Council opinion of 10 July 2007 on the updated stability programme of Austria, 2006-2010
Date: 2007-07-10
Institutions: Council of the European Union
Subjects: Austria, budget estimate, economic forecasting, public finance, stability programme

4.8.2007

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Official Journal of the European Union

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I

(Resolutions, recommendations, guidelines and opinions)

OPINIONS

COUNCIL

COUNCIL OPINION

of 10 July 2007

on the updated stability programme of Austria, 2006-2010

(2007/C 182/01)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

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

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1)

(2)

(3)

On 10 July 2007 the Council examined the updated stability programme of Austria, which covers the
period 2006 to 2010. Following the general elections in October 2006, a new government was
formed in January 2007, which presented the twin budget
for 2007/2008 to Parliament on
29 March 2007. On the same day, the updated stability programme was submitted, two and a half
months after the 15 December deadline for Austria in the code of conduct.

The macroeconomic scenario underlying the programme envisages that real GDP growth will decele-
rate from a cyclical peak of 3,1 % in 2006 to 2½ % on average over the rest of the programme
period. Assessed against currently available information, this scenario appears to be based on some-
what cautious growth assumptions until 2008, as recent data point to more robust growth. For the
outer years of the programme period, the projection seems plausible, even if the growth rates are
slightly higher than the average potential growth rate calculated by the Commission services. The
programme's projections for inflation appear realistic.

For 2006, the general government deficit amounted to 1,1 % of GDP, against a target of 1,7 % of
GDP set in the previous update of the stability programme. This improvement over the target results
from the better-than-expected cyclical developments. Although the revenue-to-GDP ratio fell slightly
compared with the previous year, it turned out higher by more than one percentage point over the
target. Higher-than-expected GDP growth contributed to the decline in the expenditure ratio
compared with the previous year. However, the expenditure ratio increased by more than ½ percen-
tage point over the target, indicating that budgetary execution was not as tight as planned.

(1) OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The

documents referred to in this text can be found at the following website:
http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm

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(4)

(5)

(6)

(7)

The main goal of the budgetary strategy is to reach a balanced budget over the cycle, reaping the
benefits of administrative reform while reinforcing expenditure in several categories. In comparison
with the previous update, the latter is reflected in the postponement of the budgetary consolidation
to the outer years of the programme period. The update projects the general government position to
improve from a deficit of 1,1 % of GDP in 2006 to a surplus of 0,4 % in 2010. The
consolidation, which is back-loaded to the last two years of the programme period, is planned to be
expenditure-based, with restraint in social spending and the gradual phasing-out of some specific
expenditure being the main factors. Compared with the previous programme, the new update back-
loads further the planned adjustment against a broadly more favourable macroeconomic scenario.

The postponement of the budgetary adjustment is reflected also in the structural balance (i.e. the
cyclically-adjusted balance net of one-off and other temporary measures) calculated according to the
commonly agreed methodology, which improves only very gradually from a deficit of around 1 % of
GDP in 2006 and swings to a slight surplus only by the end of the programme period. According to
the programme, the profile of the adjustment is affected by the purchase of military equipment
between 2007 and 2009, which, unlike the Commission services' spring forecast, it considers being a
deficit-increasing one-off measure. As in the previous update of
the
medium-term objective (MTO) for the budgetary position presented in the programme is a balanced
position in structural terms. However, the programme aims to nearly reach the MTO by 2009 and to
surpass it slightly in 2010, rather than to achieve it already in 2008 as in the previous update. As the
MTO is more demanding than the minimum benchmark (estimated at a deficit of around 1½ % of
GDP), achieving it should fulfil the aim of providing a safety margin against the occurrence of an
excessive deficit. The MTO lies within the range indicated for euro-area and ERM II Member States in
the Stability and Growth Pact and the code of conduct and adequately reflects the debt ratio and
average potential output growth in the long term.

the stability programme,

The risks to the budgetary projections in the programme appear broadly balanced for 2007 and
2008, but for 2009 and 2010, the budgetary outcomes could be worse than projected, despite plau-
sible macroeconomic assumptions. Indeed, the expenditure-to-GDP ratio is foreseen to fall signifi-
cantly in the two final years. The phasing out of specific expenditures, in particular on military equip-
ment, and the expenditure savings on unemployment benefits and on pensions, as a result of the
2004 pension reform, should contribute to the decline in the expenditure ratio in the outer years. On
the other hand, additional spending would be made on education, R&D and infrastructure over the
programme period, while the expected efficiency gains in public administration remain uncertain.
Finally, the programme hints at the possibility of further tax cuts financed by the planned expenditure
savings.

In view of this risk assessment, the budgetary stance in the programme may not be sufficient to
ensure that the MTO is achieved by 2010, as envisaged in the programme. The Commission services'
spring forecast estimates the structural deficit to widen in 2007 and 2008. However, a sufficient
safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluc-
tuations is maintained throughout the programme period. The pace of the adjustment towards the
MTO implied by the programme is insufficient and should be strengthened, especially in 2007 and
2008, to be in line with the Stability and Growth Pact, which specifies that, for euro-area and ERM II
Member States, the annual
improvement in the structural balance should be 0,5 % of GDP as a
benchmark and that the adjustment should be higher in good economic times and could be lower in
bad economic times. In particular, only a limited improvement in the structural balance is planned
between 2007 and 2009, when Austria is expected to experience good times. This conclusion is
confirmed even if one considers the purchase of military equipment to constitute a deficit-increasing
one-off measure, as the programme does.

(8)

Government gross debt is estimated to have declined to 62,2 % of GDP in 2006, still being above the
60 % of GDP Treaty reference value. The programme projects the debt ratio to fall below the refe-
rence value by 2008 and to decline further to 56,8 % of GDP by the final year of the programme
period. In view of the risk assessment, the debt ratio seems to be sufficiently diminishing towards the
reference value in the early part of the programme period and is planned to approach it by 2007.

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(9)

(10)

The long-term budgetary impact of ageing in Austria is well below the EU average, with pension
expenditure projected to decrease as a share of GDP over the long term, as a consequence of the
significant expenditure containment expected from the 2004 pension reform. The initial budgetary
position, with a structural primary surplus, contributes to easing the long-term budgetary impact of
ageing. Increasing primary surpluses over the medium term, as announced in the programme, as well
as an increase in the employment rate of older workers would contribute towards containing risks to
the sustainability of public finances. Overall, Austria appears to be at low risk with regard to the
sustainability of public finances.

The stability programme contains a qualitative assessment of the overall impact of the September
2006 implementation report of the National Reform Programme within the medium-term fiscal
strategy. In addition, it provides some information on the direct budgetary costs or savings of the
main reforms envisaged in the National Reform Programme and the public finance implications of
the actions outlined in the National Reform Programme are broadly consistent with its budgetary
projections. The measures in the area of public finances envisaged in the stability programme seem
consistent with those foreseen in the National Reform Programme. In particular, expected savings
from administrative reform and the reinforcement of spending on R&D are put forward in both
programmes.

(11)

The budgetary strategy in the programme is partly consistent with the broad economic policy guide-
lines included in the integrated guidelines for the period 2005-2008.

(12) As regards the data requirements specified in the code of conduct for stability and convergence

programmes, the programme provides all required and most of the optional data (1).

that,

in a context of

the Council considers

the programme
Overall,
envisages slow progress towards the MTO through a relatively back-loaded adjustment that is based mainly
on not-fully-specified expenditure restraint. Despite Austria being in good times and not having reached its
MTO, the structural deficit is not projected to improve before 2009. There are risks to the achievement of
the budgetary targets after 2008 and the MTO might not be reached by the end of the programme period.
Government debt would approach the 60 % of GDP reference value in 2007 and continue to decline in
subsequent years.

robust growth prospects,

In view of the above assessment, the Council invites Austria to exploit the good economic conditions and
the lower-than-targeted deficit in 2006 to frontload and strengthen the adjustment in 2008 and to continue
the fiscal consolidation towards the MTO thereafter, in particular by rigorously implementing expenditure
restraint and by using any unexpected tax revenues for consolidation.

Comparison of key macroeconomic and budgetary projections

2005

2006

2007

2008

2009

2010

Real GDP
(% change)

HICP inflation
(%)

SP Mar. 2007

COM May 2007

SP Nov. 2005

SP Mar. 2007

COM May 2007

SP Nov. 2005

2,0

2,0

1,7

2,1

2,1

2,3

3,1

3,1

1,8

1,5

1,7

2,1

Output gap
(% of potential GDP)

SP Mar. 2007 (1)

– 1,1

– 0,3

COM May 2007 (5)

– 1,1

– 0,2

2,7

2,9

2,4

1,6

1,8

1,7

0,1

0,5

2,3

2,5

2,5

1,7

1,7

1,5

– 0,1

0,8

SP Nov. 2005 (1)

– 0,7

– 1,1

– 0,9

– 0,5

2,5

n.a.

n.a.

1,7

n.a.

n.a.

0,1

n.a.

n.a.

2,6

n.a.

n.a.

1,8

n.a.

n.a.

0,3

n.a.

n.a.

(1) However, optional data on employment and hours worked as well as public sector wages are not provided.

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2005

2006

2007

2008

2009

2010

General government
balance
(% of GDP)

Primary balance (6)
(% of GDP)

Cyclically-adjusted
balance
(% of GDP)

Structural balance (2)
(% of GDP)

Government gross debt
(% of GDP)

SP Mar. 2007

– 1,6

– 1,1

– 0,9

– 0,7

– 0,2

COM May 2007

– 1,6

– 1,1

– 0,9

– 0,8

SP Nov. 2005

– 1,9

– 1,7

– 0,8

SP Mar. 2007

COM May 2007

SP Nov. 2005

1,3

1,3

1,1

1,9

1,6

1,2

2,0

1,8

2,0

0,0

2,1

1,7

2,7

n.a.

n.a.

2,6

n.a.

n.a.

SP Mar. 2007 (1)

– 1,1

– 1,0

– 0,9

– 0,7

– 0,2

COM May 2007

– 1,1

– 1,0

– 1,1

– 1,2

SP Nov. 2005

– 1,6

– 1,2

– 0,4

0,2

n.a.

n.a.

SP Mar. 2007 (3)

– 1,1

– 1,0

– 0,8

– 0,4

– 0,2

COM May 2007 (4)

– 1,1

– 1,0

– 1,1

– 1,2

SP Nov. 2005

– 1,6

– 1,2

– 0,4

SP Mar. 2007

COM May 2007

SP Nov. 2005

63,5

63,5

63,4

62,2

62,2

63,1

61,2

60,6

61,6

0,2

59,9

59,2

59,5

n.a.

n.a.

58,5

56,8

n.a.

n.a.

n.a.

n.a.

0,4

n.a.

n.a.

3,1

n.a.

n.a.

0,2

n.a.

n.a.

0,2

n.a.

n.a.

Notes:
(1) Commission services calculations on the basis of the information in the programme with potential growth estimated at 2,3 %, 2,3 %,

2,4 %, 2,4 % and 2,3 % respectively in the period 2006-2010.

(2) Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures.
(3) Deficit-increasing one-off and other temporary measures as interpreted in the programme (purchase of military aircraft of 0,2 % of

GDP in 2007, 0,4 % in 2008 and 0,1 % in 2009).

(4) The Commission services' spring 2007 forecast does not consider the purchase of military aircraft as one-offs.
(5) Based on estimated potential growth of 2,3 %, 2,0 %, 2,2 % and 2,2 % respectively in the period 2005-2008.
(6) Data on the primary balance in the programme and in the Commission services' forecasts are not directly comparable because of a
different treatment of FISIM. Data in the programme follow the definitions required by the code of conduct. To be comparable with
data in the programme, Commission data on the primary balance need to be adjusted by around 0,1-0,2 % of GDP.

Source:
Stability programme (SP); Commission services' spring 2007 economic forecasts (COM); Commission services' calculations.