Government must save

Budget deficit: the hole is getting bigger and bigger

(Bild: thinkstockphotos.de, krone.at-Grafik)

Bad news from the budget front comes almost daily. The future government now has to decide whether to balance the budget via an EU deficit procedure or not. Up to 22 billion euros will probably have to be saved in the coming years.

The latest figures from the National Bank put the deficit in 2025 at minus 4.1 percent of GDP. This would mean a consolidation requirement of 7.1 billion euros in 2025 in order to achieve the Maastricht target of 3.0 percent. Previously, around four billion had been assumed. 

According to calculations by the parliamentary budget service, between 15 and 22 billion euros will have to be saved over the next four to seven years, depending on the scenario. 

Austria has until mid-January to submit its own package of measures to the EU Commission. The Commission will evaluate it and recommend to the Economic and Financial Affairs Council whether or not it should initiate an excessive deficit procedure (EDP) against Austria. If Austria does not submit anything, an EDP is automatically initiated. Depending on the duration of the restructuring path (four or seven years), the extent to which Austria must tighten its belt will then be determined. The Fiscal Council intends to present new, concrete figures on Monday.

Maastricht target

The EU Maastricht criteria stipulate two threshold values. The annual deficit should not exceed three percent of gross domestic product (GDP) and the debt ratio should not exceed 60 percent of GDP.

"Zuckerl" negotiators are in disagreement
The advantage of a procedure would be that the government would have more leeway. This is particularly important if the economic situation is not to deteriorate further. If the next government wants to restructure the budget sustainably and buy itself time to do so, it would have an easier time with an OD procedure. The SPÖ is in favor of this approach, while the ÖVP and NEOS are skeptical.

Neos must first convince the ÖVP and SPÖ of the tough austerity measures

(Bild: APA/HELMUT FOHRINGER)

Finance Minister Gunther Mayr also prefers restructuring without a procedure. The ministry points to the risk of Austria's credit rating being downgraded in the event of an excessive deficit procedure. This would significantly increase our interest rates. In addition, Austria would have limited budgetary freedom in the procedure.

Experts urge swift action
Birgit Niessner, Director of the Economics Department at the Austrian National Bank, has no recommendations for politicians. But in principle, if the government wants a consolidation effect in the challenging year 2025, then there must be "a small number of easy-to-implement measures soon" and these must be "implemented immediately". Apart from the short-term measures, long-term structural work must be done on the "health of the budget".

The National Bank reveals new, worrying figures.

(Bild: Wolfgang Spitzbart)

Although it is uncertain how large a consolidation package will be, "what is certain is that it would have negative effects on growth", added Gerhard Fenz, head of the OeNB's economic department. An "exemplary" budget consolidation of 0.9 percent of GDP in 2025 and 0.5 percent in the two following years would reduce Austria's economic growth by 0.3 to 0.4 percentage points annually.

Debt ratio rising rapidly
According to Niessner, the deficit forecast, which is significantly higher than previously expected, would also lead to a "rapid" increase in the debt ratio. From 78.6 percent last year to 81.8 percent this year and 82.6 percent in 2025 to up to 84.2 percent in 2027. "High primary deficits, but also rising interest burdens are driving the debt ratio up sharply".