Reforms urgently required: Austria is fighting against recession and tax shock!

Reforms urgently required: Austria is fighting against recession and tax shock!

Austria is in a deep economic crisis. According to recent reports, the Austrian economy will be in contraction mode for the third year in a row in 2023, and the forecasts are anything but optimistic. Wifo expects a decline of 0.3 percent, while the IHS expects a decline of 0.2 percent. Even the Oesterreichische Nationalbank (OeNB) is forecasting a minus of 0.1 percent for 2023. These worrying developments are leading to falling tax revenues and increasing savings needs, further exacerbating the situation. The chairman of the Fiscal Council, Christoph Badelt, warns that the partial abolition of cold progression could lead to significant losses of income. Die Presse also reports that Austria is considered the highest tax country with record revenues and at the same time a high budget deficit.

In the current situation, various political actors and economists are calling for reforms to overcome the challenges. FW General Secretary Reinhard Langthaler criticizes both the current and the previous federal government for neglecting necessary reforms. He is pushing for a radical reduction in bureaucracy and tax relief for employees and employers. Langthaler's call for lower energy prices for companies and consumers is met with approval. “We have to take a reform course that gets the spending side under control,” demands Langthaler. Despite continued efforts, economic development in Austria looks bleak as the country is not making any progress compared to other European countries.

Costs and burdens are increasing

The current economic crisis also means that the unemployment rate will rise from 7 percent last year to 7.5 percent, according to IHS. This places additional burdens on the public sector as spending on pensions, healthcare and interest on national debt increases. A budget deficit of 3.3 percent is forecast for 2023, down slightly from 4.1 percent last year. Major austerity measures are being considered, including the abolition of the climate bonus, which could bring savings of around 2 billion euros, as well as planned funding cuts and savings in ministries totaling 1.1 billion euros from 2026.

Furthermore, the abolition of educational leave could result in savings of up to 350 million euros for 2023 and even 650 million euros for 2024. Austria could therefore be preparing for an impending deficit procedure, as the forecasts for 2026 also do not indicate any positive developments, although there is uncertainty about possible further years of recession. According to WKO, the inflation rate is also forecast at 2.7 percent for 2023 and 2.1 percent for 2024, which worsens the already tense situation.

Future outlook and necessary reforms

The dire economic situation makes it clear that serious reforms are essential to avoid a continuation of the recession. Wifo Director Gabriel Felbermayr emphasizes the importance of acting now to promote growth in the coming years. Hopes rest on a slight upswing in 2024, with Wifo forecasting growth of 1.2 percent and IHS of 1.1 percent. But everything depends on the international framework and political stability. It is therefore clear that Austria's government must take concrete action to sustainably correct the negative trend reversal.