Recession and deficit limit new government

Austria’s economic situation is even worse than expected. The Economic Research Institute (Wifo) and the Institute for Advanced Studies (IHS) revised their summer estimates downwards on Friday and now expect a decline in economic output of 0.6 percent for the current year. Because the economy had already shrunk by 1 percent last year, it is the longest recession of the post-war period, as Wifo boss Gabriel Felbermayr explained.

The institutes also expect a weak economy for the coming year with an increase of only 1 percent (Wifo) or even slightly less (IHS). These forecasts are also worse than in the summer. Felbermayr justified this, among other things, with the ongoing industrial crisis and falling exports of goods, which are 3.5 percent below the previous year’s level. Both Wifo and IHS therefore expect higher unemployment of 7 percent.

Austria is threatened with a gradual decline

Adjusted for prices, household incomes rise significantly due to wage increases as inflation declines. But this has surprisingly little effect on consumption, which, according to Felbermayr, is growing far too little to compensate for weak investment. Instead, people save money, which the economist explains on the one hand with the inflation shock that is still in the population’s bones. On the other hand, the population assesses the economic situation as unsustainable. There are “cautious savings” due to a lack of confidence.

In Europe, Austria is falling behind, said IHS boss Holger Bonin, referring to the last six quarters with known data. The country holds the red “economic lantern”. If this continues, Austria would face a gradual decline compared to the other European economies. Bonin cited the problems of Germany, the most important trading partner, the increase in energy prices and the sharp rise in wages compared to the euro area, which are at the expense of the price competitiveness of the export industry, as further causes.

The gloomy forecasts come at a sensitive time: Austria voted last weekend and gave the right-wing populist FPÖ a big victory. Initial discussions are currently taking place with a view to what is expected to be an extremely difficult coalition formation. The room for maneuver for the future government is limited by the high budget deficit: On Thursday, just four days after the election, the Ministry of Finance increased the deficit forecast for the current year’s budget to 3.3 percent of GDP, which is well above the Maastricht target. Border. Wifo and IHS rate it even higher.

This is explosive in that the responsible fiscal council declared months ago that Austria’s deficit would fail to meet the European convergence criteria. However, the government rejected this. During the election campaign, Chancellor Karl Nehammer from the conservative ÖVP declared, contrary to all expert opinions, that the country does not need an austerity package. Just to comply with EU rules, Vienna will have to save around 3 billion euros in the coming year.

The reactions of the opposition parties to the latest bad news were correspondingly outraged. The government is leaving behind a pile of broken pieces, complained the FPÖ. The liberal Neos party even accused her of lying to the population for electoral reasons.

When it comes to economic policy issues, the election winners, the FPÖ and the ÖVP, have extensive overlap, but the conservatives rule out cooperation with the FPÖ leader Herbert Kickl. A coalition between the ÖVP and the Social Democrats is more likely – possibly expanded to include Neos. While the ÖVP hopes to reduce the deficit by stimulating growth, the SPÖ wants to tax the rich more heavily. How the parties will agree on a real reform agenda is currently questionable.

An austerity package could stall the economy

However, this is mandatory for the two economic research institutes. There is no scope for expensive compromise solutions, explained IHS boss Bonin. If the economic stimulus package was rushed, the funds threatened to evaporate. Like Felbermayr, he warned against strangling the economic engine with a tough austerity package. In the medium term, however, spending measures are necessary, with both economists mentioning, among other things, the pension system and suggesting that the pension system be used to offset CO2 emissions₂to abolish the climate bonus created by the tax.

In the short term, however, tax increases will probably also be necessary, explained the Wifo boss, citing as sensible examples the increase in the mineral oil tax or the property tax, which have not been adjusted to inflation for years. That would be a form of wealth taxation that cannot be avoided by moving away – and at best an opportunity in the coalition negotiations to grant the SPÖ a success at the price of other concessions.