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Tax Reform Analysis by Bank Austria Economics:
Tax reform supportive for the economy in 2016, but structural budget deficit to rise slightly

• Bank Austria economists anticipate economic effect of +0.4 per cent of GDP in 2016 from the tax reform
• Counter-financing measures do not completely cover the reduction in burdens in 2016, but over several years the impact is broadly revenue-neutral
• Weak points in counter-financing measures in 2016 mainly in the field of combating fraud
• Instead of a zero deficit: structural budget deficit expected to increase modestly to 1.3 per cent of GDP in 2016
• Compliance with the statutory "debt brake" in 2017 is only possible with effective structural measures

"The tax reform in Austria will result in a significant reduction in tax burdens totalling EUR 5.2 bn, has certain very sensible aspects in terms of distributional policy and will have a positive effect on the economy in 2016," according to Bank Austria’s chief economist Stefan Bruckbauer, in an analysis by Bank Austria which focuses on the recently presented tax reform in Austria. He continues, "At the same time, it is likely that the structural deficit will increase mildly in 2016. The officially planned structural deficit of zero is thus not feasible from the current perspective, unless additional structural measures are taken in the months ahead. Accordingly, following the recently presented tax reform, the next step in Austria is: And now, on to the reforms! Specifically, there is a need to realise the savings and structural measures which have not yet been undertaken, in order to set public finances onto a sustainable path."

Tax reform has something for everyone
The tax reform bolsters purchasing power. Thanks to the reduction of the lowest tax bracket to 25 per cent, all taxpayers will feel some relief. The flatter progression means that lower and middle income levels will experience a stronger relative decline in tax burdens. Furthermore, due to the reimbursement of social insurance contributions, the lowest income groups with a high ratio of consumption will feel significant tax relief. Based on calculations by the economists at Bank Austria, adjustment of the wage and income tax results in a positive economic gross effect of just over one per cent of GDP in 2016. At the same time, however, the counter-financing has a negative effect on the economy of around 0.6 percentage points, so that the net effect of the measures (i.e. tax relief less counter-financing) is significantly less intense. "We expect a positive economic effect of 0.4 per cent of GDP for 2016. In addition to the redistribution effects, another reason for this growth impulse is that the tax reform will not have an revenue-neutral effect in 2016 at least," explained Bruckbauer.

Viewed over a period of several years, the tax reform is revenue-neutral, but during the first year, the shortfall in revenue is not covered by the counter-financing measures. Based on calculations by the economists at Bank Austria, the tax reform results in an additional financing gap of just over one billion euros in 2016. Of the planned 1.9 billion euros in counter-financing in the field of tax and social insurance fraud, only 50 per cent will actually have an effect on the budget in 2016, as it is expected that the introduction of mandatory online cash registers will be delayed and the estimates of additional revenues from the bank account review powers appear very optimistic. Furthermore, savings on subsidies and in administration are projected at 1.1 billion euros and this is hardly possible to achieve during the first year, as the approach in this regard is to merely ease increases in costs and not to implement rapid cost-cutting measures. On the other hand, the estimated self-financing amount of 850 million euros appears optimistic, but not unrealistic.

Bank Austria economist Walter Pudschedl: "Due to the presumed financing shortfall of more than 1 billions euros from the tax reform, along with the official plans for 500 million euros from a financial transaction tax, we now project that the overall public deficit as per the Maastricht definition will amount to 1.5 per cent of GDP."

In contrast to the current plans presented by the government, the structural deficit will also be higher. "After 1.0 per cent of GDP in 2015, we forecast a structural deficit of 1.3 per cent of GDP in 2016. It will thus not be possible to reach the officially planned structural deficit of zero, unless additional structural measures with quick, tangible effects on the budget are taken in the months ahead. Based on the currently available information, however, we do not expect this to happen. In 2017 at the latest, stronger efforts will be needed to reach the legally mandated zero deficit," according to Pudschedl.

The analyses of Bank Austria’s Economics and Market Analysis Austria can be found on the Internet at www.bankaustria.at / Über uns / Mediathek / Wirtschaftsanalysen & Studien / Österreich or accessed directly at http://www.bankaustria.at/en/about-us-publications-economic-research-austria-reports-und-analyses.jsp.

Enquiries: Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel. +43 (0) 50505 - 41957;
E-mail: walter.pudschedl@unicreditgroup.at