Sustainability of Public Finances

Recent and upcoming demographic changes cause a doubling of the share of 65+ year-olds in the working-age population, from 25% now to over 50% in 2050. Austria is faced with this fact like most industrialized countries. Ageing populations generate economic and budgetary challenges. Therefore, safeguarding sustainable public finances is a central matter of concern in the Austrian economic and budgetary policy. It is unavoidable, especially with regard to future generations, to consolidate in particular those budget items which probably will pose the highest risk to the sustainability of public finances.   Austria’s long-run strategy to secure the sustainability of public finances follows the three-pronged strategy at EU-level and involves following objectives:

1. Reduction of the debt-to-GDP ratio and a roughly balanced budget by 2009

The national debt ratio continued to fall during the past years from 66.0% of GDP in 2001 to 61.7% of GDP in 2006. In 2007 the national debt ratio is to decline to below the reference value of the Maastricht treaty of 60% of GDP. By reaching a structural balanced budget by 2010 also the debt-to-GDP ratio will be reduced. In 2010 the national debt ratio will amount to 55.4% of GDP. Thereby, the room for budgetary manoeuvre will increase noticeably in the medium-term.

2. Sustainable financial safeguarding of pension-, health- and long-term care systems

Pension, health and long-term care systems shall be orientated towards sustainability, while at the same time ensuring high performance levels and fairness among the generations. The low budget deficits and the pension and health care reforms of recent years make an essential contribution to the sustainability of Austrian finances. Following the most recent long-run projections (on basis of EC and EPC projections), overall public pension expenditures will rise from 13.9% of GDP in 2006 to a peak level of 15% of GDP in 2032, after which they will fall to 13.1% of GDP in the year 2050. A considerable dampening effect on pension expenditures comes form the parametric pension reforms of recent years. Those reform measures aim at raising the effective retirement age and at a clear improvement of minimum pension provision. These measures will secure an adequate income level in the future through the formula “65-45-80”¹⁾  together with the extension of the second and third pillars (firm-related benefits and private pension plans). 

3. Increase in employment rates and a rise in the growth of productivity

As a result of the ageing population the rate of potential growth will decline in the long-run by about 1 percentage point by 2050, in comparison to about 2¼% (real) today according to EU projections. Through structural and budgetary reforms and particularly through a strengthened knowledge base and innovative ability of the economy the medium- to long-term growth potential shall increase. First successes are already visible: the Austrian employment rate amounted in total to more than 70% in 2006, and to 63.5% for women in the same year. Both rates already fulfil the Lisbon employment goals. Also, the employment rate of older workers rose considerably to 35.5% in 2006 (by 4 percentage points compared to 2005). Nevertheless, Austrian economic policy aims at further increasing the employment rate and employability of older workers.

Age-related public expenditures will hardly increase by 2050. Consequently Austria belongs to those EU Member States with the lowest risk to the sustainability of public finances, as acknowledged by the EC.

1) Pension entitlements are subject to individual lifetime earnings, reaping the maximum benefits of 80% of average earnings in the case of 45 insurance years at the statutory retirement age of 65 years. 

Long-term sustainability of public finances1)	2006	2010	2020	2030	2050
% of GDP
Age-related expenditures	25.7	24.7	25.3	27.2	26.2
Total pension expenditures2)	13.9	13.4	13.8	15.0	13.1
of which: Social security	10.3	10.1	10.7	12.2	11.9
Health care3)	5.3	5.4	5.9	6.3	6.8
Long-term care3)	0.6	0.6	0.8	1.0	1.5
Other age-related expenditures4)	5.9	5.3	4.8	4.9	4.8
Revenue from pensions contributions5)	8.8	9.0	9.0	9.0	8.7
Assumptions
Real GDP (potential growth in %)	2.2	2.2	1.6	1.0	1.2
Labour productivity (rate of change in %)	1.8	2.1	1.8	1.7	1.7
Employment rate males (aged 15-64)3)	76.9	79.2	80.3	80.2	80.8
Employment rate females (aged 15-64)3)	63.5	67.8	70.6	71.1	71.8
Employment rate total (aged 15-64)3)	70.2	73.5	75.4	75.7	76.4
Unemployment rate	4.7	3.9	3.9	3.9	3.9
Population aged 55+ as a percentage of the working-age population	25.2	26.2	30.9	41.9	52.5

1) Based on EPC and EC forecasts
2) Excl. additional social assistance benefits and pension expenditures for administration, rehabilitation, etc.
3) Based on EPC forecasts
4) Incl. unemployment assistance and expenditures for education, according to EPC forecasts
5) Social security and public servants, according to EPC forecasts

Source: EC, EPC, Federal Ministry of Finance, Federal Ministry of Social and Consumer Protection

• Long-term sustainability of Public Finances in the EU - Report 4/2006 (1466 KB)

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