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On 8 March Scope affirmed Austria’s AAA rating with a Stable Outlook given the country’s euro area membership, its wealthy, diversified and internationally competitive economy, robust economic growth rates, ongoing fiscal consolidation, favourable public debt profile, low private sector debt levels and improvements in the banking sector, including exposures to Central and Eastern European countries.

At the same time, Alvise Lennkh, analyst at Scope, notes that Austria faces several medium-to-long-term challenges, including a still-too-low labour participation rate, subdued multifactor productivity, the challenges arising from an ageing population and an overly complex federal fiscal structure.

Austria’s labour participation rate remains comparatively low, particularly for women, the low-skilled and the elderly. Although it has increased since the early 2000s from below 70% to around 74% today, it remains below that of Germany (83%), the Netherlands (82%) and Finland (77%).

In addition, Austria’s population is ageing with a steady increase in the population of those aged 65 or above. Current pension expenditure is comparatively high and is expected to rise further as life expectancy increases while the statutory retirement age remains fixed. Similarly, while efficiency gains can be made in Austria’s oversized hospital sector, in the absence of reforms, the European Commission estimates that Austria’s total healthcare and pension-related expenditure will be 22.7% of GDP in 2040, above the euro area average (21.0%), Finland (20.7%), Germany (20.0%) and the Netherlands (15.5%).

Scope also notes that Austria’s federal fiscal framework still suffers from a pronounced misalignment between spending powers and revenue-raising responsibilities across the different levels of government. “The fiscal framework is complex and gives subnational governments weak incentives to contain costs as their spending powers are disproportionately higher than their revenues from autonomous taxes”, says Lennkh.

Indeed, according to the OECD, in 2016 (the year with the latest figures available), subnational governments raised revenues amounting to 2% of GDP from their own taxes, while their overall expenditure amounted to 17.7% of GDP. While the federal government has presented a legislative package including spending reviews, a reform of subnational competencies and discussions on increasing sub national tax autonomy, the Austrian Fiscal Council highlights that many of these reforms are behind schedule or have not been continued in the form originally agreed.

“The reform effort to tackle Austria’s structural issues – from raising potential growth, a labour-unfriendly taxation system, age-related challenges and federal fiscal structures – has been limited to date”, says Lennkh.

Finally, despite its market-friendly rhetoric, the government’s conversion of ÖBIB (Österreichische Bundes- und Industriebeteiligungen GmbH) into ÖBAG (Österreichische Beteiligungs AG), reflects its desire for greater state interventions via a strong representation on the supervisory boards of the partially state-owned companies – including Post (53%), OMV (32%), Telekom Austria (28%), Casinos Austria (33%), Verbund (51%) and Bundesimmobiliengesellschaft (100%). The next general election is scheduled for 2021, which gives the current government, led by Sebastian Kurz, enough time to implement is agenda.