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The Tax-Spend Debate and Budgetary Policy in Austria

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Abstract

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.

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Notes

  1. The level of public debt discussed in this paper is based on the regulations according to European System of Accounts (ESA 1995); only in October 2014, the definition of “public debt” was reformed in order to include, among others, off-balance debt of public enterprises which were left out before. This paper still uses the definition of public debt which was used before, mainly because the new definition does not lead to an altered structural consideration, but instead leads to a significant upward shift of public debt in Austria.

  2. The aim of the paper is not to discuss whether consolidation packages are effective, efficient or just an instrument to balance public budgets. There has been much critique and debate on the causes and consequences of austerity packages as well as the economic and financial crisis, and on the pathways to overcome the current structural problems.

  3. Owing to space restrictions, we leave out a detailed presentation of the econometric tests employed in this paper in terms of approaches and well-known equations of these tests. However, in order to clarify our results, we provide the detailed references for all tests in footnotes of the respective tables. For the analyses presented in Tables 2, 3, 7 and 8, we used the econometric software EViews 8 which has these tests built in. For the second generation panel unit root tests, presented in Tables 4, 5 and 6, we used MATLAB and the respective codes provided by C. Hurlin at www.runmycode.org (accessed September 2014).

  4. The reduction of spending may, in principle, be advised to reduce the public deficit. However, it must be further ascertained whether these reductions can be considered as structural reforms, or which effects in terms of efficiency or social justice are connected with the current budgetary policies. In addition, reforms in the pension and health system that may be reasonable should not distract from one of the major reasons for increasing public debt which lies in the huge cost of financial market packages such as the losses of state-owned banks like the ‘Heta’ (formerly Hypo Alpe-Adria), now subject to the EU’s Bank and Recovery Resolution Directive.

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Acknowledgments

The authors would like to thank the participants of the 77th International Atlantic Economic Conference in Madrid, Spain, April 2–5, 2014. Anonymous reviewers provided many helpful suggestions for substantial improvements of the paper. All errors are, of course, the responsibility of the authors.

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Authors and Affiliations

  1. Center of Public Finance and Infrastructure Policy, Department of Spatial Planning, TU Wien, Resselgasse 5, 1040, Vienna, Austria

    Johann Bröthaler & Michael Getzner

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  1. Johann Bröthaler
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Correspondence to Johann Bröthaler.

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Bröthaler, J., Getzner, M. The Tax-Spend Debate and Budgetary Policy in Austria. Int Adv Econ Res 21, 299–315 (2015). https://doi.org/10.1007/s11294-015-9532-1

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