The New Policies

In 1987 the government had decided that the Austrian economy needed certain structural reforms if it were to remain competitive in Europe and in the world. The new coalition government, formed by the Socialist Party of Austria (Sozialistische Partei Österreichs--SPÖ) and the People's Party of Austria (Österreichische Volkspartei--ÖVP), was spurred to take action as a result of two significant factors: the passage by the EC of the Single European Act, designed to lead to a much closer economic union of EC member states; and Austria's poor growth rate, which lagged behind that of the European members of the Organisation for Economic Co-operation and Development (OECD). Those reforms were aimed principally at fiscal and financial stability for the government sector and at greater efficiency for the private sector. The government later reinforced these measures in order to meet the requirements for establishing the European Economic Area (EEA).

The measures included steps aimed at reducing the fiscal deficit as a share of GDP. The budget deficit began to be brought down to the target level of 2.5 percent of GDP, although somewhat more slowly than the planners had hoped. The government also announced a comprehensive restructuring of the state-owned Austrian Industries, the giant national company that had taken over most of the heavy industry left to Austria by the retreat of the Germans after World War II.

The restructuring efforts moved apace for several years after the government decision of 1987. The single most important area from the standpoint of the government was the reduction of the ever-growing federal share of the economy. A series of measures were implemented to cut the federal share of GDP from 23 to 21 percent and to reduce the provincial and municipal governments' share of GPD from 17.4 to 16.8 percent between 1986 and 1990.

One of the principal objects of reducing the size of the federal government was to control the interest burden of the government sector, a burden that had risen rapidly during the early 1980s. Another was to reduce the government sector's gross indebtedness. The first of these measures had little effect because the interest burden had risen from 18.0 percent of total government tax revenues to 23.5 percent by 1991. The second measure was more successful because the ratio of the new deficit to GDP stabilized at about 2.5 percent, but the government sector's gross indebtedness nonetheless continued to rise, reaching the level of 56.5 percent of GDP by 1991. For a government that contemplated joining the European Community (EC) and the European Monetary Union (EMU), that level was dangerously high. It was almost as high as the limit of 60 percent that the EC had set in December 1991 as the maximum level acceptable for states that wished to join the EMU.

One reason the government had difficulty managing its own budget was that more than 85 percent of the central government budget expenditures were committed to nondiscretionary items such as civil service salaries and social security benefits. The government consistently found itself severely constrained in trying to reduce or even to control the remaining discretionary elements.

As for Austrian Industries, some reduction in personnel was accomplished as part of the reform, but the slump in global steel and chemical markets left considerable uncertainty as to whether more restructuring might not be needed. Privatization also made some headway with the sale of the mint to the Nationalbank in 1989 and a reduction in the government's share in Austrian Airlines and several major financial institutions.

While efforts to amend and strengthen the cartel law to increase domestic competition moved slowly at first, certain steps were taken. Among them was the decision to adapt the public monopoly regulation to the standards of the EEA. In November 1991, the last foreign-exchange controls were lifted, thus opening the economy further to foreign competition in financial services and liberalizing cross-border financial transactions. The new Stock Exchange Act of 1989 was designed to increase openness and flexibility.

The most difficult objective of structural reform was reducing government subsidies. Some success was achieved between 1987 and 1990, when federal subsidies as a percentage of GDP fell from 2.2 percent to 1.9 percent and when general government subsidies dropped from 2.9 percent to 2.4 percent. But questions arose as to whether progress of this kind could be continued.

Nonetheless, the government was able to enact a major reform in the tax system in 1989. The reform entailed gross tax reductions of about S45 billion. It lowered personal income tax schedules, reducing the top rate from 62 to 50 percent and the lower rate from 21 to 10 percent, while widening the tax base. The reform also abolished the progressive corporate tax schedule and adopted the earlier 30 percent bottom rate as the standard corporate tax rate (compared with the earlier top rate of 55 percent). The tax reform raised incentives and spurred growth.

European integration played a central role in the drive toward structural reform of the Austrian economy. The EEA treaty's provisions on regulation and liberalization forced farreaching changes in the form of increased economic opportunities and competition. It also forced the removal of many barriers that had sheltered important sectors from international competition, especially nontariff barriers.

Importantly, unit labor costs--which had almost doubled during the 1970s--held steady throughout much of the 1980s, peaking in 1987 when the new reforms were announced. By the end of the 1980s, lower labor costs had improved the competitive position of Austrian exporters to a level they had not enjoyed for some time. Wages and salaries per unit of output, which had risen steadily from a scale of 100.0 in 1970 to a scale of 205.9 by 1982, rose only gradually to 216.3 in 1987 and then declined to 208.2 in 1990.

Austria's economic environment changed dramatically during the late 1980s and early 1990s with the opening of the Iron Curtain. Many of the trade agreements that Austria had made with formerly communist states behind the Iron Curtain suddenly became null and void, opening new opportunities but also requiring Austrian resources to help invest in those states as well as to offer credit in order to finance exports. In addition, Austria lost some export markets because the German economy registered a sharp decline in the early 1990s as the cost of German unification had to be financed largely by debt and as the German central bank (the Bundesbank) began raising interest rates to reduce the risk of inflation.

The loss of export markets affected Austria adversely, as did the spillover effect of high German interest rates on Austria's own interest rates. GDP growth fell from 4.6 percent in 1990 to a level of only 2.0 percent in 1992 and was expected to decline further. Unemployment rose, especially among foreign workers. Although it appears likely that the recession will not be as long as that of the early 1980s, the slump again shows that Austria remains tied to developments in neighboring countries and cannot rely entirely on its own resources and policies in an uncertain global environment.