Economy stagnates

Wifo and IHS demand austerity package from government

In addition to weakening growth, the inflation rate will remain high in 2023 due to energy prices. Inflation is expected to reach 6.5 percent.

(Bild: studio v-zwoelf - stock.adobe.co)

In today's economic forecast, Wifo and IHS paint a less than encouraging picture. The economy will stagnate this year, unemployment will rise and industry in particular will have problems. We are currently "internationally competitive" and "first in the group" in soccer, but certainly not in economic comparison, said Wifo boss Gabriel Felbermayr and IHS boss Holger Bonin at a press conference on Wednesday. Both called on the government to take austerity measures.

The deficit this year is at the Maastricht limit of 3 percent (IHS) or slightly above (Wifo) and, in Felbermayr's view, will remain above it until 2028 if no new measures are taken. "Yes, okay, austerity package sounds terrible", but "in perspective" it is probably necessary, according to the head of Wifo.

Felbermayr: "We now need a rendezvous with reality"
Society has become poorer - GDP per capita is below the pre-corona level of 2019. "We have tried to conceal this through expansive fiscal policy and compensate for it by adjusting wages to inflation. But if we have actually suffered a loss of prosperity, then these are Potemkin villages". This is not sustainable in the long term. "We now need a rendezvous with reality," said Felbermayr.

Bonin recommended not thinking long and hard about whether economic growth will be 0.0 (Wifo) or 0.3 percent (IHS) this year. The decisive factor is that the EU average is 0.9 percent growth and Austria is far behind. Talking about an "austerity package" is "a bit short-sighted", but Austria should save around 2.5 billion euros on the revenue side. Only when measures to reduce expenditure have been exhausted should additional taxes be considered, such as alcohol and tobacco taxes in addition to fuel tax, which would have to be used to finance savings.

In the view of the economic researchers, the necessary measures ranging from cutting ancillary wage costs to thinning out taxes, reducing bureaucracy and reforming major areas of expenditure such as healthcare, nursing care and pensions are nothing new. However, Felbermayr and Bonin are realistic: in view of the upcoming elections and the expected government negotiations and the formation of a new government, a reform or savings package cannot be expected soon anyway.

Wifo head proposes increasing mineral oil tax
Felbermayr urges that "at least before the election there will be no election gifts". He knows that the need for consolidation afterwards will not be discussed during the election campaign, but politicians should at least "bear in mind that what they promise today cannot be kept in the coming years". As the major reforms would probably take years, Felbermayr could imagine a quickly implementable increase in the mineral oil tax (MÖSt) in the meantime in order to get the deficit and debt under control. The MÖSt has not been adjusted for inflation since 2011, and an inflation adjustment alone would quickly bring in 1.5 to 2.5 billion euros "even if it would incur a lot of wrath from motorists".

Austerity package probably not realistic in the near future
Bonin takes a more relaxed view of delays in measures. "Even if we had a government capable of taking action", it should wait and see in view of a possible recovery in the fall. Such an austerity package would again dampen the economy and lead to uncertainty in the economy in advance, "so perhaps it's not so bad" that measures will realistically only come in the second half of 2025. Earlier would be better, but that is not realistic, said Bonin.

Even if politicians are unlikely to react immediately to the economic researchers' proposals, "it is important that we show that there is fire under the roof", said Felbermayr.