OECD Economic Surveys: Austria 2019

Report

OECD Economic Surveys: Austria

13 November 2019

1. Key Policy Insights

Abstract

The Austrian economy has performed well over the recent decades. Real GDP per capita was the 11th highest in the OECD and 6th highest in the EU in 2018, slightly ahead of Germany, Finland and Belgium. It fell however behind the most rapidly growing OECD countries in the 2010s and the gap has widened more rapidly than in comparable countries. Available indicators of well-being remain nonetheless well above OECD averages, with limited discrepancy between population groups and regions, witnessing a high degree of social cohesion.

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

This chapter reviews the macroeconomic developments, the main outcomes in Austrian population’s well-being, the underlying trends in the supply side of the economy, and the priorities for structural policies and reforms. The main messages are:

For Austria’s high well-being and social cohesion standards to be preserved and improved, the supply capacity of the economy should further be strengthened. Risks of increased social inequality in market outcomes, heightened mobility needs of workers between activities and living places, and intergenerational equity challenges will be easier to address with a stronger economy. This can be achieved with faster growth of high-potential firms, stronger productivity gains across the business sector and higher labour force participation by women and a more rapidly upskilling working age population.
Small and medium sized firms have a special role to play in this process. They have been the core engine of Austria’s productivity and competitiveness gains and regional development in the past, but their digital transition is now relatively slow, their participation in global value chains remains centred on continental Europe, and they face more severe skill shortages than international counterparts. Many medium-sized family firms face ownership transmission in the coming years. More open entry conditions favouring competition in domestic markets, additional risk-sharing equity capital and upskilling of workers at all levels would help all types of firms to keep pace with the global frontier.
Long-acknowledged but repeatedly postponed public sector reforms should be pursued. The public sector contributed successfully to economic growth and social cohesion by narrowing inequality in the past, but its costs have gone up, its margin of action for new policy measures has narrowed, and, as a result, it risks falling short of delivering the services and infrastructures required to sustain high well-being in the face of new megatrends. On the side of revenues, there is large scope to change the composition of taxes to better support labour force participation, social inclusion and environmental sustainability.

Domestic demand growth strengthened in recent years, but external conditions are weakening

After a rapid recovery following the global financial crisis, the Austrian economy had stalled in comparison to other small open European economies in the 2010s but remarkably improved its performance in 2017 and 2018 (Figure 1.1). Both external and domestic demand strengthened. The vigour of the ‘Central European manufacturing core’ formed around Germany provided strong external stimulus until late 2018. Household consumption was backed by the 2016 tax reform, which reduced personal income tax rates for low and middle income households, and considerable wage increases negotiated in Autumn 2018. A steady improvement in household confidence supported private consumption. The increase in immigration, principally from other countries in the region, also supported domestic demand. Total employment has strongly increased and unemployment fell until early 2019 (Figure 1.1).

Business investment increased strongly in the past two years, more than in comparable countries. A large proportion of Austrian firms reported until recently that they increased investments in response to highly supportive external and domestic conditions but mentioned the shortage of skilled personnel as a binding constraint to further investments (EIB, 2018). Business representatives emphasised that the government programme 2017-2022 of the government in place after the 2017 elections, which included several growth-friendly reform objectives potentially stimulates investment (Box 1.1).

Euro area monetary policies have long been supportive, even if the recent surge in investments were financed more by retained earnings than external credit. Fiscal policy was fairly supportive in 2016 but no additional stimulus was provided in 2017 and 2018 (Figure 1.2). The previous government took a mix of restrictive and stimulus measures for 2018 and 2019. The net impact is estimated to be broadly neutral. This stance appears adequate but should cyclical conditions worsen in the euro area, automatic stabilisers should continue to operate and more active measures can be considered if growth disappoints. Additional adjustments in the composition of spending and revenues may help strengthen this stimulus. The structural and fiscal policy recommendations of this Survey have been conceived in a fiscally neutral manner and would be compatible with this stance.

Figure 1.1. The strong recovery has peaked

Box 1.1. Reform priorities in the previous government programme

The programme of the previous government for 2017-2022 aimed at “enhancing Austria’s competitiveness as a business location, with digitalisation as a major opportunity to position Austria on the international technology frontier”. Several measures were implemented in the first year following the elections, including an increase in maximum daily working time from 10 to 12 hours, and in the maximum weekly working time from 50 to 60 hours. A number of the 5 000 business regulations were amended. From 2019 on longer-term initiatives would have been phased in. Three main orientations were intended to foster a more growth-friendly environment:

“Doing business” conditions were meant to be made more attractive. Austria’s strict product market regulations were acknowledged and the 2017-2022 programme intended to simplify them. An independent ‘regulatory monitoring agency’ was supposed to examine the costs and benefits of all regulations and to streamline proposals. Labour market rules were intended to be made more open to company-level agreements. The deepening of capital markets was intended to support firms in all phases of their lifecycle, including via initial public offerings (IPOs) in the secondary segment of the Vienna Stock Exchange. Further, the telecommunications infrastructure was supposed to be modernised, with the goal of becoming a 5G pilot country by 2021 and a mobile-5G country by 2025.
A large tax reform was a key part of the programme. Its principal targets included: i) cutting the tax ratio towards 40% of GDP by 2022; ii) reducing the labour tax wedge, first for lower incomes and then for higher income groups, including by cutting social security contributions (see Table 1.8 for details), iii) reducing the corporate income tax rate, also in steps. These reductions were planned to be budget neutral thanks to additional revenues from digital taxes and cost reductions across all ministries.
A comprehensive restructuring of the education system was targeted in all its layers. The objective was to maintain separate educational tracks but to boost academic standards in all of them. Schools were supposed to be granted a higher degree of autonomy against closer ex post performance monitoring. Another goal of the programme was to make the teaching profession more attractive to entrants. The adaptation of apprenticeship education (which trains 40% of each student cohort) to the digital revolution was especially emphasised.

These economic objectives were intended to be supported with new approaches in four social policy areas:

Pension system parameters would have been re-visited in the light of international experiences, including concerning the official retirement age. The convergence of actual and official retirement ages was a priority, stressing elderly workers’ staying in the labour force.
Immigration policies were to be re-oriented according to the needs of the labour market. Issues concerning i) skilled immigration, ii) freedom of movement within the EU, and iii) asylum policies will be managed according to different priorities. Language and cultural integration of immigrant groups received a particular emphasise.
A reform of the means-tested minimum income scheme has been adopted by Parliament in May 2019 in the “Sozialhilfegrundgesetz”. This new law sets maximum rather than minimum benefit levels binding for Länder governments which administer these aids. Furthermore, benefit conditions have been made more restrictive, for example regarding the eligibility criteria for receiving the full amount of the benefit like language skills, completion of compulsory education in Austria or, proof of integration efforts years (EC, 2018). Further key points of the reform are the prioritisation of benefits in kind, increased incentives to work and a higher protection of assets. The process of implementation by the Länder, however, is still ongoing.
New legislation was adopted to grant women temporarily interrupting their career for family responsibilities notional wage increases matching their peers’ in employer firms and organisations.

The fiscal measures in the government programme 2017-2022

The previous government aimed to reduce the Maastricht debt ratio below 60%, to regain its triple-A credit rating lost after the global financial crisis. The central anchor to achieve this objective is the so-called debt-brake rule (cyclically-adjusted general government balance ≥ -0.45% of GDP). The partial recovery of the assets of the government-owned bad banks created after the global financial crisis is expected to help. General government debt reductions due to asset recoveries amounted to 6% of GDP between 2015-2018 and may further augment in the period ahead.

To attain its fiscal objectives, the government elected in 2017 announced three streams of measures that were restrictive on the spending side but also cut taxes:

The stimulus measures introduced in early 2017 by the government elected in 2013, and which had become pro-cyclical amid strong growth in 2018, were discontinued. These encompassed the “new hiring bonus” and other investment grants offered to enterprises, as well as the subsidies aimed at integrating the long-term unemployed, the elderly and the persons entitled to asylum protection in the labour market.
A catalogue of cost-saving measures was announced in the public sector, including reductions in subsidies, cuts in personnel costs in government-owned entities, the merger of 21 different health, pension and accident funds to five, and the indexation of family allowances for children living outside Austria to their local living costs.1
A number of tax cuts were introduced for 2018-19, including the reduction of contributions to unemployment insurance by low-income earners, the re-introduction of the super-reduced VAT rate on tourist accommodations, as well as a “Family Bonus plus” (a personal income tax relief per child in the order of EUR 1.5 billion over 2019 and 2020), while abolishing the deductibility of child care costs and the existing child allowance. These tax measures were intended to be fiscally neutral in the long-term but could slightly reduce the budget surplus in 2020 by around 0.3% of GDP.

While the direct impact of these measures on aggregate demand was estimated to be broadly neutral, they would have medium-term economic and social implications. The Chamber of Economy estimated that the government programme 2017-2022 addressed a large part of the proposals it had made to improve Austria’s business environment, with an aim to raise Austria’s rank in the World Bank Doing Business Indicators from 26th in 2019 to the top 10 by 2022 (Austria Economic Chamber, 2018). However, OECD evaluations suggest that economic gains from VAT reductions may not justify their high fiscal costs. Also, the replacement of the tax deductibility of child care costs and of the child care allowance by the Family Bonus may have a relatively weaker incentive effect for the labour force participation of women with children. The discontinuation of employment subsidies for the low-skilled may reduce their employment opportunities.

If the cyclical slowdown in the EU and in Austria takes hold more strongly, additional countercyclical measures such as temporarily increasing depreciation allowances for business investment would help. Re-installing well targeted wage subsidies for vulnerable workers may further support growth and social inclusion. OECD experience suggests that targeted wage subsidy programmes, if well-designed and monitored, can prove to be effective (Martin, 2017).

According to the OECD fall projections, the headline general government fiscal balance should shift from a surplus of around 0.1% of GDP in 2018 to a deficit of -0.1% in 2021, corresponding to an improvement of the cyclically-adjusted stance from neutral in 2018 to a surplus of 0.3% in 2021. The general government debt-to-GDP ratio is projected to decline from 73.8% of GDP in 2018 to 69.2% of GDP in 2021 with asset recoveries playing an important role. The national medium-term fiscal objective — a structural deficit of 0.5% of GDP was achieved in 2018 and was expected to be met from 2019 onwards.

Figure 1.2. Structural fiscal position has improved

The fast growth of the past two years has peaked in 2018. The economy is projected to slow over the 2019-21 period, similar to many euro area countries. Following the slowdown, the Austrian economy is growing roughly at its potential rate. Household demand remains strong but demand through international trade is decelerating, even if the relative strength of the Central and Eastern European economies offers some external support to the Austrian economy. Business confidence was nevertheless harmed more than in countries with similar characteristics (Germany, Switzerland, The Netherlands, Denmark and Sweden are considered as Austria’s peer countries in this survey). Subsequently business investment has lost steam, despite abundant cash-flow within firms as well as the availability of low-cost bank credits (Figure 1.1 and Table 1.1).

	2015	2016	2017	2018	2019	2020
	Current prices (billion EUR)	2016	2017	2018	2019	2020
GDP	344.3	2.1	2.6	2.3	1.4	1.3
Private consumption	181.2	1.7	1.5	1.1	1.7	1.8
Government consumption	68.1	1.7	1.1	0.8	0.8	0.9
Gross fixed capital formation	78.1	4.0	3.9	3.9	2.9	1.5
Housing	14.6	2.3	6.0	1.2	5.5	3.1
Final domestic demand	327.4	2.3	2.0	1.7	1.8	1.6
Stockbuilding1	3.8	0.0	0.1	0.1	-0.2	0.0
Total domestic demand	331.2	2.2	2.1	1.8	1.5	1.6
Exports of goods and services	182.9	3.2	5.3	5.6	2.1	0.6
Imports of goods and services	169.9	3.7	4.9	4.4	2.2	1.2
Net exports1	13.0	-0.1	0.4	0.8	0.0	-0.3
Other indicators (growth rates, unless specified)
Employment	. .	1.7	1.0	1.4	0.9	0.8
Unemployment rate	. .	6.0	5.5	4.8	4.6	4.5
GDP deflator	. .	1.7	1.1	1.7	1.7	1.4
Consumer price index (harmonised)	. .	1.0	2.2	2.1	1.6	1.7
Core consumer prices (harmonised)	. .	1.6	2.1	1.8	1.5	1.4
Household saving ratio, net2	. .	7.8	6.8	7.5	7.2	7.2
Current account balance3	. .	2.7	1.5	2.3	1.4	0.7
Government primary balance3	. .	0.1	0.7	1.4	1.2	1.0
General government fiscal balance3	. .	-1.5	-0.8	0.1	0.1	0.2
Cyclically-adjusted balance4		-1.0	-0.8	-0.7	-0.5
General government gross debt (Maastricht)3	. .	82.7	78.0	73.8	72.1	70.8
General government net debt3	. .	58.3	54.7	51.6	49.9	48.6
Ten-year government bond yield, average	. .	0.4	0.6	0.7	0.1	-0.1

1. Contribution to changes in real GDP.

2. As a percentage of household disposable income.

3. As a percentage of GDP.

4. National definition. As a percentage of GDP.

Source: OECD (2019), OECD Economic Outlook: Statistics and Projections (database), October; Statistics Austria, Austrian Ministry of Finance, Austrian Institute of Economic Research (GDP), European Commission and Fiscal Advisory Council's fall forecast (2018 and 2019).

Inflation remains moderate and is set to grow by 1.6 and 1.7% in 2019 and 2020. Austria is exposed to risks including further deteriorations in global trade conditions, which may reduce the demand and prices for Austria’s exports and dent activity and employment (30% of Austria’s exports go to Germany as intermediary goods processed and forwarded to global markets). Moreover, additional uncertainties in the EU – related to the developments in the UK and in Italy – may lead to a weakening in business and consumer confidence. The lower probability events mentioned in Table 1.2 may also lead to major changes in the outlook.

Vulnerability	Possible outcomes
Elevated asset prices and growing credit risks may lead to global financial tensions.	Austrian banks have reduced their exposure to EM markets but remain exposed to Central, Eastern and South-Eastern Europe. Severe international financial strains would affect them.
Brexit-related uncertainties and concerns over Italian sovereign debt may constrain bank lending in Europe.	Austrian firms, which depend heavily on bank loans, could be more vulnerable.
An acceleration of the technological and structural transformation of the car industry may impact car value chains in Central Europe.	The significant segments of the Austrian manufacturing connected to global German car firms would face an adjustment shock, with second-round regional and inter-industrial effects.

The financial system remains bank-focused and banks’ balance sheets have improved

Financial stability is a high priority in Austria. The authorities consider that rehabilitation of the banking sector after the global financial crisis is now largely completed. A part of the related fiscal costs are being recouped due to ongoing realisation of bad assets, which were transferred to special government institutions before. The capital adequacy of the banking sector has considerably improved in the low-interest environment and capitalisation is slightly above the EU average, but, structurally, there is further room for productivity and capital strength convergence with stronger banking systems (Figure 1.3). Bank lending rates are nevertheless duly kept at lower levels than in several other euro area countries and effectively transmit monetary policy.

Figure 1.3. Austrian banks' balance sheets can be strengthened further but monetary transmission works well

Five aspects of the Austrian financial sector have implications for policies to improve financial resilience (OeNB, 2018). Future financial policies will need to encourage structural adjustments in the banking sector in the light of these trends, while helping preserve banks’ unique relational assets:

Commercial banks dominate financial intermediation (Figure 1.4). Their competition and complementarity with alternative financing channels is limited. Their dense retail networks and labour-intensive organisations put pressure on financial sector productivity and profitability (OECD 2017

). They also expose them to a looming re‑organisation potential in the future as a result of digitalisation and competition from fintech service providers. Upgrading their capital base under these circumstances may constitute a challenge.

Banks have built-up large regional networks, and, even after the consolidations which followed the global financial crisis, their assets and liabilities remain relatively large in comparison to the size of the national economy. At the end of June 2019, the consolidated foreign claims of banks in Austrian majority ownership totalled EUR 357 billion (78% of GDP), with claims on Central and Eastern European countries accounting for around 60% of this amount. Global financial tensions may therefore pose additional risks (Kakes and Nijkens, 2018

At the same time, Austrian banks started to face emerging cross-border competition from the banks of neighbouring countries, some of which bear lower operational costs and lower tax liabilities. According to Eurostat figures, cross-border deposit and lending transactions with neighbouring banks, although still at low absolute levels, have increased in the most recent years. Regional and global competition in fintech services will also likely augment.
The Hausbank (main bank) system, centred around local cooperative banks and their national associations, boasts massive tacit and informal knowledge on myriad small-and-medium sized firms and their regional economies. This information base is a source of resilience in the Austrian financial system, provided that these banks operate under competitive and transparent governance conditions.
The provision of equity capital and tradable securities to the business sector remains much less developed than in comparable countries. This concerns both listed equity capital, listed bond, as well as non-listed private equity, venture and growth capital sources (Figure 1.4). Recent policy initiatives aimed at stimulating equity investment, with the adoption of a law facilitating “crowdfunding”, new legal forms for investment firms, and the opening of a secondary market for smaller firms in the Vienna Stock Exchange. The ecosystem for equity investing is however still emerging.

Concerning the future of prudential supervision, the planned implementation of the organisational change of banking supervision (which intended to move 180 staff and a range of supervisory powers from the Central Bank to the Financial Market Authority (FMA)) was not realized.

The ecosystem for equity investing should be boosted. Measures to improve the markets for risk capital, apart from initiatives at the European level, should promote financial literacy among Austrian investors and entrepreneurs. They should also encourage the growth of the services required for the effective operation of equity markets (information, analysis, corporate governance and financial and legal counselling services). Addressing the debt bias of the corporate tax system can help to level the playing field between debt- and equity-financing.

Figure 1.4. Financial intermediation remains centred on bank credits

Housing market risks have been kept under control so far but may increase in the future

Housing markets are exposed to risks of exuberance in the current low interest-rate environment. However, only a small share of households is exposed to the fluctuation in housing prices and this restricts financial vulnerability. Social housing represents more than 25% of the housing stock, second only to Netherlands in the OECD and reaches much higher levels in certain urban areas such as Vienna where it represents more than 60% of residential housing. It has specific features, including the involvement of different government layers and private structures, such as housing associations (co-operatives) funded by the Länder, and dwellings owned and let by municipalities (most pronounced in Vienna). Rental markets prevail in urban areas, while rural areas (40% of the population live there) are characterised by high proportions of personal ownership but thin housing transactions and markets.

Social housing has provided affordable high-quality housing for large parts of the population, but it now faces challenges. When entitlements are based on open-ended non-portable long-term contracts with low rents, they may impede the geographical mobility of beneficiaries. In other segments, differences with free market rents are lower than in other OECD countries. Many beneficiaries have also reached middle- and upper-middle income categories, which may lead to bottlenecks if demand from lower-income and younger applicant households expands (Mundt, 2018; Geymüller and Christl, 2013 ). According to a recent international estimate, the overall housing supply has a low long-term elasticity to demand conditions (Geng, 2018 ; IMF, 2018). Other recent domestic research has however suggested that such elasticity is not particularly weak (Schneider, 2019, forthcoming). Mixed findings may reflect uneven conditions in urban vs. rural housing markets in different regions.

Beyond short-term cyclical developments, the housing market will likely face long-term pressures from domestic and international migration, changing family patterns and the expansion of the population of low-income earners, while urban sprawl has already attained harmful levels. This requires more effective land planning, urban development and public transportation policies through better integrated co-operation between government levels.

High social expectations in the area of housing and the multi-dimensional character of new policy challenges invite a comprehensive long-term housing and social housing strategy. The related initiatives and experiences of other OECD countries such as Sweden (Hansson, 2018

), which have also tried to increase the supply elasticity of housing without aggravating social segregation, by means of reforms in urban planning, building codes and public infrastructure development can be drawn on.

Independently from domestic market conditions, foreign home purchasers have recently exerted upward pressure on house prices in Vienna and in certain Western Länder (EC 2018

). This has made existing residences and constructible land very expensive for average households. There has been an average 40% increase in house prices over the past decade, but price levels remain still below comparable countries. The mortgage debt stock and related financial vulnerabilities are also lower (Figure 1.5). Nonetheless, observing that rapid growth of new mortgage lending may raise challenges to financial stability, the Financial Market Stability Board, drawing on Central Bank analysis, issued a communication in 2018 on sustainable lending standards to keep systemic risks at bay also in the future.2 These safeguards should be made compulsory, as in some other OECD economies like Norway (Norwegian Ministry of Finance, 2018).

Figure 1.5. Housing market risks have been contained so far but may be increasing

Past OECD recommendations	Actions taken
Rigorously supervise large and small banks.
Facilitate digitalisation, restructuring and cost reduction in the banking sector.
Continue to support venture capital investment and reduce tax and other disincentives for equity investments.	A Start-up Package was introduced May in 2019, with i) additional risk-finance through a public Digitalization and Growth Fund (which will co-invest in start-ups together with private venture-capital funds) and ii) more credit guarantees. It comprises regulatory sandboxes, which shall remove certain administrative burdens from start-ups, and new educational streams to ensure the availability of skilled workforce. The Vienna Stock Exchange launched in January 2019 a new market segment “direct market plus” as an initial and easy access to the stock market. 8 companies are already listed.

Past OECD recommendations

Actions taken

Rigorously supervise large and small banks.

Facilitate digitalisation, restructuring and cost reduction in the banking sector.

Continue to support venture capital investment and reduce tax and other disincentives for equity investments.

A Start-up Package was introduced May in 2019, with i) additional risk-finance through a public Digitalization and Growth Fund (which will co-invest in start-ups together with private venture-capital funds) and ii) more credit guarantees. It comprises regulatory sandboxes, which shall remove certain administrative burdens from start-ups, and new educational streams to ensure the availability of skilled workforce.

The Vienna Stock Exchange launched in January 2019 a new market segment “direct market plus” as an initial and easy access to the stock market. 8 companies are already listed.

Employment performance, well-being and social cohesion are strong but come under pressures

Broad-based growth on the back of myriad entrepreneurial firms across all regions and supported by growth-friendly social partnership has underpinned Austria’s strong well-being and social cohesion so far. It has helped to create well-paid jobs for workers with different education levels, generally well trained according to labour market demands through a multitude of vocational education streams. The generous welfare system insures against labour market risks and provides very good retirement incomes. Higher proportions of children and elderly than in comparable countries are taken care of by their families.

The typical well-being outcomes include (Figure 1.6):

The broad-based growth of employment for prime age men who are generally satisfied with their working conditions despite long average work hours.
In contrast, full-time labour force participation and career engagement of women carrying out family responsibilities are restricted, and a high share of low-skilled elderly withdraw from the labour force as soon as this is legally possible - these issues are addressed in the new OECD Jobs Strategy.

Household incomes have increased regularly at top, median and bottom deciles, with relatively low inequality and poverty.

A high degree of safety has been achieved in the daily life of citizens, with low levels of crime.
Local social connections are highly appreciated, with strong support networks among friends and family.
As a result, subjective well-being has attained one of the highest levels in the OECD area, both in terms of long-term life satisfaction and short-term affect balances (balances of positive and negative feelings).
However, as basic human capital is transmitted principally within families, intergenerational social mobility remained particularly low, notably for migrant families.
Social partners and policymakers being focused on employment growth, environmental impacts have been less prominently integrated in policymaking.
Regional variations in well-being remained smaller than in most other OECD countries. Vienna, where nearly a quarter of the population lives, is regularly ranked among the most attractive living places in the world, even if it faces starker tensions on its service infrastructure. The dispersion of well-being indicators between regions is low (Figure 1.6, Panel C).

Figure 1.6. Well-being is high and regionally balanced

Austria has indeed long been among the OECD countries with the lowest income distribution inequalities (Figure 1.7). Collective wage bargaining, founded on a social partnership system that the OECD has termed “organised decentralisation” and identified as an international good practice has helped reduce differences in market wages. Collective negotiations have taken into account the interests of the self-employed and of the farmers. However, against this favourable background, recent market developments (including increased divergences between more and less well performing employer firms) have negatively affected income distribution (OECD, 2018; World Inequality Database, 2018 ).

Figure 1.7. Income inequalities are relatively low

The tax and transfer system helped reduce income inequalities, even if redistribution has somewhat weakened in the face of growing divergences in market incomes (Guger and Rocha-Akis, 2016). Social transfers are large and progressive, while taxation is rather neutral and regressive in certain areas. The earnings ratio between the 9th and 5th and the 5th and 1st income deciles remain high (Figure 1.7). A recent study, which took into account all direct and indirect taxes and social security contributions, found that the households between the 30th and 80th income percentiles face a broadly flat tax rate (aHumer and Moser, 2016 ).

Wealth distribution has long been less equal than income distribution (Figure 1.8). In Gini indicators of equality Austria comes 7th in income distribution, and 14th in wealth distribution among 35 OECD Member countries. At the top end of wealth distribution, the 10% wealthiest Austrian households hold the 4th highest share of national wealth in the OECD area. Yet, the wide coverage of social protection and the availability of social housing reduce the incentives of low-income households to accumulate family wealth during their working lives. Home ownership, the most important asset of households in market economies, is less widespread than in comparable countries. Features of long-term tenure contracts may also be making housing unattractive as a financial investment.

3 Taking into account these factors, actual wealth inequality was found to be slightly better than its statistically expected level (Pham Dao, 2016; see also Fessler and Schürz, 2015 ).

Intergenerational transmissions of wealth are not taxed, as Austria has de facto abolished inheritance taxation in 2008 after a legal stalemate between the Constitutional Court and Parliament. It is currently one of the very few OECD countries without inheritance taxes. Recent studies showed that, in the absence of inheritance taxation, bequests play a larger role in wealth accumulation than in other EU countries (Leitner, 2018

). As OECD research identified the taxation of immovable assets as a growth-compatible and inclusive form of revenue collection (Akgun et al., 2017 ), re-introducing inheritance taxation in Austria can be expected to help reduce wealth inequalities and improve intergenerational social mobility without undermining the economy’s growth potential. OECD’s Center for Tax Policy suggested recently that “growing wealth inequality may increase the need for well-designed inheritance taxes” and is starting an internationally comparative investigation of inheritance taxation practices (OECD, 2019). Adverse effects on the transmission of well-performing family firms can be handled by special provisions, such as those implemented in Switzerland (Sandbu, 2019 ).

Four new trends are likely to challenge the existing well-being model: i) disruption risks in the labour market from technological changes and digitalisation, ii) pressures on gender balances from tensions between improving professional opportunities and continuing family responsibilities of women; iii) the challenges of integrating increased numbers of migrants, and iv) lower tolerance for environmental harms, also as a consequence of Austria’s international commitments.

Figure 1.8. The distribution of private wealth is more unequal than the income distribution

Changing skills needs in the labour market and digitalisation

Creation of well-paying jobs for the majority of the population has long been the foundation of well-being and social cohesion in Austria. However, new megatrends, including digital transitions and shifts in global production networks, started to disrupt this labour market regularity. The shift of the employment structure from middle to higher skill activities has been one of the largest among OECD countries (Figure 1.9). This adjustment has unfolded relatively smoothly so far, a majority of workers preserving their long-term employment contracts and few showing concerns about their job security (Stiglitz et al., 2018). This reflects good employment relations within firms, where large-scale restructurings can be carried out internally. It may also be due to the more disrupting transformations unfolding with some lag in Austria. Available indicators suggest indeed that many job restructurings are still pending, partly along skill lines, but not only. As shown on Figure 1.9, non-routine high and middle skills remain in high demand but demand for automatable qualifications, irrespective of their educational requirements is contracting rapidly.

Figure 1.9. Structural changes in employment went smoothly so far, but more is to come

A recent development in the labour market is the emergence of severe recruitment difficulties. The proportion of firms reporting skill shortages, not only in high-technology professions but also for a wider range of qualifications (spanning from finishing skills in building construction to cooks in restaurants) reached unprecedented levels in Austrian standards (Figure 1.10). According to an employer survey of the Federal Ministry of Digital and Economic Affairs and Austrian Federal Economic Chamber, 87% of the 4 500 companies questioned reported a skill shortage, an increase of 12 percentage points compared to the previous year (Dornmayer and Winkler, 2018). Results from the most recent EIB investment survey show also that 81% of Austrian companies of all sizes refrain from capacity increasing investment due to a lack of skilled staff, which is above the EU average and a strong increase compared to the year before (EIB, 2018). Further, 60% of the Austrian firms experiencing skill shortages reported a drop in sales due to the shortage (ibw, 2018).

In digital technologies, as many as 90% of human resource managers of Austrian firms report that their firm have “significant training needs”. In response, the entire apprenticeship system (including more than 200 professional profiles) is being modernised with new focus on digital and green technologies. Symmetrically, employment opportunities have narrowed for workers in the vulnerable segments of the labour market. The rate of unemployment for the low-skilled and the elderly increased more than in comparable countries, despite the strong economic cycle. The corresponding rate for the long-term unemployed decreased recently to the level of Germany, however is still relatively high compared to peer countries such as Denmark (Figure 1.11). The rate of structural unemployment increased more rapidly4. The Beveridge curve which captures labour market mismatches displays a distinct outward shift. These developments, of an unaccustomed magnitude, form a challenge to Austria’s traditional pattern of well-being and social cohesion.

Figure 1.10. Skills could be improved to ease recruitment challenges

Figure 1.11. Increased mismatch in labour supply

Education and life-long training need to adapt to this changing world

Against these transformations, the upskilling of the population is key (OECD, 2019). It concerns the full spectrum of working age cohorts as well as the children and youth in education, and is the fundamental condition for strong and socially inclusive growth in the future. This common challenge to OECD countries is especially salient in Austria, as the fully publicly funded and vocational training-centred education system which supported the country’s post-war economic and social development needs to adapt at a large scale. Better integration and continuity between all education layers from childhood to life-long education, and more operational articulation between vocational, tertiary and life-long professional training are on the cards.

These well-known challenges include the adaptation of the numerous apprenticeship streams, the adjustment of the academic and vocational secondary school curricula to the digital revolution, and a stronger focus than in the past on life-long learning capacities of all. Tertiary education should better respond to the new qualification needs of the economy. The promotion of entrepreneurship education is also particularly important in Austria, in order to support innovation and improve efficiency in the productive sector (OECD, 2019

5). A fundamental facet of the agenda is significantly improving early childhood education, not only as a form of care but in order bring up children from a large variety of family, cultural and language backgrounds to the same strong basic education standards. This would help to ensure a strong workforce, help achieve low inequality and contributes to equality of opportunity.

Education policymakers are addressing these challenges across all school layers and technical specialisation fields throughout Austria. New classes are being opened for early childhood education and further resources are engaged in their pedagogical quality. Secondary education is being made less segmented through “new secondary schools” offering more general educational content. Universities of Applied Sciences are growing in number, to respond to labour market demands for high-level but application-oriented professionals. Public apprentice workshops are opened for candidates not finding apprenticeship positions in enterprises – or who are not sufficiently trained for such positions. Co-ordination between government layers and government Ministries in charge of different age cohorts and general versus vocational education is becoming more crucial.

After recognising the earlier efforts for fostering education policy co-operations between government layers, an OECD review of Austria’s school system in 2016 had recommended to allocate each school layer to one government level (OECD, 2016). A more recent OECD analysis of pedagogical co-operation and complementarity between pre-school education (municipal government responsibility in Austria) and school education (managed in co-operation between federal and Länder governments) hinted at the innovative experiences of several other OECD countries in integrating these policies, with important benefits for the development of children such as in Norway (OECD, 2017 and Box 1.2 below).

The government in place after the 2017 elections was initiating a comprehensive reform of the education system in all its layers (Box 1.1). The reform contained an increase in the autonomy of schools against a stricter monitoring and management of their performance, while taking into account the socio-economic and other characteristics of their students. The Ministry of Education started to draw on the experience of other OECD countries (Bruneforth et al., 2019

). For example, Denmark has built a data warehouse on student and school performances (with 35 indicators per student including national test results, school examination results, student well-being surveys) to analyse the relations between inputs and outputs and to train a pool of experts capable to advice central and local policymakers on this basis. Austria can draw on this experience (Nusche et al., 2016 ).

The Ministry for Digital and Economic Affairs launched also 15 new apprenticeship occupational profiles, enriched with digital content. They include “IT system technicians”, “IT operation technicians”, "e-commerce professionals" and “application coders”. These new profiles are expected to provide companies with the technicians they need. Further modernisation of apprenticeship profiles is ongoing, with employer firms participating in the definition of new needs and in the elaboration of new profiles. These co-operative projects are completed and implemented rapidly (at most within one year).

Systematically monitoring and reporting the labour market outcomes of existing and new education streams, on the basis of individual micro data, will be key for evaluating the adequacy of policies to goals. Policymakers intend to make prominent use of such data resources. PISA and PIAAC type surveillance exercises can be used systematically and Big Data techniques create new policy evaluation opportunities. Austria’s national proficiency tests for all young students, put in place with pedagogical adjustment purposes, are a foremost step in this direction. The rich data generated through these exercises can be analysed by researchers of various disciplines. All OECD countries have started to build up micro data based performance evaluation systems, but for these efforts to be fruitful, results should be fully open to the independent research community (Charbonnier, 2019

). Austrian reformers are engaged to make this data fully accessible (privacy protection safeguards notwithstanding).

There are some concerns about the labour market relevance of life-long learning programmes for the low-skilled. The participation rates of Austrian adults to these programmes is above OECD averages, but below peer countries (Figure 1.12). The participation rate can be increased and the existing concerns on the quality of part of these programmes should be addressed (OECD, 2014

). Active participation of employer organisations to the administration of these programmes may help (Martin, 2018 ). Additional government support can also be offered for the inclusion of low-skilled and elderly workers, whose participation is particularly low in Austria. It is possibly subject to market failures arising from firms’ uncertainties on investment returns above certain age thresholds (Dauth and Toomet, 2016 ). Work organisations in employer firms should be adapted and made compatible with life-long learning activities (Figure 1.12).

Figure 1.12. Participation in life-long learning can be raised further

Past OECD recommendations	Actions taken
Make schools and education tracks more inclusive. Strengthen the early socialisation of children from disadvantaged backgrounds.	Intermediary apprenticeship qualifications have been created to facilitate integration and further training opportunities.
Ensure that tertiary and vocational education adjust to changing needs.	All education streams and curricula will be screened in 2019 to advance their adaptation to the digital revolution. More than 50 occupational profiles and their vocational curricula will be modernised in the first year.
Allow universities to re-introduce tuition fees and accompany them with grants and income-contingent student loans.
Continue to modernise ICT-related curricula and teaching methods in schools.	In 2018, the Federal Ministry for Digital and Economic Affairs introduced 13 new 4 year-long apprenticeship streams enriched with digital content.
Enhance incentives for businesses to offer apprenticeship positions.	New funding support has been made available to firms and apprentices to increase the quantity and quality of apprenticeship places, including via language support, additional coaching services and internships abroad.

Regional aspects of labour market imbalances

Regional labour market imbalances are relatively new in Austria (Figure 1.13). Skill shortages grew in particular in Western regions. In contrast, in Vienna where more than 20% of national employment is concentrated, the rate of unemployment, and the number of applicants per vacancy are well above national averages. This excess labour supply in Vienna against labour shortages in much of the rest of the country may be revealing the reluctance of parts of the population to move between regions, but also perceived risks of inconsistency between short- and long-term employment and career prospects under changing industrial structures in different regions. The related uncertainties may be particularly high for families with double earners. Vienna and large cities are in this regard more attractive.

Population ageing compounds regional skill shortages. Most Austrian regions can expect declines in the working-age population, although Carinthia and Styria will be particularly affected (Dornmayer and Winkler, 2018). The regional heterogeneities in the projected development of 20- to 60-year olds goes hand in hand with large disparities in skill shortages (Dornmayer and Winkler, 2018).

Public policies should facilitate the geographical mobility of citizens by eliminating all policy-related factors hindering mobility. Evaluating and addressing the obstacles arising from the non-portability of local housing benefits, from uneven rent regulations, and from insufficient oversight over and control of social housing entitlements should be a priority. To stimulate the inter-regional mobility of young workers and reduce interregional skill mismatches, a new “b.mobile” programme was recently introduced to facilitate cross-regional apprenticeship placements.

Figure 1.13. Regional imbalances in labour market

The new OECD Jobs Strategy provides a comprehensive framework and policy recommendations to help member countries, including Austria, address these labour market challenges. It goes beyond job quantity and considers job quality and inclusiveness as central policy priorities. The central message is that flexibility-enhancing policies in product and labour markets are necessary but not sufficient. Policies and institutions that protect workers, foster inclusiveness and allow workers and firms to make the most of ongoing changes are needed to promote good and sustainable outcomes (OECD, 2018)

Increased pressures on gender balances

Austria has a long-established “male breadwinner/separate gender roles” model in work, family and life arrangements (OECD, 2015). There is growing consensus in society to shift to a better balance of opportunities and life choices between genders. Expectations augmented as women caught up with men in educational enrolment and achievements. The fact that a large share of women with children withdraw fully or partly from the labour force (irrespective of their educational and professional background) until their children reach upper secondary school age (OECD, 2015 ) deprives society from existing talent, higher household incomes and stronger growth and fiscal revenues (Figure 1.14). However, working part-time can also reflect preferences on work-life-balance. In-depth studies tend to conclude that it often results from insufficient public service support and tax disincentives (OECD 2015 ). The recent replacement of the tax deductibility of child care costs and of the child care allowance with a generally available tax credit per child may provide a weaker incentive for labour force participation of women with children. Despite several policy initiatives in recent years, including the inclusion of gender budgeting in the federal constitution and the adoption of a “National Action Plan on Gender Equality in the Labour Market”, actual progress with gender rebalancing has fallen behind comparable EU countries (EIGE, 2018 ).

Gender pay gaps are high. Divergences between men’s and women’s professional choices go deeper than in comparable countries, with men prioritising scientific and technical disciplines and women social service fields leading to less well-paid occupations – reflecting probably their uneven prospects for subsequent full-time career engagement (OECD, 2018

). Still, as a result of co-ordinated wage negotiations, gender pay gaps are not bigger for lower income groups as in other OECD countries (OECD, 2017 ).

Limited availability of childcare, full-day schooling and long-term elderly care in much of the country is recognised as the single biggest constraint on women’s life and professional choices (Buxbaum and Pilkbauer, 2015). More than 90% of 3-5 year old children are now taken care of in pre-school facilities but the participation of under 3 year‑olds, which stands at around 25%, is much lower than in most peer countries where it reaches 50-80%. Also, only less than half of available services are offered for more than 30 hours a week, which is required for full-time labour force participation by under 3 year‑olds’ main carers (Smidt, 2018 ; EC, 2018 ). Lack of full-day schooling for more than 50% of school children aged 6‑15 (Nusche et al., 2016 ) creates an additional need for high-quality options for their care and education outside school hours. Not only sufficient quantity but also satisfactory quality of childcare services is a pre-requisite to free-up women’s labour force participation. In this respect, some concerns about the pedagogical achievements of kindergarten education have started to be addressed through new educational programmes for kindergarten teachers.

A similar challenge emerges in the area of elderly care (Grossmann, 2017

). A higher proportion of the dependant elderly than in peer countries – around 80% of them - are taken care of by their families (OECD, 2015, Survey ). The welcome lengthening of average life expectancy, together with the rise of more complex care needs raised by chronic diseases expand the demand for long-term care. These needs have to be addressed without unduly restricting the labour force participation of relatives. Austria has already a well-developed public support framework in this area, and is experimenting with innovative approaches, including growing recourse to mobile services and daytime care assistance. A recent prospective study of long-term care needs and their financing modalities concluded that under the current care arrangements the fiscal costs of public support to long-term care will increase by more than 4% per year for several decades, with an acceleration due to demographic cohort effects after 2025 (Famira-Mühlberger, 2017 ). More recourse to institutional care would increase these costs, while higher recourse to family-supported mobile services could reduce them by around 10%. The latter type of services may also be favoured by a large proportion of beneficiaries. The previous government was working on a long-term care strategy combining these different modalities with alternative financing options.6

A consequence of the tensions arising between professional and family care responsibilities, concerning mostly women in practice, are particularly low fertility and child rearing levels. Despite a slight increase in the last few years, the total rate of fertility is the 4th lowest in the OECD and is lower than in comparable countries in Europe (OECD, 2019). Better educated women have experienced the strongest retrenchment. This reduces the life choices and the well-being of the current cohorts, and dents the long-term demographic vigour of society. In its long-term fiscal projections, the Ministry of Finance projected a gradual recovery in fertility, adding that a stronger increase would be welcome and would underpin more favourable macroeconomic scenarios (Ministry of Finance, 2016 ).

Past OECD recommendations	Actions taken
Transform childcare allowances and parental leaves into a unique childcare account that allows parents to allocate subsidised absence flexibly over time.	The existing childcare allowance is being evaluated by taking into account the EU Directive on work-life balance. Results will be available in early 2021.
Reserve a sizeable part of this account, at least 33%, for the exclusive use of fathers.
Further increase capacity for full-day schooling and childcare.
Introduce legal entitlements for these services.
Develop care capacities for dependent elderly according to a national plan.	A long-term masterplan for long-term care was adopted by the former government in 2018 and a further study was commissioned to evaluate the alternative instruments available for its financing.

The challenge of integrating migrants

Austria has become an immigration country following economic and geopolitical developments before and after the fall of the Berlin wall. More than 15% of the resident population is born abroad and, as of 2018, 16% was of foreign nationality against 10% a decade earlier. If natives with foreign-born parents were taken into consideration, around one third of the population is of migrant origin (OECD/EU, 2018).

Baseline demographic projections posit that the net immigration rate - which was around 0.8% of the total population in 2016 ‑ is expected to stay about this level in the coming decade, gravitating at around 0.6% by 2030, before gradually declining in the following decades and stabilising at around 0.2% by 2060. These projections are subject to upward and downward risks, in particular under EU mobility.

Integration of immigrants raises challenges for some groups, especially for those who arrived in Austria with low educational capital ‑ in both recent and more distant past. Their integration and well-being depend primarily on their labour market position, which in turn depends strongly on their education and skills (OECD, 2012

). The average schooling background of migrants is not lower than in other countries (Figure 1.16, Panel A), however, their position in the Austrian labour market is generally less favourable. They are more concentrated in low-skill occupations, are less represented in higher-skilled positions, and a larger proportion of them are overqualified for their present occupation (Figure 1.16, Panels B and C).

At the same time, migrants are adequately covered by the well-developed pension, health, long-term care and social protection systems. Even if their comparatively weak labour market position keeps their rate of relative poverty above peer countries (30% of migrant workers earn less than 60% of the average wage, against less than 25% in Germany and Switzerland), the national collective bargaining system helps maintain the earning gaps between skilled and unskilled migrants at the same level as natives (as a difference from other countries where these gaps are usually larger) (OECD, 2018

The integration of migrants is particularly disappointing when it comes to the advancement of their children in the education system. As transmission of human capital takes place more within families than through formal early childhood education in Austria, human capital gaps tend to entrench across generations and low-skilled migrants are particularly impacted. The share of low performing students and the share of early school leavers remains too high for the more vulnerable migrant groups (Figure 1.16, Panel D). (OECD, 2017

). Children’s being oriented to different educational tracks according to their early academic performance amplifies the challenge. The high concentration of migrant children in certain schools and their limited mixing with other social groups constitute a further obstacle (75% of migrant pupils are educated in schools hosting more than 25% of migrant pupils, against less than 60% in Denmark and the Netherlands), as social mixture is a key driver of convergence in educational development (OECD, 2018 ; OECD, 2011 ). Policymakers introduced several measures in recent years to improve the language proficiency and the learning capacity of migrant children (including a further year of compulsory pre-school education with targeted language assistance, as well as several pedagogical programmes to better prepare migrant apprentices to their workplaces). The planned education reform of the government in place after the 2017 elections intended to strengthen these policies with nationally standardised language tests at pre-school age. Such language tests can help to implement remedies to persisting language deficiencies, which bear heavily on the subsequent school performance of pupils.

Austria faced a significant inflow of asylum seekers during the 2015-16 international migration crisis (OECD, 2016

). The number of applicants attained 200 000 in the 2014‑18 period (2.3% of total population). Not all aspirants have been granted asylum, however, and numbers have declined considerably since 2016. As of 2017, accepted asylum seekers formed 0.3% of the labour force and the proportion is projected to reach 0.7% by 2020. Two thirds of refugees came from Syria, Iraq and Afghanistan and 60% of them have less than upper secondary education (OECD, 2019 )).

The share of university-educated is also significant in migrant communities, at 20%. They represent a major resource for Austrian economy and society, provided that their skills are well used. There are signs of delays in this area. In Austria, migrants are currently more likely to be unemployed or over-qualified for their jobs than in comparable countries (Figure 1.15, Panel A or B). The unemployment rate of highly-educated migrants stands at 6.4% compared to an unemployment rate of 2.4% of highly educated natives (Figure 1.15, Panel A). Furthermore, slightly more than 30% of the highly educated native Austrians are over-qualified, which is above the average of peer countries and the EU but slightly less than the OECD average of around 31% (OECD, 2018h). In contrast, more than 40% of highly-educated migrants with foreign degrees are over-qualified for their current occupation, a significantly higher share than the average of peer countries or the OECD (Figure 1.15, Panel B).

Figure 1.15. High-educated migrants are more likely to be unemployed or overqualified for their jobs

Unemployment and overqualification rate of highly educated migrants, 15-64 year-olds, 2017

All in all, the integration of refugees raises similar challenges to the integration of earlier immigrant cohorts. Austria should draw on its own experience, as well as on the experience of other OECD countries which hosted large numbers of refugees in the recent past, for their more effective economic and social integration. In addition to the labour market participation of breadwinners, the educational and social integration of accompanying and reunifying families is essential (Box 1.2). A recent OECD review of the integration policies in the city of Vienna suggested also that better co-ordinating integration programmes between federal, Länder and municipal governments can help7 (OECD, 2018).

Box 1.2. Labour market integration of immigrant women: international experiences

Austrian policymakers could draw on certain interesting initiatives in Norway, Australia and Sweden to increase labour force participation of immigrant and refugee women (OECD, 2018). These experiences aim at cultivating further the existing skills of immigrant and refugee women in the areas of child and elderly care and catering, and to make these skills more attractive and relevant for the labour market:

In the Norwegian municipality Levanger, local authorities, employers and the public employment service have worked with the adult teaching centre to run a pilot scheme that assists low-educated migrant women in obtaining a qualification and accessing regular work. Between 2014 and 2016, the “Levanger Arena Work” scheme helped participants to obtain a qualification and subsequently eased their entry into lower-skilled occupations in health, cleaning, kindergarten and gastronomy. The curriculum was developed jointly with professionals from the relevant sectors.

Australia has developed similar programmes to help migrant women build new skills and increase their labour market participation. The New Futures Training Program run by the Victorian Cooperative on Children’s Services For Ethnic Groups (VICSEG) trains women from non-OECD countries to become certified childcare workers. The programme draws on mentoring from community members working in the childcare sector and has been successful in increasing labour force participation and employment for participants.

In Sweden, Yalla Trappan programme in Malmö is a co-operative which provides employment opportunities in catering, cleaning and tailoring to long-term unemployed immigrant women with little to no formal education. Many have limited Swedish language proficiency. Participants are referred to the co-operative by the public employment service. They work on permanent contracts in a personal and close-knit female environment and have the opportunity to obtain a qualification in their field. The project started in 2010 with financial support from the European Social Fund, the City of Malmö and the adult education association of Malmö. Since then, it has grown at an average annual rate of 30% in both revenue and employment.

Figure 1.16. Migrants' integration can be improved

Foreign-born, 15-64 year-olds, 2017 (unless specified)

Past OECD recommendations	Actions taken
Emphasise labour force participation of immigrants and refugees as their main avenue of social integration.	Immigrants and refugees are invited to take further responsibility for their integration, with additional support from public language and orientation courses. Different Länder implement different support programmes.
Accelerate the recognition of qualifications of skilled migrants and refugees.	A new Law on the Recognition of Qualifications facilitated the access of immigrants and refugees to myriad different procedures for certifying their professional aptitudes and academic degrees in different areas.
Remedy to the educational handicaps of migrant children from low-educated families, by facilitating their catching-up in pre-school and primary education.	A comprehensive language training support model is specified for low-educated migrant children at their schools as well as in pre-school education.

Environmental tensions

Austria’s environmental performance is good overall (Figure 1.17). Citizens are satisfied with their environmental quality of life. Water quality is among the best in the world, a large part of the land is under some form of nature protection, and the share of organically farmed agricultural area is the highest in the EU (OECD, 2013) However, most of the Austrian population is exposed to more small particle pollution than the World Health Organisation recommended limit of 10 micrograms per m3 and this share is larger than the OECD average (Figure 1.17, Panel D). 4 000 Austrians are estimated to die prematurely because of outdoor air pollution per year. Relative to population, premature mortality from this source is higher than in many high-income OECD countries and has not fallen over the past 10 years (Roy and Braathen, 2015 ). Within metropolitan areas, air pollution is likely to affect low-income households the most. Children are particularly strongly affected by pollution. Air pollution was found to affect education outcomes of young children markedly and lastingly (Heissel, Persico and Simon, 2019 ).

Austria is part of the EU engagements to meet the Paris Climate Change Agreement (EC, 2018

) and engaged to reduce them by 36% compared to their 2005 level. The carbon intensity of the economy is lower than in the OECD overall, reflecting lower energy intensity and a large share of renewable energy supply (Figure 1.17, Panels A-C). However, the relative decoupling of CO₂ emissions from GDP experienced over the past decade was mainly due to the slowdown of industrial activities after the global financial crisis and stalled in the last three years of strong growth. Against this backdrop, Austria adopted a new national climate strategy in 2018, spelling out how policymakers plan to fulfil their Paris Agreement commitments (Box 1.3).

Box 1.3. The 2018 National Climate and Energy Strategy

In May 2018, the government issued a new Climate and Energy Strategy as required by the EU from all member states. The strategy sets out plans to achieve the greenhouse gas emission targets agreed on in the Paris Accord. The previous coalition had not reached a consensus on the issue.

The main ambition is in the energy sector, with a goal inherited from the previous government: to achieve 100% electricity generation from renewable sources by 2030. Three quarters of electricity generation was from renewable sources in 2017, mostly hydroelectric and biomass firing. The share of wind and solar is small, around 10%. Full decarbonisation of the economy is targeted for 2050, all energy supply coming then from renewables, compared with 33% in 2017. Achieving this goal will require additional infrastructure, energy storage and energy efficiency investments.

The second key sector is transportation. Transport emissions rose by about 70% since 1990, and accounted for about 30% of emissions in 2015. To reduce emissions from transport, the authorities target alternative fuel vehicles and a shift of freight traffic from road to rail. The potentially effective but politically contested measure of cutting subsidies to long-distance car commuting has not been included in the strategy. These subsidies should be phased out according to a pre-announced schedule.

The third important sector is buildings. They account for more than 10% of emissions. Although their emissions have fallen by nearly 40% since 1990, the authorities see room for a further 40% reduction in building emissions by 2030.

The previous government admitted that actual CO2 emissions may exceed targets. More concrete measures, for example in transport to roll out an electric charging infrastructure, would help strengthen prospects. The plan foresees an evaluation, and if necessary adjustments from 2023. It also announces more specific “integrated plans” to be prepared according to the forthcoming “Energy Union Strategy” at the EU level.

Economically efficient reductions of carbon emissions require more adequate carbon pricing. Carbon emissions are generally priced low and unevenly, harming cost-effective emission reduction. Energy tax revenues as percentage of total tax revenues are well below the OECD average. Most emissions are priced below EUR 30 per ton of CO₂ (Figure 1.17, Panel H), a low-end estimate of the current climate related external costs of these emissions. Austria is 16th among 28 EU countries in the taxation of diesel and 17th in the taxation of gasoline. Emissions in the industrial sector are also priced unevenly. Coal use in industry is substantial but is taxed at low rates (OECD, 2018). Some emissions are subject to both the EU emissions trading scheme (ETS) and are priced by energy taxes, while others are only subject to the ETS (OECD, 2018 ). Still others are neither covered by the ETS nor by energy taxation. These differences are generally larger in Austria than in comparable countries (Figure 1.18).

More consistent pricing of carbon emissions would boost environment-related innovation, as evidence from emissions trading suggests (Calel and Dechezleprêtre, 2016

). Austria’s lead in environment-related innovation has diminished in recent years (Panel I). To improve predictability and investment incentives, carbon pricing should follow a pre-announced path supported by international co-operation.

A recent simulation by the Austrian Institute of Economic Research (WIFO) confirms that there is scope for increasing carbon prices in Austria (Kettner-Marx et al., 2018

). Scenarios for an Austrian CO₂ tax were developed on the basis of the carbon taxation experiences of other EU countries, including variants with tax revenues recycled into labour cost reductions or into lump sum eco-transfers to households. Obvious gains result for environmental sustainability, but there is also a positive growth effect if the additional tax revenues are fully recycled into labour tax reductions. Fuller pricing of environmental externalities, if supported with adequate adjustments in the overall price and tax structure, can be growth- and employment-friendly (Köppl, 2018 ).

The behaviour of consumers and producers can also be improved through channels other than carbon pricing. Infrastructure deployment consistent with decarbonisation and optimised land use programmes help. Austria’s policies in support of organic agriculture play a positive role in this regard, as they incite producers and consumers to shift to less carbon-intensive products.

Austria’s dispersed settlement patterns, once considered a pillar of national well-being, raise also new challenges. Built-up areas have considerably grown since 2000 (Figure 1.17, Panel F and Figure 1.19). More than 40% of the population live outside urban areas (with fewer than 50 000 inhabitants) as against the OECD average of 30%, and only 47% of national employment is in metropolitan agglomerations (with more than 500 000 inhabitants) against the OECD average of 60%. Settlements sprawl more strongly than in other countries (OECD, 2018

). This fosters car dependency and traffic congestion and worsens pollution, energy consumption and CO₂ emissions.

Cities and municipalities face land planning challenges in areas requiring strong co-ordination. The space planning and management responsibilities of federal, Länder and municipal layers should be clarified. Little has been achieved in this area so far, and more ambitious initiatives are needed (Ahrend et al., 2014

; OECD, 2018 ; and Anexlinger et al., 2018 ). Coordinating municipal land use and transport policies within travel-to-work areas and creating shared governance mechanisms to this purpose would help local governments lower traffic congestion through better spatial organisation, transportation and housing(OECD, 2015 ). Such reforms have reduced urban sprawl, boosted productivity and reduced energy consumption, pollution and CO₂ emissions in other OECD countries (OECD, 2015 ).

Reaping the full mitigation potential in urban transport will also require an integrated policy for the adoption of shared and electric mobility (ITF, 2018[1]). Digital-based ride sharing, as recently modelled for Dublin (ITF, 2018[2]) can lower CO₂ emissions and deliver on substantial reductions of congestion and pollution, while improving connectivity and accessibility, especially for low-income households, at low cost to the public purse, provided it replaces individual car use. Where emissions and congestion charges were introduced, they have reduced local CO₂ emissions by around 15% and congestion by 20-30%. Electric mobility can be strengthened with better incentives and public service requirements on charging infrastructure.

Notwithstanding the welcome recent progress in the development of environment-friendly rail freight (European Court of Auditors, 2016

), Austria needs to make faster progress in decarbonising road freight to reduce emissions consistent with the objectives of Paris Agreement (International Energy Agency, 2017 ). In the near term, reducing emissions from trucking will require improvements in supply chains, logistics and routing. To fully decarbonise the economy by 2050, as the previous government intended, zero-emission infrastructure will have to be rolled in the coming decade. As an important road freight transit country Austria needs to coordinate such initiatives with its neighbours.

The volume of household waste is also large and has increased, although much waste is recycled (Figure 1.17, Panel E). Reducing waste lowers natural resource and energy consumption and resulting pollution, and also reduces greenhouse gas emissions, including CO₂ emissions generated in the production of imported goods and services (demand-based emissions). As in other high-income countries, an option to avoid waste and to increase recycling is to reinforce policies to extend producers’ responsibility at the end of the life of their products (OECD, 2016

). These policies can include product take-back requirements on retailers, refundable deposits, or disposal fees levied at purchase based on the estimated costs of treatment. Austria could consider making use of such instruments for a broader set of waste streams.

To help finance public and private investment in green infrastructure, energy storage, energy efficiency and clean technologies, Austrian policymakers are encouraging the development of “green finance” instruments. Green bonds emissions (backed by the ‘sustainability ratings’ of the projects granted by independent experts) can facilitate the financing of long-term projects. A EUR 500 million emission by the Austrian Export Credit Agency (ÖKB) in Spring 2019 has been the largest initiative so far and will be followed by other emissions in the financial and non-financial sectors.

Figure 1.18. Effective carbon rates in Austria and selected countries by sector and component

Average effective carbon rates across sectors, 2015

Figure 1.19. Urban sprawl and municipal fragmentation

Past recommendations	Actions taken
Use environmentally-related taxes in all sectors to provide more consistent carbon price signals across the economy.	Green taxes will be introduced in the next steps of the tax reform to support the National Climate Strategy 2030, including differentiated taxation of road vehicles according to their carbon emission intensity.
Phase-out long-distance car commuting subsidies according to a pre-announced schedule.

Achieving and sustaining stronger and broader-based growth

In order to firm up the main pillars of Austrian well-being and social cohesion, the economy’s capacity to create good quality jobs for the majority of the population, and the public sector’s ability to offer high-quality social services and protection for all population groups should be strengthened. This requires wider labour force participation by an upskilled working age population, broader-based entrepreneurial dynamism throughout the country and higher fiscal resources to push through ambitious structural reforms.

Room for increasing employment

Inward migration is particularly dynamic

The acceleration of immigration contributes significantly to Austria’s supply potential. The proximity of neighbouring EU populations with suitable education levels makes an important contribution to the Austrian economy through both immigration and cross-border commuting. The share of migrant workers in employment, which had stayed around 10% in the 2000s surged after the liberalisation of intra-EU inflows in 2012 and has now reached 20% ‑ the second highest proportion in the EU (Figure 1.20). Whereas migrants from former Yugoslavia and Turkey had formed the majority of migrant labour until the 2000s, the lion’s share is now taken by workers coming from Central and Eastern Europe. Around 103 000 of the 157 000 net new jobs created in Austria between 2016-2018 are estimated to have been filled by immigrant workers. Migration flows are expected to flatten as Eastern and South Eastern neighbours develop further, and Austrian authorities may need to increase efforts to attract highly skilled foreigners in the future.

Figure 1.20. Migrants are sustaining higher employment

Cross-border commuting is a special feature of the Austrian labour market. The country shares 1 300 kilometres of borders with new EU member states, where four to five million persons (equivalent to half of total Austrian population) live near the border. Large cities such as Brno, Bratislava and Maribor are close to the agglomerations of Vienna, Graz, Linz and Klagenfurt. Commuters combine higher earnings in Austria with lower cost of living at home and are highly attracted to the Austrian labour market. Their number is estimated to have reached the daily average of 160 000 in 2017 (4% of total employment).

A further form of external labour supply is foreign contracting firms offering services in Austria by temporarily employing foreign workers, in particular in the construction sector. This form has expanded in recent years and tended to raise some challenges concerning compliance with minimum wage and employment rules and causing competition distortions (Pfister, 2018). The Court of Justice of the EU has, in two cases, judged legislation intended to prevent fraud and illegal forms of employment by foreign contractors as too burdensome (2018 and 2019 ) and thus as unduly impeding the EU principle of freedom to provide services. The Austrian government should address these challenges and amend the measures and legislation accordingly.

Labour force participation has considerable room to increase

In contrast, labour force participation within Austria is weaker than in comparable countries (Figure 1.21). The participation of older workers is lower, in particular for women, and the share of part-time work is particularly high. As a result, despite working hours of full time workers being longer than in comparable countries, the number of work hours per working age person remains one of the lowest in OECD.

Figure 1.21. Labour force participation is still low

The number of hours worked is also held back by a number of barriers created by policy. Austria has one of the highest tax wedges on labour that the government programme 2017-2022 was aiming a reducing. The employee and employer social security contributions and the income tax represent together nearly 43.1% of the labour cost for low income workers (at 67% of the average wage), the 5th highest wedge among 35 OECD countries. Workers with gross earnings less than EUR 17 360 are exempt from income tax. Earnings below are entitled to a refund of part of their SSC even. The marginal income tax rate increases to 223% up to EUR 21 000 - taken into account the flat rate regime on holiday remuneration – and then to 30.9% up to EUR 36 167 (Figure 1.22). The Marginal Effective Tax Rate (METR) is low for a spouse moving from inactivity to part-time employment, but is higher in transition from part-time to full-time employment. Employers also face increased employment costs due to high employer social security contributions.

Figure 1.22. Marginal and average tax wedges hinder labour force participation

Tax wedge decomposition by level of gross earnings as % of the average wage, one-earner married couple without children, 2017

The tax framework could be made more employment friendly and supportive of inclusive growth. Reform efforts have periodically tried to reduce the existing labour tax wedges. However, they have remained relatively marginal to date. The 2015-2016 tax reform increased the capital income and the capital gains tax rates from 25% to 27.5% (with an exemption for interest income from bank deposits), and the tax rate on real estate gains was increased to 30%. The tax base was also broadened for certain real estate transactions. As the other OECD countries facing similar long-term reliance on labour taxes, Austria should now dare to undertake a more ambitious shift of the tax system take from labour onto alternative sources such as environmental, consumption, inheritance and wealth taxes (Hagemann, 2018).

The official retirement ages for men and women are, respectively, 65 and 60, and their average effective retirement ages are 63.2 and 60.4 in the pension system, and 55.7 and 52.2 in disability pensions.

8 The average age of withdrawal from the labour force is, as a result, 62 for men and 60.6 for women. This raises risks of old-age poverty, in particular for women with short or fragmented work histories living alone.9 After the closure of several early retirement windows, and their replacement with rehabilitation programmes, the effective retirement age increased by about one year in the past five years for both genders, but remains still low in international comparison.

Income replacement and contribution rates of the pension system are among the highest in OECD (OECD, 2017). Parametric reforms adjusted the benefit accrual rate and increased women’s retirement age – albeit gradually, with convergence with men’s retirement age to be achieved between 2024-2033. High contribution and benefit rates may be seen as a collective choice favouring high pension contributions during working life, in order to secure high incomes during long retirement periods. However, the current design of the system is likely to require future increases in the statutory retirement age, and augmentations in contributions or reductions in benefits, in order to adapt to changes in life expectancy and to other demographic changes.

Austria has opted to implement these changes through legislative amendments rather than automatic adjustments. Workers’ retirement benefits are linked to their life-time contributions by legislation. Participants are informed of their pension entitlements. Pension entitlements in the last ten years of activity have been safeguarded in the past. Reform measures affected only the people who were reaching the statutory retirement age in more than 10 years after the introduction of the reform. The process is transparent and democratic, but is open to sustainability risks if legislative decisions in Parliament lag behind needs. The pension system parameters could be automatically adjusted to demographic changes as in some other OECD countries, for example by linking the retirement age to life expectancy. Otherwise legislators need to closely and continuously monitor demographic and other structural changes, and promptly adjust the parameters of the system.

The long-term projections of the previous government, co-ordinated with the European Union’s Working Group on Ageing, foresaw a limited long-term increase in public pension disbursements as a share of GDP (from 13.8% in 2016 to 14.9% in 2040 and 14.3% in 2070). There are also risk variants but these cover only high-probability risks identifiable and quantifiable ex-ante (Figure 1.23) (Ministry of Finance, 2018

; EC, 2018 ). The consequences of future demographic developments will have to be closely monitored and actively managed.

As in all OECD countries, Austria’s public debt trajectory as a whole is exposed to various risks where population ageing and demographic developments play an important but non-exclusive role. Long-term public debt sustainability will be affected by developments in three main areas:

1. The long-term growth performance of the economy will bear strongly on debt sustainability, together with interest rates. The employment and productivity trajectories driving GDP growth will depend on national policies and international developments.

2. Ageing and demographic dynamics will bear on pension, health and long-term care systems. Their impact will depend on fertility and migration, average life expectancy, effective retirement ages, health technologies and costs, and demand for publicly-funded long-term institutional care.

3. Other tensions may arise from societal and ecological developments. If inequality in market incomes increases at its recent pace, stronger demands may result for public transfers and supports. If environmental pressures increase, higher mitigation and adaptation investments may become necessary.

Fiscal projections for this Survey (Figure 1.23) consider a baseline scenario and two alternative paths for public financial balances and public debt. First, the baseline debt/GDP ratio rests on ongoing trends in employment and GDP growth, baseline ageing costs and the stability of other government spending and revenue policies. Second, the ‘accelerated growth’ scenario takes the same assumptions, but more ambitious structural reforms lift trend employment, GDP growth and public revenues, creating additional fiscal space. Third, the ‘higher ageing bill’ scenario assumes the baseline growth but retirement, health and long-term care costs grow more rapidly but still at a pace considered plausible in the EU’s Ageing Group’s standard risk scenarios. These scenarios highlight the significant fiscal risks associated with ageing. They do not take into account a range of other pressures from social or ecological developments (Figure 1.23).

Figure 1.23. There are risks on long-term public finance

General government gross debt as % of GDP, Maastricht definition

Past recommendations	Actions taken
Further reduce the labour tax wedge for low-income earners by partly or fully waiving social security contributions, financed by a broadening of the tax base and increases in consumption, environmental and property taxes	The contribution of low-income earners to unemployment insurance was reduced in 2018. The tax reform announced in April 2019 cuts the personal income tax (PIT) rate of the lowest income bracket (annual income between EUR 11 000-18 000) from 25% to 20% starting from 2021, and the PIT rate of the next two income brackets (EUR 18 000-31 000 and EUR 31 000-60 000) from 35% and 42% respectively to 30% and 40%, starting from 2022.
Align the official retirement age for women with that for men. Eliminate all remaining subsidised avenues to early retirement. Tighten eligibility to disability pensions also for those above 50 and help partially-disabled workers to better use their remaining work capacity.	Disability reforms started to apply to persons between 50-55. In 2017, additional vocationally oriented medical rehabilitation measures were introduced to facilitate the return of the partially disabled to the labour market.

Past recommendations

Actions taken

Further reduce the labour tax wedge for low-income earners by partly or fully waiving social security contributions, financed by a broadening of the tax base and increases in consumption, environmental and property taxes

The contribution of low-income earners to unemployment insurance was reduced in 2018. The tax reform announced in April 2019 cuts the personal income tax (PIT) rate of the lowest income bracket (annual income between EUR 11 000-18 000) from 25% to 20% starting from 2021, and the PIT rate of the next two income brackets (EUR 18 000-31 000 and EUR 31 000-60 000) from 35% and 42% respectively to 30% and 40%, starting from 2022.

Align the official retirement age for women with that for men. Eliminate all remaining subsidised avenues to early retirement. Tighten eligibility to disability pensions also for those above 50 and help partially-disabled workers to better use their remaining work capacity.

Disability reforms started to apply to persons between 50-55. In 2017, additional vocationally oriented medical rehabilitation measures were introduced to facilitate the return of the partially disabled to the labour market.

Turning around recent weak productivity growth

Productivity growth has decelerated in Austria over the past decade more markedly than in other OECD countries taken as a whole. Average labour productivity growth per worker, which was the highest among peer countries between 1995-2005, decelerated to the lowest between 2005-2016 (Figure 1.24, Panel A). Weaknesses in resource allocation efficiency, measured on the basis of per hour productivity, appear to have played a special role. This reflects a less favourable distribution of employment between high and low productivity activities than in comparable countries10 (Panel B). There is potential for enhancing average productivity by reviving the dynamism of the business sector, fostering the convergence of enterprises with the global digital frontier, and deepening their integration with global value chains.

Figure 1.24. Productivity growth has slowed down

Firm demographics can be made more dynamic

The traditionally high level of productivity in Austria’s business sector was founded on the relatively good performance of a set of SMEs specialising in medium-high and high-technology sectors and active in regional value chains. In contrast, the rate of entry of new firms and the rate of exit of underperforming firms have remained lower than in comparable countries. The rate of entry of new firms in high-technology sectors and the share of additional jobs that they have added to total employment have been lower.

The Austrian economy would benefit from more vibrant entry, smoother exit and higher scaling-up rates, notably in high-technology sectors. As discussed in the thematic chapter, more private equity engagement in restructuring firms, and the deepening of the stock market as a source of equity capital would boost further business dynamism in Austria. Private venture capital and private equity sources should complete the large public financing resources already available for start-ups, as they play a unique role in the development of high-potential ventures – as previously documented in empirical research in Austria (Peneder, 2010). A “Start-Up Package” with new subsidies (including the establishment of a new Digitalisation and Growth Fund, and more credit guarantees), regulatory sandboxes and new educational programmes were introduced in May 2019 - without tax incentives. Tax incentives for such investment can indeed be an effective way to boost the provision of risk capital. The United Kingdom’s Enterprise Investment and Seed Enterprise Investment schemes -which provide income tax deductions and reliefs on taxation of capital gains- are examples which succeeded to stimulate investment and employment in small firms (EC, 2017 ; Cowling et al., 2008 ).

Austrian SMEs face a special challenge raised by demographic trends: a large proportion of their owner-managers approach retirement age. Many ownership transitions come on the cards within or outside current owner families. The preservation of the outstanding business goodwill that these firms have already built-up, and the social and regional stakes associated with their good performance make successful transmissions crucial. A stronger eco-system for external investments encompassing the full cycle of financing of enterprises – from venture capital to private equity, and from growth capital to stock market listings- is needed, including a supportive set-up of information and legal services. The thematic chapter recommends that Austria reviews and strengthens the most critical factors in the development of such an ecosystem.

Digitalisation needs to advance more rapidly

Austria is adapting to the moving global digitalisation frontier in both the business and public sectors. However, according to available indicators this is occurring at a slower pace than in peer countries (Figure 1.25). Divergences in the “digitalisation momentum” may be expected to create larger productivity gaps, income divergences and social cohesion tensions in the future than in the past (Andrews, Nicoletti and Timiliotis, 2018). Austria rightly aims at catching-up in this area on the back of a “Digitalisation Roadmap” adopted in 2017 and a comprehensive “Digitalisation Strategy” which is being developed under the auspices of the Federal Ministry of Digital and Economic Affairs (OECD, 2017 ).

The 2017 OECD Economic Survey had found that Austria’s digitalisation gap resulted mainly from adoption lags in small-and-medium-sized firms. This was due to shortcomings in both their skills (capabilities) and market expansion and growth opportunities (incentives). The OECD Survey recommended to focus policy efforts on i) upgrading the entire range of ICT-generic, ICT-specific and ICT-complementary skills of workers and citizens of all ages, and ii) stimulating business dynamics in ICT-producing and ICT-using sectors alike, in both manufacturing and services.

Recent OECD research suggests that the three most important drivers of digitalisation in Austria are the quality of technical and managerial skills, the fluidity of resource allocation via product and labour market reforms and access to long-term risk finance by young innovative firms (Andrews, Timiliotis and et al., 2018). Other policy levers such as e-government services and trade facilitation for digital goods and services also affect the pace of digitalisation, but to a lesser extent. Upgrading the key framework conditions promises to deliver particularly sizeable productivity and growth benefits in Austria. Based on the calculations in Andrews, Timiliotis and et al., 2018 , it is estimated that if Austria’s current gap in product market regulations, digital trade barriers, e-government use and venture and equity capital investing was reduced by half vis-à-vis best performing OECD countries in each domain, a significant acceleration may be anticipated in digitalisation and in the resulting productivity gains (Figure 1.26).

A recent comprehensive overview of the digitalisation process (Peneder et al., 2019

) suggested that while Austria is well-equipped with a high-speed broadband infrastructure,11 it risks being trapped in this penultimate technology and is lagging behind in ultra-high speed broadband. While network utilisation data suggests that only 30% of users subscribe to high-speed services, and that demand may still be too weak for ultra-high speed services, their limited availability may also be constraining the provision of data-intensive user-friendly services. Cross-country OECD comparisons confirm Austria’s gap in this area (Sorbe et al., 2019 and Figure 1.25, Panel C). This gap may be hindering the global internet connectivity required for the full development of cross-border digital services (Ferencz, 2019 and Panel D).

Figure 1.26. Structural reforms can support productivity through digital adoption

Effect on firm productivity of closing half of the gap with best performing countries

Austria hosts many multinational firm headquarters for Central and Eastern Europe. These units create high-quality jobs, generate high incomes and stimulate know-how transfers. For Austria to stay attractive as a location for these corporate headquarters, a stronger environment for digital innovations is needed – as these headquarters operate as central engines for the digital transformation of their entire groups (Nell et al., 2019). Austria’s having fallen somewhat behind the international frontier in digitalisation may become a handicap. Current policy efforts to fill this gap can help strengthen Austria’s attractiveness as a headquarter location.

The Digitalisation Strategy of the previous government, following-up on the Digital Roadmap, aimed at positioning Austria as a global digital leader. It was being developed under the auspices of the Ministry of Digital and Economic Affairs and included specific priorities, key indicators, and a timetable of implementation. It also included a comprehensive networking platform between all stakeholders (

https://www.digitalaustria.gv.at/).

International competitiveness and global value chain participation can be strengthened further

Austria is a successful export economy, with a well-diversified manufacturing base with strong positions in export markets, notably in Germany-centred value chains in Central Europe. Policymakers and economic researchers monitor closely Austria’s international competitiveness and global value chain positions. The country’s world market share declined over the past two decades, due mainly to the slower growth of its traditional markets in Europe (Figure 1.27, Panel A). However, even when this geographic composition of markets is taken into account, performance has slightly weakened.

The principal drivers of Austria’s international competitiveness have evolved in different directions. Cost competitiveness (measured by relative unit labour costs) declined slightly over the past decade, departing from Austria’s long-established ability to stabilise these costs relative to trade partners. Still, the sensitivity of exports to labour costs has also diminished, as manufacturers succeeded to preserve the differentiation and the technological sophistication of their products. The Economic Complexity Index, which measures the technical sophistication of exports, remains strong (Figure 1.27, Panel E). However, given the massive government effort engaged in R&D support over the past decade, the additional improvement which could have been expected in the innovation performance and the further technological sophistication of the economy has not been fully realised (OECD, 2019). In the meantime, some competitors and peer countries improved their relative positions (Figure 1.27, Panel E).

Austria’s integration in international value chains remains centred on EU trade partners and principally Germany and other Central European neighbours (Figure 1.27, Panel E). This is expected given Austria’s size and geographical location (Hanzl-Weiss et al., 2018

; Heimberger, 2018 ; Ghodsi, 2018 ). Moreover, given the presence of a substantial migrant population from these countries additional trade and value chain integration opportunities emerge. Still, too an exclusive confinement in European networks may deprive the Austrian economy from broader stimuli. Austria’s new External Trade Strategy aims at supporting exporters’ access to broader overseas markets (Bundesministerium für Digitalisierung und Wirtschaftsstandort, 2018 ).

Analyses of member countries’ “degree of centrality” in international value chains - defined as a country’s industrial structure being more or less connected, both directly and indirectly, to global production networks ‑ suggest that Austria has a more peripheral position than some other small open European economies (Criscuolo-Timmis, 2018

). This weakens the productivity spill-overs that domestic firms, in particular SMEs, derive from external value chains. As low barriers to entrepreneurship (where Austria has room for progress, as discussed in Section 1.4.3) and effective trade facilitation frameworks (captured by the complexity of customs procedures, where Austria performs slightly less well than Netherlands, Switzerland and Sweden) are found to be particularly relevant for SMEs’ performance in value chains. Austria should ensure that these frameworks are as supportive as possible for these international interactions.

Figure 1.27. Traditionally strong export performance has weakened somewhat

Service markets can be made more vibrant, with large benefits

Service activities account for 70% of employment in Austria. They also contribute for nearly 60% to Austria’s value-added exports, via both cross-border transactions and inputs embodied in good exports. The quality and costs of services impact increasingly on the productivity and external competitiveness of the economy. There are some indications that Austria does relatively less well in services than in manufacturing (Figure 1.28).

Figure 1.28. Performance differences between manufacturing and services are weighting on aggregate productivity

The 2015 and 2017 OECD Economic Surveys of Austria stressed the differences in competition and innovation conditions in trade-exposed manufacturing and relatively competition-sheltered services. They highlighted the productivity wedge which seemed to arise from these differences (OECD, 2017; OECD, 2015 ). While entry and competition opportunities are vibrant in services such as tourism and computer consulting, restrictions to competition persist ‑ as in a number of other OECD countries ‑ in the majority of professional and business services. These gaps risk denting the performance of the Austrian economy.

The new comprehensive OECD snapshot of product market regulations in member countries (OECD, 2019, forthcoming) confirms that Austria’s regulatory framework is less open to competition than in peer countries. Gaps persist even after the welcome amendment of the Trade Act in 2017, which lifted market access restrictions in 19 “Teilgewerbe”, which became free trades. The authorities estimate that the Trade Act should maintain high skill and qualification standards in professions, to continue to support service quality, innovations and young workers’ motivations to engage in high-quality vocational education. The official registration of new firms in non-regulated activities was simplified, via an on-line digital platform. The previous government planned to establish a “regulatory monitoring agency” which would review all existing business regulations, with a view to alleviate regulatory burdens. While earlier reforms in network sectors (electricity, gas, air transportation and e-communication) had opened them to competition, the framework remains more restrictive than in many other OECD countries in rail transportation, road freight, retail trade, distribution of pharmaceuticals, and professional services of lawyers, notaries, accountants, architects and civil engineers (Figure 1.29). In the last two areas (tax accountants and auditors, and architects and chartered engineers) professional examinations and minimum periods of practice are being simplified. Still, some of the aforementioned regulations are based more on command-and-control than economic incentives, and stakeholders appear to participate less in their design. The treatment of foreign suppliers in public procurement is also found to be more limiting.

Figure 1.29. Product Market Regulations remain generally restrictive

Index scale from 0 to 6, from least to most restrictive, 2018

The OECD indicators of the openness of service markets to international investment and trade place also Austria in an intermediary position between open and restrictive countries (Figure 1. 30). In particular, labour market tests applied to foreign service firms’ workers temporarily assigned to Austria are constraining. Managers and specialists may obtain work permits for three years, while workers in other categories can stay in the country for up to 12 months. High-skilled labour mobility and migration are important drivers in attracting foreign direct investment, and bringing in new skills and perspectives to the economy. Austria should further align the temporary employment conditions of foreign service workers with international good practices.

Figure 1.30. Service markets can be opened to freer international trade and competition

OECD Services Trade Restrictiveness Index, scale from 0 to 1 (most restrictive), 2018

The less competitive operation of service markets risks affecting price formation in Austria. Comparative trends in service sector productivity, service sector wages and service sector and headline inflation suggest that less intense competition, beyond denting productivity growth, may also be fostering a degree of rent-seeking, putting upward pressure on inflation (Figure 1.31).

Austrian inflation has been modestly but regularly higher than in Germany and Euro area in recent years (OeNB, 2018). In 2018, the consumer price inflation differential between Austria and Germany was around 0.26 percentage points, originating almost entirely from services. The contribution of service inflation to headline inflation attained 1.06 percentage points in 2018 (in a headline inflation of 2.12%), whereas the corresponding figure for the Euro area was 0.66 percentage points (in a headline inflation of 1.75%). Competition reforms and the full opening of services to international trade and investment may help reduce these inflationary pressures.

Developments in the tourism and restaurants sector have a special impact on inflation. These activities account for one third of all services included in the consumer basket. Due to large tourist inflows, tourism generates 7% of GDP and 6% of total employment in full-time equivalents in Austria (Austrian Government, 2018). The Central Bank found that a large part of Austria’s inflation differential originate from tourism services. The sector is exposed to domestic and international competition, but its productivity may be hindered by its fragmented structure. Around 16 000 hotels (mostly of small size and family-owned) employ 4 employees each on average, against 20-30 employees per hotel in Sweden and the US (OECD, 2018 ). Their service quality and product differentiation is high, but they suffer a gap in digital transitions (OECD, 2017 ; Austrian Hotel Association, 2016 ). The 2017-2022 programme of the previous government committed to stimulate the tourism sector by alleviating its regulatory burdens, its seasonal employment costs and supporting its digital transition (Austrian Government, 2017 ; Moor, 2017 ). Structural strengthening in the tourism sector may help moderate price pressures.

Figure 1.31. Inflationary pressures in services

Business sector services1

Policymakers are keen to preserve the high quality standards and consumer safety norms in the service sectors. They also value the between strict market entry rules and young cohorts’ incentives to engage in high-quality vocational training in related trades. The experience of other OECD countries (including other countries with high service standards such as Sweden) suggests that it is feasible to reconcile freer competition and high quality and reliability in services. The case of pharmaceutical distribution was recently investigated by the Austrian Competition Authority. After a detailed investigation, it concluded that, while this activity has special “confidence good” properties with limited consumer information and high safety risks, there is a case for opening the market to competition. Skill standards can be enforced without curbing new entries (Austrian Competition Authority, 2018).

Structural reforms can accelerate GDP growth

Taken together, measures recommended in this Survey to reduce barriers to labour force participation and employment, and boost competition would have a significant effect on Austria’s medium-term growth prospects. Table 1.9 sets out reform scenarios based on three different combinations of pillars. First, if existing competition restrictions in market and infrastructure services were cut by reducing the difference in the stance of regulations to the top five OECD countries by half between 2021 and 2025, GDP per capita growth may accelerate by around 0.4% percentage points. Second, ambitious but achievable labour tax reforms, which would reduce the labour tax wedge for low-income earnings by 0.8% of GDP over 2021-2025, financed by a cut in production subsidies or increases in environmental taxes, could lift GDP per capita growth by 0.7-0.9 percentage points per year over 15 years (Figure 1.32). Third, public sector reforms aimed at improving government effectiveness (section 1.5.2), if implemented, would further help accelerate GDP growth. Combinations of such growth accelerating reforms would contribute to long-term fiscal sustainability as discussed above (Figure 1.32).

Baseline	No reforms
Scenario 1: Pro-competition regulatory reform	Close half-way the gap to the average 5 best performing countries.
Scenario 2: Increase in environmental taxes and cut in labor tax wedge	Increasing the receipts from environmentally related taxes by 0.25% of GDP and reducing the labour tax wedge on below-average earnings by the same size.
Scenario 3: Cut in production subsidies and cut in the labor tax wedge	0.4% of GDP cut in production subsidies to fund a same-sized cut in the labour tax wedge of low-income earnings
Scenario 4: Full reform package	Scenarios 1-3. Reducing the gap in government effectiveness with Sweden by half.

Figure 1.32. Potential impact of structural reforms on per capita GDP

Past OECD recommendations	Actions taken
Reduce barriers to competition in services by easing entry regulations, removing restrictions on capital shares and voting rights of foreign investors and strengthening the investigation power of competition authorities	Market access restrictions in 19 so-far regulated trades were eliminated in 2017. A “regulatory monitoring agency” will be established to review all remaining regulations and make simplification proposals. The National Competition Authority’s powers of inspection on electronic files (on external servers, or on cloud) were increased. Its annual budget was also augmented in 2017.
Set up a transparent monitoring system for the implementation of the Digital Roadmap, with timelines and quantitative targets	A new “Digitalisation Strategy for Austria” was adopted in 2018 as a follow-up to the 2017 Digital Roadmap. It has specific priorities, a timetable, a monitoring system and key indicators.
Integrate a Digital Skills Plan in the Roadmap, with timelines and quantitative targets for ICT-generic, ICT-specialist and ICT-complementary skills	New support programmes “SME Digital” and “Digital Innovation Hubs” were introduced to upskill SMEs in digital technologies. “Pro boot camps” were launched to jointly train the employees of leading firms and of SMEs in specific digital subject areas. A “Digital Competence Pact” was signed between several public and private sector organisations to foster the digital skills of different target groups such as “young career starters”, “elderly professionals above 45”, “seniors above 60”, “mobile application professionals” etc.
Facilitate new entries and stimulate competition in broadband services in the context of the Broadband Plan 2020.	A “Broadband Strategy 2030” was adopted in February 2019. Austria is the first European country with a commercial 5G mobile network launched in March 2019 in 25 cities and municipalities. A nationwide 5G network is targeted for 2025.
Ensure that competition policy responds to changing threats to competition in digital markets, including through international co-operation.	A new merger threshold was defined to improve merger control in the digital sector. Austrian Competition Law’s “relative market power” concept permits to detect market power abuses and is used to foster competition in digital markets.
Promote more effective data protection, cyber security and consumer protection. Improve public awareness that responsibility for risk management remains partly with firms and consumers themselves.	An internet portal addressing exclusively security issues was created with the participation of 40 public and private sector organisations. Austria’s electronic identification system (eID and Handy Signatur) comply with high technical and legal security standards.

Public sector reforms are now more crucial

The large size of the public sector constrains policy innovations

Austria’s relatively large public sector (Figure 1.33 and 1.34) is currently exposed to three pressures: additional ageing-related spending, re-allocation needs in education spending, and the need to make the revenue structure more employment-friendly. Fiscal relations between federal, provincial (Länder) and municipal layers are also complex and hamper the strategic prioritisation and service quality in several areas. The perceived performance of the public sector is below the expectations of citizens. Public appreciation is high in certain areas such as judiciary and security services, but the overall trust in the quality of services is below comparable countries (Figure 1.33, Panel D).

Figure 1.33. The public sector is very large and its performance can be improved

Figure 1.34. The structure of general government revenue and spending remained broadly stable over two decades

The previous government aimed at reducing the tax-to-GDP ratio from 42% in 2018 towards 40% by 2023. The financing and spending reforms required to attain this goal without undermining long-term fiscal sustainability would be challenging. In order to attain this objective policies would have to reign in the “passive” trend increase in spending and regain room for more strategic use of public resources. Sector-specific spending reviews were planned to detect the potential for savings and quality and efficiency improvements. According to the experience of other OECD countries, the quality of these reviews vary and the authorities should ensure that they are carried out at the highest possible level of independence and technical standards. Their conclusions should also be well publicised and publicly discussed. Among OECD countries’ experiences with spending reviews Canada’s and The Netherlands’ experiences may be of interest for Austria. To combine independence of analysis and judgment with deep insider knowledge and practical experience in the policy areas reviewed, the Netherlands has for example created mixed review teams composed of line Ministry insiders, Ministry of Finance officials, and independent experts, under the chairmanship of experienced wise persons external to the field (OECD, 2011; Institute for Government, 2018 ).

Federal fiscal arrangements should be adapted

Austria has a multi-layer federal system which is appreciated by the population as a bottom-up governance model. However, it increases government costs and raises co-ordination challenges in the planning and implementation of public services. Policy functions, which are not explicitly vested by the constitution with the federal government, are carried out by the 9 Länder governments. More than 2 000 municipalities are in charge of various service areas such as early child care and protection against poverty. The average size of municipalities is one of the lowest in OECD and the number of local governments per 100 000 inhabitants one of the highest (Figure 1.19 above).

Länder and municipal governments have limited own revenues and are funded mainly by federal government transfers through a complex system of tax sharing and redistribution.12 Austria is among the OECD countries with the largest gap between the taxing and spending powers of sub-central governments (OECD, 2019; Allain-Dupré, 2018 ). This misalignment has long been identified as a weakness in the optimisation and efficiency of public services and spending (Fischer et al., 2011). In several key areas including the hospital infrastructure, secondary education and social protection, the three layers of government share the planning, funding and provision responsibilities and are accountable together on the quality of services. Austria should more closely align revenue raising and spending responsibilities of government levels, and seek economies of scale in municipal governance through shared services or consolidation of government. An example, in a crucial domain for long-term social cohesion and economic growth, is found in the organisation of pre-school and school education. Co-operation between government levels started with the publication of some common pedagogical documents, and information exchanges on pupils’ language abilities, but upgrading the pedagogical content of kindergarten services and ensuring better curricular continuity with school education require higher service quality at respective government levels and improved co-operation between them (Box 1.4).

Box 1.4. Co-ordination of pre-school and school education between government layers

OECD’s new study on Early Learning and Child Well-Being (OECD, 2018) emphasises that “the imperative to give all children a strong early start is more and more pressing. Children’s early experiences have a profound and long-lasting impact on individual children’s well-being and happiness during childhood, as well as their later life outcomes, including education, employment, health, citizenship and life satisfaction. Countries that fail to pay attention to the quality of children’s early years are ignoring the most effective means to assure the well-being and skills of the next generation and to achieve more equitable outcomes across families and communities”. The study found however that “providing more early childhood education and care (ECEC) does not automatically yield positive results for children. In some countries, ECEC has very positive effects on children’s learning outcomes, whereas in other countries it is neutral and even negative in some cases. Equally worrying, in a number of countries ECEC appears to benefit advantaged children more than disadvantaged children”.

Austria has taken several initiatives to improve the coverage and quality of its ECEC infrastructure, introducing notably a compulsory year of pre-school education. While participation of under 3 year-olds to ECEC remains lower than in peer countries, at around 25% (against 50-80% in the Nordic countries and in the Netherlands), attendance by 4 year-olds reached 94.9% in 2016, close to the EU average of 95.3%. For 5 year-olds it has already surpassed the EU average, reaching 97%. Amid these major progresses in coverage, it is recognised however that “quality issues remain” (EC, 2018

The upgrading of early childhood education and care faces three challenges which are partly related to government organisation in this area:

Pre-school education is a responsibility of municipal governments, under a Federal regulatory framework governing the quality of kindergarten infrastructure and the pedagogical qualifications of the educators. A large diversity is observed in the characteristics of these services across Austria, including in terms of opening hours and periods.
The educational background of kindergarten and ECEC personnel is specific to Austria. As a difference from several other OECD countries (where preschool teachers receive university training), the standard professional qualification of the educational staff is a two year-long tertiary programme. University degrees in ECEC (granted by few universities) do not authorize a candidate to work in preschools, because the certified two-yearly vocational programme is required. Austria could consider drawing on Germany’s recent innovative experience in this area.

Curricular co-ordination between ECEC and primary education is less advanced than in the most innovative OECD countries (OECD, 2019). Professional contacts and consultations have long existed between pre-school and school educators, but it is since 2018 that the Federal government has prescribed pedagogical standards for kindergarten to be implemented as part of the education financing contracts with the Länder. Substantial background pedagogical work is deemed necessary for effective curricular integration between early and primary education (Shuey et al., 2019 ).

The previous government announced a series of measures to improve both participation in ECEC and its quality. It planned to establish common educational goals encompassing both pre-school and school education, including strong competences in German language and a definition of common values. The plan included standardised language tests for all children at the age of 4, which, if necessary, would be followed by two years of compulsory pre-school language training. Sanctions against parents were envisaged if compulsory provisions are not complied with. The authorities also envisaged setting standards for pre-school infrastructure, group size, the qualification of staff and initial and life-long training of educators (Austrian Government, 2017

Reinforcing integrity in the public sector and combatting corruption

Austria is ranked 14th among 180 countries in Transparency International’s Corruption Perception Index, somewhat below its peer countries (Figure 1.35). Scoring displayed variations in the 2000s. The complex multi-layer structure of the government, the multitude of public procurement authorities and the presence of many economic entities owned by the Federal government-, Länder and municipalities expose the country to special governance challenges.

A number of difficulties in fighting transnational corruption have been identified by the OECD Working Group on Bribery, when monitoring Austria’s implementation of the OECD Anti-Bribery Convention.14 Special conditions include the weight of companies carrying-out cross-border activities in quasi-public services such as energy and telecommunications in Central, Eastern and South Eastern Europe (OECD, 2012). The gambling industry also has strong international ties, and foreigners account for 70% of the bets in Austria. All of Austria’s top six banks have significant operations throughout the region.

One key matter is the low maximum fine available to companies held liable for bribery abroad. The maximum fine, of just EUR 1.3 million, does not reflect the size and importance of many Austrian companies, the location of their international business operations, and the business sectors in which they are involved (OECD, 2017, DAF/WGB(2017)72). The fine is in fact lower than that which can be imposed on an individual convicted of the same conduct. Other longstanding issues upon which progress is being made include elements of bank secrecy, and the length of time it takes for the authorities to obtain bank account information. Historically, this has proved an obstacle in providing prompt and effective international cooperation to other countries in corruption cases. Austria has taken steps to address these issues through the creation, in October 2016, of a national register of bank accounts which can be directly accessed by Austrian prosecution authorities. Austria has also enacted laws to remove the previous difficulties in identifying the true “beneficial” owners of companies (OECD, December 2017). Furthermore, Austria should take steps to improve foreign bribery enforcement. Since ratifying the Convention in 1999, Austria has sanctioned only one individual for foreign bribery, and no companies have yet been convicted (OECD, December 2017). Austria’s foreign bribery laws and its enforcement will be comprehensively re-evaluated by the Working Group in March 2020. Austria has also volunteered in 2018 to be examined by the IMF on the quality of its legal and institutional framework to combat bribery and prevent the laundering of dirty money.

Ambitious public finance reforms should help reallocate resources and rebalance revenue sources

Austria should make use of the significant room available for rendering its public finance structures more supportive of employment, growth, social inclusion and public service quality. This requires a new strategic approach, to both public spending and public revenue patterns.

Public spending has expanded rather passively with the size of both public services and social transfers having grown along the tracks of established policies, organisations and entitlements. To make spending more strategic and more responsive to economic and social priorities and needs, Austria can draw on the experiences of other OECD countries in identifying areas where spending can be reduced with limited loss for social benefits with the help of in-depth independent spending reviews - as discussed above. The government programme 2017-2022 planned to use this instrument more actively than in the past.

On the revenue side, there is also room for major reforms. Recent OECD research on the effect of tax mix on growth and equality suggests that if Austria rebalanced the composition of its tax structure from labour to environmental and property taxes, sizeable gains can be expected for employment, growth and social inclusion (OECD, 2017), higher environmental taxes would serve both emission-reduction and revenue-raising objectives. Any regressive effects for income distribution (for instance for low-income households in remote areas) can be offset with targeted transfers. While consumption taxes have high standard rates in Austria, widespread rate-reductions 15 are fiscally costly and can be reduced (OECD, 2018; EC, 2017 ; Zu, 2017 ; IFS, 2017 ). With a VAT revenue ratio of 60% (which means that 40% of the theoretical revenue potential from VAT is not realised, due mainly to reduced rates and exemptions), Austria’s policymakers can draw on the experience of other OECD countries such as New Zealand and Canada which succeeded to enhance their VRR rates (to 95% in the case of New Zealand). If policymakers could increase Austria’s VAT revenue ratio from 60% to 70%, they could generate up to 1.1% of GDP of additional tax revenues, which may create space for more productive tax cuts.

The evaluation by the OECD of the efficiency of VAT reductions and exemptions is indeed mitigated. In the tourism sector in particular, which received additional VAT concessions in 2018, economic gains from VAT incentives may not justify their high fiscal costs (OECD, 2014

). Iceland’s experience deserves Austrian policymakers’ attention: following a positive experience with increasing the special rate for tourism from 7% to 11%, Iceland plans to align the rate for most tourism services with the normal VAT rate. This alignment will help decrease the standard VAT rate from 24% to 22.5%, in line with the objective of broadening the tax base and reducing the tax rates (OECD, 2017 ). Targeted transfers to low-income groups can offset any regressive effects from higher VAT rates (Maples and Sawyer, 2017 ).

Property taxation, in turn, may serve both revenue raising and income and wealth redistribution goals. As discussed above, recent OECD research found that inheritance taxation may be an effective form of property taxation, with, moreover, a positive estimated net effect on growth (Akgun et al., 2017

Austria announced a digital taxation initiative. A 5% tax rate will, beginning in 2020, apply to online advertising revenues from companies generating global sales of EUR 750 million with at least EUR 25 million from Austria. Further, VAT will be applied to certain sales made via digital retail platforms. The VAT reforms are welcome and should be implemented in a manner consistent with OECD guidance. The online advertising tax follows several other countries introducing similar initiatives, and the European Parliament voting to support a similar EU-wide directive (European Parliamentary Research Service, 2018

). Many of the enterprises that would be subject to the digital services tax are headquartered in the United States. A G20/OECD process is developing measures that adapt existing approaches to taxing firms to the challenges of digital technologies. Members of the G-20/OECD process are committed to reaching a consensus-based, long-term solution in 2020, and have not reached a consensus about the need or merit of interim measures (OECD, 2019 ).

Box 1.5. OECD research on public finance reforms have important implications for Austria

The findings of the new OECD project on “Public finance structure and inclusive growth” are informative for Austria. Estimated implications for the revenues of low-income deciles and social cohesion are particularly remarkable (Cournède et al., 2018):

The increase in the size of OECD governments over the past two decades has to a great extent been passive, reflecting the impact of ageing on public pension and health expenditure, with scant reallocation across spending or tax areas. This has also been the case in Austria where the share of general government spending in GDP reached the 6th highest level in OECD at 50%.

There is room for win-win public sector reforms in all OECD countries, that could boost both output and social inclusion. Austria comes out as one of the countries where potential benefits from such reforms, both for growth and social inclusion, is the greatest. Available evidence hints at a weakening of the overall quality (size, efficiency and structure - measured according to the methodology described in Cournède et al. (2018) of public spending between 1995-2012, while this quality has improved in peer countries. Re-orienting the composition of spending and taxes and increasing the quality and credibility of services would be expected to important major gains.

These OECD insights are congruent with the results of another simulation of the effects of deficit-neutral reductions of the labour tax wedge in four EU countries including Austria (the others being Germany, Italy and Belgium). This simulation concluded that the measure with the highest growth and employment gains is a decrease in labour taxation, financed by an increase in consumption taxes. However, as this raises the consumption costs of households and reduces their real incomes, financing such a cut via a reduction in public spending may be more beneficial in terms of social welfare.

Building on the OECD estimation methodology (Cournède et al., 2018

), some specific reform scenarios for Austria were investigated for this Survey:

Scenario 1: If environmental taxes are raised by 0.5% of GDP and if this is used to cut the labour tax wedge on below-average earnings by the same amount, the level of GDP per capita could increase and the lowest income decile would benefit most (see Table 1.11 on details).
Scenario 2: A reduction of 0.8% of GDP in production subsidies (which would be a sizeable reduction and would assume supporting reforms at the EU level), if used to fund a same-sized cut in the labour tax wedge on below-average earnings, could boost GDP per capita. All income deciles would benefit but the bottom decile would draw the largest gains.
In a Scenario 3: if, through structural reforms, the effectiveness, quality and credibility of the public sector is increased by reducing the gap with Sweden by half (without changing the aggregate tax and spending ratios), GDP per capita could increase and the lowest income decile would benefit most, as in the above scenarios.

Several inquiries, including by the Court of Audit, have shed light on the saving potential available in specific areas of public administration, education and health spending (EC, 2019), including in the context of transition to performance-based budgeting (OECD, 2018, GOV/PGC/SBO(2018)7). The losses for GDP growth and social inclusion from the excessive concentration of taxes on labour incomes have also been well identified (Köppl and Schratzenstaller, 2015 ). Reforms such as rebalancing primary (preventive) and secondary (curative) health services gave promising results, but their generalisation has proven difficult under existing financing and supply structures (Hofmarcher, 2014 ). Concerning the simplification of federal, Länder and municipal responsibilities in the main public services, goals have long been settled but progress has been slow. The Fiscal Equalisation Act of 2017 settled new objectives in this area from 2020/2021 (including the utilisation of formal benchmarks to compare the quality of services offered in different jurisdictions) (Federal Chancellery, 2017 ; Federal Chancellery, 2018 ). An integrated approach to public finance reform, encompassing all government layers and involving all the main spending items (pensions, health, public administration) and revenue areas (social security, personal income, consumption, environmental and wealth and inheritance taxes) could help make more systematic progress.

The fiscal policy recommendations of this Survey have been formulated as fiscally neutral measures, as highlighted in Table 1.9 and in Box 1.5. Survey recommendation to reduce VAT rate reductions is quantified in only very broad terms. The Table 1.11 below summarises the first-round likely fiscal impacts of the proposed measures (Table 1.11).

Recommendations	Fiscal impact	GDP impact after 5-15 years	Impact on inequality after 5 years
Product market liberalisation reforms.	No significant fiscal cost	GDP per capita level increases by 1-6% compared to 2020	Impact on inequality not modelled
Scenario 1: Raise environmental taxes by 0.25% of GDP Cut labour tax wedge on below-average earnings by 0.25% of GDP	Fiscally neutral	GDP per capita level increases by 1.5-8.5% compared to 2020	Lowest income decile would benefit most, with expected real increases in income of around 2%
Scenario 2: Reduction of 0.4% of GDP in production subsidies Cut labour tax wedge on below-average earnings by 0.4% of GDP	Fiscally neutral	GDP per capita level increases by 2-11% compared to 2020	Lowest income decile would benefit most, with expected real increases in income of around 2%
Scenario 3: Increase effectiveness, quality and credibility of the public sector by reducing half of the gap with Sweden	Fiscally neutral	GDP per capita level increases by 3-15% compared to 2020	Lowest income deciles would benefit the most, with increases in real income from 0.35% (lowest income decile) to 0.15% (median)

Past OECD recommendations	Actions taken
Undertake in-depth spending reviews in education, health care, long-term care and public administration.	In total three spending reviews have been completed (public compulsory schools, Disaster Relief Fund, Family Benefit Funds). Further, at the moment, five other reviews are being completed (Austrian Railways, water management services, health services in schools, international financial institutions and justice).
Align spending and financing responsibilities at different government levels by increasing the tax autonomy of sub-central governments.	The housing levy (generating revenues of about EUR 1.1 billion per year) became an exclusive levy of the Länder, which can freely set rates.
Encourage municipal mergers to exploit economies of scale.

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Notes

← 1. These changes, approved by the Austrian Parliament, mean that the level of child benefits will now be calculated according to living costs in the child’s living place and not those in Austria. The European Commission questioned the legality of this reform against EU law. The Austrian government admitted that it could be blocked by the European Court of Justice.

← 2. The Financial Market Stability Board recommended in 2018 that i) down payments for real estate credits should amount to at least 20% of the face value of loans, ii) the maturity of mortgage loans should be capped at 35 years, iii) debt service costs should not exceed 40% of the net income of borrowers, and iv) the creditworthiness of borrowers should be evaluated by using all available data sources.

← 3. Less than 20% of households in Vienna and less than 50% of households in Austria own a house, against the OECD average of 60%.

← 4. OECD calculations suggest that the structural unemployment rate (NAIRU) increased from above 4% to around 5½ per cent between 2000 and 2018, while, after an initial increase, it tended to decline in comparable countries.

← 5. OECD, Supporting Entrepreneurship and Innovation in Higher Education in Austria, 2019 (forthcoming).

← 6. Public support to long-term care is currently provided through three channels: i) cash benefits (proportional to the degree of dependence of beneficiaries on a scale of seven and ranging from monthly EUR 158 to EUR 1 689); ii) support to primary caregivers (to ease their part-time working and leave arrangements), and iii) in-kind services in care institutions. The first two components are provided by the Federal government and the third is under the responsibility of Länder governments. As dependant elderly prefer generally to stay in a private environment, the lion’s share of public aid is provided through cash-allowances. This, however, risks perpetuating the labour force participation difficulties of primary caregivers. Länder governments are now providing new in-kind, notably mobile, services to support the primary caregivers. A masterplan on long-term care was adopted in December 2018, and the former government commissioned a study to the Institute for Advanced Studies (IHS) on alternative financing arrangements.

← 7. Mixed responsibilities are typical for many policy areas: 1) in health, responsibility is shared between the federal government, the provincial governments, and local governments; 2) in housing, the provincial and local governments make the decisions; 3) in education, responsibilities are split. The local governments share responsibility with the provincial governments with regard to preschool and primary education; the responsibility for secondary education lies with the provincial governments and the federal government; post-secondary and tertiary education is the sole responsibility of the federal government.

← 8. Source: Main Association of Austrian Social Security Institutions.

← 9. Die Österreichische Sozialversicherung in Zahlen, March 2019.

← 10. The results presented in Panel B utilised micro-level data on Austrian firms from the Orbis database. While the coverage of Austrian firms in Orbis may differ from a representative sample of the Austrian firm universe, it is the only firm-level database currently available for listed and non-listed Austrian firms. In this respect, the ongoing discussion about changes to the Statistikgesetz to make Austrian micro-level data similar accessible to external researchers like in Germany, Denmark or Netherlands may help improve the accessibility and availability of Austrian firm-level data.

← 11. High-speed broadband secures the transmission of 30 to 100 megabits of data per second, ultra-high speed infrastructures transfer at least 100 megabits per second via direct fibre optic connections to buildings and homes.

← 12. The system of transfers includes unconditional block grants, earmarked grants and ad hoc transfers. There are also cost compensations for the tasks delegated from the Federal government to the Länder, and from the Länder to the municipalities. An Intergovernmental Fiscal Relations Act governs these relations. It is renewed every four to six years. The latest Act was adopted in 2017 for the period 2017-2021.

← 13. In Germany, like in Austria, the training of preschool teachers has traditionally been located in upper-secondary vocational schools. Since 2004 however, more than 100 ECEC study courses opened in the universities of applied sciences, pedagogical universities and classical universities across the country, and are now training pre-school educators.

← 14. The information contained herein does not prejudice the Working Group’s monitoring of the implementation of the OECD Anti-Bribery Convention.

← 15. In addition to the standard 20% VAT rate, there are three reduced rates of respectively 13% (applying to hotel accommodations, cultural and sport events, domestic flights and some agricultural supplies); 10% (applicable notably to foodstuffs, restaurants, pharmaceutical products, printed books and other agricultural supplies; and a zero rate applied to international air transportation.

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