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Austria The New Policies
In 1987 the government had decided that the Austrian economy
needed certain structural reforms if it were to remain
competitive in Europe and in the world. The new coalition
government, formed by the Socialist Party of Austria
(Sozialistische Partei Österreichs--SPÖ) and the People's Party
of Austria (Österreichische Volkspartei--ÖVP), was spurred to
take action as a result of two significant factors: the passage
by the EC of the Single European Act, designed to lead to a much
closer economic union of EC member states; and Austria's poor
growth rate, which lagged behind that of the European members of
the Organisation for Economic Co-operation and Development
(OECD--see Glossary).
Those reforms were aimed principally at fiscal
and financial stability for the government sector and at greater
efficiency for the private sector. The government later
reinforced these measures in order to meet the requirements for
establishing the European Economic Area
(EEA--see Glossary).
The measures included steps aimed at reducing the fiscal
deficit as a share of GDP. The budget deficit began to be brought
down to the target level of 2.5 percent of GDP, although somewhat
more slowly than the planners had hoped. The government also
announced a comprehensive restructuring of the state-owned
Austrian Industries, the giant national company that had taken
over most of the heavy industry left to Austria by the retreat of
the Germans after World War II.
The restructuring efforts moved apace for several years after
the government decision of 1987. The single most important area
from the standpoint of the government was the reduction of the
ever-growing federal share of the economy. A series of measures
were implemented to cut the federal share of GDP from 23 to 21
percent and to reduce the provincial and municipal governments'
share of GPD from 17.4 to 16.8 percent between 1986 and 1990.
One of the principal objects of reducing the size of the
federal government was to control the interest burden of the
government sector, a burden that had risen rapidly during the
early 1980s. Another was to reduce the government sector's gross
indebtedness. The first of these measures had little effect
because the interest burden had risen from 18.0 percent of total
government tax revenues to 23.5 percent by 1991. The second
measure was more successful because the ratio of the new deficit
to GDP stabilized at about 2.5 percent, but the government
sector's gross indebtedness nonetheless continued to rise,
reaching the level of 56.5 percent of GDP by 1991. For a
government that contemplated joining the European Community
(EC-- see Glossary)
and the European Monetary Union
(EMU--see Glossary),
that level was dangerously high. It was almost as high
as the limit of 60 percent that the EC had set in December 1991
as the maximum level acceptable for states that wished to join
the EMU.
One reason the government had difficulty managing its own
budget was that more than 85 percent of the central government
budget expenditures were committed to nondiscretionary items such
as civil service salaries and social security benefits. The
government consistently found itself severely constrained in
trying to reduce or even to control the remaining discretionary
elements.
As for Austrian Industries, some reduction in personnel was
accomplished as part of the reform, but the slump in global steel
and chemical markets left considerable uncertainty as to whether
more restructuring might not be needed. Privatization also made
some headway with the sale of the mint to the Nationalbank in
1989 and a reduction in the government's share in Austrian
Airlines and several major financial institutions.
While efforts to amend and strengthen the cartel law to
increase domestic competition moved slowly at first, certain
steps were taken. Among them was the decision to adapt the public
monopoly regulation to the standards of the EEA. In November
1991, the last foreign-exchange controls were lifted, thus
opening the economy further to foreign competition in financial
services and liberalizing cross-border financial transactions.
The new Stock Exchange Act of 1989 was designed to increase
openness and flexibility.
The most difficult objective of structural reform was
reducing government subsidies. Some success was achieved between
1987 and 1990, when federal subsidies as a percentage of GDP fell
from 2.2 percent to 1.9 percent and when general government
subsidies dropped from 2.9 percent to 2.4 percent. But questions
arose as to whether progress of this kind could be continued.
Nonetheless, the government was able to enact a major reform
in the tax system in 1989. The reform entailed gross tax
reductions of about S45 billion. It lowered personal income tax
schedules, reducing the top rate from 62 to 50 percent and the
lower rate from 21 to 10 percent, while widening the tax base.
The reform also abolished the progressive corporate tax schedule
and adopted the earlier 30 percent bottom rate as the standard
corporate tax rate (compared with the earlier top rate of 55
percent). The tax reform raised incentives and spurred growth.
European integration played a central role in the drive
toward structural reform of the Austrian economy. The EEA
treaty's provisions on regulation and liberalization forced farreaching changes in the form of increased economic opportunities
and competition. It also forced the removal of many barriers that
had sheltered important sectors from international competition,
especially nontariff barriers.
Importantly, unit labor costs--which had almost doubled
during the 1970s--held steady throughout much of the 1980s,
peaking in 1987 when the new reforms were announced. By the end
of the 1980s, lower labor costs had improved the competitive
position of Austrian exporters to a level they had not enjoyed
for some time. Wages and salaries per unit of output, which had
risen steadily from a scale of 100.0 in 1970 to a scale of 205.9
by 1982, rose only gradually to 216.3 in 1987 and then declined
to 208.2 in 1990.
Austria's economic environment changed dramatically during
the late 1980s and early 1990s with the opening of the Iron
Curtain. Many of the trade agreements that Austria had made with
formerly communist states behind the Iron Curtain suddenly became
null and void, opening new opportunities but also requiring
Austrian resources to help invest in those states as well as to
offer credit in order to finance exports. In addition, Austria
lost some export markets because the German economy registered a
sharp decline in the early 1990s as the cost of German
unification had to be financed largely by debt and as the German
central bank (the Bundesbank) began raising interest rates to
reduce the risk of inflation.
The loss of export markets affected Austria adversely, as did
the spillover effect of high German interest rates on Austria's
own interest rates. GDP growth fell from 4.6 percent in 1990 to a
level of only 2.0 percent in 1992 and was expected to decline
further. Unemployment rose, especially among foreign workers.
Although it appears likely that the recession will not be as long
as that of the early 1980s, the slump again shows that Austria
remains tied to developments in neighboring countries and cannot
rely entirely on its own resources and policies in an uncertain
global environment.
Data as of December 1993
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