"Need an austerity package"

Austria’s economy is falling further and further behind

Our gross domestic product is only expected to grow by one percent annually in the coming years.

(Bild: APA Pool/dpa/Arne Dedert)

Austria is falling further and further behind in terms of economic growth: according to the latest forecast by the Institute for Advanced Studies (IHS), gross domestic product is only expected to increase by an average of one percent annually between 2024 and 2028. In contrast, global GDP growth is three times as high.

By way of comparison, economic growth in China is likely to be four percent this year and in the following four years, in Romania 3.4 percent and in Poland three percent (see chart).

Austria, on the other hand, is at the lower end of the ranking. Only Germany with 0.9 percent and Japan with 0.7 percent have lower economic growth in this comparison. According to IHS head Holger Bonin, Austria is unlikely to "ignite the growth turbo" in the coming years either.

(Bild: Krone KREATIV/stock.adobe.com)

The main reason why we are falling behind is the continuing lack of investment by Austrian companies, which is both a consequence and a cause of the weak economy. Companies are putting the brakes on investment due to geopolitical and economic uncertainties. Construction investments are particularly weak.

In any case, we are a long way from "normal" growth: in the comparative period from 2014 to 2018 - i.e. before the coronavirus pandemic, inflation shock and Ukraine war - annual GDP growth was still 1.7%. According to Bonin, however, we will continue to lag behind both the EU average and the development of the global economy for the foreseeable future.

People finally have more in their wallets thanks to health insurance increases
Economic growth is still being driven by private consumption: people in Germany are spending more again because wages have risen following the collective bargaining negotiations. The population is benefiting from the increase in tax brackets. The partial abolition of cold progression also leaves more net money in the wallet.

IHS boss Holger Bonin: "We need a savings package."

(Bild: SEPA/SEPA.Media | Martin Juen)

In addition, inflation is finally falling and is approaching the target value of two percent: according to the IHS, it will be 2.2 percent in 2028. The outlook for the labor market is also slightly better: the unemployment rate is expected to fall from 6.9% this year to 5.8% in 2028.

Development of public budgets gives "cause for concern"
"The development of public budgets is a cause for concern," says Bonin. In order to compensate for inflation, the government has too often used a watering can approach and has "not always spent money in a targeted manner. Much of it was not solidly financed."

The result: "This year, Austria is scratching at the upper deficit limit of three percent and this is unlikely to change in the coming years. However, something needs to change, because Austria is threatened with a pink slip from Brussels," warns the economic researcher.

The downside risks for the Austrian economy are increasing
In addition, there are currently more downside risks for Austria, such as a further escalation of the war in Ukraine or trade wars between the EU and China. Bonin: "Each of these factors can have a negative impact on global trade and lead to a further increase in energy prices."

Austria needs a skilled labor offensive to get the economy going.

(Bild: APA Pool/dpa/Arne Dedert)

The economic researcher recommends that politicians "ignite the growth turbo or at least shift up a few gears". Three measures are important, but none of them are popular:

1. "We need an austerity packagein the short term," says Bonin. Two to four billion euros a year would have to be saved in order to "create scope for sensible investments". The budget should be thinned out more.
2. "We also need an efficient tax reform," says Bonin, adding: "The aim must be to reduce the high burden on the labor factor in Austria." The expert suggests massively increasing the tax brackets for low earners in order to increase the incentive to work. Bonin: "In Austria, the tax rate of 40 percent applies from an annual income of 33,000 euros. In Germany, the rate is 42 percent, but this only applies from 66,000 euros, i.e. twice as much." A reform could be financed through higher taxes on alcohol, cigarettes, etc., for example.
3. "We need a skilled labor offensive," says Bonin. The lack of employees is already a stumbling block for the economy. An important step, in which Austria is also lagging behind, is the expansion of childcare. In addition, the effective retirement age should be raised, for example through higher deductions for the corridor pension. Furthermore, the target group of immigrants should be better integrated into the labor market. Bonin: "The German example shows that measurable integration successes can be achieved with refugees, even in difficult cases."