Financial predicament: Have you noticed the escalating national debt?
Here's a rewritten version of the article, adhering to the guidelines provided:
In a upcoming address, Markus Marterbauer, the newly appointed Finance Minister of SPO, plans to lay out his first budget for 2025 and 2026. The proposed budget features significant cuts: 6.4 billion euros this year and 8.7 billion in 2026. It seems likely that Austria will face an EU deficit procedure as the ninth EU country to do so. This year, the nation will miss the EU Maastricht criteria for the second consecutive year.
Austria's debt situation appears relatively stable in comparison to other countries internationally. The key figure is the debt quota, which represents the state's total debt in contrast to its Gross Domestic Product (GDP). By 2026, this quota is projected to reach 86 percent, according to forecasts. However, it's 121 percent in the U.S, 135 percent in Italy, and an astounding 237 percent in Japan.
Wondering about Austria's woes? Learn the answers to crucial questions:
How does a state amass debt?
Typically, governments borrow money by issuing bonds to banks or citizens. A bond can have a short, medium, or long-term duration, and it can provide either fixed or variable interest. Thanks to the low-interest policy of the European Central Bank, government bonds were relatively cheap for a long time. However, this has changed due to the energy crisis and inflation. This shift affects Austria, making new debts more costly.
What debt levels can a state handle?
According to a study by US economists Kenneth Rogoff and Carmen Reinhart, economic growth suffers when the debt quota exceeds 90 percent. Yet, this study from 2010 was criticized for a calculation error, and many disputed its broad applicability to individual countries without considering their specific economic relationships, as pointed out by WIFO financial expert Hans Pitlik.
Priorities the government should set
Key Differences in Economic Standing
While Austria's debt quota moving towards 90 percent may not seem drastic relative to nations like Japan or the U.S, these countries have a key advantage, as stated by Pitlik: "They have their own currency, meaning they can't become insolvent. The U.S can essentially pay off its debts by printing dollars." This advantage is unavailable to Euro-zone countries like Austria "collectively." Conversely, printing too much money causes inflation.
Critical or not?
Pitlik states that "critical still sounds too dramatic" for Austria's situation. This would become apparent if financial markets were to lose trust in Austria and there were high surcharges on interest rates on government bonds, as our nation experienced during the financial crisis around 15 years ago in Greece. "Austria is still a ways off," remarks Pitlik. Still, "the higher the state debts, the higher the interest expenses will be in the end." Austria's interest expenses already place a substantial strain on the budget and significantly limit the scope of action for future governments. For example, in areas like climate protection, healthcare, or education.
Before the Budget Speech: First Cracks in the Coalition?
If Austria's national debt is divided by its population, each Austrian currently carries 54,000 euros of debt. This figure continues to rise. As long as the state can service its debts without cutting services, this is irrelevant to our personal bank accounts. Nevertheless, the crisis is already making itself felt in certain areas. According to Pitlik, this can be observed by:
- Interest costs: If the government has to pay higher interest on its debts, private investors will typically see increased rates as well. "Rising interest rates affect everyone," says Pitlik. This has been noticeable in the construction industry for some time now, where demand has significantly decreased.
- Savings: Austerity programs often cut back on services, specifically in the social sector. What this means concretely is shown by measures taken by the federal government: social benefits are no longer adjusted for inflation, the climate bonus has been abolished, and access to early retirement has been tightened.
- Tax increases: Instead of saving on expenses, the government can also increase taxes or contributions. The government has already implemented stricter measures in areas like tobacco and gambling. Additionally, health insurance contributions for pensioners will increase from 5.1 to 6 percent as of June, affecting around 1.75 million people.
FPO negotiator Schiefer: "Then everyone will pack their bags"
Feeling the Effects of the Crisis?
The Turkish-Green coalition has implemented a comprehensive aid package in the past, featuring a price cap on electricity, one-time payments, and wage and pension increases in some cases that exceed inflation rates. Despite this, the domestic economy has shrunk for the third consecutive year. "The crisis certainly affects the citizens," emphasizes Pitlik. One can tell by the fact that people are increasingly worried about their job security. Although disposable incomes have even increased, there's a sense of restraint in consumption, which in turn negatively impacts corporate revenues.
Is the current austerity package sufficient to balance the budget?
No, the government acknowledges that this isn't enough. The plan is to collaborate with federal states and municipalities until autumn on "structural" measures, such as administrative streamlining and cuts to subsidies. However, experts believe this isn't sufficient. WIFO director Gabriel Felbermayr, for instance, suggests reconsidering the planned increase in civil service salaries for 2026—a proposition the ÖVP does not rule out. Economists Hanno Lorenz and Dénes Kucsera from the liberal think tank Agenda Austria even call for a zero-wage round for the public sector, sharply criticizing the ongoing austerity path: "It's much too little." The government could have saved 3.2 billion euros this year and another 7.5 billion euros by 2026 in administrative personnel and ministries, according to Agenda Austria. They suggest raising the statutory retirement age, a measure that the government may consider.
- The recently appointed Finance Minister of SPO, Markus Marterbauer, is planning to consolidate finance in Austria through a significant budget proposal for 2025 and 2026, which includes noticeable cuts to reduce the nation's debt.
- Political discussions about Austria's economic and social policy are heightened, as the proposed budget faces criticism for potential EU deficit procedures in 2025, following9 the nation's inability to meet the EU Maastricht criteria for two consecutive years.
- By 2026, Austria's debt quota, representing the state's total debt in contrast to its GDP, is projected to reach 86 percent, marking a noticeable increase from recent years.
- To curb the growing debt, the government is expected to take consolidation measures, such as reconsidering planned increases in civil service salaries for 2026 and implementing structural measures like administrative streamlining and cuts to subsidies, as part of collaborations with federal states and municipalities.