EUROPEAN COMMISSION Brussels,7.3.2018 SWD(2018) 218 final COMMISSION STAFF WORKING DOCUMENT Country Report Austria 2018 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 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(2018) 120 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. Investment 3.5. Sectoral policies Annex A: Overview table Annex B: Macroeconomic Imbalance Procedure Scoreboard Annex C: Standard tables References LIST OF Tables Table 1.1:Key economic and financial indicators — Austria Table 2.1:Summary table on 2017 CSR assessment Table B.1:The MIP Scoreboard for Austria (AMR 2018)

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 growth54 LIST OF Graphs Graph 1.1: GDP growth and contributions Graph 1.2: Investment by asset Graph 1.3: Headline and core inflation Graph 1.4: Labour market outcomes — Austria Graph 1.5: Gini index of wealth (2014) and income inequality (2016) Graph 1.6: Labour productivity Graph 1.7: Trade balance and export market share Graph 1.8: House prices and rental costs Graph 1.9: General government debt and deficit Graph 1.10: Tax wedge (% of labour costs, 2016) 9 Graph 1.11: 2018 Ageing report - expenditure projections 9 Graph 2.1: Overall multiannual implementation of 2011-2017 CSRs to date 11

Graph 3.1.1: Composition of tax wedge on labour 15 Graph 3.1.2: Pension expenditure – long term projections 19 Graph 3.1.3: Long term projections for healthcare expenditure 20 Graph 3.2.1: Relative price developments and valuation gap 23 Graph 3.3.1: Trends in labour costs and its components 25 Graph 3.3.2: Gaps in employment rate (20-64) and between male and female full-time equivalent employment rate, 2016 25 Graph 3.3.3: Unemployment rate by educational attainment 28 Graph 3.3.4: Science — Percentage of low performers in Austria by immigrant background 30 Graph 3.4.1: Regulatory restrictiveness in key professions in Austria and the EU (2016) 34 Graph 3.4.2: Venture capital as % of GDP 36 Graph 3.4.3: Enterprises with high levels of digital intensity by size (2016) 37 Graph 3.5.1: Austria’s R&D intensity in comparison to innovation leaders 39 LIST OF Boxes Box 2.1: Tangible results delivered through EU support to structural change in Austria Box 3.1.1: Shifting taxes from labour to property 17 Box 3.3.1: Monitoring performance in the light of the European Pillar of Social Rights 26 Box 3.4.1: Investment challenges and reforms in Austria 38 Box 3.5.1: Policy highlights - Framework for crowd-funding and collaborative economy 41

Executive summary Austria’s strong economic performance offers a window of opportunity to improve potential growth and address remaining challenges. The sound economic outlook provides a supportive environment to further strengthen public finances, social outcomes, and innovation. Austria could also benefit from further measures to improve the sustainability of healthcare and pension expenditures and to enhance labour market and educational outcomes for specific groups where vulnerabilities still exist. Together with additional efforts to reduce restrictive regulations, this could help to boost productivity and potential growth, making Austria more resilient to future challenges ( ). The Austrian economy is growing robustly, supported by strong private consumption and investment. After several years of subdued progress, GDP growth accelerated to 1.5 % in 2016 and is expected to have doubled to around 3 % in 2017. The 2016 tax reform triggered a pick-up in private consumption that also acted as a boost to investment, strengthening domestic demand in 2017. On the back of improved developments in neighbouring countries and in world trade, investment also benefitted from markedly increasing exports, reversing in 2017 the trend of falling export market shares since the financial crisis in 2008. At the same time, the strong private consumption and investment growth increased imports, leading to only a marginal contribution by the external sector to GDP growth. For 2018 and 2019, the economic outlook remains favourable. GDP growth is expected to be broadly unchanged, driven mainly by stable domestic demand despite a slightly decreasing contribution from investment. The unemployment rate decreased from 6.0 % in 2016 to 5.5 % in 2017. The upswing phase is also reflected in higher headline and core inflation, which remained above the euro area average in 2017. Good economic conditions and the fade out of bank support costs are expected to benefit public finances in a no-policy-change scenario. After widening in 2016 due to the tax relief, headline deficit is expected to improve progressively at unchanged policies, with revenues benefiting from strong employment and consumption growth. Following the financial crisis Austria’s government debt increased significantly, peaking at 84.3 % of GDP in 2015, due to the impact of support measures for the banking sector. Government debt declined to 83.6 % of GDP in 2016 and is expected to continue decreasing to below 74 % of GDP in 2019, helped by the divestment of impaired assets from asset management companies. Austria has made some progress in addressing the 2017 country-specific recommendations. With regard to ensuring financial sustainability, some progress was made on healthcare but no progress was made on the pension system. Limited progress was made towards reforming fiscal relations between the various levels of government. Austria has made some progress in improving the labour market participation of women, but childcare provision is still below the targets for the under 3 years old and regional differences persist. Limited progress has been made in improving the educational achievements of disadvantaged young people. Some progress was made in reducing investment barriers in the services sector. Regarding progress in reaching the national targets under the Europe 2020 strategy, Austria has already reached its targets on tertiary education attainment and limiting early school leaving. It is on track to meet the employment and the renewable energy targets. However, more effort is needed to raise research and development expenditure, cut greenhouse gas emissions, decrease energy consumption and reduce poverty and social exclusion. Austria performs relatively well on the indicators of the Social Scoreboard supporting the European Pillar of Social Rights. Austria has robust policies to facilitate labour market access and to ensure fair working conditions. Policies to reduce poverty and social exclusion risks are generally effective. Austria has well developed institutional social dialogue mechanisms. Key structural issues analysed in this report, which point to particular challenges for Austria’s economy, are the following: ·Austria’s fiscal framework provides only weak incentives to improve cost efficiency. In 2016 the different levels of government agreed on several initiatives that could improve the quality of public spending at subnational level. These include spending reviews, more task-oriented financing, benchmark systems, a reform of subnational competencies and discussions on increasing tax autonomy at subnational level. While these initiatives are promising, their effectiveness depends on being implemented in full. Currently, the spending powers of municipal and federal state governments remain far greater than their revenue-raising responsibilities, giving them little incentive to contain costs. ·The overall tax burden on labour is comparatively large, while more growth-friendly sources of revenue are underused. Despite the 2016 tax reform, the burden on labour remains high and is set to increase as tax brackets are not indexed to inflation. This is especially true for low-income earners with adverse effects on labour supply incentives. Social security contributions represent a relatively large share of the tax wedge. Conversely, revenues from recurrent property taxes are significantly below the EU average due to the outdated tax base. ·The projections for medium- and long-term pension and healthcare expenditures point to a challenge for fiscal sustainability. Current pension expenditure is comparatively high and is expected to rise further as life expectancy increases while the statutory retirement age remains fixed. Closing the gap between the effective and statutory retirement ages would reduce public spending, but the potential savings are lower than for measures affecting the statutory retirement age. For the healthcare sector, the main driver of the high expenditure is an over-sized hospital sector, which is the result of a fragmented financial and organisational structure. There are efficiency gains to be made both at the system level, by shifting services to the less costly outpatient sector, and within the hospital sector itself by improving the use of public procurement. In this context, implementing the ongoing reform aimed at strengthening primary healthcare in full could contribute to reduce the size of the hospital sector. Enforcing expenditure ceilings may also help containing the projected spending increase. ·Banking sector resilience continues to improve, but some pockets of vulnerability still warrant monitoring. The capitalisation of Austrian banks increased substantially in 2016 but profitability in the domestic market remains under pressure. Foreign-currency loans granted by banks on the local market have further declined but are still a matter of concern. The asset quality and profitability of subsidiaries in central, eastern and south-eastern Europe continue to improve, whereas the exposure of Austrian banks to several markets has declined following the restructuring of UniCredit. Despite several challenges over recent years, Austrian insurance companies have managed to adjust relatively well to the low interest rates. The winding-down of the asset management companies is proceeding better than expected and overall risks are limited. ·House prices have grown considerably in recent years but overall risks to financial stability seem contained. Prices have risen particularly strongly in the Vienna region, where some overvaluation can be observed. Housing investment has been subdued in recent years compared to the relatively strong population growth, but picked up in 2017. Nevertheless, the price increases do not appear to be credit-driven as the level of household mortgages remains relatively low. Furthermore, the rental market and social housing play a strong role in Austria, so that the house price increase mainly affects wealthier households as well as tenants in the private urban rental market. The macro-prudential toolkit has been strengthened and can be activated to contain potential risks from real estate. ·Austria’s labour market performance is improving but challenges for specific groups remain. Over several years, immigration and overall increasing labour market participation led to a rapid expansion of the labour force that outpaced strong employment growth, causing moderate increases in the unemployment rate. In 2017 the unemployment rate started to fall on the back of a further acceleration in employment growth. Austria has reached a high employment rate of 75.3 % in Q3 of 2017, thus meeting the Europe 2020 target. Wage increases were moderate, improving Austria’s competitive position. The high proportion of women in part-time work and the high gender pay gap remain issues of concern. This is partly due to the still comparatively scarce and uneven provision of childcare for children below 3 years. The labour market integration of people with a migrant background including refugees is also a policy challenge. So is the digital transformation of the economy. ·Overall, social indicators reflect the good economic conditions, but vulnerabilities for certain groups still exist. The number of people at risk of poverty and social exclusion has continued to decline. By contrast, in-work poverty is rising, especially among foreign workers. In addition, while benefit adequacy has been overall favourable, the cuts in means-tested minimum income implemented in several federal states may put larger families at risk of poverty. The risk of poverty and social exclusion for women above 65 years is higher than for men, also due to a gender gap in pensions. Wealth inequality is particularly high. ·Learning outcomes of disadvantaged students have not improved. New reforms in education were introduced but their impact has yet to materialise. The second package of the reform agenda has increased schools’ autonomy, the regional coordination of schools and the availability of all-day schools. Nevertheless, recent national and international testing both point to a comparatively weak performance by Austrian students. Students' educational outcomes also continue to depend heavily on their socio-economic background and on whether they have a migrant background. At the same time, Austria’s tertiary education attainment rate has reached the national and Europe 2020 target. Several policy initiatives have been launched to help integrate refugees and people with a migrant background into the education system, as well as to encourage adult learning and improve digital education. ·Restrictive regulation in Austria’s services markets hampers productivity and discourages innovation and investment. Austria has high access barriers and restrictive rules on the exercise of key trades and professions. These include specific shareholding requirements, extensive reserved activities and interdisciplinary restrictions. High regulatory burdens also bear on the retail and tourism sectors. These barriers, burdens and restrictions are limiting investment, job creation and innovation in the services sector itself. They also affect other parts of the economy for which competitive and innovative services are a crucial input. ·Stagnating productivity requires a strong focus on boosting innovation results and supporting innovative businesses. Austria is investing heavily in research and innovation but has not yet managed to overcome the stagnation in total factor productivity. Strengthening science-business links and supporting knowledge-intensive sectors remain therefore important. Austria’s eco-system for starting and, even more so, for scaling-up innovative businesses remains a policy challenge. Apart from regulatory barriers, the lack of later stage funding options, such as venture capital, play a role, as well as skill shortages in some professions. ·Austria faces a challenge in spreading digital technologies including broadband and business models among small and medium-sized enterprises (SMEs). Austria is well-advanced in digitalising its public administrations and larger companies are well placed to exploit the opportunities of the digital economy. SMEs, the backbone of the Austrian economy, and micro-enterprises, are lagging behind. Austria has only started to address this issue with initiatives supporting digitalization of SMEs. High-speed connectivity in rural areas is also an issue. Austria’s national digitalization strategy still lacks monitoring and systematic performance review tools.

1. Economic situation and outlook GDP growth Austria's economy is growing robustly and has entered an upswing cycle. In 2016, GDP grew by 1.5 % and is expected to have doubled to around 3 % in 2017. Stable demand from private consumption and strong investment are supporting GDP growth. According to the European Commission 2018 winter interim forecast (European Commission, 2018a), they are expected to continue doing so in the coming years, although the contribution from investment is expected to slightly decrease (Graph 1.1). Austria’s exports increased markedly in 2017, benefiting from the acceleration in overall world trade and good conditions in neighbouring countries. However, as imports have also increased on the back of strong private consumption and investment, net trade is contributing only marginally to economic growth. Graph 1.1:GDP growth and contributions Source: European Commission Investment Investment is contributing strongly to GDP growth. In 2016, investment increased by 3.7 %, ending a period of subdued investment since 2012. After years of postponing investment, companies cleared their investment backlog and acquisitions in machinery and equipment grew particularly strongly with an increase of 8.6 % (Graph 1.2). In 2017, investment growth further accelerated, reflecting the overall economic upswing. The better economic climate is also felt in the construction sector. Residential housing and non-residential construction investment have both grown noticeably in 2017 after several years of subdued growth. Thanks to strong exports and imports, investment in machinery and equipment continued its solid growth in 2017. Austria now faces the challenges of ensuring that investment makes a sustained contribution to growth and of channelling it to the uses that increase productivity most. Graph 1.2:Investment by asset Source: Eurostat Inflation Austria's inflation rate has reached 2.2 % in 2017 and remains above the euro area average of 1.5 %. The strengthening of the economy can be felt in robust headline and core inflation, which have both reached 2.2 % in 2017. Increasing rents and the thriving tourism sector are contributing to continuously rising service prices (e.g., for hotels and restaurants). The new government programme announces a reduction of the VAT rate from currently 13 to 10 % for hotel accommodations, which may counteract the price development in the tourism sector. So far, Austria’s inflation rate remains above the euro area average for headline and core inflation, continuing the trend seen since 2012. Based on higher inflation, wages can also be expected to rise more strongly in the coming years (Graph 1.3). Graph 1.3:Headline and core inflation Source: Eurostat and European Commission Labour market On the back of solid economic growth, employment is growing faster than the labour force. The strong economic activity aided a rise in employment of 1.2 % in 2016 that exceeded growth in the labour force. Consequently, the unemployment rate is reversing its trend and dropping for the first time in several years. From 6.0 % in 2016, the unemployment rate has dropped to 5.5 % in 2017 and is expected to remain around that level (European Commission, 2017a). The youth unemployment rate (15-24 years) increased for several years but declined in 2017 to 9.7 %, below the EU average of 18.7 %. Despite the ageing of the population, the labour supply increased, mainly driven by increasing labour market participation of women, older workers and workers with migrant background. However, the long-term unemployment rate continues to increase (to 1.9 % in 2016), partly due to restrictions on early retirements. Wages are responding to the favourable developments on the labour market. Nominal compensation per employee increased by 2.4 % in 2016 and is expected to grow by 2.3 % annually between 2017 and 2019 as inflation rises (European Commission, 2017a). Coupled with solid productivity gains, this will improve Austria's competitive position. Graph 1.4:Labour market outcomes — Austria Despite the recent improvements, the labour market potential of older workers, the low skilled, women and people with a migrant background remains underused. The rate of female part-time employment, at 47.9 % in 2016, is one of the highest in the EU and well above the EU average of 31.4 %. However, the employment rate of women is considerably lower when expressed in full time equivalent. The gender pay gap of 21.7 % in 2015 remained persistently high, and above the EU average of 16.3 %, mainly due to the high proportion of women in part-time work and to low pay. The labour market integration of people with a disadvantaged socio-economic background and/or a migrant background remains a challenge. This is especially the case for women from non-EU countries. The employment rate of older workers is improving but at 49.8 % (2016) still below the EU average of 55.3 %. Social developments Income inequality remains low but opportunities are not equal. In 2016, the richest 20 % of households in Austria had an income 4.1 times greater than that of the poorest 20 %. This ratio has remained broadly stable over time and is below the EU average of 5.2. This is the combined result of a progressive income tax regime and a high level of spending on social protection which is effective in reducing high market income inequality. Indeed, market incomes (i.e. before the effect of taxes and social transfers) are more unevenly distributed in Austria than in most EU countries. Educational inequalities linked to socio-economic status suggest social mobility remains low, particularly for children with a migrant background( ) (see also Section 3.3). Wealth inequality is high. The Gini coefficient ( ) on net wealth (assets minus liabilities) was 0.73 in 2014, among the highest in the euro area, according to the ECB's Household Financial and Consumption Survey (Graph 1.5). A key driver is the low rate of house ownership at the lower wealth deciles and the comparatively strong concentration of wealth from self-employed businesses at the top of the wealth distribution. The median net wealth of households who owned their own homes was EUR 300 600 in 2014. By contrast, that of tenants —about 45.0 % of the Austrian population —was only EUR 12 000. The persistent rise in house prices might increase wealth inequality, while the lack of capital acquisition (inheritance or gift) tax and low recurrent property taxation provide no policy instrument to curb its growth. Overall, the social situation continues to improve. The proportion of the population at risk of poverty or social exclusion decreased for a third consecutive year in 2016. This was due to a further reduction in the already low level of severe material deprivation (which measures absolute poverty) to 3.0 %, well below the EU average of 7.5 %. However, in-work poverty is rising, and foreign workers are particularly affected. Foreign nationals also face an increasing risk of relative poverty, although the poverty risk for their children has fallen (see Section 3.3 on social policy). Graph 1.5:Gini index of wealth (2014) and income inequality (2016) Source: ECB, Eurostat

Productivity Labour productivity in Austria remains high while total factor productivity is stagnating. Real labour productivity per person increased again in 2016 as in the year before, but it still lags behind its pre-crisis level. However, productivity per hour worked declined in 2016 for the first time since 2009. This is in line with the average annual hours worked per person, which have increased in 2016 for the first time in 5 years. Austria’s total factor productivity dropped markedly during the financial crisis and has not yet recovered, stagnating at below pre-crisis level. This is in contrast with the euro area overall, where total factor productivity was also hit during the crisis but has been steadily growing since 2013 and has already surpassed its pre-crisis level. Graph 1.6:Labour productivity Source: Eurostat, European Commission External position The stable development of Austrian exports is contributing to a positive current account balance. In 2016, the current account surplus stood at 2.3 % of GDP, reaching a level similar to recent years. For many years Austria has had a positive trade balance, aided particularly by its tourism industry. 2016 goods exports, at EUR 128.9 billion, are more than twice as high as services exports, at EUR 55.7 billion. However, almost all of the trade surplus of EUR 11.9 billion derives from services (EUR 11.5 billion) and only a marginal share from goods (EUR 0.4 billion). This has been the trend for many years, and in 2009-2013 goods imports surpassed exports, thereby reducing the trade balance (Graph 1.7). Besides tourism, business services for companies are also contributing more and more to Austria’s service exports. In 2017, exports overall increased markedly and Austria managed to increase its market share after a steady decline since 2007. The 5-year percentage change of Austria’s export market share, that had been violating the MIP scoreboard threshold of -6 % for many years since 2009, surpassed the threshold in 2016 (with -4 %) and turned positive in 2017, thanks to base effects and world trade developments. The positive contribution of households and corporations to Austria’s net international investment position has outweighed the government’s negative contribution in recent years. As a result, Austria’s net international investment position has been positive since 2013 and continued to improve to 5.7 % of GDP in 2016 from 2.5 % in 2015. Graph 1.7:Trade balance and export market share Source: European Commission Housing market House prices accelerated strongly in 2015-2016 but have since returned to more moderate growth. Since their peak in Q1-2016, when nominal house prices increased by 13.4 % year-on-year, increases have slowed to 4.9 % in Q3-2017. The strong increase in 2016 led to a warning by the European Systemic Risk Board in December 2016 and the indicator for deflated house prices has been above the MIP scoreboard threshold for the first time for Austria. The increase in house prices does not appear to be driven by mortgage lending. Although growth in housing loans has accelerated in recent years (they increased by 4.0 % in 2016), it is still below 2009 levels and the mortgage-to-GDP ratio (at 28.6 %) is low by European standards (EA 37.5 %). Increased housing demand due to the increased inflow of refugees in 2015-2016, on top of continuously strong migration from EU and non-EU neighbouring countries, has not been met yet by sufficient supply, although housing investment is increasing. Nevertheless, a sizeable share of the population is hardly affected by increasing house prices. This is because the overall home ownership rate of 55.0 % is low (compared to the EU average of 69.3 %) and house price increases are concentrated on the higher segments of the market. According to the Austrian National Bank, house prices are overvalued by roughly 20 % in the capital region of Vienna which accounts for approximately 40 % of total residential value. In the rest of the country, however, house prices are in line with the values explained by fundamental indicators. As roughly 80 % of Vienna’s population rent their home, overvaluation risks are somewhat mitigated (see also Sections 3.2 and 3.4). Graph 1.8:House prices and rental costs Source: ECB, Statistics Austria, Oenb, Eurostat Public finances Austria’s public finances are expected to improve but government debt remains relatively high. The headline deficit widened to 1.6 % of GDP in 2016 due to the tax reform, but is expected to progressively improve to -0.6 % in 2019 in a no-policy-change scenario, supported by economic growth. At the same time, the structural budget balance is expected to hover around 1 % of GDP. Austria’s fiscal structure has traditionally been characterised by relatively high levels of both revenues and expenditures (49.1 % of GDP and 50.7 % of GDP respectively in 2016, versus an EU average of 44.7 % and 46.3 %). The high spending rate mainly reflects the importance of the welfare state, with pensions and healthcare playing a particularly significant role in the government’s budget. Government debt increased sharply in the aftermath of the crisis, due to government support for the financial sector, which also caused several peaks in the government deficit. After peaking in 2015, government debt declined to 83.6 % of GDP in 2016. It is expected to continue declining rapidly, supported by good economic conditions and the divestment of impaired assets from nationalised ‘bad’ banks. Graph 1.9:General government debt and deficit Source: European Commission The tax wedge on labour is particularly high, especially for low-income earners, mainly due to social security contributions. Austria’s historically good record on revenue collection is due to a sound economic structure, good tax compliance and an overall high level of taxation. The latter weighs mainly on labour, with comparatively high revenues from social security contributions and income taxes paid by households. As a result, the tax wedge ( ) on labour is particularly high despite the significant cut implemented in 2016 (Graph 1.10). A comparatively high share of the tax wedge is represented by social security contributions, reflecting the importance of social security on the spending side. As the progressivity of the tax wedge across income categories is rather limited, the burden is also heavy for low-income earners, who are considered particularly responsive to work incentives (Bargain et al., 2014). Graph 1.10:Tax wedge (% of labour costs, 2016) Source: OECD Pensions and healthcare The projections of the 2018 Ageing Report for medium- and long-term pension and healthcare expenditures still point to a medium risk for fiscal sustainability. The equilibrium between high revenues and expenditures has proven successful in providing good levels of public services. However, it could be particularly vulnerable to population ageing, which will further increase social spending in a context of already high fiscal pressure. The projections of the 2018 Ageing Report point to a further increase in pension and healthcare expenditures between 2016 and 2070 (European Commission, 2018b). Compared to the projections of the 2015 Ageing Report, total expenditure is starting from a lower base in 2016 than previously forecast (European Commission, 2015a). However, the trajectory is slightly worse for pension expenditure, mainly due to the deteriorating demographic projections. Overall, the risk for long-term sustainability remains medium. Education and skills Implementation of Austria’s education reform agenda has so far not translated into improved education outcomes.. Austria’s poor education outcomes, with about 25 % of 14-year-olds not fully reaching the minimum required basic skills in national testing, might restrict the skills available for future economic growth. The low number of graduates in STEM fields like ICT and engineering, in particular with PhDs, could limit the scope for innovation in Austria. Young people with a migrant background continue to do worse than their peers and education outcomes in general continue to be strongly related to the socio-economic background of parents. Graph 1.11:2018 Ageing report - expenditure projections Source: European Commission Digitalisation

Austria’s progress with the digital transformation of its economy is mixed and small and medium-sized enterprises in particular are lagging behind. Austria is doing well on some aspects of digitalisation, such as e-government and digital skills. However, it ranks below or merely in line with the EU average on others, such as e-commerce, e-procurement and the deployment of high-speed broadband in rural areas. Furthermore, Austria’s economy is characterised by a particularly large SME sector and only relatively few large companies. While these larger firms are readily adopting digital technologies and business models, Austrian SMEs are lagging behind, creating a ‘digital divide’. This is especially problematic in the case of technologies that bring particular benefits to SMEs (e.g. cloud computing with its low upfront expenditure and easy scalability). Proper implementation of Austria’s national strategy for the digital future is thus paramount. Table 1.1:Key economic and financial indicators — Austria Source: Eurostat and ECB as of 30 Jan 2018, where available; European Commission for forecast figures (Winter forecast 2018 for real GDP and HICP, Autumn forecast 2017 otherwise) 2. Progress with country-specific recommendations Progress with implementing the recommendations addressed to Austria in 2017 ( ) has to be seen in a longer-term perspective since the introduction of the European Semester in 2011. Looking at the multi-annual assessment of the implementation of the CSRs since these were first adopted, 50 % of all the CSRs addressed to Austria have recorded at least ‘some progress’. 50 % of these CSRs recorded ‘limited’ or ‘no progress’ (see Graph 2.1). Substantial progress has been achieved in the consolidation of public finances and the stabilisation of the financial sector, while full implementation has been achieved in the transposition of the Service Directive. Graph 2.1:Overall multiannual implementation of 2011-2017 CSRs to date Source: European Commission Over the last 6 years, Austria has undertaken important reforms related to the country-specific recommendations without, however, sustainably resolving the underlying issues. In recent years, several measures have been taken to improve the Austrian fiscal framework. Since 2012, the Austrian Stability Pact provides quantitative budget targets and ceilings for all levels of government, with the aim to encourage fiscal discipline. Between 2015 and 2019, accounting rules for subnational governments are being progressively harmonised, which will improve the coordination and monitoring of their finances. The 2017 Financial Equalisation Law contributed to simplifying financial relations among the different layers of government, reducing the number of intergovernmental transfers and marginally increasing the amount of revenues that federal states can potentially raise through autonomous taxes. Nevertheless, the fiscal framework remains overly complex, and the misalignment between spending powers and revenue raising responsibilities is still substantial. In these areas, the agreement between the different layers of government underlying the financial equalisation law contains far more ambitious initiatives that still need to be implemented. The 2016 tax reform substantially reduced taxes on labour, including for low income earners. The reform redesigned tax brackets for personal income taxes and increased several targeted tax allowances. Non-wage labour costs of employers have also been reduced, in particular by reducing their contributions to the Family Burden Equalisation Fund. Nevertheless, the burden on labour still remains comparatively high, especially for low income earners. Since 2014, action has been taken to increase the effective retirement age. The 2014 pension reform introduced several financial incentives to retire later and significantly restricted access to early retirement. More recently, individual pension accounts showing personal pension entitlements are being developed, with the aim to increase transparency and provide incentives to longer working lives. However, a fiscal sustainability challenge remains in light of the expected evolution of the effective retirement age and the current provisions on statutory retirement age. Austria has made positive steps towards increasing the efficiency in the healthcare sector but underlying challenges remain. In 2013, ceilings for healthcare expenditure growth were introduced up to 2016, as well as specific targets for in-patient hospital consolidation (such as number of bed days per resident, length of stay and overall discharge rates), and for the availability of outpatient multidisciplinary primary care settings. These were positive measures, although the chosen targets were not overly ambitious. The 2017 Financial Equalisation Law has set tighter expenditure ceilings until 2021 and reduced incentives to treat outpatient cases as inpatient, thereby discouraging hospital excess capacity. Outpatient multidisciplinary primary care is also being strengthened, with the aim to shift services away from the hospital sector. While these measures have the potential to improve efficiency and deserve thorough implementation, the general overlap of competencies in the healthcare sector remains to be addressed. Government intervention played an important role in stabilising the banking sector, although public finances faced significant costs. Following the financial crisis, the government nationalised and proceeded to orderly wind-down three systemic banks. In order to cover part of the public costs, a stability fee (bank tax) for credit institutions was temporarily introduced. Although government accounts faced important costs, the negative consequences of disorderly bankruptcies for the banking sector were prevented. Austria has partially improved labour market outcomes for women. While female employment has increased since 2011, most of the increase has been in part-time employment. Austria addresses the low take-up of child care for children below 3 years. Only some progress was achieved so far, with the Barcelona targets of 33 % coverage not yet reached, and uneven coverage between the Länder. The harmonisation of pensionable age for men and women has been foreseen to start in 2024 but this time frame is not ambitious. Despite the recent tax reform, the personal income tax system still includes unfavourable elements to women's higher take-up of employment. The gender pay gap remains high. Austria's policy response on education did so far not lead to improved outcomes. International testing shows that the performance of disadvantaged students and those with migrant background has deteriorated. In the area of higher education, strategic planning has improved and the number of drop outs has been reduced. Austria has made efforts to improve competition and investment in the services sector, but the overall level of regulation remains high. Austria's efforts have focused notably on administrative simplification (such as the introduction of an electronic trade register). This reduces compliance costs and mitigates some of the negative effects of regulation but it does not resolve the underlying issue of restrictiveness. Since 2015, Austria has tabled various measures to facilitate business creation in the services sector and adopted a revision of the Trade Licence Act (Gewerbeordnung) in July 2017. Austria also participated actively in the mutual evaluation of professional regulation at EU level. The action plan it presented as part of this exercise was however unambitious and has not yet resulted in a systematic attempt to remove administrative and regulatory obstacles across professions and trades. Overall, Austria has made some ( ) progress in addressing the 2017 country-specific recommendations (CSRs). Limited progress was made on CSR1 in addressing the sustainability of the pension and healthcare system together with streamlining the fiscal framework. CSR 1 is closely related to the euro area recommendation (EAR) 2 regarding the pursuance of effective national fiscal frameworks and growth-friendly fiscal consolidation. Overall, some progress was made on CSR2. Some progress was made in improving the labour market participation of women, while limited progress was made in improving the educational achievements of disadvantaged young people, both of which are also reflected by EAR3. Some progress was made in reducing barriers to investment in the services sector, which is related to EAR1. Table 2.1:Summary table on 2017 CSR assessment Source: European Commission ESI Funds are important in addressing key challenges to inclusive growth and convergence in Austria, notably by boosting social inclusion, supporting the employability of women thus improving their participation in the labour market and enhancing cooperation between SMEs and research institutions. The nation-wide Smart Specialisation Strategy improves federal-regional coordination. Box 2.1: Tangible results delivered through EU support to structural change in Austria Austria is a beneficiary of European Structural and Investment Funds (ESI Funds) support and can receive up to EUR 4.9 billion until 2020. This represents around 3% of public investment ( I ) annually over the period 2014-2018. By 31 December 2017, an estimated EUR 2 billion (42 % of the total) was allocated to projects on the ground. This is helping 105 enterprises to cooperate with research institutions; it is contributing to the creation of more than 2000 new direct jobs in firms and is supplying jobs to nearly 600 researchers. Allocated funds are also contributing to boosting the development of rural areas by supporting investments and improving environmental standards and broadband coverage. Out of the EU financing, EUR 3 million will be invested through financial instruments. ESI Funds help address structural policy challenges and implement country-specific recommendations. Investments in research and development in the private sector are stimulated, among others, by providing grants for the development of new products, by setting-up living labs or by facilitating and stimulating cooperation between SMEs and research institutions. The European Social Fund (ESF) also invests in coaching, training and working opportunities for people with a distance to the labour market, which in turn helps enhance the overall labour market participation. Furthermore, specific measures are supported which improve the job prospects of older workers. Austria also uses ESF investment for different social policies addressing social inclusion measures, especially for minorities and migrants, the employability of women, older workers and workers with migrant background. ESF supports also the implementation of the EU 2020 country specific recommendations by assisting measures improving the employability of women, older workers and workers with migrant background. Various reforms were undertaken already as precondition for ESI Funds support ( II ). Austria developed a nation-wide Smart Specialisation Strategy for research and innovation, which helps focus the resources and efforts on product specialisation with a strong market potential. Furthermore, Austria improved already with the help of the ERDF the coordination between the regional and Federal levels through the national wide Smart Specialisation Strategy. Austria is advancing the take up of the European Fund for Strategic Investments (EFSI). As of December 2017, overall financing volume of operations approved under the EFSI amounted to EUR 931 million, which is expected to trigger total private and public investment of EUR 2.8 billion. More specifically, 9 projects have been approved so far under the Infrastructure and Innovation Window (including 1 multi-country project), amounting to EUR 822 million in EIB financing under the EFSI. This is expected to trigger nearly EUR 2.3 billion in investments. Under the SME Window, 4 agreements with financial intermediaries have been approved so far. European Investment Fund financing enabled by the EFSI amounts to EUR 109 million, which is expected to mobilise more than EUR 452 million in total investment. Over 1 000 smaller companies or start-ups will benefit from this support. Transport ranks first in terms of volume approved, followed by energy, SMEs and RDI. In terms of operations however, energy ranks first. Funding under Horizon 2020, the Connecting Europe Facility and other directly managed EU funds is additional to the ESI Funds. By the end of 2017, Austria has signed agreements for EUR 755 million for projects under the Connecting Europe Facility. http://cohesiondata.ec.europa.eu/countries/AT

3. Reform priorities 3.1. Public finances and taxation Fiscal framework Austria’s fiscal framework still suffers from a strong misalignment between spending powers and revenue-raising responsibilities across the different levels of government. The fiscal framework is particularly complex and gives subnational governments weak incentives to contain costs as their spending powers are disproportionately higher than their revenues from autonomous taxes (European Commission, 2016a; European Commission, 2017b). In 2016, subnational governments (the federal states and municipalities) raised revenues from own taxes amounting to 2 % of GDP (OECD Fiscal Decentralisation Database), while their overall expenditure amounted to 17.7 % of GDP. The 2017 Financial Equalisation Law, which regulates the financial agreements between the different levels of government up to 2021, has done little to address this issue. The new government programme published in December 2017 announces a comprehensive reform of the fiscal framework aimed at pooling expenditure and revenue raising competences across levels of government (BKA, 2017). The agreement ratified between the different levels of government contains several initiatives that could improve the efficiency and quality of public spending. These include regular spending reviews, more task-oriented financing, benchmark systems at the subnational level, as well as the commitment to agree on a general reform of subnational competencies by the end of 2018. In addition, several working groups have been set up to prepare proposals for increasing tax autonomy at the subnational level, including through property taxes. While these measures are promising, their effectiveness hinges upon their thorough implementation. A pilot project increasing the task-orientation in the allocation of child-care funds should start in January 2018, but is at risk of being delayed. Taxation Austria’s tax wedge remains one of the highest in the EU, in particular for low-income earners. The 2016 tax reform has reduced the tax wedge on labour (European Commission, 2017b). However, with 47.1 % (2016) it remains relatively high compared to an EU average of 42.8 % for a single earner with average wage (OECD Taxing wages Database). The tax wedge for low-income earners – a group considered to be particularly responsive to work incentives – remains especially high, at 42.8 % compared to 36.8 % in the EU (OECD Taxing Wages Database). Furthermore, without the tax brackets being indexed to inflation, the tax wedge on labour will continue increasing as nominal wage increases due to inflation push tax payers into higher tax brackets (‘fiscal drag’). While there were some policy discussions in Austria on indexing the two lowest income tax brackets to inflation, no such measure was adopted in 2017. The new government announced to tackle this issue within the context of a broader reform of the personal income tax system. Graph 3.1.1:Composition of tax wedge on labour (3) Social security contributions do not include contributions to private pension funds Source: OECD, 2016 Social security contributions represent the largest part of the tax wedge on labour, while their impact is regressive across income categories. More than 90 % of the tax wedge for low-income earners is due to social contributions. With 77 %, this share is also relatively high for average income earners. Discussions are under way on streamlining the social security system to make it more efficient, which could allow contributions to be reduced without affecting benefits. As individual social contributions are based on flat rates and capped at maximum amounts, their share in total labour costs is constant up to roughly 150 % of the average income and regressive thereafter (see Graph 3.1.1). In combination with the progressive schedule of personal income taxes, this generates a relatively flat profile of the tax wedge across income categories. Austria has potential scope to shift revenues to taxes that are less distortive to growth, such as property and environmental taxes. Revenues from recurrent property taxes are particularly low in Austria, at 0.2 % of GDP compared to an EU average of 1.6 % (2015). This is mainly due to the outdated tax base (European Commission, 2017b). A EUROMOD simulation performed by the European Commission's Joint Research Centre shows that updating the tax base for property taxes and using the additional revenues for reducing labour taxes would have a limited impact on the income distribution and positive effects on labour supply and economic growth (see Box 3.1.1). ( ) Environmental taxes generate revenues of 2.4 % of GDP, in line with the EU. There nevertheless remains potential to shift the tax burden away from labour (European Commission, 2015b). In addition, tax advantages on company cars in Austria lead to estimated revenue losses of EUR 558 million per year (Harding, 2014). Long-term sustainability of public finances Based on the 2018 Ageing Report and the Commission 2017 autumn forecast, Austria’s fiscal sustainability still faces a medium risk in the medium and long term. Based on debt sustainability analysis by Commission staff, Austria’s public debt is projected to decrease by about 17 percentage points of GDP between 2017 and 2028 in a no-policy-change scenario, but to remain slightly above the Treaty reference value of 60% of GDP (European Commission, 2018c). To reach the 60 % debt-to-GDP ratio by 2032, a cumulative gradual improvement of 0.1 % of GDP in the structural primary balance over 5 years would be necessary (starting from 2020). By 2060, a fiscal adjustment of 3.2 % of GDP would be required to ensure the stabilisation of public debt over the long-term, mainly due to the strong projected growth in age-related spending (3.6 % of GDP between 2016 and 2070). Pensions Austria’s public expenditure on pensions is comparatively high and is projected to increase further in the medium and long term. At 13.8 % of GDP, public spending on pensions in Austria is among the highest in the EU (the EU average was 11.2 % of GDP in 2016; European Commission, 2018b). Based on the projections of the 2018 Ageing Report the expected increase in pension expenditure is also above the EU average. In particular, spending is projected to increase by 1.1 % of GDP between 2016 and 2040 – when most of the baby-boomer generation will be in retirement – and by 0.5 % of GDP by 2070 (the respective EU averages are 0.8 % and -0.2 % of GDP). These estimates are slightly more pessimistic than those in the 2015 Ageing Report (European Commission, 2015a) and they still point to a medium risk to fiscal sustainability. Current pension costs are reflected in relatively high social contribution rates, which represent the main part of the tax wedge on labour (see Section 3.1 on Taxation). The future increase in spending will reduce the fiscal space for other public areas, or alternatively increase government debt. The rising number of pensioners is projected to put pressure on pension expenditure. Increasing life expectancy and low birth rates in Austria are projected to significantly increase the number of people aged over 65 for each person between 15 and 64 years old (the ‘dependency ratio’). This number is expected to rise from 0.3 in 2016 to 0.5 in 2070 (European Commission, 2018b). If the statutory retirement age remains fixed at 65 years, ceteris paribus, this implies an increasing number of pensioners and rising pension expenditure. Box 3.1.1: Shifting taxes from labour to property The European Commission's Joint Research Centre (JRC) simulated a tax shift from labour to property by updating the tax base of recurrent property taxes to reflect properties' market values, and using the additional revenue for a reduction of labour taxes. To this end, the European Statistics on Income and Living Conditions (EU-SILC), which provides the input database for the microsimulation model EUROMOD, has been enriched with information on current property market values from the Household Finance and Consumption Survey (HFCS) ( III ). The baseline scenario, which reflects tax-benefit rules in place in 2016 reproduces the current situation of outdated cadastral values ( IV ). Current market values are then used as the taxable base, and the additional fiscal space is used to lower labour taxes in two alternative reform scenarios: (1) an across-the-board reduction in social security contributions by 16 pp and (2) the introduction of a targeted in-work benefit benefiting the middle and low income earners (3). Based on the EUROMOD simulations, directly updating the tax base of recurrent property taxes to reflect market values and proportionally adjusting the tax brackets would bring Austrian revenues in line with the EU average. In 2015, revenues from recurrent property taxes in Austria amounted to 0.2% of GDP (EUR 650 million, source Statistik Austria, property tax of non-agricultural real estate and land) while the EU average was 1.6% of GDP, which would correspond to EUR 5.7 billion in the case of Austria. Based on the EUROMOD simulations, using market values as an up-to-date taxable base and adapting the property tax brackets by the same factor summarising the difference between cadastral and market values (see footnote 2) would increase revenues by 1.4% of GDP, to EUR 5.5 billion, i.e., close to the EU average. Updating the taxable base would provide additional fiscal space amounting to 0.6% of GDP (EUR 2 billion). Austrian municipalities can multiply cadastral values by a fixed factor in order to partly correct the tax base for the outdated valuation of properties. In practice, almost all municipalities apply the highest multiplier of 500 to cadastral values. When updating the tax base to market values, the municipal multiplier is halved in order to avoid a double revaluation of the tax base. Considering this correction, potential revenues from recurrent property taxes amount to 0.8% of GDP (EUR 2.7 billion) instead of the current 0.2% of GDP. This fiscal space is used in two budget-neutral scenarios that reduce labour taxes. A targeted use of the additional revenues has slight redistributive effects and reduces the at-risk-of-poverty rate. An across-the board reduction of social contributions (reform scenario 1) has barely any statistically significant effect on disposable income across deciles, as the higher property tax liability at the top of the distribution is broadly offset by the higher reduction in social contributions in absolute terms. The more targeted in-work benefit (reform scenario 2) tends to redistribute income from higher to lower deciles, but the impact on the Gini coefficient for disposable income is negligible. Reform scenario 2 would lower the at-risk-of-poverty from 14.2% to 13.2% with the poverty line set at 60% of median equivalised disposable income. Shifting taxes from labour to property positively affects work incentives in both reform scenarios. In both reform scenarios, the average participation rate and full-time equivalent are higher than in the baseline scenario when considering the entire sample, although for reform scenario 2 the difference is very small. In reform scenario 1 (reduction of social contributions) the increase in labour market participation and average full-time equivalent is higher, which is due to a shift from short and long part-time to full-time employment and over time, especially for women. Overall, in reform scenario 2 (in-work benefit) short part-time and over time decrease while long part-time is incentivised, which holds especially for women. Full-time work remains roughly stable for both men and women.

Graph 3.1.2:Pension expenditure – long term projections Source: European Commission Following past reforms, the effective retirement age is increasing. The government has implemented several reforms of the pension system since 2014, significantly reducing access to early retirement schemes and most notably reducing access to invalidity pensions. As a result, the effective retirement age has increased since 2014, reaching 60 years and 4 months in 2016 (BMASK, 2017). The partial retirement opportunity (Teil-Pension) allows employees to remain in part-time work while receiving part of their pension. Financial support by the state makes it possible to reduce working time by 50 % while receiving 75 % of their salary. Closing the gap between the effective and the statutory retirement age can only partially improve pension sustainability. As pension entitlements are linked to the statutory retirement age, savings from increasing the effective retirement age are partly offset by higher benefits once workers decide to retire. Accordingly, after having decreased since the 2014 reforms, federal transfers to the pension system are projected to rise again in the coming years. A simulation by European Commission staff, based on the projections of the 2018 Ageing Report, shows that increasing the effective retirement age to 65.3 years for men and 64.5 years for women by 2040 (equivalent to a 5 percentage point increase in the participation rate of workers between 55-74 years old), would only marginally improve the long-term fiscal sustainability( ). In fact, total pension expenditure would amount to 14 % of GDP( ), around 0.4 % of GDP lower than in the baseline scenario in 2070, still pointing to a medium sustainability risk. On the contrary, linking the statutory retirement age to changes in life expectancy would reduce expenditure by 2.3 % GDP by 2070 as compared to the baseline, which would bring the classification of Austria’s long-term fiscal sustainability to low risk (see Graph 3.1.2) ( ). Austrian women still have one of the earliest statutory retirement ages in the EU. The government plans to start harmonising the statutory retirement ages for women and men (currently 60 and 65 years, respectively) by 2024 and to finalise the process by 2033. This contributes to lower pension adequacy for women aged over 65 (see Section 3.3). Healthcare Based on the 2018 Ageing Report, public healthcare expenditure is projected to increase significantly in the medium and long term, thus posing a medium risk to fiscal sustainability. Public spending on healthcare is currently among the highest in the EU, at 7 % of GDP against an EU average of 6.8 % in 2016 (European Commission, 2018b). Expenditure is projected to increase by 0.7 % of GDP by 2040, and by 1.3 % of GDP by 2070 (the respective EU averages are 0.6 % and 0.9 % of GDP). The new ceilings for healthcare expenditure laid down in the 2017 Financial Equalisation Law, as incorporated in the Ageing Report projections, play a role in containing the spending increase (see Graph 3.1.3). Extending implementation of these ceilings into the next years could further contribute to improve fiscal sustainability. Graph 3.1.3:Long term projections for healthcare expenditure Source: European Commission A thorough implementation of the ongoing reform of outpatient healthcare could make efficiency gains possible in the medium term. Overall, the Austrian healthcare system ensures broad access to good-quality services, as shown by the very low level of self-reported unmet healthcare needs. Nevertheless, mainly due to the incentives embedded in the fiscal framework, together with free choice of provider and no gatekeeping, the system relies heavily on the hospital sector, while less costly outpatient services are underused (OECD and EOHSP 2017). As part of the agreement on the 2017 Financial Equalisation Law, the different levels of government and the social security funds agreed to strengthen the provision of outpatient services, in order to shift services away from the hospital sector. To this end, 75 primary healthcare centres and networks will be created by 2021. While the reform is currently progressing, it is important for its success that new contractual agreements between general practitioners and social security funds will ensure the right incentives for all parties. The high number of healthcare insurance funds points to potential efficiency gains. Austria has 18 health insurance funds, to which individuals are assigned based on their region and occupational status. While contributions are broadly harmonised, benefits and the services provided vary across funds. Governance and administration costs for healthcare are comparatively high in Austria: 0.4 % of GDP compared to an EU average of 0.2 % in 2014. The new government programme announces a reduction to at most five social insurance funds. This could help improve the cost-efficiency, transparency and equity of the system. Austria’s health sector has room for savings and quality improvements from more effective procurement, such as more EU-wide tendering. Austria's health sector is confronted with demographic change, increasingly complex products and higher market concentration for some inputs. In this context, EU-wide procurement could offer lower prices, higher quality and greater innovation. The modest value of health-related tenders published EU-wide by the Austrian health sector (0.23 % of GDP, compared to an EU average of 0.62 %) indicates scope for improvements in this area ( ). Fast adoption and implementation of the pending public procurement reform law as well as increased awareness among tendering authorities would be ways to increase EU-wide tendering. Austria’s public hospitals aggregate their tenders at the level of the federal states (Länder), and are increasingly tendering cross-regionally. Cross-border joint procurement projects are however limited. Extending cross-regional and cross-border tendering could achieve volume savings for commoditised inputs and amortise costly expertise for complex products. Finally, a further move away from price as the sole award criterion (still 51 % of EU-wide tenders in 2016) could raise quality and promote innovation. Current efforts in preventive healthcare are relevant for the fiscal sustainability challenge. Although expenditure on preventive healthcare in Austria is at the EU average of 0.2 % of GDP in 2014, the number of healthy life years is relatively low. Together with long-term spending projections, this underlines the importance of improving the health status of the population. In this regard, the revocation of the smoking ban as announced in the new government programme would be a missed opportunity to reduce the incidence of life-style related health risk-factors. 3.2. Financial sector Banking sector and insurance sector The overall health of Austria’s banking sector has continued to improve. The banking sector substantially increased its capital ratios in 2016 due to retained profits and several banks’ restructuring activities. Capital adequacy (including the capitalisation of subsidiaries in central, eastern and south-east Europe - CESEE)( ) strengthened further and reached 18.5 % at the end of June 2017, up from 18.2 % in 2016. Due to their traditional business model, and notwithstanding the increase in 2016, Austrian banks continue to have lower leverage ratios than their European peers. The liquidity position of banks has remained adequate. Intra-group liquidity transfers to the CESEE countries have declined further as efforts to increase the funding sources of subsidiaries in their host countries have paid off. Thanks to the favourable macroeconomic conditions, the formation of new non-performing loans in Austria has slowed: the non-performing loan ratio declined to 4.1 % at the end of June 2017 from 5.1 % in 2016 (ECB, Supervisory Banking Statistics). Notwithstanding measures taken so far, achieving further efficiency gains to support profitability remains a priority. The profitability of Austrian banks on the local market remained robust in 2016 and increased in the first half of 2017 against the same period of the previous year. It was supported by a significant reduction in the cost of risk. However, this positive trend hides a weakening of underlying operating profits as low interest rates and increasing operating expenses continue to take their toll. Banks have stepped up their adjustment efforts but some of these have yet to bear fruit. Improving bank profitability still requires a sustainable increase in operating efficiency. The cost-to-income ratio for operations on the local market deteriorated in 2016: it increased to 74.5 % from 62.8 % in 2015 and remained above the EU average of roughly 60 %. Meanwhile, the Austrian banking sector still has scope to further reduce the total number of branches in order to move closer to the EU average. Foreign-currency loans granted by banks on the local market have further declined. The decrease in foreign-currency loans, in particular Swiss franc-denominated loans, is the outcome of supervisory measures to curb foreign exchange lending adopted by the banking supervisors since 2008. In June 2017, a revised version of the Financial Market Authority’s minimum standards for risk management and granting of foreign currency and repayment vehicle loans entered into force. The revised standards expand the obligations of credit institutions to provide sufficient information to borrowers. They also include new requirements aimed at improving market transparency and a new chapter on risk provisions to be made by banks. At the end of September 2017, the outstanding stock of foreign currency loans granted by Austrian banks declined by 67 % as compared to October 2008 (when the Financial Market Authority first recommended banks refrain from granting foreign currency loans to unhedged borrowers). The share of foreign currency loans to households in total loans has continued to decrease and stood at 15 % at the end of September 2017. Roughly 80 % of the outstanding foreign-currency loans to Austrian households will mature from 2021 onwards. The asset quality and profitability of subsidiaries in CESEE has continued to improve. At the end of June 2017, the total exposure of Austrian banks to CESEE countries stood at EUR 209.9 billion, up from EUR 193 billion in 2016( ). The most important host markets for Austrian banks with international operations are the Czech Republic, Slovakia, Romania, Croatia and Poland. The restructuring of the UniCredit Group in 2016 led to a significant change in the geographical risk profile of the Austrian banking sector as its exposure to several markets (for instance, Turkey, Russia and Croatia) declined. As of October 2016, the total assets of the subsidiaries of Austrian banks in CESEE countries decreased by roughly 40 % compared to the situation before the restructuring of UniCredit. Asset quality has continued to improve in most of the markets in the CESEE region, partly due to efforts made by banks to clean up their balance sheets. Furthermore, profitability has also increased thanks to lower impairment charges for credit risk. Overall, despite the improved outlook even in more challenging markets (for instance, Ukraine), remaining risks warrant further close oversight. The insurance sector has faced several headwinds in recent years. Low interest rates, increases in life expectancy, climate change and digitalisation are some of the main challenges faced by insurance companies in recent years. Total gross written premiums in Austria fell 1.9 % in 2016 from the previous year, mainly due to the decline in such premiums for life insurance. The life insurance business has contracted on the back of the low interest rates, the low expected rate of return and the change in the tax treatment of new life insurance contracts following the 2016 tax reform. Insurance companies have taken measures to adjust to the low interest rates by changing their product portfolios and improving operational efficiency, including through mergers. Overall, Austrian insurance companies have been better placed to cope with the challenges posed by low interest rates than those in several peer countries as the share of guaranteed products in their portfolios has been lower. Austrian insurance companies with international operations have been significantly exposed to CESEE countries, which make a high contribution to their gross written premiums. Developments in these host markets therefore also warrant close oversight. Nationalised banks

The liabilities of ‘financial defeasance vehicles’ set up in the aftermath of the crisis still account for a significant share of government debt. Between 2009 and 2015, the non-viable (winding-down) segments of three banks — Kommunalkredit, Hypo Alpe Adria and Volksbanken — were included in government accounts as corresponding financial defeasance vehicles (KA Finanz, HETA and Immigon). This had a significant impact on public finances (European Commission, 2016a). Over time the assets of these three vehicles are being divested, which will partly reduce public costs. At the end of 2016, liabilities from the three financial defeasance vehicles classified as part of government debt amounted to 6.1 % of GDP, while the overall impact on debt from the support to the financial sector was 9.4 % of GDP. The winding-down of the three public financial defeasance vehicles is proceeding, with limited overall risks. As the recoveries from the winding-down of the HETA assets have been higher than expected, in May 2017 the Financial Market Authority reduced the haircut on HETA’s debt from 54 % to 35.6 %, resulting in a recovery rate of 64.4 %. In July 2017, interim payments amounting to EUR 5.4 billion took place due to high cash reserves, despite the initial plan to wait for the complete resolution. The winding-down is also proceeding faster than planned and is expected to be concluded by 2020 instead of 2024, with most assets expected to be divested by 2018. While divestments are on track to meet these targets, some delay cannot be excluded as the remaining assets are less attractive than the ones already sold. KA Finanz returned its banking licence in September 2017, becoming a winding-down vehicle owned by the Republic of Austria. The decision was taken in order to reduce funding costs — as short- and medium-term market funding has been replaced by public long-term funding — and regulatory requirements, in particular on capitalisation. The conversion into an asset management company will also considerably shorten the time needed for winding down KA Finanz’s assets. This is now expected to be completed by 2026 instead of 2040 as previously planned. No consequences for public finances are expected, as all KA Finanz’s assets and liabilities were already included in government debt. The winding-down of Immigon is proceeding according to plan and is expected to be completed by mid-2018. Housing market House prices in Austria have grown robustly over the last decade including during the crisis years. Between 2005 and 2016 nominal house prices grew on average 5.0 % annually. Rental prices followed a similar path, increasing by 3.3 % per year. Having increased by 7.2 % in 2016, deflated house prices were above the 6.0 % threshold of the MIP scoreboard for the first time. In 2016, the European Systemic Risk Board also indicated that house price developments in Austria required closer monitoring. The price-to-rent and price-to-income ratios have increased noticeably over the last decade, by 1.7 % and 2.7 % annually. Especially the price-to-income ratio departs increasingly from its long-term average since 2012 (Graph 3.2.1). This illustrates the decreasing affordability of housing and particularly of house ownership. However, quarterly house price data in 2017 point to a slowdown in house price inflation, back to levels below the scoreboard threshold. Graph 3.2.1:Relative price developments and valuation gap Source: European Commission The increase of house prices differs across regions. House price increases have been much more pronounced in the capital region of Vienna (6.8 % on average between 2005 and 2016) than elsewhere (4.4 %). However, the impact on the population is mitigated by the fact that about 80 % of households in Vienna live in rented housing compared with 50 % in the rest of the country. In addition, social housing, which is home to about 40 % of all households that rent, and strict rental regulations play an important role in providing affordable housing in Austria. In line with these national characteristics, the recent house price increases mainly affect households with enough income to afford buying a home as well as tenants in the private urban rental market (see also Section 3.4). There seem to be no indications of excessive credit growth and risks to financial stability. Between 2005 and 2016, housing mortgages rose on average 4.6 % annually. Rising credit flows reflect the increased transaction values due to house price increases. Lending to households for housing purposes has been supported by the favourable financing conditions, with lending standards remaining broadly unchanged in recent years. Changes in investment strategies towards real estate as a reaction to the low interest rates might have created additional housing demand and contributed to price increases. Overvaluation, measured as the overall price gap exceeding the long-term average and not being explained by fundamental data, has increased since 2010 and stood at 3.9 % in 2016 (see Graph 3.2.1). A similar indicator by the Austrian National Bank specifies that overvaluation is about 20 % in Vienna but negligible in the rest of the country. The risks of a credit-driven house price bubble thus appear contained. The macro-prudential toolkit has been strengthened to contain potential risks from real estate financing. The Austrian authorities have stepped up their efforts to finalise the legal framework for introducing macro-prudential tools to contain potential risks from financing of both commercial and residential real estate following the warning issued by the European Systemic Risk Board in 2016. The macro-prudential toolbox includes the possibility of imposing limits on loan-to-value ratios, debt service-to-income ratios and debt-to-income ratios, as well as maturities limits and minimum amortisation requirements. These tools can be applied individually or jointly, but only to the flow of new loans. The tools are not yet activated as the Financial Market Stability Board has assessed that current developments do not warrant this However, credit institutions will be subject to enhanced reporting requirements on real estate financing from mid-2018 onwards. Private sector debt In 2016 private sector debt remained roughly flat for a second year in a row, at 124 % of GDP. On the back of the increase in nominal GDP, the share of private sector debt as % of GDP declined steadily from 2010 to 2015 and remained broadly stable in 2016 below the macroeconomic scoreboard threshold. The indebtedness of non-financial corporations declined slightly in 2016 from the previous year to 72.7 % of GDP. Meanwhile, household debt increased to 51.3 % in 2016, up from 50.9 % in 2015. Despite increasing further, private sector credit flow remained below the macroeconomic scoreboard threshold of 12 %. Spurred by favourable financing conditions, private sector credit flow (as % of GDP) edged up to 3.2 % at the end of 2016 from 2.3 % in 2015. The breakdown of private credit flow shows that the credit flow to households (as % of GDP) continued the upward trend seen since 2012, as it rose to 1.2 % at the end of 2016. Meanwhile, the credit flow to non-financial corporations, which has gained further momentum since 2014, increased to 2.1 % of GDP at the end of 2016, up from 1.6 % in the previous year. The credit rise was more marked for households than for corporates, for which internal resources have been the main source of financing. Low interest rates have supported the debt-servicing capacity of non-financial corporates, which remain exposed to interest rate risk due to their high proportion of loans with variable interest rates. Household lending gained further momentum in 2017, driven mainly by mortgage credit. Meanwhile, the share of loans with variable interest rates (traditionally high in Austria and above international standards) and of foreign currency loans in total loans has continued to decline. This has reduced the exposure of households to interest rate and currency risks.



3.3. Labour market, education and social policies Austria’s labour market performance is improving but some structural challenges persist. Thanks to strong economic growth, employment is growing faster than the labour force supply. After 6 years of continued increases, unemployment therefore started to decline in 2017 and is expected to remain low. It still shows strong regional differences, however. The employment rate has risen to a record high of 75.3 % (Q3-2017). Despite population ageing the labour supply increased, mainly driven by rising numbers of women, older people and people with a migrant background either in work or seeking a job. Graph 3.3.1:Trends in labour costs and its components Source: European Commission Wages are growing in line with the performance of the labour market. Nominal compensation per employee increased by 2.4 % in 2016 and is expected grow by 2.3 % annually between 2017 and 2019. Coupled with solid productivity gains, this has resulted in a fall in the nominal unit labour cost, thus improving Austria’s competitive position. As inflation picked up, real wage growth slowed, from 1.3 % in 2016 to 0.5 % in 2017. Immigration and the increased numbers of women and older people working or seeking a job led to a faster expansion of Austria’s labour force than in peer countries. Over the past decade Austria has experienced increased inflows of people mainly from new EU Member States. Recently, however, these have been surpassed by non-EU migrants due to an increased number of people seeking protection (OECD, 2017a). The proportion of women working has also increased over the past 10 years to 70.9 %, above the EU average of 65.3 %. Similarly, the employment rate of older workers increased from 33 % in 2006 to 49.2 % in 2016, but it is still below the EU-28 average of 55.3 %. Once out of the labour market, it is more difficult for older workers to return. The additional labour supply is positive as it is partially mitigating the drop in the workforce caused by the ageing of the population. Nonetheless, absorbing the additional labour supply in the labour market remains one of the challenges. The ‘employment bonus’, a subsidy aimed at creating new jobs, was introduced in July 2017 but has seen limited take-up and was phased out end of January 2018. Graph 3.3.2:Gaps in employment rate (20-64) and between male and female full-time equivalent employment rate, 2016 Source: Eurostat Box 3.3.1: Monitoring performance in the light of the European Pillar of Social Rights The European Pillar of Social Rights, proclaimed on 17 November 2017 by the European Parliament, the Council and the European Commission, sets out 20 principles and rights to benefit citizens in the EU. In light of the legacy of the crisis and changes in our societies driven by population ageing, digitalisation and new ways of working, the Pillar serves as a compass for a renewed process of convergence towards better working and living conditions. Austria performs relatively well on the indicators of the Social Scoreboard ( V ) supporting the European Pillar of Social Rights. They reflect Austria's focus on active labour market policies and a strong positive impact of social transfers on reducing poverty risks. The strong involvement of social partners in high-level decision-making, characterised by minimum government intervention, contributes to fair working conditions and a good functioning of social dialogue. A high share of part-time employment of women coincides with a fairly large pay gap. The gender employment gap is relatively low but it widens significantly if full time equivalents are taken into account. The high share of part time employment of women hampers the full use of their labour market potential which would be crucial in the context of an ageing population to sustain the welfare system. There is a strong gender segmentation of the labour market and the gender related part-time employment is among the highest in the EU. Social transfers (other than pensions) have a strong impact on poverty reduction. Cash family benefits have a very strong impact on reducing the at-risk-of poverty rate. This type of benefits reduces the at-risk-of poverty rate of families with children by approximately 8 to 23 pps depending on the given family constellation. Benefits dedicated to families and children especially reduce the at-risk-of-poverty rates of households with young children (at the age up to 6 years). Family allowances and parental leave benefits compensate to a considerable degree for the lower income deriving from lower employment rates of parents.

The high share of part-time employment of women indicates a still significant untapped labour potential. The gender differences in Austria’s employment rates are relatively low at 7.8 %, compared with an EU-28 average of 11.6 % in 2016. However, this is not the case when considering the full-time equivalent employment rates (see Graph 3.3.2). Women’s part-time employment is among the highest in the EU at 47.9 %, compared with the EU-28 average of 31.4 % in 2016. This reflects the division between women who do paid and unpaid work. There is a gender gap of 17 percentage points in the time spent in unpaid care work per week, putting Austria in the 25th place in 2015 (Bergmann and Sorger, 2017). This does not only hurt women’s income and career prospects but also reduces the adequacy of their pensions. Austria’s gender pay gap of 21.7 % in 2015 is wider than the EU average of 16.3 %, mainly due to the high proportion of women in part-time work and on low pay. The gap remains persistently high despite a slight reduction in recent years. It is driven by gender segmentation in the labour market, with women working in economic sectors that offer comparatively low pay for the same level of qualification. In 2013, women were proportionally more often in low-wage employment in all branches, and even among female full-time earners the percentage of low-wage earners is high (Geisberger, 2012). The strong influence of traditional gender roles and the undervaluation of women’s work and skills also play a key role (Bergmann and Sorger, 2017). Part-time work is often associated with lower earnings per hour and this combination contributes to Austria’s wide gender gap in pensions (see Section 3.1. on pensions). Despite a reduction of 5 pp compared to 2015, the low wage trap for second earners ( ) is still 6 pp above the EU average. Moreover, the tax reform of 2015 and 2016 benefitted men more than women (Rechnungshof, 2017). Although significantly increasing over the past ten years, the rate of formal childcare remains below the targets. The proportion of children aged below 3 attending formal childcare has substantially increased, from 10.8 % in 2006 to 25.4 % in 2016. However, it remains below the EU Barcelona target of 33 % participation in early childhood education and care (ECEC). Progress is hampered by the institutional set-up and by the lack of a framework to improve quality ( ). On opening hours and availability during public and school holidays, there are substantial differences between Vienna and the federal provinces (Baier and Kaindl, 2011; Fink 2013). In Vienna, 44.3 % of 0-2 year-olds were in childcare in 2016 while the figure for Styria was 14.2 %. Parental leave for fathers was introduced in 1990 but take-up has been low (estimations range from 0.6 % to 2 %). Austria supports expanding ECEC for children below the ages of 3-4 by giving the federal provinces incentives to improve their institutional childcare e.g., through co-financing the start-up costs of new childcare places ( ). People with a migrant background find it harder to get work. Around 21 % of Austria’s workforce in 2016 had a migrant background. In 2016, the employment rate of non-EU born persons was 17.1 pp lower than that of EU-born nationals. The lower number of people with a migrant background who are in work or seeking a job is mainly due to their qualification levels and correlates with their country of origin. Their labour market performance is influenced by their reasons for migrating, their education level and their socioeconomic background. The increase of the unemployment rate of foreign born (from non-EU 28) from 2010 to 2016 was much higher (10.3 % to 14.3 %) than the increase of unemployment of Austrian nationals (4.1 % to 4.7 %) for the same period. The employment situation of native-born with foreign born parents (i.e. second-generation) is also unfavourable( ). Getting refugees into work will remain a challenge, particularly for women. Austria has made considerable efforts to accommodate and integrate refugees ( ). More asylum seekers and refugees want to work but a number of factors including their low qualification levels and insufficient German language skills as well as institutional barriers hinder this. Of the 9 523 refugees recognised between 2015 and mid-2016, 15.2 % were in employment by the end of 2016. 66.8 % were registered at Public Employment Service Austria (AMS) and 18 % were outside the labour force (AMS, 2017). The Integration Act "Integrationsjahrgesetz" adopted in June 2017 obliges refugees and beneficiaries of subsidiary protection to a one year labour market integration programme implemented by the public employment service. Asylum seekers with a high likelihood of being granted asylum also have access to these measures. Graph 3.3.3:Unemployment rate by educational attainment Source: Eurostat Low-skilled workers have been hit particularly hard by unemployment. People with only compulsory education are particularly affected by unemployment. At 13.1 % (Q2-2017), the unemployment rate for low-qualified workers is more than twice Austria’s overall unemployment rate of 6.1 %( ). In 2016 almost half (46.8 %) of those registered as unemployed had completed only the compulsory school level (Pflichtschulabschluss); 51.2 % of this group were long-term unemployed (AMS, 2016). Active labour market policies remain crucial to upskill these workers and help them find new jobs. The digital transformation of the Austrian economy will lead to widespread changes in job profiles and qualification requirements. Forecasts for Austria predict a significant increase in automation of routine tasks in the production sector and in business administration functions. In Austria, these changes will not necessarily lead to job losses. They will however significantly alter qualification profiles, putting pressure on low-skilled and elderly workers. AMS regularly identifies professions that will be particularly impacted by digitalisation and tailors its advice services accordingly. Basic digital skills will become an essential requirement of all jobs. In 2017 around 33 % of Austrians aged 16-74 did not have basic digital skills, putting them at a disadvantage in the jobs market. Adapting to technological change may require people in all segments of the labour market to upskill through continued adult education. The relevance of Austria’s ‘dual’ vocational education system will thus increase in the future (Hausegger et al., 2016). Moreover, the share of companies reporting difficulties in finding ICT specialists is significantly higher in Austria (60 %) than the EU average (40 %) according to the European Digital Scoreboard. Austria is well placed to adapt its labour market institutions to digitalisation. Digitalisation will have profound effects on careers and working patterns. While crowd-working is still a minor phenomenon in absolute terms, numbers are rising (Huws and Joyce, 2016). Specific digitalisation challenges arise, such as protection of employees’ data and striking the right balance between work and private life. Austria has acknowledged the need to prepare labour market institutions for the digital economy and is working on modernising employee protection, including for non-traditional forms of employment (teleworking, freelancing, crowd-working). Austria can build on the existing coverage of independents in the social security system to cover freelancers and crowd-workers as well. Implementation of the corresponding measures under Austria’s national digitalization strategy is still pending. Social policy and inclusion The overall social situation reflects the good economic conditions. In 2016 the number of people at risk of poverty or social exclusion fell for the third consecutive year. The improvement was driven by a decline in severe material deprivation, which measures absolute poverty, and by a fall in the number of households with low work intensity. Austria’s real gross disposable household income per capita stagnated following the crisis but 2016 data suggest household income has increased , in line with the improved overall economic conditions. By contrast, in-work poverty is rising, particularly among foreign workers. While improved labour market conditions and falling unemployment have been broadly beneficial, the increase in in-work poverty raises questions over the quality of job creation. In 2016 Austria’s rate of in-work poverty increased slightly from 7.9 % to 8.3 %. This overall increase was driven solely by a rise in in-work poverty among (both EU and non-EU) foreign nationals, from 21.7 % to 24.8 % whilst for Austrians the rate of in-work poverty remained stable at a relatively low 5.4 %. The social partners agreed in 2017 on a monthly gross minimum wage of EUR 1 500 for all sectors, to be implemented nationally by 2020. Austria’s welfare system, though robust, might not sufficiently protect certain groups against poverty. The poverty gap remains significantly below the EU average. The means-tested minimum income (Bedarfsorientierte Mindestsicherung) provides support for poor citizens in need and for persons who are granted asylum as well as for those under subsidiary protection. The benchmarking exercise () shows that in Austria the minimum income benefits are somewhat below the national poverty threshold, still more generous than in most EU member states. However, the legislation is currently set at state ("Länder") level, which creates variations within the country. The new Government envisages establishing a federal framework with upper ceilings regardless of family composition, thus potentially increasing poverty risks for larger families. The Land of Upper-Austria introduced such a cap of 1.500 Euro per month for a family with 2 or more children already. Income inequality remains low, but both wealth and opportunity are unequally spread. The S80/S20, which measures the distribution of income, remained low at 4.1 in 2016, compared to an EU average of 5.2. This is largely due to the redistributive effects of taxes and benefits. In contrast, the continued rise in house prices might increase wealth inequality due to the unequal ownership of property assets. The opportunities for young people from a disadvantaged background are also relatively poor, as evidenced by the strong link between the 2015 PISA results and socioeconomic background. The system of long-term care faces challenges in funding and staffing which may complicate access for patients. In 2018, the provisions for personal and family contributions to long-term care from an individual’s wealth (Pflegeregress) will be abolished. There are no clear estimates of the projected impact of this measure on demand, or of its overall financial cost. In the face of demographic trends and staff shortages, the current system is already under pressure and increased demand may cause capacity constraints (Grossmann and Schuster, 2017). Based on the projections of the 2018 Ageing Report and without considering any additional impact on demand from the new measures, total expenditure for long-term care is already expected to increase from 1.9 % of GDP in 2016 to 2.6 % in 2040 and 3.8 % in 2070 (European Commission, 2018b). Furthermore, it is unclear how these changes to the existing funding model, which will mean the system is no longer progressive, will affect the already high level of inequality in the distribution of wealth (Firgo, 2017) Austria faces a particular challenge to provide adequate pensions for women over 65. The pension system features relatively high aggregate replacement ratios. This ensures adequate pensions, reducing old age poverty risks. A means-tested equalisation supplement (Ausgleichszulage) for contributions above 30 years also reduces this risk. Nevertheless, the risk of poverty for women over 65 remains higher than that for men. Shorter working lives, career interruptions due to care responsibilities, part-time work, and the high gender pay gap lead to lower contributions and thus to lower pension benefits for. Austria’s gender gap in pensions for 65-74 year-olds was 40.5 % in 2016, above the EU average. Austria’s social protection for employees and the self-employed performs well. Austria has one of the highest coverage rates of unemployment benefits for the short term unemployed but maximum duration of benefits is rather low ( ). However, employees or self-employed with gross monthly earnings below EUR 425.70 (Geringfügig Beschäftigte), a majority of whom women, are not covered by unemployment insurance(). They can opt into other strands of social insurance, i.e. sickness, maternity, pensions and invalidity schemes. National data show that the number of people employed under such conditions has increased steadily (from 148 278 in 1996 to 273 093 in 2008 and 341 735 in 2015) while the number of marginal freelance contracts has declined (European Commission, 2017c). Education and skills Austria made progress on its education reform but performance in basic skills remains below EU average. The second package( ), adopted in mid-2017, gives schools more autonomy and clearer responsibilities and will allow administrative clustering of several schools. Schools are to determine also class and group size and school heads will be allowed to select their teachers. The law foresees that within model regions, parents and teachers may vote with simple majority to convert a school into a comprehensive school for pupils aged 10-14( ). Federal authorities will nominate the directors of the newly created (still hybrid) regional ‘education directorates’ (Bildungsdirektionen) in agreement with the regional governor. The proportion of pupils in all-day schooling improved from 23.13 % in 2016/2017 to 24.36 % in 2017/2018. However, the more comprehensive type, called verschränkte Form, still accounts for only 18 % of pupils in all-day schooling at general compulsory schools. Graph 3.3.4:Science — Percentage of low performers in Austria by immigrant background Source: OECD

Overall, performance in basic skills remains below EU average. A wide performance gap remains between students with and without migrant background. National testing in 2016 confirmed that many pupils lack basic skills in German. 38 % of 10 year-olds in 2015 and 45 % of 14 year-olds in 2016 did not reach the basic level or did so only partially as measured by the Federal Institute for Education studies (BIFIE, 2016 and 2017). Comparing the 2012 and 2015 PISA results, the proportion of low achievers increased in all three core areas surveyed, i.e. mathematics, reading and science (European Commission, 2017b). Native born pupils outperform first generation migrants by 82 PISA score points (translating into almost 3 years of school). PISA indicates weaker science performance among students who do not speak the language of instruction at home. Recent international testing (PIRLS) confirmed a widening gap in reading for those with weak socio-economic or migrant background (Wallner-Paschon et al., 2017). National testing confirms this trend and shows a major difference between listening and reading( ). Many students with a migrant background attend non-academic lower secondary schools (NMS) where up to 59 % do not reach or only partially reach the minimum level in reading, whilst this is essential in preparing for work. The new Government announced to strengthen policies on early tracking and separation, including for special education, and wants to introduce an education result obligation until 18 years for all. Various policy and legal initiatives seek to help young people with a migrant background, including recognised refugees and people under ‘subsidiary protection’ to integrate into Austrian society. These include measures to reduce early school leaving like the recently adopted Education and Training Act (Ausbildungspflichtgesetz). This expands the framework for upgrading the skills of disadvantaged young people. Since July 2017 all young people aged up to 18 are obliged to be in education, training or employment. The Integration Act of June 2017 makes it compulsory for migrants to attend courses in language, culture and values. Austria has pledged to pay special attention to the transition from nursery school to primary school. The new Government aims at reinforcing German support in schools, and introducing in case of lacking language skills a second year of compulsory early childhood and care (ECEC). The quality of the latter should be improved through a common framework on quality indicators, including smaller groups, higher standards for initial and continued training as well as of management. In line with the 2016 Council Recommendation on Upskilling Pathways, Austria is implementing its Adult Education Initiative. This enables adults who lack basic skills or never graduated from lower secondary education to continue and finish their education free of charge. Since many of those with a migrant background and most recognised refugees opt for professional training, vocational education and training (VET) ( ) is crucial to their integration. Initiatives and programmes integrate refugees into formal VET by assessing and validating their skills and qualifications gained abroad. An essential aspect is to support young refugees in gaining an apprenticeship diploma and help them choose the appropriate occupation. Austria’s tertiary educational attainment rate is 40.1%, reaching both the national and Europe 2020 targets. The number of students and graduates has continually increased over the last decade. However, resources and teaching staff have not kept pace (European Commission 2016a and 2017b). The intended move to capacity-based financing has not been finalised. Such a ‘fully managed’ system of access to higher education is planned to be linked to a relative increase of available resources to improve quality and effectiveness by, among other things, boosting the student-teacher ratio to levels comparable to the international average. This measure has not been adopted but figures among the priorities of the new government. Having adopted a national strategy ‘on the social dimension in higher education’( ) allows mitigating rising inequality, also through such a reform. Study grants have already been increased and the range of recipients enlarged( ). Austria is expected to increase the use of digital technology in higher education. This is important for both teaching and publishing( ). Higher education structural funds (Hochschulraumstrukturmittel) will be invested in a new ‘e-infrastructure’ and in developing a national infrastructure for creating, discovering and sharing open educational resources. Austria has a lower nu