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Tax cuts in Austria. Placebo or genuine reform?
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Tax cuts in Austria. Placebo or genuine reform? 
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Stop-and-go policies have characterised the fiscal course in Austria for decades.While in all other EU-15 Member States the tax wedge on labour declined in the recent past, it continued to increase in Austria. The Austrian government, alarmed by the continuous increase the tax burden, announced to steer a different course: The new objectives are to reduce the tax burden significantly to below 40% of GDP and at the same time return to budgetary balance. The tax break in personal income taxes targets above all low income earners, while providing considerable relief for 90% of the taxpayers. Triggered by similar measures in neighbouring countries, corporate taxes are lowered noticeably. Despite considerable budgetary cost, boosting the deficit in 2005 by some 0.8 percentage points of GDP, the short-term impact on growth is estimated to remain quite limited. A crucial factor is the behaviour of private households, which in turn depends on the credibility of the new fiscal policy course. Based on experience, economic agents may believe that the tax break will be followed by tax hikes later on. Therefore, increasing precautionary savings would be a rational reaction. This would reduce the impact of the tax reform. To prevent this, tough measures curbing primary spending are called for.
(Country Focus 06. March 2004.
Brussels. Free.)
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