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The Fiscal Consolidation Program from a Short-term and Medium-term Perspective

  • Economics
  • Political Science


In January 1995 the Austrian Institute of Economic Research carried out a preliminary assessment of the consolidation measures as provided in the Working Agreement between the two coalition parties ("austerity package"). In the meantime, several items contained in this package have been changed, and the Parliament has passed the federal budget for 1995. The new evaluation is based on the federal budget 1995 as well as on the likely development of expenditure cuts up to 1998 according to the intentions of the government expressed so far. According to the present program, expenditure cuts are only half as large as envisaged in the austerity package; furthermore an increase in revenues is proposed in the budget. These changes move the budget further away from the consolidation target, but at the same time ameliorate possible negative distributive effects. The consolidation measures are estimated to relieve the federal budget by a cumulated Sch 127.5 billion over the period 1995-1998, with half of the savings coming from expenditure cuts, the other half from an increase in revenues. Compared to a scenario without fiscal restraint, new indebtedness of the central government will be reduced by Sch 29 billion in 1995. These savings more than offset the direct and indirect cost of accession to the EU (contribution to the EU and compensation for farmers). According to the simulations of the macroeconomic model, the consolidation measures lower the level of real GDP by 0.4 percentage points and reduce the number of jobs by 13,000 in the year 1998. The increase in the mineral oil tax will raise consumer prices by ¼ percent. The balance in the current account will be relieved by Sch 17 billion (0.5 percent of GDP) in 1998. Net lending of general government will improve by 1 percent of GDP, and in 1998 will total 2.6 percent of GDP, dropping below the Maastricht convergence goal of 3 percent. The public debt ratio is expected to steadily decline to 64 percent. The austerity program pursues two goals: to strengthen the hard-currency policy by fiscal restraint and to meet the convergence criteria for participation in a future European Monetary Union. The budget proposal for 1995 is a first step in the direction of a medium-term consolidation of the budget. Over the following years there will be some maneuvering room left in the choice of specific instruments for attaining this goal.

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