Austria?s 2009/2010 Budgets: Fat Now, Lean to Come

UNCLAS SECTION 01 OF 03 VIENNA 000738

SIPDIS, SENSITIVE

PASS TREASURY FOR OASIA/ICB/PETER MAIER
TREASURY ALSO PASS FEDERAL RESERVE

E.O. 12958: N/A
TAGS: ECON EFIN PGOV AU
SUBJECT: Austria?s 2009/2010 Budgets: Fat Now, Lean to Come

REFS: A) VIENNA 0495; B) VIENNA 0642;
C) VIENNA 0484; D) 08 VIENNA 1287

Sensitive but unclassified -- protect accordingly.


1. (U) SUMMARY: On May 29, Austria?s Parliament adopted budgets for
2009 and 2010, endorsing a temporary flood of red ink to mitigate
the current economic downturn. Total public sector deficits will
likely exceed 4.0%/GDP in 2009 and 5.0% in 2010 (versus the GoA?s
estimates of 3.5% and 4.7% respectively, which are based on outdated
forecasts). The GoA?s forecast for public debt (73%/GDP at the end
of 2010) is also too optimistic: the debt ratio could be closer to
80%/GDP by the end of next year. This cable provides a detailed
analysis of expenditures, including defense (which will fall) and
social welfare (which will grow substantially). END SUMMARY.

Budget Overview
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2. (U) On May 29, Parliament approved the GoA?s 2009 and 2010 budget
bills (ref A) with support from the government coalition parties,
the Social Democrats (SPO) and the People?s Party (OVP),and over
the opposition of all other parties (the Greens, the Freedom Party
(FPO) and the Alliance for the Future of Austria (BZO)). The 2009
budget shows nominal expenditures of EUR 77.5 billion ($108.5
billion at the current exchange rate of $1.40/EUR) and revenues of
EUR 63.9 billion ($89.4 billion). Net of asset swaps, i.e. EUR 6
billion ($8.4 billion) in revenues from dissolution of reserves and
EUR 9.3 billion ($13.0 billion) in expenditures for equity
participations in banks, the relevant federal deficit pursuant to
EMU Maastricht criteria is EUR 9.0 billion ($12.6 billion) or
3.2%/GDP.


3. (U) The figures for 2010: expenditures of EUR 70.8 billion ($99.1
billion),revenues of EUR 57.6 billion ($80.6 billion),and a
Maastricht deficit of EUR 11.6 billion ($16.2 billion) or 4.1%/GDP.


4. (U) The benchmark for international comparisons is the total
public sector deficit (encompassing all levels of government,
according to the EMU?s Maastricht definition). A 2008 agreement
requires provincial governments and other public bodies to render a
surplus of 0.5%/GDP annually to offset some of the federal deficit,
but due to the economic crisis those bodies will also run a deficit
estimated at 0.3-0.6%/GDP. In sum, the GoA projects the total
public sector deficit to reach 3.5%/GDP in 2009 and 4.7%/GDP in
2010, and says consolidated public sector debt will reach 68.5%/GDP
by the end of 2009 and 73%/GDP by the end of 2010, with the federal
government accounting for more than 90% of the debt. COMMENT: as
detailed below, those estimates are far too optimistic -- END
COMMENT.

Price Tag for Fiscal Stimulus
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5. (U) Crisis spending, tax cuts, and automatic stabilizers will
drive up deficits sharply. While the EUR 100 billion bank rescue
package has had a limited budgetary impact so far, other crisis
measures are have an immediate impact on the budgets, mostly in 2009
but some also in 2010. These include:

-- the first economic stimulus package in late fall 2008, with
infrastructure measures for railroads and road construction and
subsidies, loans, and guarantees for SMEs,

-- the second economic stimulus package, which moves forward GoA
building investments, accelerates depreciation of tangible assets,
give subsidies for thermal retrofitting of buildings, additional R&D
funds, and funds an obligatory free Kindergarten year for pre-school
kids.

-- an income tax cut (retroactive to January 1) valued at EUR 2.3
billion, increased family payments of EUR 0.5 billion, and measures
for the self-employed costing EUR 0.3 billion. As a result, half of
Austrian wage earners no longer pay income tax.

-- an EUR 220 million labor market package with measures to support
employment and training and finance reduced-work arrangements.

-- the ?cost-of-living? measures Parliament enacted before September
2008 elections, including a thirteenth monthly family allowance, a
higher nursing care allowance, the abolition of university student
fees, an extension (from 2010 to 2013) of the possibility for early
retirement without cuts in pension payments, and a VAT cut on
pharmaceuticals from 20% to 10% -- altogether costing over EUR 1.5
billion annually (ref D).

Political Debate over Budgets
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6. (U) Defending the budget in Parliament, Finance Minister Josef
Proell painted the 2009/10 budgets as a decisive reaction to the
financial and economic crises. With a bank rescue package to
stabilize credit markets, fiscal stimulus for investment and
industry, and the income tax cut to strengthen private consumption,
Proell explicitly endorsed temporarily higher deficits, but called
on all levels of government to prepare for administrative reforms
and cut-backs.


7. (U) The opposition predictably panned the budgets. Far-right FPO
head Heinz-Christian Strache criticized the income tax cut as too
small. BZO (also far-right) Chairman Josef Bucher accused the GoA
of ?flying blind? on budgets and stalling on reforms, and predicted
a ?crash landing.? Green party chairwoman Eva Glawischnig accused
the GoA of exacerbating poverty and misery by not increasing
unemployment benefits and emergency welfare payments.

Line Item Highlights
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8. (SBU) GUARANTEES: GoA guarantees for various purposes stand at
EUR 104 billion ($145.6 billion) at the end of 2008 (2007: EUR 80
billion). The sharp increase in 2008 was primarily due to higher
demand for export financing guarantees and guarantees for interbank
lending and bond issues under the new bank rescue package (ref C).
Those effects will continue and grow with the GoA?s economic
stimulus guarantees -- the level of outstanding guarantees will rise
further in 2009 and 2010 -- as will GoA outlays to cover more
failures.


9. (SBU) DEFENSE: The MoD?s funding level in 2009 will be EUR 2.112
billion. While this is a nominal 3.6% increase from 2008 budgeted
levels, in fact it represents a decline of 2.8% (EUR 61 million)
from the actual spending level in 2008. Defense expenditures will
comprise around 2.7% of 2009 budget expenditures or 0.75%/GDP (down
from 2008 actual spending of 0.77%/GDP). For 2010, the defense
budget is essentially flat (EUR 2.122 billion, an increase of EUR 12
million or 0.57%). Defense will take a slightly larger share of
falling total budget expenditures in 2010 (3%),but stagnate in
terms of GDP (0.75%). At that level, MoD funding is rock bottom and
far from the 1.0%/GDP level the Armed Forces Reform (Bundesheer)
Commission in 2004 stated was required to adequately fund the
Bundesheer's reform program.


10. (U) EU Contributions: The 2009 budget includes EUR 2.2 billion
(2010: EUR 2.4 billion) in EU contributions versus expected EU
payments of EUR 1.8 billion (2010: EUR 1.8 billion),amounting to a
net contribution of approximately EUR 361 million (2010: EUR 613
million).


11. (U) Civil Service: The GoA will make only minimal cuts to civil
service jobs. Excluding employees of the federal railroads, postal
company and other entities, the GoA has some 136,500 civil service
jobs. Expenditures for active personnel will total EUR 10.7 billion
in both 2009 and 2010 (including transfers to provincial governments
for the salaries of 67,500 teachers). Pension expenses for the
growing ranks of civil service retirees will be about EUR 4.3
billion annually or EUR 7.4 billion including railroad and postal
retirees. Thus, total GoA personnel expenditures for active and
retired civil service employees (including outsourced and refunds)
will be around EUR 18.1 billion per year, equal to 23% of total
budget expenditures in 2009 and 26% in 2010.


12. (U) Pensions and Social Affairs: Excluding civil service
pension expenses, GoA contributions to the social insurance system
for pensions should rise to EUR 7.3 billion in 2009 from EUR 6.6
billion in 2008, and further to EUR 7.8 billion in 2010. For labor
market programs and unemployment benefits, the budget includes EUR
6.0 billion in 2009 and EUR 6.4 billion in 2010, and for family
allowances and nursing benefits EUR 8.0 billion in 2009 and EUR 8.4
billion in 2010. Including minor amounts for other programs, the
GoA?s total social services expenditures, excluding civil service
expenses, will be EUR 23.1 billion in 2009 and EUR 24.6 billion in
2010 (2008: EUR 21.3 billion). In addition the GoA will spend
about EUR 1.0 billion annually for health services and hospitals.

COMMENT
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13. (SBU) Austria?s public deficits will be an order of magnitude
higher than in 2008 (0.6% and 0.4%, respectively) and well over the
3%/GDP reference value for Euro-zone economies. Local economists
support the current stimulus, but are concerned that the GoA has
failed to update its projections. The budgets are based on outdated
growth projections of -2.2% in 2009 and 0.5% growth in 2010 (and
unemployment rates of 5.0% and 5.3%, respectively). Current
forecasts see a deeper and longer recession: the European Commission
sees -4.0% in 2009 and stagnation in 2010, while Austria?s central
bank forecasts -4.2% in 2009 and -0.4% in 2010 (with unemployment

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rates of 5.3% and 6.5%, respectively). Bernhard Felderer (Head of
the Federal Debt Commission) has said Austria?s debt ratio
(58.4%/GDP in 2008) could easily reach 80%/GDP by 2013 while GoA
annual interest payments will top EUR 10 billion (versus EUR 7.5
billion in 2008). Felderer and others want the GoA to announce
decisive spending cuts to return the debt level to 60%/GDP within
the next five to ten years, since revenue increases will be
problematic.


14. (SBU) While pre-election giveaways in late 2008 softened the
initial crisis impact, they do nothing for long-term recovery or
productivity. The GoA enjoys broad approval for its decisive
economic stimulus and bank rescue efforts, but the real test will
start in late 2010, when FinMin Proell will have to cut deficits
dramatically and try to stop the debt ratio?s rise. 2011 will be
particularly trying, since elections will loom larger on the horizon
(parliamentary elections will be in fall 2013 at the latest).
Austria?s grand coalition, which quickly united on new spending,
will face tremendous divisions over budget consolidation since the
SPO tends to favor new/higher taxes while the OVP leans towards
cutting expenditures -- and unemployment will be higher than today.
In such a trying climate, Austria?s growing opposition parties may
grow further.

ORDWAY