February 10th 2015

Challenges of Austrian fiscal policy.

Hans Jörg Schelling, Federal Minister of Finance of the Republic of Austria

During the Tyrolean Industry Talks (Tiroler Industriegespräche), Management Center Innsbruck’s MCI Alumni & Friends club and the Federation of Austrian Industries Tyrol welcomed the Austrian Minister of Finance, Hans Jörg Schelling. In an impressive speech, the finance minister explained the key elements of Austria’s current fiscal policy as well as the strategic course for the years to come.

According to Schelling, geopolitical and sociopolitical factors as well as global economics need to be considered to assess Austria’s currrent fiscal state: Global economic growth has slowed. As a consequence we can no longer rely on solving fiscal problems through growth. In addition, terrorism, war and political unrest – as in Paris or the Ukraine – have shown to be massive setbacks for most European economies.

However, the finance minister believes that playing the blame game and holding others responsible for the country’s financial misery would be utterly wrong. Like many other countries, Austria will have to do its fiscal homework, which is long overdue. Schelling underscores that Austria does not suffer from a lack of earnings but from overspending. The country’s 85 % debt ratio provides clear evidence of that. Since the founding of the Second Republic, Austria has only managed to reach a ‘zero deficit’ twice.

According to Schelling, financial restructuring requires the definition of strategies and targets before structural changes can actually be addressed. For a long-term positive development it is essential to set the right course using courage and leadership. A number of challenges and implicit cost developments need to be considered: rising costs for pensions, a growing demand for care, annually increasing administration costs and a persisting lack of flexibility on the job market. Currently a five billion euro ($ 5.5 billion) tax cut is on its way, the biggest fiscal reform in the history of the Second Republic. It is based on the following pillars:

·         tax relief for citizens
·         ownership unbundling and reduction of bureaucracy
·         generation of growth and employment

The reform will lower the starting rate of income and payroll tax from 36.5 % to 25 %; the highest tax rate will be changed to apply only for an income of over 80,000 – 100,000 euros (about $ 88,000 – 110,000). Citizens currently not paying income or payroll taxes will benefit from a reduction of social security contributions.

According to Schelling, approximately 15 to 17 % of the tax reform will come at no cost and will be financed by a multiplier effect on consumer spending. A substantial portion of the tax reform will be financed by the federal government (67 %), the states (22 %) and the municipalities (11 %). Further approaches on how to pay for the reform are weeding out subsidies, abolishing tax exemptions, and introducing measures to combat tax evasion, benefit fraud and organized VAT fraud. On a federal level an administrative cost reduction initiative will be launched, which will aim to lower predicted 2016-2020 administrative costs from 2.9 % to 1.9 %. This cumulative effect alone will recoup at least three billion euros of lost tax revenues.

Schelling’s speech was followed by a lively discussion with the audience headed by MCI Rector Andreas Altmann.