The Impact of EU Accession on Austria's Budget Policy

This paper analyzes Austria's budget policy prior to accession to the European Union (EU) and budgetary action taken to support the opening up of the domestic economy and its integration into the EU. Moreover, it assesses the impact that joining the European monetary union has had on Austria's fiscal strategy. The analysis reveals several regime changes over the past few decades: While the fiscal policy goal of the 1960s was, in essence, that of achieving a balanced budget, the government's commitment in the 1970s to developing the welfare state and to pursuing a stabilizing role in addition to its allocation function fundamentally changed the fiscal framework. The rapid rise in the debt ratio that ensued in the second half of the 1970s triggered a debate on the necessity of enforcing upper limits for budget deficits (as a percentage of GDP). This debate led to the proposition of the so-called Seidel formula, with which the federal government's budget deficit regained significance as a fiscal policy target. The government indeed responded to the rising interest payments on the spiraling debt with — heavily debated — consolidation measures. While EU accession as such in 1995 was not deemed to create substantial need for fiscal action, a general government deficit ratio in excess of 5% of GDP called for significant consolidation measures in its own right in 1996 and 1997 in order to ensure that Austria would be among the founding members of the euro area. The new coalition government coming into office in 2000 staged a fiscal policy turnaround in so far as it propagated the goal of a balanced general government budget, which was indeed reached in 2001. Yet given the ongoing weakness of the economy, the goal of achieving strictly balanced budgets has since been redefined into balancing the general government budget over the business cycle. With its decision to design another tax reform, not fully financed right away, Austria recently changed its fiscal policy strategy yet again, incurring a “temporary deviation” from the medium-term target under the Stability and Growth Pact