By Julian Zimmermann, Sovereign and Public Sector

To stabilise the country’s debt trajectory, additional structural fiscal reform measures are essential, beyond the significant consolidation measures already committed to of EUR 6.4bn (1.3% of GDP) for 2025 and EUR 2.3bn (0.5%) in 2026. The general government deficit of 4.7% of GDP in 2024 far exceeds the government’s initial projection of 2.9% as well as our previous estimate of 3.3%.

Given further downside risks to growth from the persistent threat of US tariffs, with our baseline of a third consecutive year of economic contraction in 2025 (-0.2%), we estimate that a medium-term fiscal deficit of around 2.5% of GDP is needed to stabilise the debt trend.

We left Austria’s AA+/Stable long-term sovereign credit rating unchanged on 4 April 2025, highlighting the risk of a continuous rise in the debt ratio to around 87.5% of GDP in 2029, from 81.8% in 2024, which would be credit negative should it materialise.

Excessive Deficit Procedure for Austria increasingly likely

We expect an improvement in the fiscal deficit to around 4.0% of GDP this year, exceeding the 3% Maastricht threshold and likely triggering an Excessive Deficit Procedure. Consolidation measures already committed to and coordinated with the European Commission are likely to be broadly sufficient to meet consolidation targets for 2025/26. We expect the deficit to improve to around 3.7% of GDP in 2026.

The elevated 2024 deficit reflects structural pressure points related to high pension and healthcare costs. Ageing-related costs will rise by around two percent of GDP by 2030, according to the IMF. Austria operates a generous pay-as-you-go pension system, and a series of special pension hikes between 2018-23 (‘außertourliche Pensionserhöhungen’) have added annual budgetary costs of around EUR 1.3bn (0.3% of GDP) according to estimates by the Fiscal Council. In this context, a key comparative credit strength of Finland (AA+/Stable) is its high pension reserve, with earnings-related pension assets totalling EUR 270bn (98% of GDP) in Q3 2024, of which around 37% relate to the public sector.

We also note with concern that Austria’s medium-term fiscal balances will be further pressured by increasing interest expenditure (with net interest payments projected to increase to around 1.8% of GDP by 2029 from 1.0% in 2024) and defence expenditure, with a government target of 2.0% of GDP by 2032 from around 1.0% in 2024.

Window of opportunity to bring public finances on a more sustainable path

Austria’s credit rating continues to be supported by important strengths including its wealthy and diversified economy, a strong external position with low private sector debt, a sound banking sector and favourable public debt profile. The central government debt structure is highly resilient, with a long average maturity of 11.71 years, shielding interest costs in coming years to some extent from higher refinancing rates.

Moreover, following months of political uncertainty, the three-party coalition is in a position to implement necessary fiscal and structural reforms. These could include reforms to the pension system and streamlining healthcare services, where Austria faces relatively high spending per inhabitant compared with other European countries.

Efficiency gains could also be realised within Austria’s complex intergovernmental relations. The 2024 fiscal outcome showed a deterioration in the budget performance of state and local governments, which posted a combined deficit of 1% of GDP in 2024. This is despite significantly higher central government transfers to lower tiers of government, which increased from EUR 2.5bn in 2023 to EUR 3.4bn in 2024, predominantly due to a EUR 1.1bn payment into the ‘Zukunftsfonds’, i.e. a new fund established to provide additional funds for key policy areas, including climate.

Given these challenges and the coalition’s emerging understanding of the urgency to address these, there is a window of opportunity for authorities to implement needed reforms to address rising fiscal risks in the context of the upcoming budget for 2025 and 2026.

Credible reforms and gradual consolidation measures that do not stifle the timid economic recovery, which we estimate at around 1% starting in 2026, are critical for Austria’s credit rating. Our focus will be on the medium-term structural-fiscal plan to be published for the end of April and the budget for 2025 and 2026 to be presented in mid-May.

Scope’s next calendar review for the Republic of Austria is scheduled for 12 September 2025.