16 January 2014

ECFIN Country Focus: Austria's fiscal rules - Climbing the mountain towards effective fiscal relations

Summary

This study of Austria's fiscal framework discusses positive aspects and weaknesses of recent reforms in intergovernmental fiscal relations by analysing from a backward- and forward-looking perspective some of the factors driving subnational fiscal performance.

Looking back, transfer dependency has differed between various levels of government and coincided with different fiscal outcomes for State governments (Länder) and local governments. The fiscal framework has not been able to prevent State governments from consistently missing their budgetary targets from 2001 to 2009, causing a significant drag on Austria's overall budgetary position. In response, reforms going in the direction of higher tax sharing and lower transfer dependence for subnational governments have provided stronger incentives to curb expenditure, paving the way for better fiscal performance in recent years.

Looking forward, the analysis focuses on the new system of fiscal rules adopted in Austria, aimed at reinforcing the budgetary framework through the introduction of multiple fiscal rules that are extended to subnational governments. The reform has reinforced the link between structural macroeconomic variables and subnational budgetary targets, in particular by capping subnational expenditure dynamics to national potential output growth. Although the new rules constitute progress, their design may in some respects be ineffective to ensure the respect of the targets.

In particular the link between potential output and subnational expenditure growth may prove difficult to maintain in light of the volatile nature of subnational spending in Austria, which is often caused by specific recurrent expenditure overruns. In this respect, the study presents the underlying factors driving the dynamic of subnational health sector expenditure, such as recurrent subsidies and capital transfers to the health sector, and confirms that the effectiveness of Austria's new fiscal framework will depend on the interplay of comprehensive organisational and structural reforms in order to tackle inefficiencies and reduce the underlying trend expenditure growth.

Full study

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