The measures presented to the European Commission by Austria (AA+/Stable) have avoided an immediate excessive deficit procedure (EDP) for 2025. However, the medium-term fiscal outlook depends on additional, structural fiscal consolidation and reform efforts to stabilise Austria’s public debt trajectory and build up fiscal buffers, a key credit consideration.

Austria’s leading political parties, the FPÖ and ÖVP which are in coalition talks, have agreed to the consolidation measures for 2025, worth EUR 6.4bn or 1.3% of GDP, which focus mostly on expenditure cuts. If implemented in full, the measures would lower the fiscal deficit to around 3.0% of GDP this year from an expected 3.7% of GDP in 2024. Austria’s general government expenditure – which was the fifth highest in the EU at 52.7% of GDP in 2023 – would fall to nearer the pre-pandemic level of 49.1% in 2019, which is in line with the EU average of around 49%.

The incoming government needs to carefully calibrate budget consolidation to avoid stifling the timid economic recovery. We assume 0.5% growth in 2025 after a 0.9% contraction expected for 2024. From 2026, we project average annual growth at around 1.2% until 2028 versus 1.4% for the euro area.

Longer-term, Austria needs further consolidation to comply with EU fiscal rules. If a seven-year consolidation plan is adopted, additional required savings would average EUR 2bn (0.36% of GDP) each year from 2026-31 (Figure 1). Conversely, if authorities opted for a four-year consolidation path, required annual consolidation efforts would increase to an average EUR 5.9bn, or 1.12% of GDP for 2026-28, which appears particularly challenging given the outlook for only moderate economic growth.

Reductions in primary deficits in line with a seven-year consolidation path would stabilise Austria’s general government debt-to-GDP ratio at around 80% (Figure 2). This compares with around 90%, on average, for countries rated AA. In a no-policy-change scenario, deficits would likely stay at or above 3.5% of GDP until 2028, in line with projections from the Austrian Fiscal Council, and on that basis, the debt burden would gradually trend towards 90% of GDP over the long term, which would be a key credit risk.

Structural reforms key for long-term trajectory of public finances

Critically, Austria’s medium-term fiscal outlook hinges on the incoming government’s commitment to address the country’s long-standing challenges. Structural pressure points on the budget stem primarily from the country’s pension system, ageing-related healthcare and long-term care costs, as well as complex inter-governmental relations with lower tiers of government.

In its long-term budgetary forecasts, the Federal Ministry of Finance projects expenditure on pensions, healthcare and long-term care will rise to 23.2% in 2025 and 24.2% by 2030 from 21.8% of GDP in 2019. According to IMF estimates, implementing reforms in the healthcare and pension system, such as partially linking the statutory retirement age to life expectancy, could realise cost savings of 1.4% of GDP by 2030.

Finally, structural reform to Austria’s labour market to further incentivise higher participation rates and more hours worked particularly from women and the elderly could increase potential output and support the budget. Part-time employment is particularly prevalent among women (50.8% in Q3 2024 versus around 33.7% for the euro area) while the participation rate for persons aged 55-64 of 53.5% is below the euro area average of 63.2%.