Identifier
Created
Classification
Origin
05VIENNA2786
2005-08-19 14:32:00
UNCLASSIFIED
Embassy Vienna
Cable title:  

GOA UNVEILS PACKAGE TO FIGHT RISING

Tags:  ECON EFIN ELAB AU EUN 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 VIENNA 002786 

SIPDIS

PASS TREASURY FOR OASIA/ICB/VIMAL ATUKORALA

TREASURY ALSO FOR OCC/EILEEN SIEGEL

TREASURY ALSO PASS FEDERAL RESERVE

USDOC PASS TO OITA

USDOC FOR 4212/MAC/EUR/OWE/PDACHER

PARIS ALSO FOR USOECD

FRANKFURT FOR JIM WALLAR

E.O. 12958: N/A

TAGS: ECON EFIN ELAB AU EUN
SUBJECT: GOA UNVEILS PACKAGE TO FIGHT RISING


UNEMPLOYMENT, BUT REJECTS FURTHER TAX CUTS

REFS: A) VIENNA 2349 B) 04 VIENNA 273

Summary

-------

UNCLAS SECTION 01 OF 02 VIENNA 002786

SIPDIS

PASS TREASURY FOR OASIA/ICB/VIMAL ATUKORALA

TREASURY ALSO FOR OCC/EILEEN SIEGEL

TREASURY ALSO PASS FEDERAL RESERVE

USDOC PASS TO OITA

USDOC FOR 4212/MAC/EUR/OWE/PDACHER

PARIS ALSO FOR USOECD

FRANKFURT FOR JIM WALLAR

E.O. 12958: N/A

TAGS: ECON EFIN ELAB AU EUN
SUBJECT: GOA UNVEILS PACKAGE TO FIGHT RISING


UNEMPLOYMENT, BUT REJECTS FURTHER TAX CUTS

REFS: A) VIENNA 2349 B) 04 VIENNA 273

Summary

--------------


1. The GoA recently announced a Euro 1.2 billion ($1.5

billion) stimulus package of employment and growth

initiatives. The GoA also plans to introduce a

combination-wage model to subsidize low-paid jobs.

Economists view the GoA's package as positive, but note

that only GDP growth in excess of 2.5% will effect a

lasting improvement in the rising unemployment trend.

The opposition Social Democrats (SPO) and some in the

government's junior coalition partner Alliance Future

Austria (BZO) are calling for tax cuts to stimulate

growth and counter rising unemployment. However,

Chancellor Schuessel and Vice-Chancellor Hurbert Gorbach

agreed that consideration of further tax relief should

wait until after the 2006 elections. End Summary.

Government Moves to Reduce Unemployment

--------------


2. The GoA and Austria's nine state governments recently

agreed on a "Regional Employment and Growth Pact" to

stimulate the economy and reduce unemployment. The GoA's

move is in response to growing concerns regarding

increasing unemployment and corresponding criticism from

opposition parties. Media and the opposition have

highlighted Eurostat's recent upward revision of

Austria's 2004 unemployment rate from 4.6% to 5.1%.


3. The stimulus package totals Euro 1.2 billion ($1.5

billion) for regional employment and economic growth

initiatives. However, only Euro 370 million will be

"fresh" money, with the remaining funding coming from low-

interest loans and GoA guarantees for investments and

R&D. The GoA expects these measures will encourage

additional investments of up to Euro 3 billion, create up

to 20,000 new jobs, and raise GDP growth by 0.1% in 2005

and 0.3% in 2006. The GoA will finance the package from


budgeted labor market reserves, thus avoiding any further

increase in the 2005 and 2006 federal deficits.

Targeting the long-term unemployed under 25 years of age

and over 45, the GoA also announced plans to introduce a

combination-wage model in 2006. The "combi-wage" will

provide additional payments of up to Euro 1,000 per month

for low-paid jobs.

Rising Unemployment, Yet Record Employment

--------------


4. The number of unemployed during January - July 2005

was 4-5% higher than in the comparable 2004 period.

However, employment figures continue to reach new records

every month, as total employment has grown 3.3% since


2000. Factors contributing to record numbers in the

workforce include the following: a continued influx of

labor from other EU-15 nations, especially Germany;

growing numbers of illegal workers from Central and

Eastern Europe; and pension reform, which raised the

retirement age (ref A). Low growth rates since 2000 have

also dampened job creation.

No Further Tax Cut

--------------


5. The opposition SPO continues to call for a tax cut

for low-income groups. The GoA's tax cuts, effective

January 1, 2005, provided tax relief of Euro 1.1 billion

and higher allowances of Euro 250 million (ref B),

primarily for low-income earners. Competing for support

in the run-up to the 2006 elections, the junior coalition

partner, the Alliance Future Austria (BZO) has also

argued for further tax relief. However, Chancellor

Schuessel and Vice-Chancellor Gorbach (BZO) agreed that

further tax cuts would be a subject for the next

parliament to consider.

Limited But Positive Impact

--------------


6. Opposition parties characterized the GoA's employment

package as a "propaganda show" and criticized the GoA for

its failure to create jobs. Economists generally praised

the GoA measures, but have cautioned that the GoA has

overstated the package's simulative effect. According to

the Austrian Institute for Economic Research (WIFO),the

GoA's previous three economic stimulus packages (2001-

2003) have had positive, but limited impact on

investment, R&D and the labor market. Research indicates

that only about 50% of the funds for such stimulative

measures remains in Austria, with the remainder flowing

abroad. The WIFO estimates that long-term improvement in

the Austrian labor market would require a minimum growth

rate of 2.5%. Current GDP growth projections for 2005

and 2006 are 1.8% and 1.9%, respectively.

Comment

--------------


7. In essence, the stimulus package totals only Euro 370

million, as the majority of the Euro 1.2 billion amounts

to a repackaging of already existing investment loans and

GoA guarantees, which Austrian business has not fully

utilized to date. Since 40% of all Austrian workers no

longer pay any income tax, the SPO's call for tax relief

for low-income groups would amount to a so-called

"negative tax," i.e., cash grants for low-income groups

that are currently not paying taxes. Moreover, as

Schuessel's chief economic advisor publicly noted, the

additional consumer spending that a further tax cut would

encourage would provide marginal benefits to the economy.

Much of the money would be spent on imported consumer

goods and abroad, for example, on vactions.

van Voorst