Austria's 2006 Budget - Analysis

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SUBJECT: Austria's 2006 Budget - Analysis

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Summary
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1. (U) On April 7, Parliament adopted the GoA's 2006
Budget Bill. For 2006, the GoA predicts a federal budget
deficit of 2.2% of projected GDP (EMU's Maastricht
definition) and a corresponding consolidated public
sector budget deficit of 1.7%. The government's second-
highest deficit since 2000 is a result of its 2005 income
and corporate tax cuts, which now have an anti-cyclical
effect. Finance Minister Karl-Heinz Grasser defended the
budget deficit as a consequence of the 2005 tax cuts,
which are necessary to stimulate growth. In 2006,
Austria will be a Euro 780 million net contributor to the
EU. The 2006 budget also reflects GoA policies of
stabilizing civil service costs and curbing growth in
contributions to the social insurance pension system.
The GoA's promise to balance the budget by 2008 seems
unlikely. End Summary.


The 2006 Budget
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2. (U) On April 7, Parliament approved the GoA's 2006
Budget Bill with the support of the government coalition
parties, the People's Party (OVP) and the Alliance for
the Future of Austria (BZO). (Note: the BZO includes 14
out of 16 former Freedom Party parliamentarians; see ref

A. End Note) The opposition Social Democrats (SPO) and
Greens voted unanimously against the Budget Bill. Final
figures for the 2006 budget are: expenditures of Euro
66.2 billion (USD 86.0 billion),revenues of Euro 60.4
billion (USD 78.5 billion),and a federal deficit of Euro
5.8 billion (USD 7.6 billion),equal to 2.2% of projected
GDP.


3. (U) The federal government deficit of 2.2% of GDP
would be down slightly from the projected 2005 deficit of
2.4%. The corresponding consolidated public sector
budget deficit (encompassing all levels of government,
according to the EMU's Maastricht definition) will be
1.7% (2005: 1.9%). The 2006 budget is based on a
projected growth rate of 3.9% GDP and a 4.2% unemployment
rate.


4. (U) As a result of the 2006 deficit, the consolidated
public sector debt (encompassing all levels of
government) will rise to a projected Euro 159.8 billion
by the end of 2006, with the federal government
accounting for more than 90% of the debt. In terms of
GDP, the total public sector debt will decline to 62.8%
from around 63.3% in 2005 - slightly above the EMU's 60%
target.

The Debate - The Same Old Arguments
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5. (U) Defending the budget in Parliament, Finance
Minister Karl-Heinz Grasser stressed that the GoA
accepted the deficit as a necessary consequence of the
2005 income and corporate tax cuts that should boost
growth. Grasser noted that growth in 2005 and 2006 will
be higher than in Germany and Italy, Austria's largest
trading partners, and higher than the Eurozone average.
Grasser acknowledged that a balanced budget in 2008 was
an ambitious goal, but he ruled out tax increases. He
outlined the following GoA priorities: reduce
unemployment, increase labor participation and labor
market flexibility, increase economic growth, increase
R&D spending, and reduce the tax burden.


6. (U) During the parliamentary discussion, SPO Chairman
Alfred Gusenbauer accused the GoA of ignoring reality and
Grasser of living in a "virtual reality." He predicted
the GoA would initiate austerity measures after the next
elections. Green MP Werner Kogler said there would be no
balanced budget over the cycle. He also criticized
moving up the 2006 budget discussion from the fall of
2005, when better economic forecasts for 2006 would have
been available.


7. (U) In a press statement, the Austrian National Bank
(ANB) expressed support for the GoA's general budgetary
priorities, i.e., a lower deficit and a declining debt
level. However, the ANB urged more intensive efforts to
reduce expenditures to achieve a balanced budget more
quickly.


Line Item Highlights
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8. (SBU) Defense: The MoD will receive no increase in
2006, as funding will remain at the 2005 level of Euro
1.81 billion (USD 2.35 million). Defense expenditures,
as a share of total budget expenditures, will fall to
2.74% in 2006 from 2.83% in 2005. As a percentage of
GDP, defense spending will drop to 0.71% in 2006 from
0.74% in 2005. Despite a further reduction in military
personnel by almost 700 to 22,760, the share of personnel
expenses in total defense expenditures will rise to
59.67% in 2006 from 58.27% in 2005. Operating
expenditures will increase to 21.49% from 21.16% and
investment will drop to 18.84% from 20.57%.


9. (U) Development Assistance: Funds for the Austrian
Development Agency (ADA) will rise 3.9% to Euro 93.6
million in 2006. However,
ADA's direct funding represents only about 15% of
Austria's total development assistance. Figures for the
other assistance components are not yet available.


10. (U) EU Contributions: The budget includes Euro 2.3
billion in contributions to the EU, expected payments
from the EU of Euro 1.6 billion, amounting to a net
contribution of approximately Euro 780 million.


11. (U) Civil Service: The GoA plans to cut another
3,000 civil service jobs in 2006 to 170,500. At Euro
7.56 billion, GoA expenses for civil service salaries
will remain stable at the 2005 level. Total GOA
expenditures for active personnel (including transfers to
provincial governments for salaries of some 70,000
teachers) will also remain stable at the 2005 level of
Euro 10.3 billion. Pension expenses for the rising
number of civil service retirees will increase 2.4% to
Euro 3.2 billion in 2006. The moderate increase reflects
savings from the GoA's 2003 pension reform. Total GOA
personnel expenditures for active and retired civil
service employees (including outsourced and refunds) will
be Euro 17.4 billion in 2006 after Euro 17.3 billion in

2005.


12. (U) Pensions and Social Affairs: In addition to
civil service pension expenses, GoA contributions to the
social insurance system for pensions should rise to Euro
6.7 billion in 2006 from Euro 6.6 billion in 2005 (2004:
Euro 6.7 billion, 2003: Euro 6.9 billion). In addition,
the GoA will contribute Euro 4.9 billion (2005: Euro 4.8
billion) for labor market programs and unemployment
benefits, Euro 8.0 billion (2005: Euro 7.8 billion) for
family allowances and nursing benefits, Euro 0.8 billion
(no change from 2005) for hospitals, and Euro 1.8 billion
(no change from 2005) for housing subsidies. Including
minor amounts for other programs, the GoA's total
expenditures on social services, excluding civil service
expenses, will be Euro 22.9 billion in 2006 compared to
Euro 22.4 billion in 2005.


Comment
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13. (SBU) The GoA's promise of a balanced budget by 2008
seems unlikely and will require additional revenues or
expenditure cuts of more than Euro 2 billion in both 2007
and 2008. The GoA's hope that higher economic growth and
expenditure cuts will suffice seems illusory. To achieve
a balanced budget, the GoA will have to make harsh
political decisions on issues such as health and
administrative reforms. Substantial savings from a
planned realignment of federal, provincial, and local
government responsibilities seems unlikely.

BROWN