The Tax-Spend Debate and Budgetary Policy in Austria

In the aftermath of the 2008 financial and economic crisis, governments developed plans to steer fiscal policies back to a sustainable path. Austria is no exception, since the latest 2012 consolidation package aimed to balance the budget by 2016. For the success of consolidation policies, however, it is of great importance which fiscal policy strategies are pursued. For instance, should the deficit be reduced by reducing expenditure, by increasing revenue, or by a mixed coordinated policy? Empirical evidence from the mid-1990s indicated that Austria’s policy makers followed a path according to the spend-tax hypothesis, deciding on expenditure and then caring about the funding of public tasks. Since 1995, the year of Austria’s accession to the European Union, fiscal policy frameworks have changed (e.g., Maastricht Treaty, Fiscal Pact), and thus budgetary policies might have changed as well. The current paper provides new econometric evidence for a stable spend-tax fiscal policy decision process in Austria for the last 60 years. Therefore, it seems that the importance of reducing expenditure (about 72 % of the total consolidation volume in the current package) accounts for this principal approach in Austrian fiscal policy making. However, left open is whether the envisioned increase in revenues (about 28 % of the total consolidation volume) might be counterproductive for sustainably balancing the budget. Copyright International Atlantic Economic Society 2015