Does Austria really have an economic problem? By European standards, it appears in an enviable situation. Gross domestic product will expand by 1.7 per cent this year — faster than in the past four years and at roughly the same pace as Germany, according to forecasts by Wifo, the Austrian institute of economic research.

At about 6 per cent, unemployment as a share of the workforce is relatively low. The country is affluent and Vienna regularly comes close to the top of global “liveability” indices, scoring especially highly for its infrastructure.

Yet a clue that all is not necessarily well with the economy comes in indices of global competitiveness. Austria ranked 19th in this year’s list compiled by the World Economic Forum, organisers of the Davos economic summit. Although higher than in previous years, that was a long way behind, for instance, the UK in seventh place. As for Austria’s western neighbours, Germany ranked fifth and Switzerland kept its position at the top of the list.

Further causes for concern are apparent in the country’s recent economic performance. Before this year, growth was at best spluttering and lagged behind the pace of expansion in Germany and across the eurozone. “If a country grows by less than 1 per cent for four or five years, there is obviously something wrong,” says Marcus Scheiblecker, Wifo’s deputy director.

While unemployment is low, the rate is rising. What is more, this year’s economic growth rate has been flattered by the impact of the migration crisis, which saw thousands fleeing wars in countries such as Syria and crossing Austria on their way to Germany and elsewhere. This brought a one-off boost to public spending from support for refugees.

As the European Commission warned in May, however: “The medium-term effect on employment and growth hinges on refugees’ successful labour market and social integration, including via educational support.” Given the controversy over migration, none of this can be considered a given.

Longer-term prospects are still more worrying. Austria received a substantial boost from its proximity to faster-growing eastern European nations after the fall of the Berlin Wall in 1989 and the subsequent expansion of the European Union. But it cannot expect more of the same in the future.

“We thought it was our performance but it was a growth illusion,” says Franz Schellhorn, director of the Agenda Austria think-tank. “We have had under-investment and shrinking productivity growth — the dynamism is not there.”

Among concerns are tax rates, especially on labour. According to the Paris-based Organisation for Economic Co-operation and Development (OECD), Austria’s so-called “tax wedge” — taxes on labour income paid by employees and employers as a share of labour costs — is the second highest among industrialised countries.

High taxes and government spending have long formed part of Austria’s economic approach. They have arguably been essential, for instance, in maintaining its very good transport infrastructure.

“You always have to work on your economic model,” concedes Jan Krainer, a Social Democrat parliamentarian. “We have a lot to do on our education system and making the public part of society more efficient and work better,” he adds. “But I don’t think we have to say ‘we’re no good at this, let’s downsize the public side.’”

In sharp contrast to Germany, however, Austria has long run public sector deficits, raising fears about whether expenditure levels will be sustainable without yet higher taxes. The risks are all the greater given Austria’s escalating pension and health liabilities. In a study this month by Allianz, the German financial group, the Austrian pension system was ranked 28th out of 54 countries in terms of long term sustainability — above France and Belgium but below Germany and the UK.

High government expenditure is not necessarily producing better outcomes, as appears clear from the education system. Spending per student in Austria is 30 per cent higher than the OECD average and its performance mixed, note some experts. “Quality and equity in Austria’s school education remain far behind what parents and taxpayers should expect,” said Andreas Schleicher, OECD director for education and skills, this year.

To tackle Austria’s problems, Christian Kern, the country’s new chancellor, plans a series of policy initiatives during the autumn, covering education, competitiveness, deregulation and investment incentives. He is discussing schemes to help start-up enterprises, which have long relied on state, rather than private, funding.

More broadly, Mr Kern has argued in favour of a shift away from taxes on labour and towards taxes on capital. Political gridlock in Vienna, however, cuts the chances of agreement on solutions to Austria’s economic difficulties in the near term.



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