EUROPEAN COMMISSION Brussels, 26.2.2020 SWD(2020) 519 final COMMISSION STAFF WORKING DOCUMENT Country Report Austria 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2020) 150 final} EN EN CONTENTS Executive summary 3 1. Economic situation and outlook 7 2. Progress with country-specific recommendations 13 3. Reform priorities 17 3.1. Public finances and taxation 17 3.2. Financial sector 28 3.3. Labour market, education and social policies 32 3.4. Competitiveness, Reforms and investment 40 3.5. Environmental sustainability 49 Annex A: Overview Table 53 Annex B: DSA statistical annex 59 Annex C: Standard Tables 60 Annex D: Investment guidance on Just Transition Fund 2021-2027 for Austria 66 Annex E: Progress towards the Sustainable Development Goals (SDGs) 67 References 72 LIST OF TABLES Table 1.1: Key economic and financial indicators - Austria 12 Table 2.1: Summary table on 2019 CSR assessment 15 Table 3.1.1: Measures to reduce the tax wedge on labour 20 Table 3.1.2: Recent pension-related fiscal measures 25 Table C.1: Financial market indicators 60 Table C.2: Headline Social Scoreboard indicators 61 Table C.3: Labour market and education indicators 62 Table C.4: Social inclusion and health indicators 63 Table C.5: Product market performance and policy indicators 64 Table C.6: Green growth 65 1 LIST OF GRAPHS Graph 1.1: GDP growth and contributions [TO BE UPDATED] 7 Graph 1.2: Labour productivity 7 Graph 1.3: Contributions to potential growth 8 Graph 1.4: Labour productivity (real GVA per worker), EU-28, Austria (NUTS-2 regions), 2000-2017 8 Graph 1.5: Benchmark for nominal compensation growth 9 Graph 1.6: Key fiscal indicators 10 Graph 2.1: Overall multiannual implementation of 2011-2019 CSRs to date 13 Graph 3.1.1: Austria's tax mix and ITRs in EU comparison 18 Graph 3.1.3: Composition of Austria’s labour tax wedge in EU comparison 19 Graph 3.1.2: Marginal effective tax rate of a single household without children 19 Graph 3.1.4: Income relief provided by 2020 Tax Reform Act and 2020 Pension Adjustment Act 20 Graph 3.1.5: Consumption tax mix in EU comparison 22 Graph 3.1.6 Simulated CO₂ tax scenarios and compensatory measures 23 Graph 3.1.7 Distributional and equity effects 23 Graph 3.2.1: Credit to the private sector (y-o-y % change) 28 Graph 3.2.2: Price developments and valuation gaps 30 Graph 3.2.3: Venture capital in Austria (million euro), 2007-2018 31 Graph 3.3.1: Rates of activity, unemployment and NEET (not in education, employment or training) 32 Graph 3.3.2: Vacancies per registered unemployed and labour shortage by sector 32 Graph 3.3.3: Main indicators of poverty, 2005-2018 34 Graph 3.3.4: Participation of children under 3 years of age in formal childcare, 2010-2017 37 Graph 3.4.1: Productivity levels and change in the share of employment for aggregated sectors 2009 - 2018 40 Graph 3.4.2: Austria’s innovation strengths and weaknesses 42 Graph 3.5.1: Change in total GHG emissions 1990-2017 49 LIST OF BOXES Box 2.1: EU funds and programmes to address structural challenges and to foster growth and competitiveness in Austria 16 Box 3.1.2: The distributional and equity effects of introducing an explicit price for CO₂ 23 Box 3.3.3: Monitoring performance in light of the European Pillar of Social Rights 39 Box 3.4.4: Digitalisation as an opportunity for rural Austria 44 Box 3.4.5: Investment challenges and reforms in Austria 48 2 EXECUTIVE SUMMARY In a context of growing uncertainty and rapid back of the economic boom, the general technological change, further structural reform government budget surplus is expected to have and targeted investment could help Austria grown further to 0.4% in 2019 thanks to higher achieve more sustainable and inclusive growth. than expected revenues. The headline balance is The Austrian economy has performed well in expected to narrow to 0.2% of GDP in 2020, recent years, consistently recording one of the before expanding again to 0.4% in 2021, assuming highest levels of per capita GDP in the EU. no policy changes. The dip in 2020 is largely due However, rapidly changing economic conditions to a series of discretionary fiscal measures that underscore the need to tackle key outstanding were adopted shortly before the snap elections in challenges. Austria is still far away from reaching September 2019. its greenhouse gas emissions targets and this will make it more difficult to achieve carbon neutrality Identifying investment needs in green by 2040. There is considerable scope for technology and sustainable solutions, and comprehensive reform of the tax system to foster securing adequate funding will be key to environmental sustainability, fairness and inclusive delivering on climate and energy objectives and growth. Over the medium term, population ageing shaping a new growth model. To remain and the untapped labour market potential of competitive in international markets, Austria will women, the low-skilled and people with a migrant need to focus investment on the ecological background are expected to limit the extent to transition, research and (digital) innovation, and which labour contributes to economic growth and human capital. For the last decade, its investment this will require further reform efforts. In addition, ratio has been above the euro area average, but people’s educational success is still heavily investment growth is expected to be less lively in influenced by their socio economic background. the coming years. The high level of R&D As a result, future productivity growth hinges on expenditure is not translating sufficiently into improving innovation outcomes, digitalisation, the innovation outcomes. Digital technologies are still business environment and human capital. At the not widely used, particularly among smaller same time, curbing public expenditure remains businesses, and restrictive service sector regulation essential to ensuring long-term fiscal is hampering investment. Increasing energy sustainability. More comprehensive reform of the efficiency and the share of renewables would fiscal framework could make public spending strengthen Austria’s sustainable growth potential. more efficient, especially at subnational level. Investment in skills, affordable full-time childcare and all-day schools would help to improve labour The broad-based, solid economic growth of market outcomes, in particular for disadvantaged recent years lost momentum in 2019 and is groups and women. expected to remain moderate in 2020-2021. Austria had experienced fast growth (2.1-2.5%) Austria has made overall limited (1) progress in from 2016, but this slowed down in 2019 (1.6%). addressing the 2019 country-specific In line with worsening sentiment indicators, recommendations. (2) There has been some growth is set to remain moderate in 2020-2021, progress in the following areas: mostly due to expected lower industrial production, export and investment growth. Private focusing investment on research and consumption is expected to remain the main development, innovation and digitalisation; contributor to growth. After peaking in 2016, the unemployment rate decreased strongly and reached (1) Information on the level of progress and actions taken to 4.5% in 2019 (the lowest rate since the crisis) and address the policy advice in each respective subpart of a country-specific recommendation is presented in the is expected to only slightly increase (4.6%) in overview table in the Annex. 2020-2021. Over the medium term, with labour (2) As a result of the governmental crisis in June 2019, a contributing less, capital and total factor caretaker government took over until the end of the year. Following snap elections and coalition talks, the new productivity will become more important for government was sworn in at the beginning of 2020. The potential growth. following analyses report on planned measures and reforms as announced in the new government programme. However, the new plans are not incorporated in the Public finances are developing favourably. assessment of the implementation of the country-specific Having improved to 0.2% of GDP in 2018 on the recommendations. 3 Executive summary supporting productivity growth by stimulating particularly SDG 3 (good health and well-being). digitalisation of businesses and company However, it scores below EU average for SDG 13 growth; on climate action. reducing the tax wedge; Other key structural issues analysed in this report, which point to particular challenges for Austria’s ensuring the sustainability of the health care economy, are the following: system and The fiscal framework is still overly complex supporting full-time employment among and the tax mix relies too strongly on labour. women. Austria’s fiscal federalism provides weak incentives for efficient public spending at There has been limited progress in the following subnational level, due to a considerable areas: mismatch of revenue-raising and spending responsibilities. Greater subnational tax ensuring the sustainability of the pension and autonomy paired with a more transparent long-term care systems; allocation of competences across levels of government could improve political simplifying fiscal relations; accountability and incentives to contain costs. The tax system has considerable scope for reducing regulatory barriers in the service reform to foster fairness, inclusive growth and sector, and environmental sustainability. High labour taxes create significant disincentives for labour raising the levels of basic skills for demand and supply. Relying more on disadvantaged groups. wealth-related and environmental taxes, including a consistent taxation of CO2 There has been no progress in the following areas: emissions would be more efficient gains, make climate-friendly energy sources more Labour market outcomes for the low skilled.