 1.3% in 2018. While investment in construction picked up since 2016, the parallel increase in GDP meant that residential investment as a percentage of GDP remained roughly stable. It increased slightly, to 4.5%, in 2017‑2018, compared to 4.3% in 2012‑2016. Graph 3.2.2:Price developments and valuation gaps Source: European Commission, OeNB Most indicators suggest that house prices are overvalued by 10% or more. Several assessment indicators suggest an average house prices overvaluation of 10-14% (see Graph 3.2.2). As prices have increased more than income, the price to income ratio is 29% (Q3 2019) above its long‑term average and among the highest in the euro area. In 2018, a 100 m² dwelling cost on average 10.7 years of the average annual household income, somewhat more than in most euro area countries. The OeNB fundamentals indicator for residential property prices increased further for Vienna, reaching 26% in Q3 2019, and went up to 14% for the country as a whole (OeNB, 2019). A key difference from other euro area markets is that rents also increased strongly. This has affected the affordability of housing (see Section 3.3.3, also on housing subsidies). However, the price to rent ratio is only 15% (Q3 2019) above its long-term average and the model-based methods point to a rather low valuation gap. Risks to the banking sector seem contained (see Section 3.2.1). 3.2.3.Capital markets and access to finance The financial sector is dominated by banks, while capital markets have scope for further development. For Austrian companies, in particular SMEs, bank credit is the main source of external financing. In 2018, as in previous years, non-financial corporations have heavily relied on bank loans, which represented 46.4% of GDP, 12 pps above the EU average. By contrast, funding from capital markets stood at 20.3% of GDP and remained significantly below the EU average of 49.7% in 2018. The Vienna Stock Exchange experienced a setback in 2018, as the Austrian index (ATX) lost 19.7%. This was on the back of muted growth prospects in various EU Member States and falling investment sentiments in light of a more restrictive US monetary policy and uncertainties induced by trade conflicts. Austria also has some catching up potential as regards the number of listed companies (OECD, 2019a). Despite useful measures taken in recent years, companies’ access to non-bank financing is still subdued. The Vienna Stock Exchange launched a new segment dedicated to SMEs in January 2019. Despite favourable listing conditions in terms of simplified requirements and lower costs, only six SMEs have been listed so far. The modest use of equity financing is only partly explained by demand side factors, such as the concerns of some SMEs related to losing control. Most SMEs have not had access to debt financing via the capital market, through issuing bonds or commercial papers. This is mainly due to the lack of economies of scale, as tapping the bond market entails significant transaction costs. According to Demmou et al. (2019), policies aimed at providing similar access to equity and venture capital could have a positive impact on the economy through increases in productivity growth. The impact is particularly pronounced in sectors that make intensive use of intangible assets, such as software, patents, R&D expenditure and human or organisational capital. The new government programme includes measures to reduce administrative burdens relating to capital markets. Graph 3.2.3:Venture capital investment in Austria, 2007-2018 Austria is lagging behind peer countries as regards the availability of equity capital, including venture capital. As percentage of GDP, venture capital investment is still relatively low (0.02%) compared to Denmark (0.1%) and Sweden (0.09%), but it has been catching up steadily (Invest Europe, 2019). The small size of the market also involves a high degree of volatility. After the crisis, venture capital investments dropped sharply, driven by a decline in private investment, while the public sector took a more prominent role (European Commission, 2017). Since 2015, venture capital investment has increased exceeding even pre-crisis levels, but it remains scarce for companies outside Vienna (Flachenecker et al., 2020). The recent expansion has been driven by an increase in funding for start‑up and later‑stage companies (see Graph 3.2.3). Administrative barriers and restrictive service sector regulations may be partly responsible for the low supply of domestic equity capital (AVCO, 2019). Several funds were put in place through the ‘Venture Capital Initiative’, including three in the investment phase. These funds invest, inter alia, in IT, medical engineering and industrial biotechnology. The new government programme includes improved incentives for private venture capital for innovative start‑ups and SMEs. 3.3. Labour market, education and social policies 3.3.1.Labour Market The labour market continues to improve, but regional differences remain pronounced. Employment and activity rates (among 20‑64 year‑olds) have risen steadily since 2015, to 76.8% and 80.5% in Q1 2019. While unemployment continued to drop in 2018, reaching 4.9% (see Graph 3.3.1), there are pronounced disparities between regions, ranging from 2.4% in Tyrol and 2.8% in Salzburg to 10.0% in Vienna. Differences also apply for youth unemployment, which reached 18.6% in Vienna, 13.4% in Burgenland and 12.2% in Carinthia, but was significantly lower in other regions, so that the national figure was 9.4%. Low inter-regional labour mobility seems to be an important factor behind the differences.

Graph 3.3.1:Rates of activity, unemployment and NEET (not in education, employment or training) Source: European Commission, Labour Force Survey The growing number of vacancies points to emerging labour shortages. The number of vacancies increased by 17% between Q2 2018 and Q2 2019, reaching 129,100. Recent survey data show that labour shortages affect especially construction and services. In Q2 2019, the vacancy rate reached a record 3%, compared to EU and euro area averages of 2.3%. In 2018, the share of firms reporting lack of labour as a limiting factor jumped from 24.9% in 2017 to 38.6% in the construction sector, and from 16.1% to 20.8% in the service sector. In the first 10 months of 2019, this figure dropped slightly (to 37.3%) for construction, but continued to increase for services to 23.8% (see Graph 3.3.2). Given population ageing and structural changes, encouraging higher labour market participation of women, migrants and older workers is necessary. Graph 3.3.2:Vacancies per registered unemployed and labour shortage by sector Source: European Commission, business surveys for Business Climate Indicators The female labour market potential remains underutilised. The female employment rate has been increasing continuously and is above the EU average (71.7% vs 67.4%). However, the male employment rate has grown faster, widening the gender employment gap (9.0 pps in 2018 vs 7.8 pps in 2016). Moreover, 47.6% of employed women worked part-time in 2018, one of the highest rates in the EU (EU average 30.8%). This is linked to the fact that nearly two-thirds of children enrolled in childcare attend it for fewer than 30 hours a week. In 2019, addressing these challenges and promoting a more equal division of caring responsibilities between women and men, Austria introduced the legal right to a 1-month paternity leave scheme (Familienzeit) and encourages parents to share their right to parental leave (Elternkarenz). The gender pay gap ( ) remains above the EU average (19.9% vs 16.0% in 2017) ( ). The labour market potential of people with migrant background remains underutilised. The employment gap between non-EU born and native-born residents narrowed from 16.9 pps in 2017 to 13.6 pps in 2018 (from 21.8 pps to 18.9 pps for non-EU born women), but it remains among the highest in the EU. The labour market participation of recent migrants (i.e. non-EU born residents established for less than 5 years) is improving and 50.4% of them were employed in 2018, a 5 pps increase from 2016. On the other hand, unemployment was still high among nationals of certain countries (50.9%, 39.2% and 29.6% respectively among nationals of Syria, Iraq and Afghanistan), despite significant drops between 2017 and 2018. The new government programme announces a common federal integration strategy for recognised refugees through better cooperation between the public employment service, the Integration Fund Austria and civil society. Foreign-born workers are disproportionately affected by in-work poverty and over-qualification. In-work poverty remains much higher among foreign-born workers than among native-born residents (16.9% vs 5.5% in 2018). This suggests that the former occupy jobs below their qualifications and are concentrated in the low-wage sector (30% of non-EU born residents work for less than two thirds of the median wage, compared to 12% of native-born workers (Statistik Austria, 2019a). Despite a slight improvement, over-qualification clearly remains an issue for non-EU born workers (43% over-qualification rate for non-EU born vs 25.7% for native-born workers). Despite positive labour market developments, challenges remain in terms of participation by older workers. Although the employment rate of older workers (aged 55+) increased from 46.3% in 2015 to 54% in 2018, it is still below the EU average of 58.7%. Long-term unemployment is relatively low (1.4% in 2018), but older workers are disproportionately affected. The number of long-term unemployed aged 50+ more than quadrupled between 2008 (10,562) and 2018 (44,045). Over the same period, the share of long-term unemployed in that age group rose from 24% to 45%, with significant regional differences (AMS, 2019). The ‘20,000 plus’ pilot initiative reduced the number of older people in long-term unemployment in 8 out of 11 pilot regions. In response, the parliament earmarked a further €50 million for continued support in 2019 and 2020. Population ageing and the harmonisation of the retirement age of women with that of men are the main drivers of an expected rise in the share of people aged 55+ in the workforce. The new government programme includes tailored measures to increase employment opportunities for older workers. Upskilling can help to reduce unemployment among low-skilled workers. Around 50% of the unemployed have completed lower secondary school (Pflichtschule) at most. Unemployment among the low-skilled has doubled since 2008, to over 20%. 14.7% of adults have less than an upper-secondary qualification, while the number of jobs requiring only elementary skills is limited and likely to decrease. The Adult Education Initiative (Initiative Erwachsenenbildung) provides free access to education for socio-economically disadvantaged adults who lack basic skills or never graduated from lower secondary education. The skills base needs to adapt to technological change. Specific skill gaps are prevalent in ICT and science, technology, engineering and mathematics (STEM). Of 10 Austrian leading companies, eight report recruitment problems in STEM jobs (IV, 2015). Rapidly increasing technological change, particularly linked to digitalisation, artificial intelligence and robotics, poses a challenge to the economy and society in general. 43% of firms report a lack of IT staff and 74% fear that the situation will get worse (IV, 2018). Research underlines that innovation will change the nature and distribution of tasks, creating a challenge for the low-skilled and manual routine workers (BMVIT, 2017a; OECD, 2018a). Rather than replacing jobs, the new world of work is expected to replace primarily individual tasks. A recent OECD study estimates that 16.6% of jobs are at high risk of automation and a further 29.7% at risk of significant change (OECD, 2019b). The increased need for continued learning requires good basic digital skills and better cooperation between actors in adult learning. Better framework conditions should facilitate the entry of new players including higher education institutions. The exact nature of future skills is difficult to predict, but research suggests a differentiation between digital/cognitive and non-cognitive skills (Gonzalez Vazquez et al., 2019).While cognitive skills have been at the centre of formal education, Austria’s curricula do not yet focus enough on non-cognitive skills,. It is planned within the ongoing curricula reform to further strengthen these elements. Compared to Innovation Leaders ( ), Austria needs to further improve digital skills in the workforce (in 2017, only 39% of workers had above-basic digital skills, compared to 53% in the Netherlands) (see also Section 3.3.4). In 2019, several initiatives (e.g. ‘DigComp 2.2 AT’) were pursued to address labour market needs linked to digitalisation. Under the related ‘fit4internet’ initiative, launched in 2019, anyone can assess their digital skills and receive suggestions for training as a basis for further personal development. Other initiatives include ‘Digital Pro Bootcamps’ to train employees who already have IT experience, and the ‘Work in Austria’ programme aimed at attracting foreign skilled labour, incl. IT experts. An orientation platform on digital jobs (www.digitaleberufe.at) was set up in September 2019 jointly by the Ministry of Education, Science and Research and the digital economy. It informs teachers, pupils and parents about the wide range of digital jobs. Austria has an overall well-functioning social dialogue system. The legal and institutional framework for tripartite social dialogue foresees the involvement of the social partners in policy-making and provides them with feedback from government. However, the previous government weakened the role and importance of the social partners somewhat, by not involving them fully in the design and implementation of reforms in the areas of social insurance and assistance as stipulated by the legal provisions on social dialogue. 3.3.2.Social Policy Graph 3.3.3:Main indicators of poverty, 2005-2018 Source: European Commission, Labour Force Survey The overall social situation has improved. In 2018, the share of people at risk of poverty or social exclusion fell to 17.5%, the lowest level since 2005. This improvement was driven mainly by a significant decline in the severe material deprivation rate (2017: 3.7%; 2018: 2.8%) and in the number of households with low work intensity (2017: 8.3%; 2018: 7.3%). Social transfers effectively reduce poverty (Graph 3.3.3), moving Austria forward in SDG 1 (no poverty). A reform of the minimum income benefit (Neue Sozialhilfe) was planned to come into force as of January 2020, but central elements thereof were declared unconstitutional in December 2019. However, some vulnerable groups continue to fall behind. Though down slightly, the risk of poverty or social exclusion remains high for certain vulnerable groups: foreign-born residents aged 18+ (31.4%), single-parent households (46.4%) and households with two adults and three or more dependent children (27.9%). Moreover, the persistence of poverty (the share of people at risk of monetary poverty currently and in at least 2 of the preceding 3 years) increased (2008: 5.6%; 2018: 10.2%), with an especially high increase for children (2008: 4.0%; 2018: 12.5%). Some 21.6% of children (aged 0-17) are at risk of poverty or social exclusion, a higher share than in other age groups. The new government programme prioritises the fight against child poverty. In 2018, the ‘at risk of poverty or social exclusion’ rate for children of low-skilled parents was 45.1 pps higher than for children of high-skilled parents. For the children of foreign parents, the risk was also considerable (22.4 pps higher than the average). The latest results of the OECD programme for international student assessment (PISA) show that the percentage of 15-year-old students underperforming in reading is 26.3 pps higher for those with a lower than for those with a higher socio-economic background (see Section 3.3.4). The social situation continues to vary significantly across regions. In line with the overall trend, the share of people at risk of poverty or social exclusion decreased in cities (to 25.5% in 2018 from 26.3% in 2017) and even more so in towns/suburbs (to 13.5% in 2018 from 16.4% in 2017). However, poverty and social exclusion became slightly more common in rural areas (1.2 pps increase to 14.2%). Among the regions, in 2017 the risk was highest in Vienna (26.7%) and Vorarlberg (22.2%), and lowest in Lower (12.6%) and Upper (13.2%) Austria. Social protection for employees and the self-employed performs comparably well, but the uptake of voluntary opt-ins remains low. The self-employed are mandatorily covered by all major strands of social protection, except for unemployment benefits. Relatively few self-employed opt i